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

FORM 10-Q

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 25, 2016
OR
o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from _______________ to _______________
Commission file number 1-9947
TRC COMPANIES, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
06-0853807
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
21 Griffin Road North
 
 
Windsor, Connecticut
 
06095
(Address of principal executive offices)
 
(Zip Code)
Registrant's telephone number, including area code: (860) 298-9692
___________________________________________________
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES [X] NO [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer [ ]
Accelerated filer [X]
Non-accelerated filer [ ]
Smaller reporting company [ ]
 
 
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).         YES [ ] NO [X]
On April 26, 2016 there were 31,070,299 shares of the registrant's common stock, $.10 par value, outstanding .
 
 
 
 
 
 
 
 
 
 



TRC COMPANIES, INC.
CONTENTS OF QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED March 25, 2016


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Exhibits
 
 

2


PART I: FINANCIAL INFORMATION

Item 1. Financial Statements

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

 
Three Months Ended
 
Nine Months Ended
 
March 25,
2016
 
March 27,
2015
 
March 25,
2016
 
March 27,
2015
Gross revenue
$
158,130

 
$
130,777

 
$
451,332

 
$
397,030

Less subcontractor costs and other direct reimbursable charges
36,877

 
29,783

 
118,534

 
103,579

Net service revenue
121,253

 
100,994

 
332,798

 
293,451

Interest income from contractual arrangements
27

 
23

 
69

 
67

Insurance recoverables and other income
146

 
753

 
1,919

 
6,238

Operating costs and expenses:
 
 
 
 
 
 
 
Cost of services (exclusive of costs shown separately below)
104,030

 
83,486

 
280,690

 
247,275

General and administrative expenses
9,523

 
8,927

 
24,690

 
25,360

Acquisition and integration expenses
1,606

 

 
3,724

 

Goodwill impairment
24,465

 

 
24,465

 

Depreciation
1,942

 
1,303

 
5,070

 
4,481

Amortization
3,162

 
905

 
5,078

 
2,633

Total operating costs and expenses
144,728

 
94,621

 
343,717

 
279,749

Operating (loss) income
(23,302
)
 
7,149

 
(8,931
)
 
20,007

Interest income
189

 

 
326

 

Interest expense
(1,073
)
 
(73
)
 
(1,562
)
 
(125
)
(Loss) income from operations before taxes
(24,186
)
 
7,076

 
(10,167
)
 
19,882

Income tax benefit (provision)
9,954

 
(1,916
)
 
4,358

 
(7,244
)
Net (loss) income
(14,232
)
 
5,160

 
(5,809
)
 
12,638

Net (income) loss applicable to noncontrolling interest
(65
)
 
5

 
(59
)
 
14

Net (loss) income applicable to TRC Companies, Inc.
$
(14,297
)
 
$
5,165

 
$
(5,868
)
 
$
12,652

 
 
 
 
 
 
 
 
Basic (loss) earnings per common share
$
(0.46
)
 
$
0.17

 
$
(0.19
)
 
$
0.42

Diluted (loss) earnings per common share
$
(0.46
)
 
$
0.17

 
$
(0.19
)
 
$
0.41

 
 
 
 
 
 
 
 
Weighted-average common shares outstanding:
 
 
 
 
 
 
 
Basic
31,045

 
30,382

 
30,886

 
30,233

Diluted
31,045

 
30,737

 
30,886

 
30,551


See accompanying notes to condensed consolidated financial statements.

3


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

 
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
March 25, 2016
 
March 27, 2015
 
March 25, 2016
 
March 27, 2015
Net (loss) income
$
(14,232
)
 
$
5,160

 
$
(5,809
)
 
$
12,638

Other comprehensive income (loss)
 
 
 
 
 
 
 
 
Unrealized (loss) gain on available-for-sale securities
5

 
15

 
(18
)
 
8

 
Tax effect on unrealized (loss) gain on available-for-sale securities
(2
)
 
(6
)
 
8

 
(3
)
 
Reclassification for loss (gain) on available-for-sale securities
included in net income
2

 
(2
)
 
32

 
5

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

 
(13
)
 
(2
)
 
 
Total other comprehensive income (loss)
4

 
8

 
9

 
8

Comprehensive (loss) income
(14,228
)
 
5,168

 
(5,800
)
 
12,646

 
Comprehensive (income) loss attributable to noncontrolling interests
(65
)
 
5

 
(59
)
 
14

Comprehensive (loss) income attributable to TRC Companies, Inc.
$
(14,293
)
 
$
5,173

 
$
(5,859
)
 
$
12,660


See accompanying notes to condensed consolidated financial statements.


4


TRC COMPANIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(Unaudited)
 
March 25,
2016
 
June 30,
2015
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
9,120

 
$
37,296

Restricted cash

 
122

Accounts receivable, less allowance for doubtful accounts
145,789

 
138,346

Insurance recoverable - environmental remediation
38,745

 
40,927

Restricted investments
6,156

 
6,701

Deferred income tax assets
16,280

 
16,057

Income taxes refundable
203

 
412

Prepaid expenses and other current assets
27,559

 
10,499

Total current assets
243,852

 
250,360

Property and equipment
73,114

 
64,594

Less accumulated depreciation and amortization
(50,356
)
 
(50,885
)
Property and equipment, net
22,758

 
13,709

Goodwill
75,337

 
37,024

Intangible assets, net
48,726

 
9,304

Long-term deferred income tax assets
10,284

 
2,867

Long-term restricted investments
16,870

 
18,385

Long-term prepaid insurance
24,258

 
25,929

Other assets
20,174

 
5,303

Total assets
$
462,259

 
$
362,881

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
20,031

 
$
50

Current portion of capital lease obligations

 
166

Accounts payable
32,370

 
31,999

Accrued compensation and benefits
47,552

 
47,233

Deferred revenue
16,010

 
10,612

Environmental remediation liabilities
8,669

 
8,695

Income taxes payable
212

 
3,271

Other accrued liabilities
45,605

 
42,170

Total current liabilities
170,449

 
144,196

Non-current liabilities:
 
 
 
Long-term debt, net of current portion
83,756

 
55

Income taxes payable and deferred income tax liabilities
2,067

 
1,647

Deferred revenue
60,492

 
68,579

Environmental remediation liabilities
461

 
489

Total liabilities
317,225

 
214,966

Commitments and contingencies


 


Equity:
 
 
 
Common stock, $.10 par value; 40,000,000 shares authorized, 31,057,243 and 31,053,761 shares issued and outstanding, respectively, at March 25, 2016, and 30,485,510 and 30,482,028 shares issued and outstanding, respectively, at June 30, 2015
3,106

 
3,049

Additional paid-in capital
193,288

 
191,321

Accumulated deficit
(51,807
)
 
(45,939
)
Accumulated other comprehensive loss
(79
)
 
(88
)
Treasury stock, at cost
(33
)
 
(33
)
Total stockholders' equity applicable to TRC Companies, Inc.
144,475

 
148,310

Noncontrolling interest
559

 
(395
)
Total equity
145,034

 
147,915

Total liabilities and equity
$
462,259

 
$
362,881


See accompanying notes to condensed consolidated financial statements.

5


TRC COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
 
Nine Months Ended
 
March 25,
2016
 
March 27,
2015
Cash flows from operating activities:
 
 
 
Net (loss) income
$
(5,809
)
 
$
12,638

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 
 
 
Non-cash items:
 
 
 
Depreciation and amortization
10,148

 
7,114

Amortization of debt issuance costs
302

 

Stock-based compensation expense
4,278

 
3,746

Goodwill impairment
24,465

 

Deferred income taxes
(8,246
)
 
156

Other non-cash items
483

 
4

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
19,581

 
(9,582
)
Insurance recoverable - environmental remediation
2,182

 
(585
)
Income taxes
(2,443
)
 
(1,291
)
Restricted investments
1,184

 
(982
)
Prepaid expenses and other current assets
(6,147
)
 
(1,913
)
Long-term prepaid insurance
1,671

 
2,016

Other assets
3,411

 
(107
)
Accounts payable
(1,889
)
 
(5,456
)
Accrued compensation and benefits
(6,897
)
 
6,254

Deferred revenue
(2,739
)
 
(3,783
)
Environmental remediation liabilities
(54
)
 
2,268

Other accrued liabilities
(3,006
)
 
2,083

Net cash provided by operating activities
30,475

 
12,580

Cash flows from investing activities:
 
 
 
Additions to property and equipment
(6,547
)
 
(4,996
)
Withdrawals from restricted investments
858

 
874

Acquisition of businesses, net of cash acquired
(119,690
)
 
(11,214
)
Proceeds from sale of fixed assets
73

 
51

Net cash used in investing activities
(125,306
)
 
(15,285
)
Cash flows from financing activities:
 
 
 
Borrowings under revolving credit facility
27,000

 

Repayments under revolving credit facility
(27,000
)
 

Payments on long-term debt and other
(9,101
)
 
(4,634
)
Payments on capital lease obligations
(166
)
 
(468
)
Proceeds from long-term debt and other
81,523

 
5,247

Payments of issuance costs on credit facility
(3,248
)
 

Net working capital and additional cash payments on acquisitions
(1,132
)
 
(2,644
)
Shares repurchased to settle tax withholding obligations
(2,906
)
 
(1,628
)
Excess tax benefit from stock-based awards
1,473

 
251

Proceeds from exercise of stock options
212

 
327

Net cash provided by (used in) financing activities
66,655

 
(3,549
)
Decrease in cash and cash equivalents
(28,176
)
 
(6,254
)
Cash and cash equivalents, beginning of period
37,296

 
27,597

Cash and cash equivalents, end of period
$
9,120

 
$
21,343

Supplemental cash flow information:
 
 
 
Non-cash consideration for business acquired
$
7,500

 
$
994


See accompanying notes to condensed consolidated financial statements.

6


TRC COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(in thousands)
(Unaudited)
 
 
TRC Companies, Inc. Stockholders' Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
Total
 
 
 
 
 
 
Common Stock
 
Additional
 
 
 
Other
 
Treasury Stock
 
TRC
 
Non-
 
 
 
 
Number
 
 
 
Paid-in
 
Accumulated
 
Comp.
 
Number
 
 
 
Stockholders'
 
Controlling
 
Total
 
 
of Shares
 
Amount
 
Capital
 
Deficit
 
Loss
 
of Shares
 
Amount
 
Equity
 
Interest
 
 Equity
 Balances as of July 1, 2014
 
29,753

 
$
2,975

 
$
187,748

 
$
(65,354
)
 
$
(77
)
 
3

 
$
(33
)
 
$
125,259

 
$
(376
)
 
$
124,883

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 

 

 

 
12,652

 

 

 

 
12,652

 
(14
)
 
12,638

Other comprehensive income
 

 

 

 

 
8

 

 

 
8

 

 
8

Issuance of common stock in connection with business acquired
 
50

 
5

 
318

 

 

 

 

 
323

 

 
323

Exercise of stock options
 
61

 
6

 
321

 

 

 

 

 
327

 

 
327

Stock-based compensation
 
862

 
86

 
3,660

 

 

 

 

 
3,746

 

 
3,746

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

 

 

 

 
(1,632
)
 

 
(1,632
)
Directors' deferred compensation
 
5

 
1

 
37

 

 

 

 

 
38

 

 
38

Stock-based compensation income tax deficiencies
 

 

 
(267
)
 

 

 

 

 
(267
)
 

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

 
$
3,044

 
$
190,214

 
$
(52,702
)
 
$
(69
)
 
3

 
$
(33
)
 
$
140,454

 
$
(390
)
 
$
140,064


 
 
TRC Companies, Inc. Stockholders' Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
Total
 
 
 
 
 
 
Common Stock
 
Additional
 
 
 
Other
 
Treasury Stock
 
TRC
 
Non-
 
 
 
 
Number
 
 
 
Paid-in
 
Accumulated
 
Comp.
 
Number
 
 
 
Stockholders'
 
Controlling
 
Total
 
 
of Shares
 
Amount
 
Capital
 
Deficit
 
Loss
 
of Shares
 
Amount
 
Equity
 
Interest
 
 Equity
 Balances as of July 1, 2015
 
30,486

 
$
3,049

 
$
191,321

 
$
(45,939
)
 
$
(88
)
 
3

 
$
(33
)
 
$
148,310

 
$
(395
)
 
$
147,915

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss
 

 

 

 
(5,868
)
 

 

 

 
(5,868
)
 
59

 
(5,809
)
Other comprehensive income
 

 

 

 

 
9

 

 

 
9

 

 
9

Exercise of stock options
 
31

 
3

 
208

 

 

 

 

 
211

 

 
211

Stock-based compensation
 
824

 
82

 
4,196

 

 

 

 

 
4,278

 

 
4,278

 Shares repurchased to settle tax withholding obligations
 
(290
)
 
(29
)
 
(2,877
)
 

 

 

 

 
(2,906
)
 

 
(2,906
)
Directors' deferred compensation
 
6

 
1

 
62

 

 

 

 

 
63

 

 
63

Acquisition of non-controlling interest
 

 

 
(948
)
 





 

 
(948
)
 
895

 
(53
)
Stock-based compensation excess tax benefit
 

 

 
1,326

 

 

 

 

 
1,326

 

 
1,326

 Balances as of March 25, 2016
 
31,057

 
$
3,106

 
$
193,288

 
$
(51,807
)
 
$
(79
)
 
3

 
$
(33
)
 
$
144,475

 
$
559

 
$
145,034


See accompanying notes to condensed consolidated financial statements.

