TRC COMPANIES INC /DE/ - FORM 10-Q - February 2, 2017

Attached files

file filename
EX-32.2 - EXHIBIT 32.2 CERTIFICATION OF CFO - TRC COMPANIES INC /DE/trr-ex322_20161230xq2x2017.htm
EX-32.1 - EXHIBIT 32.1 CERTIFICATION OF CEO - TRC COMPANIES INC /DE/trr-ex321_20161230xq2x2017.htm
EX-31.2 - EXHIBIT 31.2 CERTIFICATION OF CFO - TRC COMPANIES INC /DE/trr-ex312_20161230xq2x2017.htm
EX-31.1 - EXHIBIT 31.1 CERTIFICATION OF CEO - TRC COMPANIES INC /DE/trr-ex311_20161230xq2x2017.htm

 
 
 
 
 
 
 
 
 
 
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 December 30, 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 January 20, 2017 there were 31,594,685 shares of the registrant's common stock, $.10 par value, outstanding.
 
 
 
 
 
 
 
 
 
 


TRC COMPANIES, INC.
CONTENTS OF QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED DECEMBER 30, 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
 
Six Months Ended
 
December 30,
2016
 
December 25,
2015
 
December 30,
2016
 
December 25,
2015
Gross revenue
$
198,662

 
$
157,743

 
$
379,513

 
$
293,202

Less subcontractor costs and other direct reimbursable charges
71,306

 
46,361

 
127,852

 
81,657

Net service revenue
127,356

 
111,382

 
251,661

 
211,545

Interest income from contractual arrangements
62

 
27

 
96

 
42

Insurance recoverables and other income
644

 
1,031

 
1,281

 
1,773

Operating costs and expenses:
 
 
 
 
 
 
 
Cost of services (exclusive of costs shown separately below)
105,613

 
93,676

 
209,289

 
176,660

General and administrative expenses
11,042

 
8,046

 
21,881

 
15,167

Acquisition and integration expenses
—

 
1,240

 
—

 
2,118

Depreciation
1,754

 
1,704

 
3,542

 
3,128

Amortization
2,617

 
1,076

 
5,333

 
1,916

Total operating costs and expenses
121,026

 
105,742

 
240,045

 
198,989

Operating income
7,036

 
6,698

 
12,993

 
14,371

Interest income
286

 
137

 
564

 
137

Interest expense
(841
)
 
(461
)
 
(1,686
)
 
(489
)
Income from operations before taxes
6,481

 
6,374

 
11,871

 
14,019

Income tax provision
(2,473
)
 
(2,439
)
 
(4,204
)
 
(5,596
)
Net income
4,008

 
3,935

 
7,667

 
8,423

Net (income) loss applicable to noncontrolling interest
(10
)
 
2

 
(30
)
 
6

Net income applicable to TRC Companies, Inc.
$
3,998

 
$
3,937

 
$
7,637

 
$
8,429

 
 
 
 
 
 
 
 
Basic earnings per common share
$
0.13

 
$
0.13

 
$
0.24

 
$
0.27

Diluted earnings per common share
$
0.13

 
$
0.13

 
$
0.24

 
$
0.27

 
 
 
 
 
 
 
 
Weighted-average common shares outstanding:
 
 
 
 
 
 
 
Basic
31,451

 
30,968

 
31,300

 
30,805

Diluted
31,966

 
31,369

 
31,783

 
31,347


See accompanying notes to condensed consolidated financial statements.

3

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

 
 
 
Three Months Ended
 
Six Months Ended
 
 
 
December 30, 2016
 
December 25, 2015
 
December 30, 2016
 
December 25, 2015
Net income
$
4,008

 
$
3,935

 
$
7,667

 
$
8,423

Other comprehensive (loss) income
 
 
 
 
 
 
 
 
Unrealized (loss) gain on available-for-sale securities
(48
)
 
(11
)
 
(92
)
 
(23
)
 
Tax effect on unrealized (loss) gain on available-for-sale securities
18

 
5

 
35

 
10

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

 
5

 
—

 
30

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

 
(2
)
 
—

 
(12
)
 
 
Total other comprehensive (loss) income
(30
)
 
(3
)
 
(57
)
 
5

Comprehensive income
3,978

 
3,932

 
7,610

 
8,428

 
Comprehensive (income) loss attributable to noncontrolling interests
(10
)
 
2

 
(30
)
 
6

Comprehensive income attributable to TRC Companies, Inc.
$
3,968

 
$
3,934

 
$
7,580

 
$
8,434


See accompanying notes to condensed consolidated financial statements.


4

TRC COMPANIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(Unaudited)
 
December 30,
2016
 
June 30,
2016
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
26,733

 
$
18,804

Restricted cash
43

 
71

Accounts receivable, less allowance for doubtful accounts
174,215

 
149,280

Insurance recoverable - environmental remediation
49,066

 
49,934

Restricted investments
5,767

 
5,959

Income taxes refundable
—

 
75

Prepaid expenses and other current assets
21,798

 
24,122

Total current assets
277,622

 
248,245

Property and equipment
76,120

 
74,053

Less accumulated depreciation and amortization
(54,600
)
 
(51,593
)
Property and equipment, net
21,520

 
22,460

Goodwill
75,337

 
75,337

Intangible assets, net
40,636

 
45,969

Deferred income tax assets
26,377

 
26,239

Long-term restricted investments
17,441

 
18,420

Long-term prepaid insurance
22,367

 
23,425

Other assets
14,540

 
18,383

Total assets
$
495,840

 
$
478,478

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
13,963

 
$
18,339

Accounts payable
51,455

 
29,311

Accrued compensation and benefits
45,398

 
48,485

Deferred revenue
15,890

 
15,363

Environmental remediation liabilities
8,644

 
8,654

Income taxes payable
785

 
265

Other accrued liabilities
59,796

 
58,026

Total current liabilities
195,931

 
178,443

Non-current liabilities:
 
 
 
Long-term debt, net of current portion
74,101

 
79,243

Long-term income taxes payable
959

 
2,204

Deferred revenue
61,930

 
65,340

Environmental remediation liabilities
436

 
433

Total liabilities
333,357

 
325,663

Commitments and contingencies


 


Equity:
 
 
 
Common stock, $.10 par value; 40,000,000 shares authorized, 31,594,124 and 31,590,642 shares issued and outstanding, respectively, at December 30, 2016, and 31,087,084 and 31,083,602 shares issued and outstanding, respectively, at June 30, 2016
3,159

 
3,109

Additional paid-in capital
197,164

 
195,156

Accumulated deficit
(38,261
)
 
(45,898
)
Accumulated other comprehensive loss
(128
)
 
(71
)
Treasury stock, at cost
(33
)
 
(33
)
Total stockholders' equity applicable to TRC Companies, Inc.
161,901

 
152,263

Noncontrolling interest
582

 
552

Total equity
162,483

 
152,815

Total liabilities and equity
$
495,840

 
$
478,478


See accompanying notes to condensed consolidated financial statements.

5

TRC COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
 
Six Months Ended
 
December 30,
2016
 
December 25,
2015
Cash flows from operating activities:
 
 
 
Net income
$
7,667

 
$
8,423

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Non-cash items:
 
 
 
Depreciation and amortization
8,875

 
5,044

Amortization of debt issuance costs
358

 
119

Stock-based compensation expense
3,743

 
2,780

Provision for doubtful accounts
670

 
—

Deferred income taxes
(102
)
 
892

Other non-cash items
(459
)
 
476

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(25,609
)
 
12,143

Insurance recoverable - environmental remediation
868

 
505

Income taxes
(650
)
 
(2,426
)
Restricted investments
454

 
914

Prepaid expenses and other current assets
(92
)
 
(6,442
)
Long-term prepaid insurance
1,058

 
1,120

Other assets
3,635

 
558

Accounts payable
22,103

 
(1,328
)
Accrued compensation and benefits
(3,059
)
 
(9,574
)
Deferred revenue
(2,883
)
 
676

Environmental remediation liabilities
(7
)
 
(61
)
Other accrued liabilities
1,647

 
(383
)
Net cash provided by operating activities
18,217

 
13,436

Cash flows from investing activities:
 
 
 
Additions to property and equipment
(2,662
)
 
(4,013
)
Withdrawals from restricted investments
613

 
466

Acquisition of businesses, net of cash acquired
—

 
(119,600
)
Proceeds from sale of fixed assets
198

 
29

Net cash used in investing activities
(1,851
)
 
(123,118
)
Cash flows from financing activities:
 
 
 
Borrowings under revolving credit facility
—

 
27,000

Repayments under revolving credit facility
—

 
(18,000
)
Payments on long-term debt and other
(11,711
)
 
(2,970
)
Payments on capital lease obligations
—

 
(133
)
Proceeds from long-term debt and other
4,865

 
6,523

Proceeds from term loan
—

 
75,000

Repayments of term loan debt
(2,813
)
 
—

Payments of issuance costs on credit facility
—

 
(3,248
)
Net working capital and additional cash payments on acquisitions
2,957

 
(1,132
)
Shares repurchased to settle tax withholding obligations
(2,373
)
 
(2,886
)
Excess tax benefit from stock-based awards
—

 
1,473

Proceeds from exercise of stock options
638

 
209

Net cash (used in) provided by financing activities
(8,437
)
 
81,836

Increase (decrease) in cash and cash equivalents
7,929

 
(27,846
)
Cash and cash equivalents, beginning of period
18,804

 
37,296

Cash and cash equivalents, end of period
$
26,733

 
$
9,450

Supplemental cash flow information:
 
 
 
Non-cash consideration for business acquired
$
—

 
$
7,500


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, 2015
 
30,486

 
$
3,049

 
$
191,321

 
$
(45,939
)
 
$
(88
)
 
