Business Acquisitions, Goodwill and Other Intangible Assets

Fiscal 2016 Acquisition

On November 30, 2015, the Company acquired the Professional Services business ("Pipeline Services") of Willbros Group ("Willbros") in an all cash transaction. The $125,715 purchase price consisted of (i) an initial cash payment of $119,955 paid at closing, and, (ii) a second cash payment due of $7,500 payable at the earlier of certain Willbros contract novations (or written approval of a subcontract) and Willbros obtaining certain consents, or March 15, 2016, net of a preliminary estimate working capital adjustment due from Willbros. Goodwill of $62,778, all of which is expected to be tax deductible, and other intangible assets of $44,500 were recorded as a result of this acquisition.

The following summarizes the estimated fair values of the Pipeline Services assets acquired and liabilities assumed at the acquisition date, as well as measurement period adjustments:



			November 30, 2015 (As Initially Reported)			Measurement Period Adjustments			November 30, 2015 (As Adjusted)
Cash and cash equivalents			$	355		$	—		$	355
Accounts receivable			26,406			620			27,026
Prepaid expenses and other current assets			7,276			(24		)	7,252
Property and equipment			3,552			—			3,552
Identifiable intangible assets:
	Customer relationships and backlog		43,500			—			43,500
	Internally developed software		1,000			—			1,000
		Total identifiable intangible assets	44,500			—			44,500
Goodwill			64,673			(1,895		)	62,778
Other non-current assets			20,683			—			20,683
Accounts payable			(2,587		)	53			(2,534		)
Accrued compensation and benefits			(7,199		)	(16		)	(7,215		)
Other accrued liabilities			(5,210		)	50			(5,160		)
Current portion of long-term debt			(6,447		)	(38		)	(6,485		)
Long-term debt, net of current portion			(18,547		)	—			(18,547		)
Non-controlling interest			$	—		$	(490	)	$	(490	)
	Net assets acquired		$	127,455		$	(1,740	)	$	125,715

Customer relationships and backlog represent the fair value of existing contracts and the underlying customer relationships. The customer relationships and backlog have lives ranging from 1 to 15 years (weighted average lives of 6 years). The internally developed software has a life of approximately 5 years (weighted average life of 3 years).

The purchase price allocation is based upon preliminary information and is subject to change when additional information becomes available. The goodwill recognized is attributable to the future strategic growth opportunities arising from the acquisition, Pipeline Service's highly skilled assembled workforce, which does not qualify for separate recognition, and the expected cost synergies of the combined operations. The Company has not completed its final assessment of the fair values of purchased receivables, liabilities, contingent liabilities, or acquired contracts. The final fair value of the net assets acquired may result in adjustments to certain assets and liabilities, including goodwill.

The unaudited pro forma financial information summarized in the following table gives effect to the Pipeline Services acquisition assuming it occurred on July 1, 2014, the earliest period presented. These unaudited pro forma operating results do not assume any impact from revenue, cost or other operating synergies that are expected as a result of the acquisition. Pro forma adjustments have been made to reflect amortization of the identified intangible assets for the related periods, as well as the amortization of deferred debt issuance costs incurred. Identifiable intangible assets are being amortized on a basis approximating the economic value derived from those assets. These unaudited pro forma operating results are presented for illustrative purposes only and are not indicative of the operating results that would have been achieved had the acquisition occurred on July 1, 2014, nor does the information project results for any future period.



	Nine Months Ended
	March 25, 2016			March 27, 2015
Gross revenue	$	526,384		$	559,079
Net service revenue	383,374			406,712
Net (loss) income applicable to TRC Companies, Inc.	(8,368		)	6,483

Basic earnings per common share	$	(0.27	)	$	0.21
Diluted earnings per common share	$	(0.27	)	$	0.21

Since the acquisition date, the Pipeline Services operating segment has contributed $34,543 in gross revenue, $27,546 in net service revenue, and an operating loss of $(4,289) for the period from November 30, 2015 through March 25, 2016.

Acquisition and integration expenses in the accompanying condensed consolidated statements of operations were comprised of the following:



	Three Months Ended		Nine Months Ended
	March 25, 2016		March 25, 2016
Severance and personnel costs	$	914	$	1,600
Professional services and other expenses	692		2,124
Total	$	1,606	$	3,724

Fiscal 2015 Acquisition

On September 29, 2014, the Company acquired all of the outstanding stock of NOVA Training Inc. and all of the outstanding membership interests of NOVA Earthworks, LLC (collectively "NOVA") based in Midland, Texas. NOVA provides safety training and environmental services as well as oil spill response, remediation and general oil field construction services to customers in the oil and gas industry. The initial purchase price consisted of (i) a cash payment of $7,198 payable at closing, (ii) a second cash payment of $2,600 placed into escrow, of which $508 was paid in six months and the remaining $2,092 was due 18 months from the acquisition date subject to withholding for various contractual issues, (iii) 50 shares of the Company's common stock valued at $323 on the closing date, and (iv) a $560 net working capital adjustment. The sellers are also entitled to up to $1,500 in contingent cash consideration through an earn-out provision based on the NSR performance of the acquired firm over the 24 month period following closing. The Company estimated the fair value of the contingent earn-out liability to be $893 based on the projections and probabilities of reaching the performance goals through September 2016. Goodwill of $3,683, none of which is expected to be tax deductible, and other intangible assets of $3,622 were recorded as a result of this acquisition. The goodwill is primarily attributable to the synergies and ancillary growth opportunities expected to arise after the acquisition. The fair values of assets and liabilities of the NOVA acquisition have been recorded in the Environmental operating segment. The impact of this acquisition was not material to the Company's condensed consolidated balance sheets and results of operations.