7


TRC COMPANIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(Unaudited)

Note 1. Company Background and Basis of Presentation
TRC Companies, Inc., through its subsidiaries (collectively, the "Company"), provides integrated engineering, consulting, and construction management services. Its project teams help its commercial and governmental clients implement environmental, energy, infrastructure and pipeline projects from initial concept to delivery and operation. The Company provides its services almost entirely in the United States of America.
The unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") have been omitted pursuant to those rules and regulations, but the Company's management believes that the disclosures included herein are adequate to make the information presented not misleading. The condensed consolidated financial statements include the accounts of the Company and all of its subsidiaries in which a controlling interest is maintained. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2015 .
Certain prior year amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported results of operations. In the second quarter of fiscal 2016, the Company concluded that it was appropriate to separately present intangible assets and intangible asset amortization on its condensed consolidated balance sheets and condensed consolidated statements of operations, respectively. Previously, intangible assets were classified as other assets on the condensed consolidated balance sheets whereas intangible asset amortization was classified as depreciation and amortization on the condensed consolidated statements of operations.

Note 2. New Accounting Pronouncements

In March 2016, the Financial Accounting Standards Board ("FASB") issued an accounting standards update which simplifies employee share-based payment accounting. This standard will simplify the income tax consequences, accounting for forfeitures and classification on the statement of cash flows. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016, with early adoption permitted. This standard will be effective for the Company's fiscal year beginning July 1, 2017. The Company is currently in the process of evaluating the effects of this standard on its condensed consolidated financial statements, including potential early adoption.

In February 2016, the FASB issued an accounting standards update which will replace most existing lease accounting guidance. This standard establishes a right-of-use model that requires a lessee to record a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than twelve months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. This standard is effective for fiscal years beginning after December 15, 2018, including interim periods within that reporting period. This standard will be effective for the Company's fiscal year beginning July 1, 2019. Early adoption is permitted and should be applied using a modified retrospective approach.   The Company is in the process of evaluating the potential impacts of this standard on its condensed consolidated financial statements and related disclosures, including potential early adoption.

In November 2015, the FASB issued an accounting standards update which simplifies the balance sheet classification of deferred taxes. This standard requires that all deferred tax assets and liabilities be classified as non-current in the classified balance sheet, rather than separating such deferred taxes into current and non-current amounts, as is required

8


under current guidance.  The standard is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period with early application permitted. This standard can be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. This standard will be effective for the Company's fiscal year beginning July 1, 2017.   The Company is currently in the process of evaluating the effects of this standard on its condensed consolidated financial statements, including potential early adoption.
In September 2015, the FASB issued an accounting standards update simplifying the accounting for measurement-period adjustments in business combinations. This standard eliminates the requirement to restate prior period financial statements for measurement period adjustments. The new guidance requires that the cumulative impact of a measurement period adjustment (including the impact on prior periods) be recognized in the reporting period in which the adjustment is identified. The standard is effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period with early application permitted. The standard is to be applied prospectively to adjustments to provisional amounts that occur after the effective date of the standard. The Company adopted this standard effective for its first quarter of fiscal 2016. The adoption of this standard did not have a material impact on the Company's condensed consolidated financial statements.
In April 2015, the FASB issued an accounting standards update requiring that debt issuance costs related to a recognized debt liability be reported in the balance sheet as a direct deduction from the carrying amount of that debt liability. The standard is effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period with early application permitted for financial statements that have not been previously issued. In August 2015, the FASB issued an accounting standards update which provides additional guidance related to the presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements. An entity may present debt issuance costs as an asset and subsequently amortize the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings. The Company adopted these standards effective for its first quarter of fiscal 2016. The adoption of these standards did not have a material impact on the Company's condensed consolidated financial statements.
In May 2014, the FASB issued an accounting standards update that replaces existing revenue recognition guidance. The updated guidance requires companies to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the new standard requires that reporting companies disclose the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. In March 2016, the FASB further clarified the implementation guidance on principal versus agent considerations. The new standard will be effective for the Company's fiscal year beginning July 1, 2018. No early adoption is permitted under this standard, and it is to be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying it recognized at the date of initial application. The Company has not yet selected a transition method and is currently evaluating the effect the standard will have on its condensed consolidated financial statements.

Note 3. Fair Value Measurements
The Company's financial assets or liabilities are measured using inputs from the three levels of the fair value hierarchy. The classification of a financial asset or liability within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. The three levels are as follows:
Level 1 Inputs - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. Generally, this includes debt and equity securities and derivative contracts that are traded on an active exchange market (e.g., the New York Stock Exchange) as well as certain U.S. Treasury and U.S. Government and agency mortgage-backed securities that are highly liquid and are actively traded in over-the-counter markets.

9


Level 2 Inputs - Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; or valuations based on models where the significant inputs are observable (e.g., interest rates, yield curves, credit risks) or can be corroborated by observable market data.
Level 3 Inputs - Valuations based on models where significant inputs are not observable. The unobservable inputs reflect the Company's own assumptions about the assumptions that market participants would use.
The following tables present the level within the fair value hierarchy at which the Company's financial assets and certain liabilities were measured on a recurring basis as of March 25, 2016 and June 30, 2015 :
Assets and Liabilities Measured at Fair Value on a Recurring Basis as of March 25, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
 
 
 
 
 
 
Restricted investments:
 
 
 
 
 
 
 
Mutual funds
$
68

 
$

 
$

 
$
68

Certificates of deposit

 
106

 

 
106

Municipal bonds

 
547

 

 
547

Corporate bonds

 
500

 

 
500

U.S. government bonds

 
218

 

 
218

Money market accounts and cash deposits
4,456

 

 

 
4,456

Total assets
$
4,524

 
$
1,371

 
$

 
$
5,895

 
 
 
 
 
 
 
 
Contingent consideration
$

 
$

 
$
283

 
$
283

Total liabilities
$

 
$

 
$
283

 
$
283

Assets and Liabilities Measured at Fair Value on a Recurring Basis as of June 30, 2015
 
Level 1
 
Level 2
 
Level 3
 
Total
Restricted investments:
 
 
 
 
 
 
 
Mutual funds
$
100

 
$

 
$

 
$
100

Certificates of deposit

 
106

 

 
106

Municipal bonds

 
548

 

 
548

Corporate bonds

 
228

 

 
228

U.S. government bonds

 
216

 

 
216

Money market accounts and cash deposits
4,896

 

 

 
4,896

Total assets
$
4,996

 
$
1,098

 
$

 
$
6,094

 
 
 
 
 
 
 
 
Contingent consideration
$

 
$

 
$
693

 
$
693

Total liabilities
$

 
$

 
$
693

 
$
693

A majority of the Company's investments are priced by pricing vendors and are generally Level 1 or Level 2 investments, as these vendors either provide a quoted market price in an active market or use observable input for their pricing without applying significant adjustments. Broker pricing is used mainly when a quoted price is not available, the investment is not priced by the pricing vendors, or when a broker price is more reflective of fair value in the market in which the investment trades. The Company's broker priced investments are classified as Level 2 investments because the broker prices the investment based on similar assets without applying significant adjustments. The Company's restricted investment financial assets as of March 25, 2016 and June 30, 2015 are included within current and long-term restricted investments on the condensed consolidated balance sheets.
The Company's long-term debt is not measured at fair value in the condensed consolidated balance sheets. The fair value of debt is the estimated amount the Company would have to pay to transfer its debt, including any premium or discount attributable to the difference between the stated interest rate and market rate of interest at the balance sheet

10


date. Fair values are based on valuations of similar debt at the balance sheet date and supported by observable market transactions when available: Level 2 of the fair value hierarchy.  At March 25, 2016 and June 30, 2015 the fair value of the Company's debt was not materially different than its carrying value.
Reclassification adjustments for realized gains or losses from available for sale restricted investment securities out of accumulated other comprehensive income are included in the condensed consolidated statements of operations within the insurance recoverables and other income line item.
The Company's contingent consideration liabilities, included in other accrued liabilities on the condensed consolidated balance sheets, are associated with the acquisitions made in the fiscal year ended June 30, 2015 . The liabilities are measured at fair value using a probability weighted average of the potential payment outcomes that would occur should certain contract metrics be reached. There is no market data available to use in valuing the contingent consideration; therefore, the Company developed its own assumptions related to the achievement of the metrics to evaluate the fair value of these liabilities. As such, the contingent consideration is classified within Level 3 as described below.
Items classified as Level 3 within the valuation hierarchy, consisting of contingent consideration liabilities related to recent acquisitions, were valued based on various estimates, including probability of success, discount rates and amount of time until the conditions of the contingent payments are achieved. The table below presents a roll-forward of the contingent consideration liabilities valued using Level 3 inputs:
Contingent consideration balance at July 1, 2015
$
693

Reduction of liability for payments made
(806
)
Increase of liability related to re-measurement of fair value
396

Contingent consideration balance at March 25, 2016
$
283


Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis as of March 25, 2016
Certain assets were measured at fair value on a non-recurring basis and are not included in the tables above. During the quarter ended March 25, 2016 , the Company recorded an impairment charge of $24.5 million . In determining the fair value of goodwill, the Company utilized valuation methods, including the discounted cash flow method and the guideline company approach as the best evidence of fair value. These fair value methods are classified within Level 3 of the fair value hierarchy. See Note 8 - Business Acquisitions, Goodwill and Other Intangibles Assets for further information.
 
Note 4. Stock-Based Compensation

The Company has two plans under which outstanding stock-based awards have been issued: the TRC Companies, Inc. Restated Stock Option Plan (the "Restated Plan"), and the Amended and Restated 2007 Equity Incentive Plan (the "2007 Plan"), (collectively "the Plans"). The Company issues new shares or may utilize treasury shares, when available, to satisfy awards under the Plans. Awards are made by the Compensation Committee of the Board of Directors; however, the Compensation Committee has delegated to the Chief Executive Officer ("CEO") the authority to grant awards for up to 10 shares to employees subject to a limitation of 100 shares in any 12  month period.

Stock-based awards under the Plans consist of stock options, restricted stock awards ("RSA's"), restricted stock units ("RSU's") and performance stock units ("PSU's"). As of March 25, 2016 , 2,767 shares remained available for grants under the 2007 Plan.

Stock-Based Compensation

The Company measures stock-based compensation cost at the grant date based on the fair value of the award. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company's condensed consolidated statements of operations. Stock-based compensation expense

11


includes the estimated effects of forfeitures, and estimates of forfeitures will be adjusted over the requisite service period to the extent actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized in the period of change and will also impact the amount of expense to be recognized in future periods.

During the three and nine months ended March 25, 2016 and March 27, 2015 , the Company recognized stock-based compensation expense in cost of services ("COS") and general and administrative expenses within the condensed consolidated statements of operations as follows:
 
 
Three Months Ended
 
Nine Months Ended
 
 
March 25,
2016
 
March 27,
2015
 
March 25,
2016
 
March 27,
2015
Cost of services
$
794

 
$
670

 
$
2,243

 
$
1,799

General and administrative expenses
704

 
700

 
2,035

 
1,947

 
Total stock-based compensation expense
$
1,498

 
$
1,370

 
$
4,278

 
$
3,746


The benefits associated with the tax deductions in excess of recognized compensation cost are required to be reported as financing activities in the condensed consolidated statements of cash flows. This reduces reported operating cash flows and increases reported financing cash flows. As a result, net financing cash flows included $1,473 and $251 for the nine months ended March 25, 2016 and March 27, 2015 , respectively, from the benefits of tax deductions in excess of recognized compensation cost. The tax benefit of any resulting excess tax deduction increases the additional paid-in capital ("APIC") pool. Any resulting tax deficiency is deducted from the APIC pool.

Stock Options

The Company uses the Black-Scholes option pricing model for determining the estimated grant date fair value for stock options. The fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period. Use of a valuation model requires management to make certain assumptions with respect to selected model inputs. The risk-free interest rate assumption is based upon observed interest rates appropriate for the expected life of the employee stock options. The average expected life is based on the contractual term of the option and expected employee exercise and historical post-vesting employment termination experience. The Company estimates the volatility of its stock using historical volatility in accordance with current accounting guidance. Management determined that historical volatility of TRC common stock is most reflective of market conditions and the best indicator of expected volatility. The dividend yield assumption is based on the Company's historical and expected dividend payouts. There were no stock options granted during the nine months ended March 25, 2016 and March 27, 2015 .
 