3

 
$
(33
)
 
$
148,310

 
$
(395
)
 
$
147,915

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
—

 
—

 
—

 
8,429

 
—

 
—

 
—

 
8,429

 
(6
)
 
8,423

Other comprehensive income
 
—

 
—

 
—

 
—

 
5

 
—

 
—

 
5

 
—

 
5

Exercise of stock options
 
30

 
3

 
206

 
—

 
—

 
—

 
—

 
209

 
—

 
209

Stock-based compensation
 
808

 
81

 
2,699

 
—

 
—

 
—

 
—

 
2,780

 
—

 
2,780

 Shares repurchased to settle tax withholding obligations
 
(287
)
 
(29
)
 
(2,857
)
 
—

 
—

 
—

 
—

 
(2,886
)
 
—

 
(2,886
)
Directors' deferred compensation
 
3

 
—

 
37

 
—

 
—

 
—

 
—

 
37

 
—

 
37

Stock-based compensation income tax benefits
 
—

 
—

 
1,441

 
—

 
—

 
—

 
—

 
1,441

 
—

 
1,441

 Balances as of
December 25, 2015
 
31,040

 
$
3,104

 
$
192,847

 
$
(37,510
)
 
$
(83
)
 
3

 
$
(33
)
 
$
158,325

 
$
(401
)
 
$
157,924


 
 
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, 2016
 
31,087

 
$
3,109

 
$
195,156

 
$
(45,898
)
 
$
(71
)
 
3

 
$
(33
)
 
$
152,263

 
$
552

 
$
152,815

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
—

 
—

 
—

 
7,637

 
—

 
—

 
—

 
7,637

 
30

 
7,667

Other comprehensive loss
 
—

 
—

 
—

 
—

 
(57
)
 
—

 
—

 
(57
)
 
—

 
(57
)
Exercise of stock options
 
71

 
7

 
631

 
—

 
—

 
—

 
—

 
638

 
—

 
638

Stock-based compensation
 
716

 
71

 
3,672

 
—

 
—

 
—

 
—

 
3,743

 
—

 
3,743

 Shares repurchased to settle tax withholding obligations
 
(287
)
 
(29
)
 
(2,344
)
 
—

 
—

 
—

 
—

 
(2,373
)
 
—

 
(2,373
)
Directors' deferred compensation
 
7

 
1

 
49

 
—

 
—

 
—

 
—

 
50

 
—

 
50

 Balances as of
December 30, 2016
 
31,594

 
$
3,159

 
$
197,164

 
$
(38,261
)
 
$
(128
)
 
3

 
$
(33
)
 
$
161,901

 
$
582

 
$
162,483


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, power, infrastructure and oil and gas related 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, 2016.

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 simplifies the income tax consequences, accounting for forfeitures and classification on the statement of cash flows. The standard requires that, prospectively, all tax effects related to share-based payments be made through the income statement at the time of settlement as opposed to excess tax benefits being recognized in additional paid-in-capital under the current guidance. The standard also removes the requirement to delay recognition of a tax benefit until it reduces current taxes payable. This change is required to be applied on a modified retrospective basis, with a cumulative-effect adjustment to opening retained earnings. Additionally, all tax related cash flows resulting from share-based payments are to be reported as operating activities on the statement of cash flows, a change from the current requirement to present tax benefits as an inflow from financing activities and an outflow from operating activities. Finally, entities will be allowed to withhold an amount up to the employees’ maximum individual tax rate (as opposed to the minimum statutory tax rate) in the relevant jurisdiction without resulting in liability classification of the award. The change in withholding requirements will be applied on a modified retrospective approach. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016, with early adoption permitted. The Company adopted this standard effective for its first quarter of fiscal 2017. The impact of the early adoption resulted in the following:

•
The Company recorded a net tax benefit of $27 and $21 within income tax expense for the three and six months ended December 30, 2016, respectively, related to net tax windfalls on share based awards. Prior to adoption this amount would have been recorded as an increase of capital in excess of par value. This change could create volatility in the Company's effective tax rate.

•
The Company no longer reflects the cash received from the excess tax benefit within cash flows from financing activities but instead now reflects this benefit within cash flows from operating activities in the Condensed Consolidated Statements of Cash Flows. The Company elected to apply this change in presentation prospectively and thus prior periods have not been adjusted.

•
The Company elected not to change its policy on accounting for forfeitures and continues to estimate the total number of awards for which the requisite service period will not be rendered.

8

•
The Company’s statutory withholding requirements have been updated to allow withholding up to the Company's maximum statutory withholding requirements in relevant jurisdictions.

•
The Company excluded the excess tax benefits from the assumed proceeds available to repurchase shares in the computation of its diluted earnings per share for the three and six months ended December 30, 2016. This increased diluted weighted average common shares outstanding by 147 and 85 shares, respectively, for the periods.

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. The Company anticipates the standard will have a material impact on its assets and liabilities due to the addition of right-of-use assets and lease liabilities to the balance sheet; however, it does not expect the standard to have a material impact on its cash flows or results of operations.
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. Early adoption is permitted under this standard for annual periods beginning after December 15, 2016, 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. The Company has developed a project plan that includes a three-phase approach to implementing this standard update. Phase one, the assessment phase, is currently in process. Phase two, which is expected to begin during the third quarter of fiscal 2017, will include conversion activities, such as establishing policies, identifying system impacts and understanding the initial financial impact this standard update will have. Phase three, which is expected to begin during the first quarter of fiscal 2018, will include integrating the standard update into financial reporting processes and systems, and developing a more robust understanding of the financial impact of this standard update on the Company's condensed consolidated financial statements. The Company anticipates that the transition to the new standard could have a material impact on its consolidated financial statements but will be unable to quantify that impact until the third phase of the project has been completed. The Company expects the cost of the activities it is undertaking to transition to the new standard will result in an increase in general and administrative expenses in fiscal 2017 and 2018.

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 December 30, 2016 and June 30, 2016:
Assets and Liabilities Measured at Fair Value on a Recurring Basis as of December 30, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
 
 
 
 
 
 
Restricted investments:
 
 
 
 
 
 
 
Mutual funds
$
49

 
$
—

 
$
—

 
$
49

Certificates of deposit
—

 
105

 
—

 
105

Municipal bonds
—

 
532

 
—

 
532

Corporate bonds
—

 
256

 
—

 
256

U.S. Government bonds
—

 
216

 
—

 
216

U.S. Treasury Notes
1,937

 
—

 
—

 
1,937

Money market accounts and cash deposits
6,377

 
—

 
—

 
6,377

Total assets
$
8,363

 
$
1,109

 
$
—

 
$
9,472

 
 
 
 
 
 
 
 
Contingent consideration
$
—

 
$
—

 
$
90

 
$
90

Total liabilities
$
—

 
$
—

 
$
90

 
$
90

Assets and Liabilities Measured at Fair Value on a Recurring Basis as of June 30, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
Restricted investments:
 
 
 
 
 
 
 
Mutual funds
$
71

 
$
—

 
$
—

 
$
71

Certificates of deposit
—

 
107

 
—

 
107

Municipal bonds
—

 
547

 
—

 
547

Corporate bonds
—

 
439

 
—

 
439

U.S. Government bonds
—

 
219

 
—

 
219

U.S. Treasury Notes
2,009

 
—

 
—

 
2,009

Money market accounts and cash deposits
6,476

 
—

 
—

 
6,476

Total assets
$
8,556

 
$
1,312

 
$
—

 
$
9,868

 
 
 
 
 
 
 
 
Contingent consideration
$
—

 
$
—

 
$
233

 
$
233

Total liabilities
$
—

 
$
—

 
$
233

 
$
233

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 December 30, 2016 and June 30, 2016 are included within current and long-term restricted investments on the condensed consolidated balance sheets.

10

The Company's long-term debt is not measured at fair value in the condensed consolidated balance sheets. The fair value of debt is the estimated amount the Company would have to pay to transfer its debt, including any premium or discount attributable to the difference between the stated interest rate and market rate of interest at the balance sheet date. Fair values are based on valuations of similar debt at the balance sheet date and supported by observable market transactions when available: Level 2 of the fair value hierarchy.  At December 30, 2016 and June 30, 2016 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, 2016
$
233

Decrease of liability related to re-measurement of fair value
(143
)
Contingent consideration balance at December 30, 2016
$
90

 
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 December 30, 2016, 2,015 shares remained available for grants under the 2007 Plan.

Stock-Based Compensation

The Company measures stock-based compensation cost at the grant date based on the fair value of the award. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company's condensed consolidated statements of operations. Stock-based compensation expense includes the estimated effects of forfeitures, and estimates of forfeitures will be adjusted over the requisite service period to the extent actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized in the period of change and will also impact the amount of expense to be recognized in future periods.


11

During the three and six months ended December 30, 2016 and December 25, 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
 
Six Months Ended
 
 
December 30,
2016
 
December 25,
2015
 
December 30,
2016
 
December 25,
2015
Cost of services
$
1,283

 
$
802

 
$
1,990

 
$
1,449

General and administrative expenses
1,003

 
709

 
1,753

 
1,331

 
Total stock-based compensation expense
$
2,286

 
$
1,511

 
$
3,743

 
$
2,780


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 six months ended December 30, 2016 and December 25, 2015.
 