Goodwill and Goodwill Impairment

The Company assesses goodwill for impairment on an annual basis as of each fiscal April period end, or at an interim date when events or changes in the business environment would more likely than not reduce the fair value of a reporting unit below its carrying value. As of March 25, 2016, the Company had $75,337 of goodwill, subsequent to the impairment as further discussed below. Due to the current economic conditions in the oil and gas commodity markets, current actual operating performance, and revised projected financial performance, we assessed the recoverability of goodwill within the two reporting units within Pipeline Services operating segment during the three months ended March 25, 2016.

The impairment test for goodwill is a two-step process involving the comparison of the estimated fair value of each reporting unit to the reporting unit’s carrying value, including goodwill. The Company estimates the fair value of reporting units based on a comparison and weighting of the income approach, specifically the discounted cash flow method, and the guideline company approach. If the fair value of a reporting unit exceeds its carrying amount, the goodwill of the reporting unit is not considered impaired; therefore, the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the Company performs the second step of the goodwill impairment test to measure the amount of impairment loss to be recorded. If goodwill is impaired, the Company is required to record a non-cash charge to reduce the carrying value of goodwill to its implied fair value.

The Company performed the first step of the impairment test for the two reporting units within the Pipeline Services operating segment, and in each case determined that the carrying value of the reporting unit exceeded its fair value indicating potential goodwill impairment. The significant change to the assumptions used in the interim impairment test during the three months ended March 25, 2016 compared to the assumptions utilized in the Pipeline Services operating segments initial November 2015 valuation were the projected net service revenue, operating income, and cash flows for each reporting unit tested, which were impacted by the continued market uncertainty in the oil and gas commodity markets and current actual operating performance compared to the originally projected results.

The Company performed the second step of the goodwill impairment test to measure the amount of the impairment loss, if any, of the applicable reporting units. The second step of the test requires the allocation of the reporting unit’s fair value to its assets and liabilities, including any unrecognized intangible assets, in a hypothetical analysis that calculates the implied fair value of goodwill as if the reporting unit was being acquired in a business combination. If the implied fair value of goodwill is less than the carrying value, the difference is recorded as an impairment loss. Based on the results of the step two analysis, the Company recorded a preliminary goodwill impairment charge of $24,465 during the three months ended March 25, 2016. Significant management judgments are necessary to evaluate the impact of operating and macroeconomic changes. Critical assumptions include projected net service revenue growth, profit margins, general and administrative expenses, working capital fluctuations, capital expenditures, discount rates and terminal growth rates. Due to the timing and complexity of the second step of the impairment test, which is required to determine the actual impairment of goodwill, the Company recorded its best estimate of impairment for the three and nine months ended March 25, 2016. The second step of the goodwill test will be completed during the fourth quarter of fiscal 2016, and any adjustment to the amount recorded, which could differ materially from the Company's current best estimate, will be recorded in the fourth quarter of fiscal 2016. Further, the measurement period for purchase price allocation related to the Pipeline Services acquisition remains open, as the initial allocation remains preliminary. Any future adjustments to purchase price allocation could impact the final charge for goodwill impairment.

The carrying amount of goodwill for the nine months ended March 25, 2016 by operating segment are as follows:



	Gross									Gross
	Balance,		Accumulated			Balance,				Balance,		Accumulated			Balance,
	July 1,		Impairment			July 1,		Additions /		March 25,		Impairment			March 25,
Operating Segment	2015		Losses			2015		Adjustments		2016		Losses			2016
Energy	$	28,506	$	(14,506	)	$	14,000	$	—	$	28,506	$	(14,506	)	$	14,000
Environmental	40,889		(17,865		)	23,024		—		40,889		(17,865		)	23,024
Infrastructure	7,224		(7,224		)	—		—		7,224		(7,224		)	—
Pipeline Services	—		—			—		62,778		62,778		(24,465		)	38,313
	$	76,619	$	(39,595	)	$	37,024	$	62,778	$	139,397	$	(64,060	)	$	75,337

Other Intangible Assets

Identifiable intangible assets as of March 25, 2016 and June 30, 2015 are included in other assets on the condensed consolidated balance sheets and were comprised of:



	March 25, 2016							June 30, 2015
	Gross					Net		Gross					Net
	Carrying		Accumulated			Carrying		Carrying		Accumulated			Carrying
Identifiable intangible assets	Amount		Amortization			Amount		Amount		Amortization			Amount
With determinable lives:
Customer relationships	$	59,218	$	(12,451	)	$	46,767	$	16,618	$	(7,740	)	$	8,878
Contract backlog	900		(300		)	600		—		—			—
Technology	1,000		(67		)	933		—		—			—
	61,118		(12,818		)	48,300		16,618		(7,740		)	8,878
With indefinite lives:
Engineering licenses	426		—			426		426		—			426
	$	61,544	$	(12,818	)	$	48,726	$	17,044	$	(7,740	)	$	9,304

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

Identifiable intangible assets with determinable lives are being amortized over a weighted-average period of approximately 6 years. The weighted-average period of amortization is approximately 6 years for customer relationship assets. The amortization of intangible assets for the three and nine months ended March 25, 2016 was $3,162 and $5,078. The amortization of intangible assets for the three and nine months ended March 27, 2015 was $905 and $2,633.

Estimated amortization expense of intangible assets for the remainder of fiscal year 2016 and succeeding fiscal years is as follows:



Fiscal Year		Amount
2016		$	2,759
2017		10,159
2018		9,182
2019		8,367
2020		7,821
2021 and Thereafter		10,012
	Total	$	48,300

On an annual basis, or more frequently if events or changes in circumstances indicate that the asset might be impaired, the fair value of the indefinite-lived intangible assets is evaluated by the Company to determine if an impairment charge is required. The Company performed an interim impairment assessment as of March 25, 2016, which resulted in no impairments to intangible assets.