 
 
 
 
 
 
 
A summary of stock option activity for the nine months ended March 25, 2016 under the Plans is as follows:
 
 
 
 
 
Weighted-
 
 
 
 
 
 
 
Average
 
 
 
 
 
Weighted-
 
Remaining
 
 
 
 
 
Average
 
Contractual
 
Aggregate
 
 
 
Exercise
 
Term
 
Intrinsic
 
Options
 
 Price
 
 (in years)
 
Value
Outstanding options as of June 30, 2015 (214 exercisable)
215

 
$
8.46

 
 
 
 
Options exercised
(31
)
 
$
6.74

 
 
 
 
Options expired
(83
)
 
$
9.07

 
 
 
 
Outstanding options as of March 25, 2016
101

 
$
8.49

 
0.9
 
$
45

Options exercisable as of March 25, 2016
100

 
$
8.50

 
0.9
 
$
44

Options vested and expected to vest as of March 25, 2016
101

 
$
8.49

 
0.9
 
$
45


12



The aggregate intrinsic value is measured using the fair market value at the date of exercise (for options exercised) or as of March 25, 2016 (for outstanding options), less the applicable exercise price. The closing price of the Company's common stock on the New York Stock Exchange was $6.63 as of March 25, 2016 . The total intrinsic value of options exercised for the nine months ended March 25, 2016 and March 27, 2015 was $124 and $134 , respectively. The total proceeds received from option exercises for the nine months ended March 25, 2016 and March 27, 2015 was $212 and $327 , respectively.

As of March 25, 2016 , there was $0 of total unrecognized compensation expense related to unvested stock option grants under the Plans, and this expense is expected to be recognized over a weighted-average period of 0.1  years.

Restricted Stock Awards

Compensation expense for RSA's is recognized ratably over the vesting term, which is generally four years . The fair value of the RSA's is determined based on the closing market price of the Company's common stock on the grant date. There were 2 non-vested RSA's as of March 25, 2016 . There were no RSA's granted during the nine months ended March 25, 2016 . As of March 25, 2016 , there was $8 of total unrecognized compensation expense related to unvested RSA's under the Plans, and this expense is expected to be recognized over a weighted-average period of 0.6  years.
 
 
 
 
Restricted Stock Units

Compensation expense for RSU's is recognized ratably over the vesting term, which is generally four years . The fair value of RSU's is determined based on the closing market price of the Company's common stock on the grant date.

A summary of non-vested RSU activity for the nine months ended March 25, 2016 is as follows:
 
 
 
Weighted-
 
Restricted
 
Average
 
Stock
 
Grant Date
 
Units
 
Fair Value
Non-vested units as of June 30, 2015
890

 
$
6.92

Units granted
440

 
$
9.33

Units vested
(413
)
 
$
6.59

Units forfeited
(7
)
 
$
7.69

Non-vested units as of March 25, 2016
910

 
$
8.23


RSU grants totaled 170 and 440 shares with a total weighted-average grant date fair value of $1,086 and $4,112 during the three and nine months ended March 25, 2016 , respectively. RSU grants totaled 26 and 403 shares with a total weighted-average grant date fair value of $203 and $2,781 during the three and nine months ended March 27, 2015 . The total fair value of RSU's vested during the three and nine months ended March 25, 2016 was $112 and $4,058 , respectively. The total fair value of RSU's vested during the three and nine months ended March 27, 2015 was $202 and $2,797 , respectively.

As of March 25, 2016 , there was $6,235 of total unrecognized compensation expense related to unvested RSU's under the Plans, and this expense is expected to be recognized over a weighted-average period of 2.8  years.

Performance Stock Units

Compensation expense for PSU's is recognized ratably over the vesting term, which is generally four years , if and when the Company concludes that it is probable that the performance condition will be achieved. The Company reassesses the probability of vesting at each reporting period for awards with performance conditions and adjusts compensation expense based on its probability assessment. The fair value of the PSU's is determined based on the closing market price of the Company's common stock on the grant date.

13



The number of PSU's earned is determined based on the Company's performance against predefined targets. The range of payout is zero to 150% of the number of granted PSU's. The number of PSU's earned is determined based on actual performance at the end of the performance period. PSU grants totaled 413 and 464 with a total weighted-average grant date fair value of $3,697 and $2,986 during the nine months ended March 25, 2016 and March 27, 2015 , respectively. The total fair value of PSU's vested during the nine months ended March 25, 2016 , was $4,097 . The total fair value of PSU's vested during the nine months ended March 27, 2015 , was $1,977 .

At March 25, 2016 , there was $7,297 of total unrecognized compensation expense related to non-vested PSU's; this expense is expected to be recognized over a weighted-average period of 2.5 years.

A summary of non-vested PSU activity for the nine months ended March 25, 2016 is as follows:
 
 
 
 
 
 
 
Weighted-
 
PSU
 
 
 
Total
 
Average
 
Original
 
PSU
 
PSU
 
Grant Date
 
Awards
 
Adjustments (1)
 
Awards
 
Fair Value
Non-vested units as of June 30, 2015
932

 

 
932

 
$
7.10

Units granted
327

 
86

 
413

 
$
11.28

Units vested
(321
)
 
(86
)
 
(407
)
 
$
6.54

Units forfeited
(35
)
 

 
(35
)
 
$
7.44

Non-vested units as of March 25, 2016
903

 

 
903

 
$
8.73

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


Note 5. Earnings per Share

Basic earnings per share ("EPS") is computed based on the weighted-average number of shares of common stock outstanding during the period. Diluted EPS is computed using the treasury stock method for stock options, warrants, non-vested restricted stock awards and units, and non-vested performance stock units. The treasury stock method assumes conversion of all potentially dilutive shares of common stock with the proceeds from assumed exercises used to hypothetically repurchase stock at the average market price for the period. Diluted EPS is computed by dividing net income applicable to the Company by the weighted-average common shares and potentially dilutive common shares that were outstanding during the period. For the three and nine months ended March 25, 2016 , the Company reported a net loss applicable to common shareholders; therefore, the potentially dilutive shares are anti-dilutive and are excluded from the calculation of diluted (loss) earnings per share in accordance with ASC Topic 260, Earnings per Share .


14


The following table sets forth the computations of basic and diluted EPS for the three and nine months ended March 25, 2016 and March 27, 2015 :
 
Three Months Ended
 
Nine Months Ended
 
March 25,
2016
 
March 27,
2015
 
March 25,
2016
 
March 27,
2015
Net (loss) income applicable to TRC Companies, Inc.
$
(14,297
)
 
$
5,165

 
$
(5,868
)
 
$
12,652

 
 
 
 
 
 
 
 
Basic weighted-average common shares outstanding
31,045

 
30,382

 
30,886

 
30,233

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

 
355

 

 
318

Diluted weighted-average common shares outstanding
31,045

 
30,737

 
30,886

 
30,551

 
 
 
 
 
 
 
 
Earnings per common share applicable to TRC Companies, Inc.
 
 
 
 
 
 
 
Basic (loss) earnings per common share
$
(0.46
)
 
$
0.17

 
$
(0.19
)
 
$
0.42

Diluted (loss) earnings per common share
$
(0.46
)
 
$
0.17

 
$
(0.19
)
 
$
0.41

Anti-dilutive stock options, RSA's, RSU's and PSU's, excluded from the calculation
1,916

 
1,832

 
1,916

 
1,868



Note 6. Accounts Receivable

The current portion of accounts receivable as of March 25, 2016 and June 30, 2015 , were comprised of the following:
 
 
March 25,
2016
 
June 30,
2015
Billed
$
92,644

 
$
80,932

Unbilled
59,317

 
62,528

Retainage
2,266

 
3,478

 
Total accounts receivable - gross
154,227

 
146,938

Less allowance for doubtful accounts
(8,438
)
 
(8,592
)
 
Total accounts receivable, less allowance for doubtful accounts
$
145,789

 
$
138,346



Note 7. Other Accrued Liabilities

As of March 25, 2016 and June 30, 2015 , other accrued liabilities were comprised of the following:

 
 
March 25,
2016
 
June 30,
2015
Contract costs
$
29,205

 
$
27,980

Legal accruals
6,766

 
5,224

Lease obligations
3,725

 
3,354

Other
5,909

 
5,612

 
Total other accrued liabilities
$
45,605

 
$
42,170




15


Note 8. 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

16


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

17


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



18


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.



19


Note 9. Long-Term Debt and Capital Lease Obligations

Revolving Credit Facility

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

Amounts outstanding under the Prior Credit Agreement bore interest at the Base Rate (as defined, generally the prime rate) plus a margin of 1.00% to 1.50% or at LIBOR plus a margin of 2.00% to 2.50% , based on the ratio (measured over a trailing four-quarter period) of consolidated total debt to earnings before interest, taxes, depreciation and amortization ("EBITDA"), as defined. The Company's obligations under the Prior Credit Agreement were secured by a pledge of substantially all of its assets and guaranteed by its principal operating subsidiaries. The Prior Credit Agreement also contained cross-default provisions which became effective if the Company defaulted on other indebtedness.

Under the Prior Credit Agreement the Company was required to maintain a fixed charge coverage ratio of no less than 1.25 to 1.00 and to not permit its leverage ratio to exceed 2.00 to 1.00 . The Prior Credit Agreement also required the Company to achieve minimum levels of Consolidated Adjusted EBITDA of $20,000 for the twelve-month periods ending June 30, 2015 and thereafter. The Prior Credit Agreement also limited the payment of cash dividends to $10,000 in aggregate during its term. The Company was in compliance with the financial covenants under the Prior Credit Agreement through its termination date.

As of June 30, 2015 , the Company had no borrowings outstanding under the Prior Credit Agreement. Letters of credit outstanding were $2,048 as of June 30, 2015 . Based upon the leverage covenant, the maximum availability under the Prior Credit Agreement was $75,000 as of June 30, 2015 . Funds available to borrow under the Prior Credit Agreement, after consideration of the letters of credit outstanding and other indebtedness outstanding of $166 , were $72,786 at June 30, 2015 .

On November 30, 2015, the Company entered into a five -year credit agreement (the “New Credit Agreement”) with Citizens Bank, N.A. as lender, LC issuer, administrative agent, sole lead arranger, and sole book runner; BMO Harris Bank, N.A. as lender, LC issuer and syndication agent; KeyBank, N.A. as lender and document agent, and five other banks as lenders . The New Credit Agreement provides the Company with an aggregate borrowing capacity of $175,000 , consisting of a $100,000 five -year secured revolving credit facility (“Revolving Facility”) with a sub-limit of $15,000 available for the issuance of letters of credit, as well as a five -year secured $75,000 term loan (“Term Loan”). The New Credit Agreement replaced the Company’s Prior Credit Agreement.

The proceeds of the Term Loan, together with cash on hand and proceeds from borrowing under the Revolving Facility, were used to pay the purchase price for Willbros Professional Services and to fund transaction costs incurred in connection with the Willbros Professional Services acquisition. The Revolving Facility will also be available for working capital and general corporate purposes. The Revolving Facility includes borrowing capacity for letters of credit and for borrowings on same-day notice, referred to as “swingline loans.” Borrowings under the Revolving Facility are subject to the satisfaction of customary conditions, including absence of defaults and accuracy of representations and warranties. The Company may request an increase in the amount of the Credit Agreement up to an additional $75,000 , which may be through additional term or revolving loans.

Borrowings outstanding under the Revolving Facility will mature on November 30, 2020. The Term Loan amortizes in quarterly installments payable on the last day of each March, June, September, and December, commencing on March 31, 2016 in amounts equal to 1.875% of the term loan made or outstanding, with the balance payable on

20


November 30, 2020 (the "Term Loan Maturity Date.") In addition, the Company is required, subject to certain exceptions, to make payments on the Term Loan (a) based on a stated percentage of Excess Cash Flow, either 50% or 0% depending on whether the the Company's consolidated leverage ratio is above or below 2 times adjusted EBITDA as defined in the New Credit Agreement, (b) in an amount of 100% of net cash proceeds from asset sales subject to certain reinvestment rights, (c) in an amount of 100% of net cash proceeds of any issuance of debt other than debt permitted to be incurred under the New Credit Agreement, and (d) in an amount of 100% of net cash proceeds from events of loss subject to certain reinvestment rights. The borrowings under the New Credit Agreement may be reduced, in whole or in part, without premium or penalty.

Amounts outstanding under the New Credit Agreement bear interest at the Base Rate (as defined, generally the prime rate) plus a margin of 0.50% to 1.25% , or at the Eurodollar Rate (as defined, generally the LIBOR rate) plus a margin of 1.50% to 2.25% , based on the Company's Leverage Ratio (as defined). In addition to these borrowing rates, there is a commitment fee which ranges from 0.20% to 0.375% on any unused commitments. The applicable fees for issuance of letters of credit under the Revolving Facility is a range from 1.50% to 2.25% .

The Company’s obligations under the New Credit Agreement are secured by a pledge of substantially all of its assets and guaranteed by its principal operating subsidiaries. The New Credit Agreement also contains cross-default provisions which become effective if the Company defaults on other indebtedness.