 
 
 
 
 
 
 
A summary of stock option activity for the six months ended December 30, 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, 2016 (85 exercisable)
85

 
$
8.28

 
 
 
 
Options exercised
(72
)
 
$
8.96

 
 
 
 
Options expired
(1
)
 
$
9.80

 
 
 
 
Outstanding options as of December 30, 2016
12

 
$
4.20

 
1.5
 
$
78

Options exercisable as of December 30, 2016
12

 
$
4.20

 
1.5
 
$
78

Options vested and expected to vest as of December 30, 2016
12

 
$
4.20

 
1.5
 
$
78


The aggregate intrinsic value is measured using the fair market value at the date of exercise (for options exercised) or as of December 30, 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 $10.60 as of December 30, 2016. The total intrinsic value of options exercised for the six months ended December 30, 2016 and December 25, 2015 was $55 and $120, respectively. The total proceeds received from option exercises for the six months ended December 30, 2016 and December 25, 2015 was $638 and $209, respectively.


12

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 no non-vested RSA's as of December 30, 2016. There were no RSA's granted during the six months ended December 30, 2016. As of December 30, 2016, there was no unrecognized compensation expense related to unvested RSA's under the Plans.
 
 
 
 
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 six months ended December 30, 2016 is as follows:
 
 
 
Weighted-
 
Restricted
 
Average
 
Stock
 
Grant Date
 
Units
 
Fair Value
Non-vested units as of June 30, 2016
904

 
$
8.24

Units granted
595

 
$
6.78

Units vested
(338
)
 
$
8.05

Units forfeited
(30
)
 
$
10.41

Non-vested units as of December 30, 2016
1,131

 
$
7.47


RSU grants totaled 78 and 595 shares with a total weighted-average grant date fair value of $848 and $4,036 during the three and six months ended December 30, 2016. RSU grants totaled 258 and 271 shares with a total weighted-average grant date fair value of $2,876 and $3,026 during the three and six months ended December 25, 2015. The total fair value of RSU's vested during the three and six months ended December 30, 2016 was $1,835 and $2,801, respectively. The total fair value of RSU's vested during the three and six months ended December 25, 2015 was $1,165 and $3,946, respectively.

As of December 30, 2016, there was $7,647 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 over the vesting term, which is generally four years, if and when the Company concludes that it is probable that the performance condition will be achieved. The Company reassesses the probability of vesting at each reporting period for awards with performance conditions and adjusts compensation expense based on its probability assessment. The fair value of the PSU's is determined based on the closing market price of the Company's common stock on the grant date.

The number of PSU's earned is determined based on the Company's performance against predefined targets. The range of payout is zero to 150% of the number of granted PSU's. The number of PSU's earned is determined based on actual performance at the end of the performance period. PSU grants totaled 512 and 410 with a total weighted-average grant date fair value of $3,152 and $3,668 during the six months ended December 30, 2016 and December 25, 2015, respectively. The total fair value of PSU's vested during the six months ended December 30, 2016, was $3,107. The total fair value of PSU's vested during the six months ended December 25, 2015, was $4,097.

At December 30, 2016, there was $6,101 of total unrecognized compensation expense related to non-vested PSU's; this expense is expected to be recognized over a weighted-average period of 2.6 years.


13

A summary of non-vested PSU activity for the six months ended December 30, 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, 2016
895

 
—

 
895

 
$
8.74

Units granted
512

 
56

 
568

 
$
6.15

Units vested
(320
)
 
(56
)
 
(376
)
 
$
7.75

Units forfeited
(89
)
 
—

 
(89
)
 
$
9.70

Non-vested units as of December 30, 2016
998

 
—

 
998

 
$
7.59

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


Note 5. Earnings per Share

Basic earnings per share ("EPS") is computed based on the weighted-average number of shares of common stock outstanding during the period. Diluted EPS is computed using the treasury stock method for stock options, warrants, non-vested restricted stock awards and units, and non-vested performance stock units. The treasury stock method assumes conversion of all potentially dilutive shares of common stock with the proceeds from assumed exercises used to hypothetically repurchase stock at the average market price for the period. Diluted EPS is computed by dividing net income applicable to the Company by the weighted-average common shares and potentially dilutive common shares that were outstanding during the period.

The following table sets forth the computations of basic and diluted EPS for the three and six months ended December 30, 2016 and December 25, 2015:
 
Three Months Ended
 
Six Months Ended
 
December 30,
2016
 
December 25,
2015
 
December 30,
2016
 
December 25,
2015
Net income applicable to TRC Companies, Inc.
$
3,998

 
$
3,937

 
$
7,637

 
$
8,429

 
 
 
 
 
 
 
 
Basic weighted-average common shares outstanding
31,451

 
30,968

 
31,300

 
30,805

Effect of dilutive stock options, RSA's, RSU's and PSU's
515

 
401

 
483

 
542

Diluted weighted-average common shares outstanding
31,966

 
31,369

 
31,783

 
31,347

 
 
 
 
 
 
 
 
Earnings per common share applicable to TRC Companies, Inc.
 
 
 
 
 
 
 
Basic earnings per common share
$
0.13

 
$
0.13

 
$
0.24

 
$
0.27

Diluted earnings per common share
$
0.13

 
$
0.13

 
$
0.24

 
$
0.27

Anti-dilutive stock options, RSA's, RSU's and PSU's, excluded from the calculation
1,130

 
1,423

 
1,161

 
1,282




14

Note 6. Accounts Receivable

The current portion of accounts receivable as of December 30, 2016 and June 30, 2016, were comprised of the following:
 
 
December 30,
2016
 
June 30,
2016
Billed
$
116,578

 
$
90,194

Unbilled
62,333

 
64,954

Retainage
3,727

 
2,429

 
Total accounts receivable - gross
182,638

 
157,577

Less allowance for doubtful accounts
(8,423
)
 
(8,297
)
 
Total accounts receivable, less allowance for doubtful accounts
$
174,215

 
$
149,280



Note 7. Other Accrued Liabilities

As of December 30, 2016 and June 30, 2016, other accrued liabilities were comprised of the following:

 
 
December 30,
2016
 
June 30,
2016
Contract costs
$
40,652

 
$
40,343

Legal accruals
6,389

 
5,232

Lease obligations
5,162

 
5,564

Other
7,593

 
6,887

 
Total other accrued liabilities
$
59,796

 
$
58,026



Note 8. Business Acquisitions, Goodwill and Other Intangible Assets

Fiscal 2016 Acquisition

On November 30, 2015, the Company acquired the Professional Services business of Willbros Group ("Willbros") ("Oil and Gas") in an all cash transaction. The $124,498 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 working capital adjustment due from Willbros of $2,957. The second cash payment was made in two tranches, with $2,354 paid in March 2016 and the remaining balance paid in July 2016 in conjunction with the final net working capital settlement. Goodwill of $60,294, all of which is expected to be tax deductible, and other intangible assets of $44,500 were recorded as a result of this acquisition.


15

The following summarizes the estimated fair values of the Oil and Gas 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

 
1,857

 
28,263

Prepaid expenses and other current assets
7,276

 
(48
)
 
7,228

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

 
(4,379
)
 
60,294

Other non-current assets
20,683

 
—

 
20,683

Accounts payable
(2,587
)
 
43

 
(2,544
)
Accrued compensation and benefits
(7,199
)
 
(2
)
 
(7,201
)
Other accrued liabilities
(5,210
)
 
100

 
(5,110
)
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

 
$
(2,957
)
 
$
124,498


Customer relationships and backlog represent the fair value of existing contracts and the underlying customer relationships. The backlog has a 1 year life and customer relationships have lives ranging from 12 years to 15 years (weighted average lives of 6 years). The internally developed software has a life of approximately 5 years (weighted average life of 5 years).

The goodwill recognized is attributable to the future strategic growth opportunities arising from the acquisition, Oil and Gas's highly skilled assembled workforce (which does not qualify for separate recognition) and the expected cost synergies of the combined operations.

The unaudited pro forma financial information summarized in the following table gives effect to the Oil and Gas acquisition assuming it occurred on July 1, 2014. These unaudited pro forma operating results do not assume any impact from revenue, cost or other operating synergies that are expected as a result of the acquisition. Pro forma adjustments have been made to reflect amortization of the identified intangible assets for the related periods, as well as the amortization of deferred debt issuance costs incurred. Identifiable intangible assets are being amortized on a basis approximating the economic value derived from those assets. These unaudited pro forma operating results are presented for illustrative purposes only and are not indicative of the operating results that would have been achieved had the acquisition occurred on July 1, 2014, nor does the information project results for any future period.
 
 
Six Months Ended
 
 
December 25, 2015
Gross revenue
 
$
368,254

Net service revenue
 
$
262,121

Net income applicable to TRC Companies, Inc.
 
$
6,419

 
 
 
Basic earnings per common share
 
$
0.21

Diluted earnings per common share
 
$
0.20


16


Goodwill

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 December 30, 2016, the Company had $75,337 of goodwill, and does not believe there were any events or changes in circumstances since the last goodwill assessment as of April 29, 2016 that would indicate the fair value of goodwill was more likely than not reduced to below its carrying value. Accordingly, goodwill was not tested for impairment during the current fiscal quarter.

The carrying amount of goodwill for the six months ended December 30, 2016 by operating segment are as follows:
 
 
Gross
 
 
 
 
 
 
 
Gross
 
 
 
 
 
 
Balance,
 
Accumulated
 
Balance,
 
 
 
Balance,
 
Accumulated
 
Balance,
 
 
July 1,
 
Impairment
 
July 1,
 
Additions /
 
December 30,
 
Impairment
 
December 30,
Operating Segment
 
2016
 
Losses
 
2016
 
Adjustments
 
2016
 
Losses
 
2016
Power
 
$
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
)
 
—

Oil and Gas
 
60,294

 
(21,981
)
 
38,313

 
—

 
60,294

 
(21,981
)
 
38,313

 
 
$
136,913

 
$
(61,576
)
 
$
75,337

 
$
—

 
$
136,913

 
$
(61,576
)
 
$
75,337


Other Intangible Assets

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

 
$
(19,791
)
 
$
39,427

 
$
59,218

 
$
(14,933
)
 
$
44,285

Contract backlog
 
900

 
(900
)
 
—

 
900

 
(525
)
 
375

Technology
 
1,000

 
(217
)
 
783

 
1,000

 
(117
)
 
883

 
 
61,118

 
(20,908
)
 
40,210

 
61,118

 
(15,575
)
 
45,543

With indefinite lives:
 
 
 
 
 
 
 
 
 
 
 
 
Engineering licenses
 
426

 
—

 
426

 
426

 
—

 
426

 
 
$
61,544

 
$
(20,908
)
 
$
40,636

 
$
61,544

 
$
(15,575
)
 
$
45,969


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 7 years. The weighted-average period of amortization is approximately 7 years for customer relationship assets. The amortization of intangible assets for the three and six months ended December 30, 2016 was $2,617 and $5,333. The amortization of intangible assets for the three and six months ended December 25, 2015 was $1,076 and $1,916.


17

Estimated amortization expense of intangible assets for the remainder of fiscal year 2017 and succeeding fiscal years is as follows:
Fiscal Year
 
Amount
2017
 
$
4,826

2018
 
9,183

2019
 
8,367

2020
 
7,821

2021
 
7,274

2022 and Thereafter
 
2,739

 
Total
 
$
40,210


On an annual basis, or more frequently if events or changes in circumstances indicate that the asset might be impaired, the fair value of the indefinite-lived intangible assets is evaluated by the Company to determine if an impairment charge is required. The Company performed its most recent annual impairment assessment as of April 29, 2016, which resulted in no impairments to intangible assets. There were no events or changes in circumstances that would indicate the fair value of intangible assets was reduced to below its carrying value during the six months ended December 30, 2016, and therefore intangible assets were not tested for impairment.


Note 9. Long-Term Debt and Capital Lease Obligations

Revolving Credit Facility

On November 30, 2015, the Company entered into a five-year credit agreement (the “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 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 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 ("Oil and Gas") and to fund transaction costs incurred in connection with the Oil and Gas acquisition. The Revolving Facility also is 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 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 is above or below 2 times adjusted EBITDA as defined in the 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 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 Credit Agreement may be reduced, in whole or in part, without premium or penalty.


18

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

The Credit Agreement contains various customary restrictive covenants that limit the Company's 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 its assets; sell its assets; engage in mergers, consolidations, liquidations or dissolutions; engage in transactions with affiliates; and make restricted payments. Under the Credit Agreement the Company is required to maintain a fixed charge coverage ratio of no less than 1.25 to 1.00 and to not permit its leverage ratio to exceed 3.00 to 1.00. The 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 Credit Agreement to partially fund the Oil and Gas 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 2.11% and have an effective interest rate of 2.15% at December 30, 2016. As of December 30, 2016 the Company had zero borrowings outstanding under the Credit Agreement's Revolving Facility and $69,375 outstanding under the Term Loan. Funds available to borrow under the Credit Agreement, after consideration of the letters of credit outstanding, were $97,346 at December 30, 2016.

In accounting for the transaction costs incurred in conjunction with the 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 December 30, 2016, the Term Loan consisted of the following:

Current portion of Term Loan
 
$
5,625

 
 
 
Long-term portion of Term Loan
 
$
63,750

Less: Debt issuance costs
 
(1,000
)
Net long-term carrying amount
 
$
62,750


The scheduled principal amounts due under the Company’s Term Loan obligations as of December 30, 2016 for the remainder of fiscal year 2017 and succeeding fiscal years are as follows:

2017
 
$
2,813

2018
 
5,625

2019
 
5,625

2020
 
5,625

2021
 
49,687

 
Total
 
$
69,375



19

Contractor-owned, contractor-operated (CoCo) facility debt

As of December 30, 2016, the Company had approximately $19,090 of debt obligations ("CoCo" debt) assumed in the Oil and Gas acquisition, of which $7,769 was current.  A third party finance company had provided financing to Oil and Gas in conjunction with the construction of fueling facilities for the federal government pursuant to three government contracts. Upon acceptance of the constructed facilities, the federal government pays Oil and Gas in equal monthly installments over the subsequent five years. Therefore, as of December 30, 2016, the Company also had recorded approximately $19,090 of receivables which were acquired in the transaction, of which $7,769 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 December 30, 2016, the government has provided acceptance and final funding on all three contracts.

The principal amounts due under the Company’s remaining CoCo debt obligations as of December 30, 2016 for the remainder of fiscal year 2017 and succeeding fiscal years is as follows:
2017
 
$
4,271

2018
 
5,734

2019
 
3,717

2020
 
3,980

2021
 
1,388

 
Total
 
$
19,090



Other Notes Payable

In July 2016, the Company financed $3,838 of insurance premiums payable in seven equal monthly installments of $552 each, including a finance charge of 2.19%. As of December 30, 2016, the balance outstanding under this agreement was $552.

In conjunction with the Oil and Gas 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. The second cash payment was made in two tranches, with $2,354 paid in March 2016 and the remaining balance paid in July 2016 in conjunction with the final net working capital settlement.


Note 10. Variable Interest Entity
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.
WBA
Willbros Engineers LLC, which the Company acquired in fiscal 2016, was party to an option and service arrangement with the equity owners of WBA, a limited liability company. WBA is considered a VIE due to the lack of decision-making rights by its equity holders. The Company consolidates the operations of WBA, as it retains the contractual power to direct the activities of WBA which most significantly and directly impact its economic performance. The Company also has the obligation to absorb losses and the right to receive residual returns of WBA. The activity of WBA is not significant to the overall performance of the Company. The assets of WBA are available for the Company's general business use outside the context of WBA. In consolidation, as of December 30, 2016, $558 of cash and cash equivalents, $234 of accounts receivable and $3 of other current liabilities were attributable to WBA.

20

While the Company is currently in the process of winding down the operations of WBA, it has an obligation to fund operating activities not covered by WBA’s available cash and cash flow from operations. During fiscal year 2017, the Company provided $9 of financial support to WBA. The Company does not expect ongoing funding obligations to be material.

Note 11. Income Taxes

The Company's effective tax rate was approximately 35.5% and 39.9% for the six months ended December 30, 2016 and December 25, 2015 respectively. The primary reconciling items between the federal statutory rate of 35.0% and the Company's overall effective tax rate for the six months ended December 30, 2016 were the effect of state income taxes offset by tax benefits related to the U.S. Research and Development credit, U.S. Domestic Production Activities deduction and the effective settlement of uncertain tax positions. The primary reconciling items between the federal statutory rate of 35.0% and the Company's overall effective tax rate for the six months ended December 25, 2015 were the effect of state income taxes.

As of December 30, 2016, the recorded liability for uncertain tax positions under the measurement criteria of Accounting Standards Codification ("ASC") Topic 740, Income Taxes, was $960. The effective settlement of uncertain tax positions resulted in a decrease in the recorded liability of $1,344 during the six months ended December 30, 2016, which resulted in a net decrease to the provision for income taxes of $294. The Company does not expect the amount of unrecognized tax benefits to materially change within the next twelve months.
As a result of the early adoption of ASU 2016-09 in the first quarter of fiscal 2017, excess tax benefits and tax deficiencies will be prospectively classified to the statement of operations instead of additional paid-in capital. The Company's effective tax rate for the six months ended December 30, 2016 was not materially impacted by the adoption of ASU 2016-09. The Company recorded a net tax benefit of $21 during the six months ended December 30, 2016 which decreased the provision for income taxes.
In the first quarter of fiscal year 2017, the IRS concluded its income tax examination for fiscal year 2014. No adjustments were proposed.


Note 12. Operating Segments
 
To more clearly communicate the Company's capabilities and focus to the marketplace, beginning in fiscal 2017, the Company renamed its Energy segment “Power” and its Pipeline Services segment “Oil and Gas.” The Company manages its business under the following four operating segments:

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

Environmental: The Environmental operating segment provides services to a wide range of clients including industrial, transportation, energy and natural resource companies, as well as federal, state and municipal agencies. The Environmental operating segment is organized to focus on key areas of demand including: environmental management of buildings 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.

21


Infrastructure: The Infrastructure operating segment provides services related to the expansion of infrastructure capacity and the rehabilitation of overburdened and deteriorating infrastructure systems. 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 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, design and construction management.

Oil & Gas (formerly Pipeline Services): Acquired in November 2015, the Oil & Gas operating segment provides pipeline and facilities engineering; engineer, procure, and construct ("EPC") services; engineer, procure, construct and management ("EPCm") services; 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, 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 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, and integrity engineering. The Company is 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, 2016 the Company made certain changes to its management reporting structure which resulted in a change to the composition of the Infrastructure operating segment. Certain corporate employees were transferred to the Infrastructure operating segment. As a result, beginning in fiscal year 2017 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.