The New Credit Agreement contains various customary restrictive covenants that limit our ability to, among other things: incur additional indebtedness including guarantees; enter into sale/leaseback transactions; make investments, loans or acquisitions; grant or incur liens on our assets; sell our assets; engage in mergers, consolidations, liquidations or dissolutions; engage in transactions with affiliates; and make restricted payments. Under the New Credit Agreement the Company is required to maintain a fixed charge coverage ratio of no less than 1.25 to 1.00 and to not permit its leverage ratio to exceed 3.00 to 1.00 . Additionally, the New Credit Agreement also limits the payment of cash dividends to $10,000 in aggregate during its term.

On November 30, 2015 the Company borrowed $102,000 under the New Credit Agreement to partially fund the aforementioned Willbros Professional Services acquisition. The borrowing was comprised of a full borrowing of the $75,000 term loan and a $27,000 borrowing under the Revolving Facility. Borrowings under the Term Loan bear interest at a stated rate of 2.32% and have an effective interest rate of 2.74% at March 25, 2016 . As of March 25, 2016 the Company had no borrowings outstanding under the New Credit Agreement's Revolving Facility. Funds available to borrow under the New Credit Agreement, after consideration of the letters of credit outstanding, were $97,221 at March 25, 2016 .

In accounting for the transaction costs incurred in conjunction with the New Credit Agreement, the Company allocated the total costs incurred based on the relative fair values of the Revolving Facility and Term Loan. A total of $1,916 and $1,332 were allocated to the Revolving Facility and Term Loan, respectively.

As of March 25, 2016 , the Term Loan consisted of the following:

Current portion of Term Loan
 
$
5,469

 
 
 
Long-term portion of Term Loan
 
$
69,531

Less: Debt issuance costs
 
(1,227
)
Net carrying amount
 
$
68,304



21


The scheduled principal amounts due under the Company’s Term Loan obligations as of March 25, 2016 for the remainder of fiscal year 2016 and succeeding fiscal years are as follows:

2016
 
$
2,786

2017
 
5,265

2018
 
4,882

2019
 
4,526

2020
 
4,196

2021
 
53,345

 
Total
 
$
75,000


Contractor-owned, contractor-operated facility debt

As of March 25, 2016 , the Company recorded approximately $22,817 of debt obligations related to the Pipeline Services acquisition, of which $7,407 was current.  A third party finance company had provided financing to Pipeline Services in conjunction with the construction of fueling facilities for the federal government. Upon acceptance of the constructed facilities, the federal government pays Pipeline Services in equal monthly installments over the subsequent five years pursuant to a contract. Therefore, as of March 25, 2016 , the Company also recorded approximately $24,562 of receivables which were acquired in the transaction, of which $7,407 was current. These amounts were recorded within other assets and represent the amount due from the federal government for the construction of the fueling facilities.

As of March 25, 2016 , the government has provided acceptance on all three contracts and final funding has been received on one contract.

The principal amounts due under the Company’s remaining debt obligations as of March 25, 2016 for the remainder of fiscal year 2016 and succeeding fiscal years is as follows:
2016
 
$
2,127

2017
 
7,551

2018
 
5,734

2019
 
3,717

2020
 
3,688

 
Total
 
$
22,817



Other Notes Payable

In July 2015, the Company financed $5,632 of insurance premiums payable in eleven equal monthly installments of $517 each, including a finance charge of 1.99% . In December 2015, an additional $891 was financed in conjunction with the Willbros Professional Services acquisition, resulting in six remaining payments of $667 . As of March 25, 2016 , the balance outstanding under this agreement was $1,993 .

In conjunction with the Pipeline Services acquisition, the Company was required to remit a second cash payment 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.

Capital Lease Obligations

During fiscal years 2013 and 2012 , the Company financed $1,160 and $756 , respectively, of furniture, office equipment, and computer equipment under capital lease agreements expiring in fiscal years 2015 and 2016 . The assets and liabilities under capital lease agreements are recorded at the lower of the present value of the minimum lease payments or the

22


fair value of the asset. The assets are amortized over the shorter of their related lease terms or their estimated useful lives. Amortization of assets under capital leases is included in depreciation and amortization in the condensed consolidated statements of operations. The final lease payments were made in the fiscal quarter ended March 25, 2016 , with no future capital lease obligation remaining, and the underlying assets having been fully depreciated.


Note 10. Variable Interest Entity
The Company acquired the non-controlling interest in Center Avenue Holdings ("CAH") a limited liability company, in its third fiscal quarter of 2016 for $90 . Prior to CAH becoming a wholly owned subsidiary, the Company's condensed consolidated financial statements included the financial results of CAH as a variable interest entity in which it was the primary beneficiary. In determining whether the Company is the primary beneficiary of an entity, it considers a number of factors, including its ability to direct the activities that most significantly affect the entity's economic success, the Company's contractual rights and responsibilities under the arrangement and the significance of the arrangement to each party. These considerations impact the way the Company accounts for its existing collaborative and joint venture relationships and determines the consolidation of companies or entities with which the Company has collaborative or other arrangements.
The Company previously consolidated the operations of CAH as it retained the contractual power to direct the activities of CAH which most significantly and directly impact its economic performance. The activity of CAH is not significant to the overall performance of the Company. Prior to CAH becoming a wholly owned subsidiary, its assets were restricted, from the standpoint of the Company, in that they were not available for the Company's general business use outside the context of CAH.
The following table sets forth the assets and liabilities of CAH included in the condensed consolidated balance sheets of the Company:
 
March 25,
2016
 
June 30,
2015
Current assets:
 
 
 
Restricted investments
$
63

 
$
63

    Total current assets
63

 
63

Property and equipment
4,344

 

Other assets

 
4,344

    Total assets
$
4,407

 
$
4,407

Long-term environmental remediation liabilities
22

 
21

    Total liabilities
$
22

 
$
21


Prior to CAH becoming a wholly owned subsidiary, the Company did not generally have an obligation to make additional capital contributions to CAH. However, through the end of the second fiscal quarter of 2016 the Company had provided $4,086 of support it was not contractually obligated to provide. The additional support was primarily for debt service payments on a note payable. CAH repaid this loan balance in the amount of $2,448 in full on October 1, 2013. The Company intends to continue funding CAH's obligations as they become due.


Note 11. Income Taxes

The Company's effective tax rate was approximately 41.1% and 27.1% for the three months ended March 25, 2016 and March 27, 2015 respectively. The primary reconciling items between the federal statutory rate of 35.0% and the Company's overall effective tax rate for the three months ended March 25, 2016 were the effect of state income taxes offset by discrete tax benefits related to the U.S. Research and Development credit and U.S. Domestic Production Activities deduction. The discrete impact of research and development credits and U.S. Domestic Production Activities deduction is the result of a change in estimate resulting from the finalization of a new research and development credit

23


study and U.S. Domestic Production Activities deduction study during the three months ended March 25, 2016 ; the tax benefit for the change in estimate was reflected in its entirety in the three months ended March 25, 2016 . The primary reconciling items between the federal statutory rate of 35.0% and the Company's overall effective tax rate for the three months ended March 27, 2015 were the effect of state income taxes offset by discrete tax benefits related to the U.S. Research and Development credit. The discrete impact of research and development credits is the result of a change in estimate resulting from the finalization of a new research and development credit study during the three months ended March 27, 2015 . A tax benefit for the change in estimate was reflected in its entirety in the three months ended March 27, 2015 .

The Company's effective tax rate was 42.6% and 36.4% for the nine months ended March 25, 2016 and March 27, 2015 , respectively. The primary reconciling items between the federal statutory rate of 35.0% and the Company's overall effective tax rate for the nine months ended March 25, 2016 and March 27, 2015 , respectively, were the effect of state income taxes offset by discrete tax benefits related to the U.S. Research and Development credit and U.S. Domestic Production Activities deduction in the current year, as well as the discrete tax benefits related to research and development tax credits in the prior year period.

As of March 25, 2016 , the recorded liability for uncertain tax positions under the measurement criteria of Accounting Standards Codification ("ASC") Topic 740, Income Taxes, was $2,067 . The Company does not expect the amount of unrecognized tax benefits to materially change within the next twelve months.
As of March 25, 2016 , the Company had a tax benefit of $4,111 related to excess tax benefits from stock compensation. Pursuant to ASC Topic 718, a benefit of $1,473 was recorded to increase APIC as it reduced income taxes payable during the nine months ended March 25, 2016 . In addition, a tax deficiency of $147 related to the expiration of vested stock options was recorded during the period to decrease APIC as it reduced deferred tax assets.


Note 12. Operating Segments
 
In connection with the acquisition of Pipeline Services, the Company's reportable segments increased from three to four to reflect how the Company currently manages its business. The Company manages its business under the following four operating segments:

Energy: The Energy operating segment provides services to a range of clients including energy companies, utilities, other commercial entities, and state and federal government agencies. The Company's Energy services include program management, engineer/procure/construct projects, design, and consulting. The Company's typical Energy projects involve upgrades, design and new construction for electric transmission and distribution systems and substations; energy efficiency program design and management; and renewable energy development and power generation.

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

Infrastructure: The Infrastructure operating segment provides services related to the expansion of infrastructure capacity, the rehabilitation of overburdened and deteriorating infrastructure systems, and the management of risks related to security of public and private facilities. The Company's client base is predominantly state and municipal governments as well as select commercial developers. In addition, the Company provides infrastructure services on projects originating in its other operating segments. Primary

24


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.

Pipeline Services: The Pipeline Services operating segment provides pipeline and facilities engineering, EPC/EPCM, field services and integrity services to the oil and gas transmission and midstream markets as well as at government facilities. The Company specializes in providing engineering services to assist clients in designing, engineering and constructing or expanding pipeline systems, compressor stations, pump stations, fuel storage facilities, terminals, gas processing, and field gathering and production facilities. The Company's expertise extends to the engineering of a wide range of project peripherals, including various types of support buildings and utility systems, power generation and electrical transmission systems, communications systems, fire protection, water and sewage treatment, water transmission, roads and railroad sidings. The Company also provides project management, engineering and material procurement services to the refining industry and government agencies, including chemical/process, mechanical, civil, structural, electrical instrumentation/controls and environmental engineering. The Company provides full-service integrity management program offerings including program development, data services, risk analysis, corrosion evaluation, integrity engineering and integrity construction services. The Company partnered with Google to provide a cloud-based pipeline life-cycle integrity management solution, Integra Link™, which utilizes Google’s geospatial technology platform to help oil and gas pipeline companies visualize and utilize their data and information.


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

On July 1, 2015 the Company made certain changes to its management reporting structure which resulted in a change to the composition of its Energy and Infrastructure operating segments. In addition, certain corporate employees were transfered to the Energy operating segment. As a result, beginning in fiscal year 2016 the Company reports its financial performance based on the current reporting structure. The Company has recast certain prior period amounts to conform to the way it internally manages and monitors segment performance. These changes had no impact on consolidated net income or cash flows and were not material to the segment measurements presented.


25


The following tables present summarized financial information for the Company's operating segments (for the periods noted below): 
 
 
Energy
 
Environmental
 
Infrastructure
 
Pipeline
Services
 
Total
 
 
 
 
 
 
 
 
 
 
 
Three months ended March 25, 2016:
 
 
 
 
 
 
 
 
 
 
Gross revenue
 
$
46,280

 
$
65,465

 
$
18,721

 
$
26,526

 
$
156,992

Net service revenue
 
35,974

 
50,023

 
13,036

 
21,560

 
120,593

Segment profit (loss)
 
8,048

 
7,922

 
2,561

 
(3,128
)
 
15,403

Acquisition and integration expense
 

 

 

 
1,171

 
1,171

Depreciation
 
473

 
615

 
119

 
519

 
1,726

Amortization
 
260

 
279

 

 
2,454

 
2,993

 
 
 
 
 
 
 
 
 
 
 
Three months ended March 27, 2015:
 
 
 
 
 
 
 
 
 
 
Gross revenue
 
$
42,404

 
$
70,711

 
$
16,037

 
$

 
$
129,152

Net service revenue
 
37,056

 
51,172

 
11,865

 

 
100,093

Segment profit
 
8,796

 
9,942

 
2,673

 

 
21,411

Acquisition and integration expense
 

 

 

 

 

Depreciation
 
455

 
542

 
94

 

 
1,091

Amortization
 
282

 
399

 

 

 
681


 
 
 
 
 
 
 
 
 
 
 
 
 
Energy
 
Environmental
 
Infrastructure
 
Pipeline
Services
 
Total
 
 
 
 
 
 
 
 
 
 
 
Nine months ended March 25, 2016:
 
 
 
 
 
 
 
 
 
 
Gross revenue
 
$
134,526

 
$
220,721

 
$
61,365

 
$
34,543

 
$
451,155

Net service revenue
 
111,065

 
154,497

 
40,673

 
27,546

 
333,781

Segment profit (loss)
 
25,020

 
27,760

 
8,173

 
(4,289
)
 
56,664

Acquisition and integration expense
 

 

 

 
1,171

 
1,171

Depreciation
 
1,431

 
1,877

 
341

 
786

 
4,435

Amortization
 
858

 
944

 

 
2,756

 
4,558

 
 
 
 
 
 
 
 
 
 
 
Nine months ended March 27, 2015:
 
 
 
 
 