22

The following tables present summarized financial information for the Company's operating segments (for the periods noted below): 
 
 
Power
 
Environmental
 
Infrastructure
 
Oil & Gas
 
Total
 
 
 
 
 
 
 
 
 
 
 
Three months ended December 30, 2016:
 
 
 
 
 
 
 
 
 
 
Gross revenue
 
$
67,860

 
$
80,162

 
$
21,442

 
$
27,483

 
$
196,947

Net service revenue
 
40,288

 
50,325

 
14,618

 
21,332

 
126,563

Segment profit
 
9,501

 
9,184

 
3,474

 
1,467

 
23,626

Depreciation
 
438

 
657

 
139

 
311

 
1,545

Amortization
 
245

 
254

 
—

 
1,992

 
2,491

 
 
 
 
 
 
 
 
 
 
 
Three months ended December 25, 2015:
 
 
 
 
 
 
 
 
 
 
Gross revenue
 
$
48,040

 
$
77,925

 
$
22,307

 
$
8,017

 
$
156,289

Net service revenue
 
39,794

 
51,424

 
13,709

 
5,986

 
110,913

Segment profit (loss)
 
9,470

 
9,548

 
2,532

 
(1,161
)
 
20,389

Depreciation
 
492

 
638

 
125

 
267

 
1,522

Amortization
 
298

 
300

 
—

 
302

 
900


 
 
 
 
 
 
 
 
 
 
 
 
 
Power
 
Environmental
 
Infrastructure
 
Oil & Gas
 
Total
 
 
 
 
 
 
 
 
 
 
 
Six months ended December 30, 2016:
 
 
 
 
 
 
 
 
 
 
Gross revenue
 
$
124,854

 
$
154,098

 
$
44,355

 
$
54,121

 
$
377,428

Net service revenue
 
77,388

 
99,219

 
31,249

 
42,671

 
250,527

Segment profit
 
17,468

 
18,236

 
7,782

 
2,838

 
46,324

Depreciation
 
881

 
1,301

 
277

 
663

 
3,122

Amortization
 
493

 
528

 
—

 
4,059

 
5,080

 
 
 
 
 
 
 
 
 
 
 
Six months ended December 25, 2015:
 
 
 
 
 
 
 
 
 
 
Gross revenue
 
$
87,276

 
$
153,768

 
$
42,277

 
$
8,017

 
$
291,338

Net service revenue
 
74,132

 
102,988

 
27,272

 
5,986

 
210,378

Segment profit (loss)
 
16,782

 
19,529

 
5,425

 
(1,161
)
 
40,575

Depreciation
 
956

 
1,262

 
222

 
267

 
2,707

Amortization
 
599

 
665

 
—

 
302

 
1,566


23

 
 
Three Months Ended
 
Six Months Ended
Gross revenue
 
December 30, 2016

December 25, 2015
 
December 30, 2016
 
December 25, 2015
Gross revenue from reportable operating segments
 
$
196,947

 
$
156,289

 
$
377,428

 
$
291,338

Reconciling items (1)
 
1,715

 
1,454

 
2,085

 
1,864

  Total consolidated gross revenue
 
$
198,662

 
$
157,743

 
$
379,513

 
$
293,202

 
 
 
 
 
 
 
 
 
Net service revenue
 
 
 
 
 
 
 
 
Net service revenue from reportable operating segments
 
$
126,563

 
$
110,913

 
$
250,527

 
$
210,378

Reconciling items (1)
 
793

 
469

 
1,134

 
1,167

  Total consolidated net service revenue
 
$
127,356

 
$
111,382

 
$
251,661

 
$
211,545

 
 
 
 
 
 
 
 
 
Income from operations before taxes
 
 
 
 
 
 
 
 
Segment profit from reportable operating segments
 
$
23,626

 
$
20,389

 
$
46,324

 
$
40,575

Corporate shared services (2)
 
(13,969
)
 
(10,582
)
 
(28,915
)
 
(20,535
)
Stock-based compensation expense
 
(2,286
)
 
(1,511
)
 
(3,743
)
 
(2,780
)
Unallocated acquisition and integration expenses
 
—

 
(1,240
)
 
—

 
(2,118
)
Unallocated depreciation and amortization
 
(335
)
 
(358
)
 
(673
)
 
(771
)
Interest income
 
286

 
137

 
564

 
137

Interest expense
 
(841
)
 
(461
)
 
(1,686
)
 
(489
)
  Total consolidated income from operations before taxes
 
$
6,481

 
$
6,374

 
$
11,871

 
$
14,019

 
 
 
 
 
 
 
 
 
Acquisition and integration expenses
 
 
 
 
 
 
 
 
Acquisition and integration expenses from reportable operating segments
 
$
—

 
$
—

 
$
—

 
$
—

Unallocated acquisition and integration expenses
 
—

 
1,240

 
—

 
2,118

Total consolidated acquisition and integration expenses
 
$
—

 
$
1,240

 
$
—

 
$
2,118

 
 
 
 
 
 
 
 
 
Depreciation and amortization
 
 
 
 
 
 
 
 
Depreciation and amortization from reportable operating segments
 
$
4,036

 
$
2,422

 
$
8,202

 
$
4,273

Unallocated depreciation and amortization
 
335

 
358

 
673

 
771

  Total consolidated depreciation and amortization
 
$
4,371

 
$
2,780

 
$
8,875

 
$
5,044

 
 
 
 
 
 
 
 
 
(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.


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

24

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 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 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 consolidated financial statements. With respect to these projects, there is a wide range of potential outcomes that may result in costs being incurred beyond the limits or term of insurance, such as: (i) greater than expected volumes of contaminants requiring remediation; (ii) treatment systems requiring operation beyond the insurance term; and (iii) greater than expected allocable share of the ultimate remedy. The Company does not believe these outcomes are likely, and the exact nature, impact and duration of any such occurrence could vary due to a number of factors. Accordingly, the Company is unable to provide an estimate of potential loss with a reasonable degree of accuracy. Nevertheless, if these events were to occur, the Company believes that it is reasonably possible that the amount of costs currently accrued, which represents the Company's best estimate, could increase by as much as $24,200, of which $4,000 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 appears to be consistent with regulatory guidance and the Company’s estimates. However, until the final remedy is formally adopted following a public notice period, it remains reasonably possible that 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 $18,600.

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/ Contract Loss

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 potential damages is likely.

Furthermore, with respect to one specific fixed price project, there are tasks within the specified scope of work that may result in costs being incurred beyond the currently defined budget. The Company does not believe this outcome is likely, and the exact impact and duration of any such occurrence could vary due to a number of factors. 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 between the range of $0 to $6,000.


25

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.

Insurance Captive

During fiscal 2016, the Company became a shareholder in a member-owned heterogeneous (various industries) group captive reinsurance company. The policies of the program are placed with a U.S. insurance carrier, which provides coverage for workers' compensation, general liability and auto liability, with a certain initial layer of loss being reinsured to the carrier by the captive. The Company’s annual premiums are actuarially determined based on historical loss experience, and also include administrative costs and fees. In addition, the captive is designed to have an acceptable level of risk sharing among its members. For a given policy period, if the Company’s actual loss experience is greater than the estimate, the Company is required to make additional payments to the captive up to a maximum predetermined level. If the Company’s loss experience is less than the estimate, the Company may receive a shareholder distribution, when declared by the captive's Board of Directors. The Company records any additional costs or distributions received from the captive in the period in which the Company is notified of the amount due or distribution to be received. The Company has not recorded any additional costs or distributions received related to the captive as of December 30, 2016.

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 December 30, 2016 and June 30, 2016, the Company had recorded litigation accruals of $5,845 and $4,869, respectively. The Company also had insurance recovery receivables related to the aforementioned litigation-related accruals of $3,022 and $2,661 as of December 30, 2016 and June 30, 2016, 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 $11,200, of which $2,100 would be covered by insurance.



26

Note 14. Subsequent Events

On January 31, 2017, the Company entered into a credit agreement (the “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 documentation agent, and five other banks as lenders. The Credit Agreement provides the Company with a $250,000 five-year secured revolving credit facility (“Revolving Facility”) with a sublimit of $15,000 available for the issuance of letters of credit. The Credit Agreement replaces the Company’s existing credit facility with Citizens Bank, N.A. (the “Prior Credit Agreement”) converting the existing amortizing term loan and revolving borrowing structure to a non-amortizing, fully revolving format.
The Revolving Facility will be available for working capital and general corporate purposes as permitted under the Credit Agreement. The Credit Agreement includes borrowing capacity for letters of credit and for borrowings on same-day notice, referred to as “swingline loans.” Borrowings under the Credit Agreement are subject to the satisfaction of customary conditions, including absence of defaults and accuracy of representations and warranties. Under the terms of the Credit Agreement, the amount of the Revolving Facility may be increased through incremental revolving commitments, subject to a cap of an additional $75,000.
The commitments under the Credit Agreement may be reduced, in whole or in part, without premium or penalty. Any borrowings outstanding under the Credit Agreement will mature on January 31, 2022.
Amounts outstanding under the Credit Agreement bear interest at the Base Rate (as defined, generally the prime rate) plus a margin of 0.50% to 1.75%, or at the Eurodollar Rate (as defined, generally the Libor rate) plus a margin of 1.50% to 2.75%, 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 0.50% (based on the Leverage Ratio) on any unused commitments. The applicable fees for issuance of letters of credit under the Revolving Facility is a range of 1.50% to 2.75% also based on the Leverage Ratio.
The Company’s obligations under the Credit Agreement are secured by a pledge of substantially all of its assets and guaranteed by its principal operating subsidiaries. The Credit Agreement also contains cross-default provisions which become effective if the Company defaults on other indebtedness.
The Credit Agreement contains customary restrictive covenants that limit our ability to, among other things: incur additional indebtedness or enter into 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 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.
On January 31, 2017 the Company utilized $15,000 of cash on hand to pay down the existing $69,375 of Term Loan borrowings outstanding under the Prior Credit Agreement, resulting in $54,375 borrowed under the Credit Agreement's Revolving Facility.




27

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

Three and Six Months Ended December 30, 2016 and December 25, 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 six months ended December 30, 2016 contained three more business days 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, 2016. 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, 2016 as well as in this Form 10-Q provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations described in the forward-looking statements.

Overview

We are a firm that provides integrated engineering, consulting, and construction management services. Our project teams help our commercial and governmental clients implement environmental, power, infrastructure and oil and gas related 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 ("ODC's"), 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:


28

•
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;
•
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 of Willbros Group ("Willbros") ("Oil and Gas") 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 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 an estimated working capital adjustment due from Willbros of $3.0 million. The second cash payment was made in two tranches, with $2.4 million paid in March 2016 and the remaining balance paid in July 2016 in conjunction with the final net working capital settlement. Goodwill of $60.3 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, Oil and Gas's highly skilled assembled workforce (which does not qualify for separate recognition) and the expected cost synergies of the combined operations.

29

Operating Segments
We manage our business under the following four operating segments. To more clearly communicate our capabilities and focus to the marketplace, beginning in fiscal 2017, we renamed our Energy segment “Power” and our Pipeline Services segment “Oil and Gas.”

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

Environmental:  The Environmental operating segment provides services to a wide range of clients including industrial, transportation, energy and natural resource companies, as well as federal, state and municipal agencies. The Environmental operating segment is organized to focus on key areas of demand including: environmental management of buildings 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 and the rehabilitation of overburdened and deteriorating infrastructure systems. 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, design and construction management.

Oil & Gas (formerly Pipeline Services): Acquired in November 2015, the Oil & Gas operating segment provides pipeline and facilities engineering; engineer, procure, and construct ("EPC") services; engineer, procure, construct and management ("EPCm") services; 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, 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 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, and integrity engineering. 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

30

management can actively influence; and gauging our investments and our ability to service, incur or pay down debt. Specifically, our CEO evaluates segment revenue and segment profit and assesses the performance of each operating segment based on these measures, as well as, among other things, the prospects of each of the operating segments and how they fit into our overall strategy. Our CEO then decides how resources should be allocated among our operating segments. We do not track our assets by operating segment, and consequently, it is not practical to show assets by operating segment. Segment profit includes all operating expenses except the following: costs associated with providing corporate shared services (including certain depreciation and amortization), goodwill and intangible asset write-offs, 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, 2016 we made certain changes to our management reporting structure which resulted in a change to the composition of the Infrastructure operating segment. Certain corporate employees were transferred to the Infrastructure operating segment. As a result, beginning in fiscal year 2017 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 six months ended December 30, 2016 and December 25, 2015:

 
 
Three Months Ended
 
Six Months Ended
 
 
December 30,
2016
 
December 25,
2015
 
December 30,
2016
 
December 25,
2015
Power
 
32
%
 
36
%
 
31
%
 
35
%
Environmental
 
40
%
 
47
%
 
40
%
 
49
%
Infrastructure
 
11
%
 
12
%
 
12
%
 
13
%
Oil and Gas
 
17
%
 
5
%
 
17
%
 
3
%
 
 
100
%
 
100
%
 
100
%
 
100
%

Business Trend Analysis

Power: 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 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: Following a slowdown caused by general economic conditions, market demand for environmental services continues to be mixed. 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

31

in the near term, the outlook for services related to other areas of the market, such as 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.

Infrastructure: Long-term prospects should be favorable. 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.

Oil & Gas: Our Oil & Gas 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 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 and Latin America. Furthermore natural gas pipelines will be required as coal plants are retired and replaced with cleaner gas-burning plants. New regulatory requirements proposed 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, 2016, as filed with the Securities Exchange Commission ("SEC") on August 31, 2016. No material changes concerning our critical accounting policies have occurred since June 30, 2016.




32

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 six months ended December 30, 2016 and December 25, 2015:
 
Three Months Ended
 
Six Months Ended
 
Dec. 30,
 
Dec. 25,
 
Change
 
Dec. 30,
 
Dec. 25,
 
Change
(Dollars in thousands)
2016
 
2015
 
$
 
%
 
2016
 
2015
 
$
 
%
Gross revenue
$
198,662

 
$
157,743

 
$
40,919

 
25.9
 %
 
$
379,513

 
$
293,202

 
$
86,311

 
29.4
 %
Less subcontractor costs and other direct reimbursable charges
71,306

 
46,361

 
24,945

 
53.8

 
127,852

 
81,657

 
46,195

 
56.6

Net service revenue
127,356

 
111,382

 
15,974

 
14.3

 
251,661

 
211,545

 
40,116

 
19.0

Interest income from contractual arrangements
62

 
27

 
35

 
129.6

 
96

 
42

 
54

 
128.6

Insurance recoverables and other income
644

 
1,031

 
(387
)
 
(37.5
)
 
1,281

 
1,773

 
(492
)
 
(27.7
)
Cost of services (exclusive of costs shown separately below)
105,613

 
93,676

 
11,937

 
12.7

 
209,289

 
176,660

 
32,629

 
18.5

General and administrative expenses
11,042

 
8,046

 
2,996

 
37.2

 
21,881

 
15,167

 
6,714

 
44.3

Acquisition and integration expenses
—

 
1,240

 
(1,240
)
 
(100.0
)
 
—

 
2,118

 
(2,118
)
 
(100.0
)
Depreciation
1,754

 
1,704

 
50

 
2.9

 
3,542

 
3,128

 
414

 
13.2

Amortization
2,617

 
1,076

 
1,541

 
143.2

 
5,333

 
1,916

 
3,417

 
178.3

Operating income
7,036

 
6,698

 
338

 
5.0

 
12,993

 
14,371

 
(1,378
)
 
(9.6
)
Interest income
286

 
137

 
149

 
108.8

 
564

 
137

 
427

 
311.7

Interest expense
(841
)
 
(461
)
 
(380
)
 
82.4

 
(1,686
)
 
(489
)
 
(1,197
)
 
244.8

Income from operations before taxes
6,481

 
6,374

 
107

 
1.7

 
11,871

 
14,019

 
(2,148
)
 
(15.3
)
Income tax provision
(2,473
)
 
(2,439
)
 
(34
)
 
1.4

 
(4,204
)
 
(5,596
)
 
1,392

 
(24.9
)
Net income
4,008

 
3,935

 
73

 
1.9

 
7,667

 
8,423

 
(756
)
 
(9.0
)
Net (income) loss applicable to noncontrolling interest
(10
)
 
2

 
(12
)
 
(600.0
)
 
(30
)
 
6

 
(36
)
 
(600.0
)
Net income applicable to TRC Companies, Inc.
$
3,998

 
$
3,937

 
$
61

 
1.5
 %
 
$
7,637

 
$
8,429

 
$
(792
)
 
(9.4
)%


Three Months Ended December 30, 2016

Gross revenue increased $40.9 million, or 25.9%, to $198.7 million for the three months ended December 30, 2016 from $157.7 million for the same period in the prior year. Organic activities accounted for $23.4 million, or 57.1%, of the growth in gross revenue, and acquisitions accounted for the remaining $17.5 million, or 42.9%, of the increase. The organic increase was primarily driven by several large capital projects in our Power operating segment that had significant subcontractor and procurement activities which generated higher levels of gross revenue and ODC's in the current period, including a significant program management project in California.

NSR increased $16.0 million, or 14.3%, to $127.4 million for the three months ended December 30, 2016 from $111.4 million for the same period in the prior year. Organic activities accounted for $2.6 million, or 16.4%, of the increase in NSR, and acquisitions accounted for $13.4 million, or 83.6%, of the increase. Organic growth in our Oil & Gas operating segment of $2.0 million was driven by improved project execution. Organic growth in our Infrastructure operating segment of $0.9 million was driven by improved transportation-related spending. To a lesser extent, organic NSR increased $0.5 million in our Power operating segment driven by the aforementioned large capital projects. The organic NSR growth in our Oil & Gas, Power and Infrastructure operating segments was partially offset by a $1.1 million decline in the Environmental operating segment. This decline was due to the wind-down of several large remediation projects.

Insurance recoverables and other income decreased $0.4 million, or 37.5%, to $0.6 million for the three months ended December 30, 2016 from $1.0 million for the same period in the prior year.


33

COS increased $11.9 million, or 12.7%, to $105.6 million for the three months ended December 30, 2016 from $93.7 million for the same period in the prior year. Organic COS increased $1.1 million, or 9.1%, and acquisitions accounted for $10.8 million, or 90.9%, of the increase. The increase from organic activities was primarily attributable to higher
than expected project costs on a large fixed price project, which resulted in a $0.9 million increase to COS in the current period. As a percentage of NSR, COS were 82.9% and 84.1% for the three months ended December 30, 2016 and December 25, 2015, respectively.

G&A expenses increased $3.0 million, or 37.2%, to $11.0 million for the three months ended December 30, 2016 from $8.0 million for the same period in the prior year. Organic G&A expenses increased $2.3 million, or 75.2%, and acquisitions accounted for $0.7 million, or 24.8%, of the increase. The organic increase was primarily due to $1.4 million of increased legal costs which can vary in amount and timing year to year. The remainder of the increase was due to additional costs incurred to support certain organic growth activities. As a percentage of NSR, G&A expenses were 8.7% and 7.2% for the three months ended December 30, 2016 and December 25, 2015, respectively, primarily due to the aforementioned increased legal costs.
  
Depreciation expenses increased $50.0 thousand, or 2.9%, to $1.8 million for the three months ended December 30, 2016 from $1.7 million for the same period in the prior year. The increase was primarily attributable to the Oil and Gas assets acquired in November 2015, which contributed an additional $44.0 thousand of depreciation expense in the three months ended December 30, 2016.

Amortization expenses increased $1.5 million, or 143.2%, to $2.6 million for the three months ended December 30, 2016 from $1.1 million for the same period in the prior year. The increase was primarily attributable to the Oil and Gas intangible assets acquired in November 2015, which contributed $2.0 million of amortization expense in the three months ended December 30, 2016.

Our effective tax rate was approximately 38.2% and 38.3% for the three months ended December 30, 2016 and December 25, 2015 respectively. The primary reconciling items between the federal statutory rate of 35.0% and our overall effective tax rate for the three months ended December 30, 2016 were the effect of state income taxes offset by tax benefits related to the U.S. Research and Development credit and the U.S. Domestic Production Activities deduction. The primary reconciling items between the federal statutory rate of 35.0% and our overall effective tax rate for the three months ended December 25, 2015 were the effect of state income taxes.