 
 
 
 
 
Gross revenue
 
$
124,325

 
$
219,960

 
$
51,330

 
$

 
$
395,615

Net service revenue
 
106,621

 
151,384

 
35,493

 

 
293,498

Segment profit
 
22,575

 
30,252

 
6,203

 

 
59,030

Acquisition and integration expense
 

 

 

 

 

Depreciation
 
1,478

 
1,728

 
319

 

 
3,525

Amortization
 
909

 
1,036

 

 

 
1,945


26


 
 
Three Months Ended
 
Nine Months Ended
Gross revenue
 
March 25, 2016

March 27, 2015
 
March 25, 2016
 
March 27, 2015
Gross revenue from reportable operating segments
 
$
156,992

 
$
129,152

 
$
451,155

 
$
395,615

Reconciling items (1)
 
1,138

 
1,625

 
177

 
1,415

  Total consolidated gross revenue
 
$
158,130

 
$
130,777

 
$
451,332

 
$
397,030

 
 
 
 
 
 
 
 
 
Net service revenue
 
 
 
 
 
 
 
 
Net service revenue from reportable operating segments
 
$
120,593

 
$
100,093

 
$
333,781

 
$
293,498

Reconciling items (1)
 
660

 
901

 
(983
)
 
(47
)
  Total consolidated net service revenue
 
$
121,253

 
$
100,994

 
$
332,798

 
$
293,451

 
 
 
 
 
 
 
 
 
Income from operations before taxes
 
 
 
 
 
 
 
 
Segment profit from reportable operating segments
 
$
15,403

 
$
21,411

 
$
56,664

 
$
59,030

Corporate shared services (2)
 
(11,922
)
 
(12,456
)
 
(33,144
)
 
(33,633
)
Goodwill impairment
 
(24,465
)
 

 
(24,465
)
 

Stock-based compensation expense
 
(1,498
)
 
(1,370
)
 
(4,278
)
 
(3,746
)
Unallocated acquisition and integration expenses
 
(435
)
 

 
(2,553
)
 

Unallocated depreciation and amortization
 
(385
)
 
(436
)
 
(1,155
)
 
(1,644
)
Interest income
 
189

 

 
326

 

Interest expense
 
(1,073
)
 
(73
)
 
(1,562
)
 
(125
)
  Total consolidated (loss) income from operations before taxes
 
$
(24,186
)
 
$
7,076

 
$
(10,167
)
 
$
19,882

 
 
 
 
 
 
 
 
 
Acquisition and integration expenses
 
 
 
 
 
 
 
 
Acquisition and integration expenses from reportable operating segments
 
$
1,171

 
$

 
$
1,171

 
$

Unallocated acquisition and integration expenses
 
435

 

 
2,553

 

Total consolidated acquisition and integration expenses
 
$
1,606

 
$

 
$
3,724

 
$

 
 
 
 
 
 
 
 
 
Depreciation and amortization
 
 
 
 
 
 
 
 
Depreciation and amortization from reportable operating segments
 
$
4,719

 
$
1,772

 
$
8,993

 
$
5,470

Unallocated depreciation and amortization
 
385

 
436

 
1,155

 
1,644

  Total consolidated depreciation and amortization
 
$
5,104

 
$
2,208

 
$
10,148

 
$
7,114

 
 
 
 
 
 
 
 
 
(1)
Amounts represent certain unallocated corporate amounts not considered in the CODM's evaluation of operating segment performance.
(2)
Corporate shared services consist of centrally managed functions in the following areas: accounting, treasury, information technology, legal, human resources, marketing, internal audit and executive management such as the CEO and various executives. These costs and other items of a general corporate nature are not allocated to the Company’s four operating segments.


27


Note 13. Commitments and Contingencies

Exit Strategy Contracts

The Company has entered into a number of long-term contracts pursuant to its Exit Strategy program under which it is obligated to complete the remediation of environmental conditions at covered sites. The Company assumes the risk for remediation costs for pre-existing environmental conditions and believes that through in-depth technical analysis, comprehensive cost estimation and creative remedial approaches it is able to execute strategies which protect the Company's return on these projects. The Company's client pays a fixed price and, as additional protection, for a majority of the contracts the client also pays for a cleanup cost cap insurance policy. The policy, which includes the Company as a named or additional named insured party, provides coverage for cost increases from unknown or changed conditions up to a specified maximum amount significantly in excess of the estimated cost of remediation. The Company believes that it is adequately protected from risk on these projects and that it is not likely that it will incur material losses in excess of applicable insurance. However, because several projects are near or beyond the term or financial limits of the insurance, the Company believes it is reasonably possible that events could occur under certain circumstances which could be material to the Company's condensed consolidated financial statements. With respect to these projects, there is a wide range of potential outcomes that may result in material costs being incurred beyond the limits or term of insurance, such as: (i) greater than expected volumes of contaminants requiring remediation; (ii) treatment systems requiring operation beyond the insurance term; (iii) agency requirement for implementation of a more expansive remedy that currently required; and, (iv) greater than expected allocable share of the ultimate remedy. The Company does not believe these outcomes are likely, and the exact nature, impact and duration of any such occurrence could vary due to a number of factors. Accordingly, the Company is unable to provide an estimate of potential loss with a reasonable degree of accuracy. Nevertheless, if these events were to occur, the Company believes that it is reasonably possible that the amount of costs currently accrued, which represents the Company's best estimate, could increase by as much as $38,200 , of which $12,400 would be covered by insurance.
 
With respect to one of the projects noted above, the regulatory agency charged with oversight of the project approved a remedial plan that is more expensive than the remedy that had been proposed by the Company. A cost allocation among the potentially responsible parties has not been finalized. However, the Company (and the party from whom it assumed site responsibility) did not contribute in any way to the site contamination, and the Company believes that it has meritorious defenses to liability and that it will not ultimately be responsible for any material remedial costs attributable to the more costly selected remedy. Nevertheless, due to uncertainty over the cost allocation process, it is reasonably possible that the Company's recorded estimate could change. With respect to another one of these projects, the regulatory agency charged with oversight of the project selected a remedy that is consistent with regulatory guidance and the Company’s estimates. However, until the final remedy is actually implemented, it remains reasonably possible that the volumes associated with the selected remedial alternative could change and the related costs could increase. The Company's estimated share of the potential remedial cost changes related to these two projects range from $0 to $18,700 .

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

Contract Damages

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


28


Government Contracts

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

Legal Matters

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

TRC Environmental Corporation v. LVI Group Services, Inc., United States District Court for the Western District of Texas, Austin Division 2014. TRC was the prime contractor on a project to demolish and decommission a power plant in Austin, Texas. LVI was a subcontractor on that project, and TRC sued LVI for approximately $3,000 for breaches in connection with LVI’s work. LVI filed a number of responsive pleadings in this lawsuit including a counterclaim for approximately $9,900 . TRC believes that its claims against LVI are meritorious and that LVI’s counterclaim is without merit. Nevertheless, an adverse determination on LVI’s counterclaim could have a material adverse effect on the Company’s business, operating results, financial position and cash flows.

The Company records actual or potential litigation-related losses in accordance with ASC Topic 450 "Contingencies". As of March 25, 2016 and June 30, 2015 , the Company had recorded litigation accruals of $6,295 and $4,479 , respectively. The Company also had insurance recovery receivables related to the aforementioned litigation-related accruals of $4,062 and $1,918 as of March 25, 2016 and June 30, 2015 , respectively.

The Company periodically adjusts the amount of such liabilities when such actual or potential liabilities are paid or otherwise discharged, new claims arise, or additional relevant information about existing or potential claims becomes available. The Company believes that it is reasonably possible that the amount of potential litigation-related liabilities could increase by as much as $10,900 , of which $2,400 would be covered by insurance.


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

Three and Nine Months Ended March 25, 2016 and March 27, 2015

Our fiscal quarters end on the last Friday of the quarter except for the last quarter of the fiscal year which always ends on June 30. The nine months ended March 25, 2016 contained one less business day than the prior fiscal year period.

The following discussion of our results of operations and financial condition should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this Form 10-Q and with our Annual Report on Form 10-K for the fiscal year ended June 30, 2015 . This discussion contains forward-looking statements that are based upon current expectations and assumptions, and, by their nature, such forward-looking statements are subject to risks and uncertainties. We have attempted to identify such statements using words such as "may", "expects", "plans", "anticipates", "believes", "estimates", or other words of similar import. We caution the reader that there may be events in the future that management is not able to accurately predict or control which may cause actual results to differ materially from the expectations described in the forward-looking statements. The factors described in the sections captioned "Critical Accounting Policies" and "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended June 30, 2015 as well as in this Form 10-Q provide examples of risks, uncertainties and

29


events that may cause our actual results to differ materially from the expectations described in the forward-looking statements.

Overview

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

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

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

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

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

Unanticipated changes in contract performance that may affect profitability, particularly with contracts that are fixed-price or have funding limits;
Seasonality of the spending cycle, notably for state and local government entities, and the spending patterns of our commercial sector clients;
Budget constraints experienced by our federal, state and local government clients;
Divestitures or discontinuance of operating units;
The timing and impact of acquisitions;
Employee hiring, utilization and turnover rates;
The number and significance of client contracts commenced and completed during the period;
Creditworthiness and solvency of clients;
The ability of our clients to terminate contracts without penalties;
Delays incurred in connection with contracts;
The size, scope and payment terms of contracts;
Contract negotiations on change orders and collection of related accounts receivable;
The timing of expenses incurred for corporate initiatives;
Competition;
Litigation;
Changes in accounting rules;
The credit markets and their effect on our customers;

30


General economic or political conditions; and
Employee expenses such as medical and other benefits.

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

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

On November 30, 2015, we acquired the Professional Services business segment ("Pipeline Services") of Willbros Group ("Willbros") in an all cash transaction. The initial purchase price consisted of (i) an initial cash payment of $120.0 million payable at closing, and, (ii) a second cash payment due of $7.5 million 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 $62.8 million was initially recorded prior to impairment, all of which is expected to be tax deductible, and other intangible assets of $44.5 million were recorded as a result of this acquisition. 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. Pipeline Services has contributed $34.5 million in gross revenue, $27.5 million in net service revenue, and an operating loss of $(4.3) million to our results for the period from November 30, 2015 through March 25, 2016 .

On September 29, 2014, we acquired all of the outstanding stock of NOVA Training Inc. and all of the outstanding membership interests of NOVA Earthworks, LLC (collectively "NOVA") based in Midland, Texas. NOVA provides safety training and environmental services as well as oil spill response, remediation and general oil field construction services to customers in the oil and gas industry. The initial purchase price consisted of (i) a cash payment of $7.2 million payable at closing, (ii) a second cash payment of $2.6 million placed into escrow, of which $0.5 million was paid in six months and the remaining $2.1 million was due in 18 months subject to withholding for various contractual issues, (iii) 50 shares of our common stock valued at $0.3 million on the closing date, and (iv) a $0.6 million net working capital adjustment. The sellers are also entitled to up to $1.5 million in contingent cash consideration through an earn-out provision based on the NSR performance of the acquired firm over the 24 month period following closing. We estimated the fair value of the contingent earn-out liability to be $0.9 million based on the projections and probabilities of reaching the performance goals through September 2016. Goodwill of $3.7 million , none of which is expected to be tax deductible, and other intangible assets of $3.6 million were recorded as a result of this acquisition. The goodwill is primarily attributable to the synergies and ancillary growth opportunities expected to arise after the acquisition. The fair values of assets and liabilities of the NOVA acquisition have been recorded in the Environmental operating segment. The impact of this acquisition was not material to our condensed consolidated balance sheets and results of operations.

Operating Segments

In connection with the acquisition of Pipeline Services, our reportable segments increased from three to four to reflect how we are currently managing our business. We manage our business under the following four operating segments:


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Energy:   The Energy operating segment provides services to a range of clients including energy companies, utilities, other commercial entities, and state and federal government agencies. Our Energy services include program management, engineer/procure/construct projects, design, and consulting. Our typical Energy projects involve upgrades, design and new construction for electric transmission and distribution systems and substations; energy efficiency program design and management; and renewable energy development and power generation.

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

Infrastructure:   The Infrastructure operating segment provides services related to the expansion of infrastructure capacity, the rehabilitation of overburdened and deteriorating infrastructure systems, and the management of risks related to security of public and private facilities. Our client base is predominantly state and municipal governments as well as select commercial developers. In addition, we provide infrastructure services on projects originating in our other 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.

Pipeline Services: The Pipeline Services operating segment provides pipeline and facilities engineering, EPC/EPCM, field services and integrity services to the oil and gas transmission and midstream markets, as well as at government facilities. We specialize in providing engineering services to assist clients in designing, engineering and constructing or expanding pipeline systems, compressor stations, pump stations, fuel storage facilities, terminals, gas processing, and field gathering and production facilities. Our expertise extends to the engineering of a wide range of project peripherals, including various types of support buildings and utility systems, power generation and electrical transmission systems, communications systems, fire protection, water and sewage treatment, water transmission, roads and railroad sidings. We also provide project management, engineering and material procurement services to the refining industry and government agencies, including chemical/process, mechanical, civil, structural, electrical instrumentation/controls and environmental engineering. We provide full-service integrity management program offerings including program development, data services, risk analysis, corrosion evaluation, integrity engineering and integrity construction services. We are partnered with Google to provide a cloud-based pipeline life-cycle integrity management solution, Integra Link™, which utilizes Google’s geospatial technology platform to help oil and gas pipeline companies visualize and utilize their data and information.

Our chief operating decision maker is our Chief Executive Officer ("CEO"). Our CEO manages the business by evaluating the financial results of the four 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

32


operating segment. Segment profit includes all operating expenses except the following: costs associated with providing corporate shared services (including certain depreciation and amortization), goodwill and intangible asset write-offs, and stock-based compensation expense. Depreciation expense is primarily allocated to operating segments based upon their respective use of total operating segment office space. Assets solely used at the Corporate level are not allocated to the operating segments. Inter-segment balances and transactions are not material. The accounting policies of the operating segments are the same as those for us as a whole except as discussed herein.
On July 1, 2015 we made certain changes to our management reporting structure which resulted in a change to the composition of the Energy and Infrastructure operating segments. In addition, certain corporate employees were transferred to the Energy operating segment. As a result, beginning in fiscal year 2016 we report our financial performance based on the current reporting structure. We have recast certain prior period amounts to conform to the way we internally manage and monitor segment performance. These changes had no impact on consolidated net income or cash flows and were not material to the segment measurements presented.

The following table presents the approximate percentage of our NSR by operating segment for the three and nine months ended March 25, 2016 and March 27, 2015 :

 
 
Three Months Ended
 
Nine Months Ended
 
 
March 25,
2016
 
March 27,
2015
 
March 25,
2016
 
March 27,
2015
Energy
 
30
%
 
37
%
 
33
%
 
36
%
Environmental
 
41
%
 
51
%
 
47
%
 
52
%
Infrastructure
 
11
%
 
12
%
 
12
%
 
12
%
Pipeline Services
 
18
%
 
%
 
8
%
 
%
 
 
100
%
 
100
%
 
100
%
 
100
%
Business Trend Analysis

Energy: The utilities in the United States are in the midst of a multi-year upgrade of the electric transmission grid to improve capacity, reliability and distribution of sources of generation. Years of underinvestment coupled with a favorable regulatory environment have provided a good business opportunity for those serving this market. According to the Edison Electric Institute, electric utilities throughout the United States will be investing over $60 billion in the performance of this work over the next several years. Economic impacts have slowed the pace of this investment, yet they do not appear to have affected the long term plan of investment. Demand for energy efficiency services continues to be supported by increasing state and federal funds targeted at energy efficiency. The American Recovery and Reinvestment Act of 2009, Regional Green House Gas Initiative and system benefit charges at the state or utility level have expanded the marketplace for energy efficiency program management services. Investment within the renewable portfolios also remains strong. We are well established in the Northeast and Mid-Atlantic regions and are growing our presence in the Southeast and in Texas and California where demand for services is the highest.

Environmental: Although there had been signs of growth in this market following a slowdown caused by general economic conditions, market demand for environmental services continues to be mixed. The last decade saw growth in nearly all aspects of this market. The fundamental market drivers remain in place, and this market also benefits from evolving regulatory developments particularly with respect to air quality, and the continuing need to enhance our aging transportation and energy infrastructure. While we expect oil and gas activity and major capital projects to be constrained in the near term, the outlook for services related to other areas of the market, such as environmental remediation, construction, transaction support, the retirement of coal plants and the need to transport natural gas remains favorable. Renewables and other energy source initiatives present important market opportunities but are linked to federal and state policy changes which will be required for the markets to commit long-term capital to projects such as pipelines and related infrastructure.


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Infrastructure: Although long-term prospects should be favorable and our backlog is up significantly, demand for infrastructure services is generally expected to continue to be flat. The overall infrastructure construction markets are expected to benefit from the federal funding certainty provided by the new $305 billion highway bill known as the Fixing America’s Surface Transportation (FAST) Act. The bill calls for the spending of approximately $205 billion on highways and $48 billion on transit projects.

Pipeline Services: Our Pipeline Services segment is currently in the midst of a market downturn due to low oil and gas prices and uncertainty in the oil and gas markets. Nevertheless, long-term opportunities include mid-stream oil and Natural Gas Liquid pipelines which are necessary to match takeaway capacity with current levels of production, some of which is stranded due to inadequate pipeline infrastructure, primarily in the Marcellus and Utica shales. Additional future opportunities are presented by natural gas pipelines to take gas to LNG export facilities as well as Mexico. In addition natural gas pipelines will be required as coal plants are retired and generating capacity is replaced with cleaner gas-burning plants. New regulatory requirements currently under consideration by the Department of Transportation will lead to data and integrity requirements for pipeline operators where our technologies and services can be utilized.


Critical Accounting Policies

Our condensed consolidated financial statements have been prepared in accordance with U.S. GAAP. These principles require the use of estimates and assumptions that affect amounts reported and disclosed in the condensed consolidated financial statements and related notes. Actual results could differ from these estimates and assumptions. We use our best judgment in the assumptions used to compile these estimates which are based on current facts and circumstances, prior experience and other assumptions that are believed to be reasonable. Further detail regarding our critical accounting policies can be found in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and notes included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2015 , as filed with the Securities Exchange Commission ("SEC") on September 9, 2015. No material changes concerning our critical accounting policies have occurred since June 30, 2015 .



34


Results of Operations

Consolidated Results of Operations

The following table presents the dollar and percentage changes in the condensed consolidated statements of operations for the three and nine months ended March 25, 2016 and March 27, 2015 :
 
Three Months Ended
 
Nine Months Ended
 
Mar. 25,
 
Mar. 27,
 
Change
 
Mar. 25,
 
Mar. 27,
 
Change
(Dollars in thousands)
2016
 
2015
 
$
 
%
 
2016
 
2015
 
$
 
%
Gross revenue
$
158,130

 
$
130,777

 
$
27,353

 
20.9
 %
 
$
451,332

 
$
397,030

 
$
54,302

 
13.7
 %
Less subcontractor costs and other direct reimbursable charges
36,877

 
29,783

 
7,094

 
23.8

 
118,534

 
103,579

 
14,955

 
14.4

Net service revenue
121,253

 
100,994

 
20,259

 
20.1

 
332,798

 
293,451

 
39,347

 
13.4

Interest income from contractual arrangements
27

 
23

 
4

 
17.4

 
69

 
67

 
2

 
3.0

Insurance recoverables and other income
146

 
753

 
(607
)
 
(80.6
)
 
1,919

 
6,238

 
(4,319
)
 
(69.2
)
Cost of services (exclusive of costs shown separately below)
104,030

 
83,486

 
20,544

 
24.6

 
280,690

 
247,275

 
33,415

 
13.5

General and administrative expenses
9,523

 
8,927

 
596

 
6.7

 
24,690

 
25,360

 
(670
)
 
(2.6
)
Acquisition and integration expenses
1,606

 

 
1,606

 
100.0

 
3,724

 

 
3,724

 
100.0

Goodwill impairment
24,465

 

 
24,465

 
100.0

 
24,465

 

 
24,465

 
100.0

Depreciation
1,942

 
1,303

 
639

 
49.0

 
5,070

 
4,481

 
589

 
13.1

Amortization
3,162

 
905

 
2,257

 
249.4

 
5,078

 
2,633

 
2,445

 
92.9

Operating (loss) income
(23,302
)
 
7,149

 
(30,451
)
 
(425.9
)
 
(8,931
)
 
20,007

 
(28,938
)
 
(144.6
)
Interest income
189

 

 
189

 
100.0

 
326

 

 
326

 
100.0

Interest expense
(1,073
)
 
(73
)
 
(1,000
)
 
1,369.9

 
(1,562
)
 
(125
)
 
(1,437
)
 
1,149.6

(Loss) income from operations before taxes
(24,186
)
 
7,076

 
(31,262
)
 
(441.8
)
 
(10,167
)
 
19,882

 
(30,049
)
 
(151.1
)
Income tax benefit (provision)
9,954

 
(1,916
)
 
11,870

 
(619.5
)
 
4,358

 
(7,244
)
 
11,602

 
(160.2
)
Net (loss) income
(14,232
)
 
5,160

 
(19,392
)
 
(375.8
)
 
(5,809
)
 
12,638

 
(18,447
)
 
(146.0
)
Net (income) loss applicable to noncontrolling interest
(65
)
 
5

 
(70
)
 
(1,400.0
)
 
(59
)
 
14

 
(73
)
 
(521.4
)
Net (loss) income applicable to TRC Companies, Inc.
$
(14,297
)
 
$
5,165

 
$
(19,462
)
 
(376.8
)%
 
$
(5,868
)
 
$
12,652

 
$
(18,520
)
 
(146.4
)%


Three Months Ended March 25, 2016

Gross revenue increased $27.4 million , or 20.9% , to $158.1 million for the three months ended March 25, 2016 from $130.8 million for the same period in the prior year. Organic activities were nearly level with the prior year period, accounting for $0.2 million, or 0.6%, of the growth in gross revenue, and acquisitions accounted for the remaining $27.2 million, or 99.4%, of the increase.

NSR increased $20.3 million , or 20.1% , to $121.3 million for the three months ended March 25, 2016 from $101.0 million for the same period in the prior year. Organic activities accounted for a $1.8 million, or 9.3%, decrease in NSR, and acquisitions accounted for a $22.1 million, or 109.3%, increase. The decrease in organic NSR was primarily attributable to our Environmental operating segment where NSR decreased $1.1 million. This decline was due to decreased demand from our oil and gas clients for services primarily related to midstream activities, and, in particular, pipeline permitting services.

Insurance recoverables and other income decreased $0.6 million , or 80.6% , to $0.1 million for the three months ended March 25, 2016 from $0.8 million for the same period in the prior year. In the three months ended March 27, 2015 , certain Exit Strategy projects had estimated cost increases which are not expected to be funded by the project-specific restricted investments and, therefore, are projected to be funded by the project specific insurance policy procured at project inception to cover, among other things, costs in excess of the original estimates. We did not experience the same level of estimated cost increases in the current quarter.

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COS increased $20.5 million , or 24.6% , to $104.0 million for the three months ended March 25, 2016 from $83.5 million for the same period in the prior year. Organic activities decreased $0.5 million, or 2.5%, and acquisitions accounted for $21.0 million, or 102.5%, of the increase. The decrease in organic COS primarily corresponded to the lower volume of work in our Environmental operating segment. As a percentage of NSR, COS were 85.8% and 82.7% for the three months ended March 25, 2016 and March 27, 2015 , respectively. As a percentage of NSR, organic COS were 83.7% and 82.7% for the three months ended March 25, 2016 and March 27, 2015 , respectively.

G&A expenses increased $0.6 million , or 6.7% , to $9.5 million for the three months ended March 25, 2016 from $8.9 million for the same period in the prior year. The increase was generally attributable to increased salary costs in connection with the Pipeline Services acquisition and higher professional service fees in the current year period. As a percentage of NSR, G&A expenses were 7.9% and 8.8% for the three months ended March 25, 2016 and March 27, 2015 , respectively.

Acquisition and integration expenses for the three months ended March 25, 2016 are comprised of:
Severance and personnel costs
 
$
914

Professional services and other
 
692

     Total
 
$
1,606


Due to the current economic conditions in the oil and gas markets and current operating performance, we assessed the recoverability of goodwill within our Pipeline Services operating segment during the three months ended March 25, 2016 .  In performing the goodwill assessment, we performed an impairment analysis that involved the use of discounted cash flow models as the best evidence of fair value.  The aggregate fair value of our Pipeline Services operating segment declined from its initial November 2015 valuation primarily due to a reduction in the projected future cash flows.  These reductions were primarily driven by a challenging commodity price environment and continued market uncertainty, which has had an adverse impact on capital spending. While the fundamentals for midstream infrastructure investment remain positive in the long term, the near term outlook remains uncertain, causing delays of large, midstream infrastructure projects. We do not expect activity to meaningfully increase in the near-term and, therefore, have adjusted our cash flows and sized our Pipeline Services operating segment accordingly.  Because of this reduction in our near term cash flow estimates, the fair value of the two Pipeline Services reporting units with goodwill did not exceed their carrying value, resulting in a goodwill impairment charge of $24.5 million during the three months ended March 25, 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 materially impact the final charge for goodwill impairment.

Significant assumptions underlying the discounted cash flows included: a weighted average cost of capital; profit margins and a terminal growth rate. Changes in these assumptions could have a significant impact on the valuation model. As an example, a hypothetical 1% change in weighted average cost of capital would increase/decrease the fair value by approximately $10.0 million. A hypothetical 1% change in the profit margin percentages in all periods would increase/decrease the fair value by approximately $5.0 million. Finally, a hypothetical 1% change in the terminal growth rate would increase/decrease the fair value by approximately $6.0 million. Changes in fair value from changes in these assumptions would increase/decrease the goodwill impairment charge. Additionally, if we experience sustained periods of constrained capital spending beyond the periods already contemplated in our model, it could adversely impact our valuation. These assumptions are highly judgmental and subject to change. Such changes, if material, may require us to incur additional impairment charges for goodwill and/or other indefinite-lived intangible assets in future periods.
  