Six Months Ended December 30, 2016

Gross revenue increased $86.3 million, or 29.4%, to $379.5 million for the six months ended December 30, 2016 from $293.2 million for the same period in the prior year. Organic activities accounted for $42.1 million, or 48.8%, of the growth in gross revenue, and acquisitions accounted for the remaining $44.2 million, or 51.2%, of the increase. The increase in organic gross revenue was primarily attributable to our Power operating segment where gross revenue increased $37.6 million driven by several large capital projects that had significant subcontractor and procurement activities which generated higher levels of gross revenue and ODC's in the current period.

NSR increased $40.1 million, or 19.0%, to $251.7 million for the six months ended December 30, 2016 from $211.5 million for the same period in the prior year. Organic activities accounted for $5.4 million, or 13.5%, of the increase in NSR, and acquisitions accounted for $34.7 million, or 86.5%, of the increase. The increase in organic NSR was, in part, due to our Power operating segment where NSR increased $3.3 million driven by the aforementioned large capital projects. In our Infrastructure operating segment, several large transportation projects and increased demand from our state government clients, contributed $4.0 million of organic NSR growth for the period. Organic growth in our Oil & Gas operating segment of $2.0 million was driven by improved project execution. The organic NSR growth in our Oil & Gas, Power and Infrastructure operating segments was partially offset by a $3.8 million decline in the Environmental operating segment. This decline was primarily due to the wind-down of several large remediation projects.

Insurance recoverables and other income decreased $0.5 million, or 27.7%, to $1.3 million for the six months ended December 30, 2016 from $1.8 million for the same period in the prior year.

34


COS increased $32.6 million, or 18.5%, to $209.3 million for the six months ended December 30, 2016 from $176.7 million for the same period in the prior year. Organic COS increased $4.2 million, or 13.0%, and acquisitions accounted for $28.4 million, or 87.0%, of the increase. Organic COS were negatively impacted by increased project costs on a large fixed price project that was ongoing during the second quarter of 2017. Fringe benefit costs also contributed to the increase in organic COS, and, in particular, health insurance costs increased $1.1 million in the current period as compared to the same period in the prior year. The Company is self-insured for the first $150 thousand of health claims per employee each year. Consequently, employee health insurance costs can vary significantly from period to period, and we experienced a higher level of costs in the first quarter of 2017. The balance of the increase in organic COS was attributable to costs incurred to support the current demand from our Infrastructure and Power operating segment clients. As a percentage of NSR, COS were 83.2% and 83.5% for the six months ended December 30, 2016 and December 25, 2015, respectively.

G&A expenses increased $6.7 million, or 44.3%, to $21.9 million for the six months ended December 30, 2016 from $15.2 million for the same period in the prior year. Organic G&A expenses increased $5.2 million, or 78.0%, and acquisitions accounted for $1.5 million, or 22.0%, of the increase. The organic increase was primarily due to $2.3 million of increased in legal costs which can vary in amount and timing year to year. The remainder of the increase was due to additional costs incurred to support certain organic growth activities. As a percentage of NSR, G&A expenses were 8.7% and 7.2% for the six months ended December 30, 2016 and December 25, 2015, respectively.
  
Depreciation expenses increased $0.4 million, or 13.2%, to $3.5 million for the six months ended December 30, 2016 from $3.1 million for the same period in the prior year. The increase was primarily attributable to the Oil and Gas assets acquired in November 2015, which contributed $0.4 million of depreciation expense in the six months ended December 30, 2016.

Amortization expenses increased $3.4 million, or 178.3%, to $5.3 million for the six months ended December 30, 2016 from $1.9 million for the same period in the prior year. The increase was primarily attributable to the Oil and Gas intangible assets acquired in November 2015, which contributed $3.8 million of additional amortization expense in the six months ended December 30, 2016.

Our effective tax rate was approximately 35.5% and 39.9% for the six months ended December 30, 2016 and December 25, 2015 respectively. The primary reconciling items between the federal statutory rate of 35.0% and our overall effective tax rate for the six months ended December 30, 2016 were the effect of state income taxes offset by tax benefits related to the U.S. Research and Development credit, U.S. Domestic Production Activities deduction and the effective settlement of uncertain tax positions. The primary reconciling items between the federal statutory rate of 35.0% and our overall effective tax rate for the six months ended December 25, 2015 were the effect of state income taxes.



35

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 six months ended December 30, 2016 and December 25, 2015:            

 
Three Months Ended
 
Six Months Ended
 
December 30,
2016
 
December 25,
2015
 
December 30,
2016
 
December 25,
2015
Net service revenue
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Interest income from contractual arrangements
—

 
—

 
—

 
—

Insurance recoverables and other income
0.5

 
0.9

 
0.5

 
0.8

Operating costs and expenses:
 
 
 
 
 
 
 
Cost of services (exclusive of costs shown separately below)
82.9

 
84.1

 
83.2

 
83.5

General and administrative expenses
8.7

 
7.2

 
8.7

 
7.2

Acquisition and integration expenses
—

 
1.1

 
—

 
1.0

Depreciation
1.4

 
1.5

 
1.4

 
1.5

Amortization
2.1

 
1.0

 
2.1

 
0.9

Total operating costs and expenses
95.0

 
94.9

 
95.4

 
94.1

Operating income
5.5

 
6.0

 
5.2

 
6.8

Interest income
0.2

 
0.1

 
0.2

 
0.1

Interest expense
(0.7
)
 
(0.4
)
 
(0.7
)
 
(0.2
)
Income from operations before taxes
5.1

 
5.7

 
4.7

 
6.6

Income tax provision
(1.9
)
 
(2.2
)
 
(1.7
)
 
(2.6
)
Net income
3.1
 %
 
3.5
 %
 
3.0
 %
 
4.0
 %


Additional Information by Reportable Operating Segment

Power Operating Segment Results

 
 
Three Months Ended
 
Six Months Ended
 
 
December 30,
 
December 25,
 
Change
 
December 30,
 
December 25,
 
Change
(Dollars in thousands)
 
2016
 
2015
 
$
 
%
 
2016
 
2015
 
$
 
%
Gross revenue
 
$
67,860

 
$
48,040

 
$
19,820

 
41.3
%
 
$
124,854

 
$
87,276

 
$
37,578

 
43.1
%
Net service revenue
 
$
40,288

 
$
39,794

 
$
494

 
1.2
%
 
$
77,388

 
$
74,132

 
$
3,256

 
4.4
%
Segment profit
 
$
9,501

 
$
9,470

 
$
31

 
0.3
%
 
$
17,468

 
$
16,782

 
$
686

 
4.1
%

Gross revenue increased $19.8 million, or 41.3%, and $37.6 million, or 43.1%, for the three and six months ended December 30, 2016, compared to the same periods in the prior year. These increases were primarily driven by several large capital projects, in particular, a large EPC project and a significant program management project in California. These projects, which are in the construction phase, had significant subcontractor and procurement activities that generated higher levels of gross revenue and ODC's in the current periods. The increase in gross revenue was not reflected in NSR at the same level because the mark-up for procurement and subcontracted services is typically lower than work performed by our employees, or direct labor revenue.

NSR increased $0.5 million, or 1.2%, and $3.3 million, or 4.4%, for the three and six months ended December 30, 2016, compared to the same periods in the prior year. The increases in NSR were due, in part, to the aforementioned capital projects, as well as increased labor revenue from our electrical testing and commissioning services which were primarily associated with the upgrade of existing substation facilities. NSR also benefitted from three additional business days in the current six month period, which added approximately $1.7 million of NSR.
  

36

The Power operating segment's profit increased $31.0 thousand, or 0.3%, and $0.7 million, or 4.1%, for the three and six months ended December 30, 2016, compared to the same periods in the prior year. The increase in segment profit was primarily due to the same factors that led to the increase in NSR, offset in part, by increased current quarter project costs on a large fixed price project. As a percentage of NSR, the Power operating segment's profit decreased slightly to 23.6% from 23.8% and remained flat at 22.6% for the three and six months ended December 30, 2016, respectively, compared to the same periods in the prior year.


Environmental Operating Segment Results

 
 
Three Months Ended
 
Six Months Ended
 
 
December 30,
 
December 25,
 
Change
 
December 30,
 
December 25,
 
Change
(Dollars in thousands)
 
2016
 
2015
 
$
 
%
 
2016
 
2015
 
$
 
%
Gross revenue
 
$
80,162

 
$
77,925

 
$
2,237

 
2.9
 %
 
$
154,098

 
$
153,768

 
$
330

 
0.2
 %
Net service revenue
 
$
50,325

 
$
51,424

 
$
(1,099
)
 
(2.1
)%
 
$
99,219

 
$
102,988

 
$
(3,769
)
 
(3.7
)%
Segment profit
 
$
9,184

 
$
9,548

 
$
(364
)
 
(3.8
)%
 
$
18,236

 
$
19,529

 
$
(1,293
)
 
(6.6
)%

Gross revenue increased $2.2 million, or 2.9%, and $0.3 million, or 0.2%, for the three and six months ended December 30, 2016, compared to the same periods in the prior year. These increases were primarily driven by several new projects, in particular, a large project to decommission a coal power plant. This project, had significant subcontractor activities that generated higher levels of gross revenue and ODC's in the current periods.

NSR decreased $1.1 million, or 2.1%, and $3.8 million, or 3.7%, for the three and six months ended December 30, 2016, compared to the same periods in the prior year. The decreases in NSR were primarily attributable to a lower volume of labor services provided to our oil and gas clients as well as the completion of several large remediation projects. The decrease in NSR in the current six month period was partially mitigated by three additional business days, which added approximately $2.2 million of NSR.