Depreciation expenses increased $0.6 million , or 49.0% , to $1.9 million for the three months ended March 25, 2016 from $1.3 million for the same period in the prior year. The increase was primarily attributable to the Pipeline Services assets acquired in November 2015, which contributed $0.5 million of depreciation expense in the three months ended March 25, 2016 .


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Amortization expenses increased $2.3 million , or 249.4% , to $3.2 million for the three months ended March 25, 2016 from $0.9 million for the same period in the prior year. The increase was primarily attributable to the Pipeline Services intangible assets acquired in November 2015, which contributed $2.5 million of amortization expense in the three months ended March 25, 2016 .

Our effective tax rate was 41.1% for the three months ended March 25, 2016 , compared to 27.1% for the same period in the prior year. Our effective tax rate excluding the goodwill impairment was approximately 5.3% for the three months ended March 25, 2016, compared to approximately 27.1% for the same period in the prior year. The primary reconciling items between the federal statutory rate of 35.0% and our overall effective tax rate for the three months ended March 25, 2016 were the effect of state income taxes offset by discrete tax benefits related to the U.S. Research and Development credit and U.S. Domestic Production Activities deduction. The discrete impact of research and development credits and U.S. Domestic Production Activities deduction is the result of a change in estimate resulting from the finalization of a new research and development credit study and U.S. Domestic Production Activities deduction study during the three months ended March 25, 2016 ; the tax benefit for the change in estimate was reflected in its entirety in the three months ended March 25, 2016 . For the three months ended March 27, 2015 , the primary reconciling item between the federal statutory rate of 35.0% and our overall effective tax rate was the effect of state income taxes offset by discrete tax benefits related to the U.S. Research and Development credit. The discrete impact of research and development credits was the result of a change in estimate resulting from the finalization of a new research and development credit study during the three months ended March 27, 2015 . A tax benefit for the change in estimate was reflected in its entirety in the three months ended March 27, 2015 .


Nine Months Ended March 25, 2016

Gross revenue increased $54.3 million or 13.7% , to $451.3 million for the nine months ended March 25, 2016 from $397.0 million for the same period in the prior year. Organic activities accounted for $15.1 million, or 27.9%, of the growth in gross revenue, and acquisitions accounted for the remaining $39.2 million, or 72.1%, of the increase. The growth in organic gross revenue was driven by our Infrastructure operating segment where organic gross revenue increased $10.0 million primarily driven by increased transportation-related spending by our municipal and state clients. In addition, organic gross revenue increased $8.5 million in our Energy operating segment due to increased demand for electric transmission and distribution services. This organic growth was offset, in part, by a $2.1 million decline in the Environmental operating segment where we experienced decreased demand from our oil and gas clients for services primarily related to midstream activities.

NSR increased $39.3 million , or 13.4% , to $332.8 million for the nine months ended March 25, 2016 from $293.5 million for the same period in the prior year. Organic activities accounted for $8.1 million, or 20.6%, of the growth in NSR, and acquisitions accounted for the remaining $31.2 million, or 79.4%, of the increase. The increase in organic NSR was primarily attributable to our Infrastructure and Energy operating segments where organic NSR increased $5.2 million and $2.9 million respectively. The organic NSR increases are due to the same factors that led to the increases in gross revenue.

Insurance recoverables and other income decreased $4.3 million , or 69.2% , to $1.9 million for the nine months ended March 25, 2016 from $6.2 million for the same period in the prior year. In the nine months ended March 27, 2015 , an Exit Strategy project had estimated cost increases which were not expected to be funded by the project-specific restricted investments and, therefore, were projected to be funded by the project-specific insurance policy procured at project inception to cover, among other things, costs overruns. We did not experience a similar contract adjustment in the current period.

COS increased $33.4 million , or 13.5% , to $280.7 million for the nine months ended March 25, 2016 from $247.3 million for the same period in the prior year. Organic activities accounted for $3.0 million, or 8.9%, of the growth in COS, and acquisitions accounted for the remaining $30.4 million, or 91.1%, of the increase. Organic COS increased $3.2 million and $0.6 million in our Infrastructure and Energy operating segments, respectively. These increases were primarily attributable to costs incurred to support the current demand from our Energy and Infrastructure operating

37


segment clients. Organic COS decreased $0.6 million in our Environmental operating segment primarily due to lower volumes of work. As a percentage of NSR, COS were level at 84.3% and 84.3% for the nine months ended March 25, 2016 and March 27, 2015 , respectively. As a percentage of NSR, organic COS were 83.0% and 84.3% for the nine months ended March 25, 2016 and March 27, 2015 , respectively.

G&A expenses decreased $0.7 million , or 2.6% , to $24.7 million for the nine months ended March 25, 2016 from $25.4 million for the same period in the prior year. The decrease was largely attributable to lower in litigation costs in the current year. As a percentage of NSR, G&A expenses were 7.4% and 8.6% for the nine months ended March 25, 2016 and March 27, 2015 , respectively.

Acquisition and integration expenses for the nine months ended March 25, 2016 are comprised of:
Severance and personnel costs
 
$
1,600

Professional services and other
 
2,124

     Total
 
$
3,724


As aforementioned, due to the current economic conditions in the oil and gas markets and current operating performance, we assessed the recoverability of goodwill within our Pipeline Services operating segment during the three months ended March 25, 2016 .  The aggregate fair value of our Pipeline Services operating segment declined from its initial November 2015 valuation primarily due to a reduction in the projected future cash flows.  Because of this reduction in our near term cash flow estimates, the fair value of the two Pipeline Services reporting units with goodwill did not exceed their carrying value, resulting in a goodwill impairment charge of $24.5 million during the nine months ended March 25, 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 materially impact the final charge for goodwill impairment.
  
Depreciation expenses increased $0.6 million , or 13.1% , to $5.1 million for the nine months ended March 25, 2016 from $4.5 million for the same period in the prior year. The increase was primarily attributable to the Pipeline Services assets acquired in November 2015, which contributed $0.8 million of depreciation expense in the nine months ended March 25, 2016 .

Amortization expenses increased $2.4 million , or 92.9% , to $5.1 million for the nine months ended March 25, 2016 from $2.6 million for the same period in the prior year. The increase was primarily attributable to the Pipeline Services intangible assets acquired in November 2015, which contributed $2.8 million of amortization expense in the nine months ended March 25, 2016 .
 
Our effective tax rate was 42.6% for the nine months ended March 25, 2016 , compared to 36.4% for the same period in the prior year. Our effective tax rate excluding the Goodwill impairment was approximately 35.9% for the nine months ended March 25, 2016, compared to approximately 36.4% for the same period in the prior year. The primary reconciling items between the federal statutory rate of 35.0% and our overall effective tax rate were the effect of state income taxes offset by discrete tax benefits related to the U.S. Research and Development credit and U.S. Domestic Production Activities deduction in the current period, and the effect of state income taxes offset by discrete tax benefits related to research and development tax credits for the prior year period.


38


Costs and Expenses as a Percentage of NSR

The following table presents the percentage relationships of items in the condensed consolidated statements of operations to NSR for the three and nine months ended March 25, 2016 and March 27, 2015 :             

 
Three Months Ended
 
Nine Months Ended
 
March 25,
2016
 
March 27,
2015
 
March 25,
2016
 
March 27,
2015
Net service revenue
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Interest income from contractual arrangements

 

 

 

Insurance recoverables and other income
0.1

 
0.7

 
0.6

 
2.1

Operating costs and expenses:
 
 
 
 
 
 
 
Cost of services (exclusive of costs shown separately below)
85.8

 
82.7

 
84.3

 
84.3

General and administrative expenses
7.9

 
8.8

 
7.4

 
8.6

Acquisition and integration expenses
1.3

 

 
1.1

 

Goodwill impairment
20.2

 

 
7.4

 

Depreciation
1.6

 
1.3

 
1.5

 
1.5

Amortization
2.6

 
0.9

 
1.5

 
0.9

Total operating costs and expenses
119.4

 
93.7

 
103.3

 
95.3

Operating (loss) income
(19.2
)
 
7.1

 
(2.7
)
 
6.8

Interest income
0.2

 

 
0.1

 

Interest expense
(0.9
)
 
(0.1
)
 
(0.5
)
 

(Loss) income from operations before taxes
(19.9
)
 
7.0

 
(3.1
)
 
6.8

Income tax benefit (provision)
8.2

 
(1.9
)
 
1.3

 
(2.5
)
Net (loss) income
(11.7
)%
 
5.1
 %
 
(1.7
)%
 
4.3
 %

Additional Information by Reportable Operating Segment

Energy Operating Segment Results

 
 
Three Months Ended
 
Nine Months Ended
 
 
March 25,
 
March 27,
 
Change
 
March 25,
 
March 27,
 
Change
(Dollars in thousands)
 
2016
 
2015
 
$
 
%
 
2016
 
2015
 
$
 
%
Gross revenue
 
$
46,280

 
$
42,404

 
$
3,876

 
9.1
 %
 
$
134,526

 
$
124,325

 
$
10,201

 
8.2
%
Net service revenue
 
$
35,974

 
$
37,056

 
$
(1,082
)
 
(2.9
)%
 
$
111,065

 
$
106,621

 
$
4,444

 
4.2
%
Segment profit
 
$
8,048

 
$
8,796

 
$
(748
)
 
(8.5
)%
 
$
25,020

 
$
22,575

 
$
2,445

 
10.8
%

Gross revenue increased $3.9 million , or 9.1% , and $10.2 million , or 8.2% , for the three and nine months ended March 25, 2016 , respectively, compared to the same periods in the prior year. Organic gross revenue increased $3.2 million and $8.5 million while acquisitions provided $0.6 million and $1.7 million of gross revenue growth for the three and nine months ended March 25, 2016 , respectively, compared to the same periods in the prior year. The increase in organic gross revenue during the nine months ended March 25, 2016 was primarily attributable to increased demand for services from existing clients due to their continued investment in electric transmission and distribution, offset, in part, by delays on a significant new program management award.

NSR decreased $1.1 million , or 2.9% , and increased $4.4 million , or 4.2% , for the three and nine months ended March 25, 2016 , respectively, compared to the same periods in the prior year. Organic NSR decreased $1.7 million and increased $2.9 million while acquisitions provided $0.6 million and $1.5 million of NSR growth for the three and nine months ended March 25, 2016 , respectively, compared to the same periods in the prior year. The decrease in organic NSR during the three months ended March 25, 2016 was primarily due to delays on a significant new award as well timing associated

39


with the receipt of change orders. The increase in organic NSR for the nine months ended March 25, 2016 was primarily attributable to the same factors that led to higher gross revenue.

The Energy operating segment's profit decreased $0.7 million , or 8.5% , and increased $2.4 million , or 10.8% , for the three and nine months ended March 25, 2016 , respectively, compared to the same periods in the prior year. Organic segment profit decreased $0.8 million and increased $2.5 million while acquisitions accounted for no change and a $0.1 million decrease in segment profit growth for the three and nine months ended March 25, 2016 , respectively, compared to the same periods in the prior year. The decrease in organic segment profit for the three months ended March 25, 2016 was primarily attributable to lower employee productivity resulting from the aforementioned project and change order delays. As a percentage of NSR, the Energy operating segment's profit decreased to 22.4% from 23.7% and increased to 22.5% from 21.2% for the three and nine months ended March 25, 2016 , respectively, compared to the same periods in the prior year.


Environmental Operating Segment Results

 
 
Three Months Ended
 
Nine Months Ended
 
 
March 25,
 
March 27,
 
Change
 
March 25,
 
March 27,
 
Change
(Dollars in thousands)
 
2016
 
2015
 
$
 
%
 
2016
 
2015
 
$
 
%
Gross revenue
 
$
65,465

 
$
70,711

 
$
(5,246
)
 
(7.4
)%
 
$
220,721

 
$
219,960

 
$
761

 
0.3
 %
Net service revenue
 
$
50,023

 
$
51,172

 
$
(1,149
)
 
(2.2
)%
 
$
154,497

 
$
151,384

 
$
3,113

 
2.1
 %
Segment profit
 
$
7,922

 
$
9,942

 
$
(2,020
)
 
(20.3
)%
 
$
27,760

 
$
30,252

 
$
(2,492
)
 
(8.2
)%

Gross revenue decreased $5.2 million , or 7.4% , and increased $0.8 million , or 0.3% , for the three and nine months ended March 25, 2016 , respectively, compared to the same periods in the prior year. Organic gross revenue decreased $5.2 million and $2.1 million while acquisitions provided $0.0 million and $2.8 million of gross revenue growth for the three and nine months ended March 25, 2016 , respectively, compared to the same periods in the prior year. The decrease in organic gross revenue for the three and nine months ended March 25, 2016 was primarily to due to the decline in oil and gas prices, which led to delayed midstream capital projects. In addition, we completed a large pipeline permitting project that had generated significant revenue in the comparable period of the prior year.

NSR decreased $1.1 million , or 2.2% , and increased $3.1 million , or 2.1% , for the three and nine months ended March 25, 2016 , respectively, compared to the same periods in the prior year. Organic NSR decreased $1.1 million and increased $0.9 million while acquisitions provided $0.0 million and $2.2 million of gross revenue growth for the three and nine months ended March 25, 2016 , respectively, compared to the same periods in the prior year. The decrease in organic NSR for the three months ended March 25, 2016 was primarily attributable to the same factors that led to lower gross revenue.

The Environmental operating segment's profit decreased $2.0 million , or 20.3% , and $2.5 million , or 8.2% , for the three and nine months ended March 25, 2016 , respectively, compared to the same periods in the prior year. The segment profit decrease for the three and nine months ended March 25, 2016 was almost entirely organic. The decrease in segment profit for the three months ended March 25, 2016 was attributable to lower revenue, and increased salary costs. As a result, we incurred employee termination costs in the current quarter associated with efforts to align employee productivity with our current revenue base. The decrease in segment profit for the nine months ended March 25, 2016 was primarily attributable to a decrease in the employee productivity, unfavorable cost estimate adjustments on several large fixed price projects and the aforementioned employee termination costs. As a percentage of NSR, the Environmental operating segment's profit decreased to 15.8% from 19.4% and to 18.0% from 20.0% for the three and nine months ended March 25, 2016 , respectively, compared to the same periods in the prior year.



40


Infrastructure Operating Segment Results

 
 
Three Months Ended
 
Nine Months Ended
 
 
March 25,
 
March 27,
 
Change
 
March 25,
 
March 27,
 
Change
(Dollars in thousands)
 
2016
 
2015
 
$
 
%
 
2016
 
2015
 
$
 
%
Gross revenue
 
$
18,721

 
$
16,037

 
$
2,684

 
16.7
 %
 
$
61,365

 
$
51,330

 
$
10,035

 
19.5
%
Net service revenue
 
$
13,036

 
$
11,865

 
$
1,171

 
9.9
 %
 
$
40,673

 
$
35,493

 
$
5,180

 
14.6
%
Segment profit
 
$
2,561

 
$
2,673

 
$
(112
)
 
(4.2
)%
 
$
8,173

 
$
6,203

 
$
1,970

 
31.8
%

Gross revenue increased $2.7 million , or 16.7% , and $10.0 million , or 19.5% , for the three and nine months ended March 25, 2016 , respectively, compared to the same periods in the prior year. These results reflect increased U.S. commercial and state and local government activity associated with the upgrade of existing infrastructure.

NSR increased $1.2 million , or 9.9% , and $5.2 million , or 14.6% , for the three and nine months ended March 25, 2016 , respectively, compared to the same periods in the prior year. The increases in NSR were largely attributable to the same factors that led to the increases in gross revenue.

The Infrastructure operating segment's profit decreased $0.1 million , or 4.2% , and increased $2.0 million , or 31.8% , for the three and nine months ended March 25, 2016 , respectively, compared to the same periods in the prior year. The decrease in segment profit during the three months ended March 25, 2016 was primarily attributable to several large change orders received in the prior year period, which increased revenue and segment profit. A similar effect did not occur in the current period. The increase segment profit during the nine months ended March 25, 2016 was primarily attributable to the same factors that led to the increase in NSR, as well as a stronger emphasis on project and overhead cost controls. As a percentage of NSR, the Infrastructure operating segment's profit decreased to 19.6% from 22.5% and increased to 20.1% from 17.5% for the three and nine months ended March 25, 2016 , respectively, compared to the same periods in the prior year.


Pipeline Services Operating Segment Results

 
 
Three Months Ended
 
Nine Months Ended
(Dollars in thousands)
 
March 25, 2016
 
March 25, 2016
Gross revenue
 
$
26,526

 
$
34,543

Net service revenue
 
$
21,560

 
$
27,546

Segment loss
 
$
(3,128
)
 
$
(4,289
)

Pipeline Services operating results for nine months are for the post-acquisition period from November 30, 2015 to March 25, 2016 . During this four month period, Pipeline Services contributed $34.5 million in gross revenue, $27.5 million in NSR, and had segment loss of $4.3 million . These operating results were impacted by non-cash purchase accounting adjustments and integration costs of approximately $3.9 million, primarily amortization expense. Continued uncertainty surrounding the oil and gas markets, including depressed commodity prices also impacted current period operating results. Specifically, the uncertain market outlook has constrained capital spending, resulting in lower demand for our services and increased competition for new contracts.
 


41


Backlog by Operating Segment

As of March 25, 2016 , our contract backlog based on gross revenue was $595 million , compared to $435 million as of March 27, 2015 . Our contract backlog based on NSR was $376 million as of March 25, 2016 , compared to $289 million as of March 27, 2015 . Typically about 60% of backlog is completed in one year. In addition to this contract backlog, we hold open-order contracts from various commercial clients and government agencies. As work under these contracts is authorized and funded, we include this portion in our contract backlog. While most contracts contain cancellation provisions, we are unaware of any material work included in backlog that will be canceled or delayed.

The following table sets forth the gross revenue and NSR contract backlog amounts of our operating segments at March 25, 2016 and March 27, 2015 (in millions):
 
Gross Revenue Backlog
 
NSR Backlog
 
March 25,
 
March 27,
 
Change
 
March 25,
 
March 27,
 
Change
(Dollars in millions)
2016
 
2015
 
$
 
%
 
2016
 
2015
 
$
 
%
Energy
$
160

 
$
97

 
$
63

 
64.9
%
 
$
91

 
$
86

 
$
5

 
5.8
%
Environmental
243

 
235

 
8

 
3.4
%
 
139

 
133

 
6

 
4.5
%
Infrastructure
131

 
103

 
28

 
27.2
%
 
96

 
70

 
26

 
37.1
%
Pipeline Services
61

 

 
61

 
N/A

 
50

 

 
50

 
N/A

  Total
$
595

 
$
435

 
$
160

 
36.8
%
 
$
376

 
$
289

 
$
87

 
30.1
%


Revisions in Estimates
We have numerous contracts in progress at any time, all of which are at various stages of completion. Our recognition of profit is dependent upon the accuracy of a variety of estimates including engineering progress, materials quantities, achievement of milestones and other incentives, liquidated-damages provisions, labor productivity and cost estimates. Such estimates are based on various judgments we make with respect to those factors and can be difficult to accurately determine until the project is significantly underway. Due to uncertainties inherent in the estimation process, actual completion costs often vary from estimates. If estimated total costs on any contract indicate a loss, we charge the entire estimated loss to operations in the period the loss first becomes known. If actual costs exceed the original fixed contract price, recognition of any additional revenue will be pursuant to a change order, contract modification, or claim.
The following table summarizes the number of projects that experienced estimated contract profit revisions relating to the revaluation of work performed in prior periods:
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
 
March 25,
 
March 27,
 
March 25,
 
March 27,
(Dollars in thousands)
 
2016
 
2015
 
2016
 
2015
Number of projects
 
1,437

 
1,243

 
1,659

 
1,688

Net increase (reduction) in project profitability
 
$
715

 
$
3,943

 
$
(1,617
)
 
$
(205
)
 
 
 
 
 
 
 
 
 
 
 
Net increase (reduction) in project profitability by operating segment:
 
 
 
 
 
 
 
 
Energy
 
 
$
310

 
$
1,130

 
$
(408
)
 
$
(857
)
Environmental
 
1,672

 
1,145

 
(828
)
 
837

Infrastructure
 
(886
)
 
1,668

 
(381
)
 
(185
)
Pipeline Services
 
(381
)
 

 

 

 
Total
 
 
$
715

 
$
3,943

 
$
(1,617
)
 
$
(205
)



42


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

Liquidity and Capital Resources

We primarily rely on cash from operations and financing activities, including borrowings under our revolving credit facility, to fund our operations. Our liquidity is assessed in terms of our overall ability to generate cash to fund our operating and investing activities and to service debt. We believe that our available cash, cash flows from operations and borrowing capacity under our credit facility, discussed under "Revolving Credit Facility and Term Loan" below, will be sufficient to fund our operations for at least the next twelve months.
The following table provides summarized information with respect to our cash balances and cash flows as of and for the nine months ended March 25, 2016 and March 27, 2015 (in thousands):
 
 
Nine Months Ended
 
 
March 25,
 
March 27,
 
Change
(Dollars in thousands)
 
2016
 
2015
 
$
 
%
Net cash provided by operating activities
 
$
30,475

 
$
12,580

 
$
17,895

 
142.2
%
Net cash used in investing activities
 
(125,306
)
 
(15,285
)
 
110,021

 
719.8
%
Net cash provided by (used in) financing activities
 
66,655

 
(3,549
)
 
70,204

 
1,978.1
%

As of March 25, 2016 , cash and cash equivalents decreased by $28.2 million , or 75.5% , to $9.1 million , compared to the fiscal year ended June 30, 2015 . This decline is primarily the result of cash utilized for the acquisition of Pipeline Services from Willbros on November 30, 2015.

Net cash provided by operating activities increased by $17.9 million , or 142.2% , to $30.5 million for the nine months ended March 25, 2016 , compared to $12.6 million of cash provided for the same period of the prior year. The increase was attributable to the favorable timing of collections activity with respect to accounts receivable in the nine months ended March 25, 2016 compared to the same period of the prior year. These favorable results are offset by higher cash payments made primarily with respect to income taxes and employee related compensation in the nine months ended March 25, 2016 compared to the same period of the prior year.

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. Current quarter DSO, which measures the collections turnover of both billed and unbilled receivables, remained level at 83 days as of March 25, 2016 and 83 days as of June 30, 2015 , and decreased from 90 days when compared to March 27, 2015 . Our goal is to maintain DSO at less than 80 days.

Net cash used in investing activities increased by $110.0 million , or 719.8% , to $125.3 million for the nine months ended March 25, 2016 , compared to $15.3 million of cash used for the same period of the prior year. The increase was attributable to $108.5 million in additional cash paid for acquisitions, primarily the acquisition of Pipeline Services.

Net cash provided by financing activities increased by $70.2 million , or 1,978.1% , to $66.7 million for the nine months ended March 25, 2016 , compared to $3.5 million of cash used for the same period of the prior year. The increase was directly attributable to the proceeds received on debt incurred, net of issuance costs paid, for the acquisition of Pipeline Services.


43


Long-Term Debt

Revolving Credit Facility and Term Loan

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

The actual results as compared to the covenant requirements under the Credit Agreement as of March 25, 2016
for the measurement periods described below are as follows (in thousands):

Financial Covenant
 
Measurement Period
 
Actual
 
Required
Maximum leverage ratio
 
Trailing 12 Months
 
1.36

 
Not to exceed
3.00 to 1.00
Minimum fixed charge coverage ratio
 
Trailing 12 Months
 
8.92

 
Must exceed
1.25 to 1.00




Item 3. Quantitative and Qualitative Disclosures about Market Risk

We do not currently utilize derivative financial instruments. We are exposed to interest rate risk under our New Credit Agreement. Amounts outstanding under the New Credit Agreement bear interest at the Base Rate (as defined, generally the prime rate) plus a margin of 0.50% to 1.25% , or at the Eurodollar Rate (as defined, generally the Libor rate) plus a margin of 1.50% to 2.25% , based on the Company's Leverage Ratio (as defined).

Borrowings at these rates under the Revolving Facility have no designated term and may be repaid without penalty any time prior to the maturity date. Borrowings outstanding under the Revolving Facility will mature on November 30, 2020. The Term Loan amortizes in quarterly installments payable on the last day of each March, June, September, and December, commencing on March 31, 2016 in amounts equal to 1.875% of the term loan made or outstanding, with the balance payable on the November 30, 2020 Term Loan Maturity Date.


Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company has evaluated, under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, the effectiveness of its disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act, as of March 25, 2016 . Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures were effective as of March 25, 2016 .

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act, during the Company's quarter ended March 25, 2016 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

44


PART II: OTHER INFORMATION

Item 1.      Legal Proceedings

See Legal Matters in Note 13 - Commitments and Contingencies, under Part I, Item 1, Financial Information.

Item 1A. Risk Factors

No material changes.

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

None.

Item 3.      Defaults Upon Senior Securities

None.

Item 4.    Mine Safety Disclosures

Not Applicable.

Item 5.      Other Information

None.

Item 6.      Exhibits
    
31.1
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
31.2
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
32.1
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
32.2
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
101.INS
XBRL Instance Document
 
 
101.SCH
XBRL Taxonomy Extension Schema Document
 
 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
 
 
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
 
 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document


45


SIGNATURE


Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
TRC COMPANIES, INC.
 
 
 
May 4, 2016
By:
/s/ Thomas W. Bennet, Jr.
 
 
 
 
 
Thomas W. Bennet, Jr.
 
 
Senior Vice President and Chief Financial Officer
 
 
(Duly Authorized Officer, Principal Financial Officer and Principal Accounting Officer)


46
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