The Environmental operating segment's profit decreased $0.4 million, or 3.8%, and $1.3 million, or 6.6%, for the three and six months ended December 30, 2016, compared to the same periods in the prior year. The decreases in segment profit were directly related to transitions associated with new projects, which resulted in lower employee utilization and severance costs. As a percentage of NSR, the Environmental operating segment's profit decreased to 18.2% from 18.6% and decreased to 18.4% from 19.0% for the three and six months ended December 30, 2016, respectively, compared to the same periods in the prior year.


Infrastructure Operating Segment Results

 
 
Three Months Ended
 
Six Months Ended
 
 
December 30,
 
December 25,
 
Change
 
December 30,
 
December 25,
 
Change
(Dollars in thousands)
 
2016
 
2015
 
$
 
%
 
2016
 
2015
 
$
 
%
Gross revenue
 
$
21,442

 
$
22,307

 
$
(865
)
 
(3.9
)%
 
$
44,355

 
$
42,277

 
$
2,078

 
4.9
%
Net service revenue
 
$
14,618

 
$
13,709

 
$
909

 
6.6
 %
 
$
31,249

 
$
27,272

 
$
3,977

 
14.6
%
Segment profit
 
$
3,474

 
$
2,532

 
$
942

 
37.2
 %
 
$
7,782

 
$
5,425

 
$
2,357

 
43.4
%

Gross revenue decreased $0.9 million, or 3.9%, and increased $2.1 million, or 4.9%, for the three and six months ended December 30, 2016, compared to the same periods in the prior year. The decrease in gross revenue for the three month period was due to a reduction of sub-contractors used to perform services in the current quarter. The level of sub-contractors can fluctuate in any period due to changes in the scopes and stages of our ongoing contracts. The $2.1 million gross revenue increase for the six month period was primarily driven by improved transportation-related spending by our clients.

37


NSR increased $0.9 million, or 6.6%, and $4.0 million, or 14.6%, for the three and six months ended December 30, 2016, compared to the same periods in the prior year. The increase in NSR was largely attributable to continuous labor revenue on several large public-private partnership projects as well as the benefit of three additional business days in the current six month period compared to the same period of the prior year, which added approximately $0.8 million of NSR.

The Infrastructure operating segment's profit increased $0.9 million, or 37.2%, and $2.4 million, or 43.4%, for the three and six months ended December 30, 2016, compared to the same periods in the prior year. The increase in segment profit was primarily attributable to the same factors that led to the increase in NSR, as well as improved project execution and the benefit of increased scale in the business. As a percentage of NSR, the Infrastructure operating segment's profit increased to 23.8% from 18.5% and increased to 24.9% from 19.9% for the three and six months ended December 30, 2016, respectively, compared to the same periods in the prior year.


Oil & Gas Operating Segment Results

 
 
Three Months Ended
 
Six Months Ended
 
 
December 30,
 
December 25,
 
Change
 
December 30,
 
December 25,
 
Change
(Dollars in thousands)
 
2016
 
2015
 
$
 
%
 
2016
 
2015
 
$
 
%
Gross revenue
 
$
27,483

 
$
8,017

 
$
19,466

 
242.8
%
 
$
54,121

 
$
8,017

 
$
46,104

 
575.1
%
Net service revenue
 
$
21,332

 
$
5,986

 
$
15,346

 
256.4
%
 
$
42,671

 
$
5,986

 
$
36,685

 
612.8
%
Segment profit
 
$
1,467

 
$
(1,161
)
 
$
2,628

 
226.4
%
 
$
2,838

 
$
(1,161
)
 
$
3,999

 
344.4
%

Acquired on November 30, 2015, Oil & Gas contributed $27.5 million in gross revenue, $21.3 million in NSR, and had segment profit of $1.5 million for the three months ended December 30, 2016. Oil & Gas contributed $54.1 million in gross revenue, $42.7 million in NSR, and had segment profit of $2.8 million for the six months ended December 30, 2016. Continued uncertainty surrounding the oil and gas markets impacted current period operating results, although more recently, stability is being seen in the markets. These operating results were also impacted by purchase accounting related amortization expenses of approximately $2.0 million and $4.1 million in the three and six months ended December 25, 2016, respectively. Against the backdrop of the uncertain markets, the Oil and Gas operating segment improved sequential operating results. In particular as a percentage of NSR, operating segment profit margin increased to 6.8% in the current quarter compared to 6.4% in the prior quarter and a loss in the prior two sequential quarters. Additionally organic NSR and organic segment profit increased $1.9 million and $1.8 million, respectively, for the three and six months ended December 30, 2016. The improved segment profit is primarily related to cost reduction initiatives taken over the last several quarters, including, but not limited to, staff reductions, reduction of indirect costs and rationalization of office space.
 

Backlog by Operating Segment

As of December 30, 2016, our contract backlog based on gross revenue was $580 million, compared to $555 million as of December 25, 2015. Our contract backlog based on NSR was $350 million as of December 30, 2016, compared to $343 million as of December 25, 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.


38

The following table sets forth the gross revenue and NSR contract backlog amounts of our operating segments at December 30, 2016 and December 25, 2015 (in millions):
 
Gross Revenue Backlog
 
NSR Backlog
 
December 30,
 
December 25,
 
Change
 
December 30,
 
December 25,
 
Change
(Dollars in millions)
2016
 
2015
 
$
 
%
 
2016
 
2015
 
$
 
%
Power
$
186

 
$
160

 
$
26

 
16.3
 %
 
$
102

 
$
88

 
$
14

 
15.9
 %
Environmental
222

 
220

 
2

 
0.9
 %
 
121

 
125

 
(4
)
 
(3.2
)%
Infrastructure
116

 
135

 
(19
)
 
(14.1
)%
 
84

 
100

 
(16
)
 
(16.0
)%
Oil & Gas
56

 
40

 
16

 
40.0
 %
 
43

 
30

 
13

 
43.3
 %
  Total
$
580

 
$
555

 
$
25

 
4.5
 %
 
$
350

 
$
343

 
$
7

 
2.0
 %


Revisions in Estimates
We have numerous contracts in progress at any time, all of which are at various stages of completion. Our recognition of profit is dependent upon the accuracy of a variety of estimates including engineering progress, materials quantities, achievement of milestones and other incentives, liquidated-damages provisions, labor productivity and cost estimates. Such estimates are based on various judgments we make with respect to those factors and can be difficult to accurately determine until the project is significantly underway. Due to uncertainties inherent in the estimation process, actual completion costs often vary from estimates. If estimated total costs on any contract indicate a loss, we charge the entire estimated loss to operations in the period the loss first becomes known. If actual costs exceed the original fixed contract price, recognition of any additional revenue would 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
 
Six Months Ended
 
 
 
 
December 30,
 
December 25,
 
December 30,
 
December 25,
(Dollars in thousands)
 
2016
 
2015
 
2016
 
2015
Number of projects
 
1,324

 
1,234

 
1,605

 
1,473

Net increase (reduction) in project profitability
 
$
(748
)
 
$
(1,553
)
 
$
(3,143
)
 
$
(1,470
)
 
 
 
 
 
 
 
 
 
 
 
Net increase (reduction) in project profitability by operating segment:
 
 
 
 
 
 
 
 
Power
 
 
$
(1,867
)
 
$
(954
)
 
$
(2,379
)
 
$
(156
)
Environmental
 
131

 
(796
)
 
(1,919
)
 
(1,124
)
Infrastructure
 
398

 
197

 
525

 
(190
)
Oil and Gas
 
590

 
—

 
630

 
—

 
Total
 
 
$
(748
)
 
$
(1,553
)
 
$
(3,143
)
 
$
(1,470
)


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.


39

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 six months ended December 30, 2016 and December 25, 2015 (in thousands):
 
 
Six Months Ended
 
 
December 30,
 
December 25,
 
Change
(Dollars in thousands)
 
2016
 
2015
 
$
 
%
Net cash provided by operating activities
 
$
18,217

 
$
13,436

 
$
4,781

 
35.6
%
Net cash used in investing activities
 
(1,851
)
 
(123,118
)
 
121,267

 
98.5
%
Net cash (used in) provided by financing activities
 
(8,437
)
 
81,836

 
(90,273
)
 
110.3
%

As of December 30, 2016, cash and cash equivalents increased by $7.9 million, or 42.2%, to $26.7 million, compared to the fiscal year ended June 30, 2016.

Net cash provided by operating activities increased by $4.8 million, or 35.6%, to $18.2 million for the six months ended December 30, 2016, compared to $13.4 million of cash provided for the same period of the prior year. This increase was due to higher income, adjusted for non-cash charges, in the current year period, as well as a favorable impact in the current period from changes in our working capital accounts.

Accounts receivable include both: (1) billed receivables associated with invoices submitted for work performed and (2) unbilled receivables (work in progress). The unbilled receivables are primarily related to work performed in the last month of the quarter. The efficiency of the billing and collection process is commonly evaluated as day's 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, was 79 days as of December 30, 2016 remaining flat with the 79 days as of June 30, 2016, and increased slightly from 78 days when compared to December 25, 2015. Our goal is to maintain DSO at less than 82 days.

Net cash used in investing activities decreased by $121.3 million, or 98.5%, to $1.9 million for the six months ended December 30, 2016, compared to $123.1 million of cash used for the same period of the prior year. The decrease was primarily attributable to $119.6 million utilized for the acquisition of Oil and Gas in the prior year period.

Net cash used in financing activities increased by $90.3 million, or 110.3%, to $8.4 million for the six months ended December 30, 2016, compared to $81.8 million of cash provided in the same period of the prior year. The change was directly attributable our Term Loan and Revolving Credit Facility drawn to fund the acquisition of Oil and Gas in the prior year period.

Long-Term Debt

Revolving Credit Facility and Term Loan

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


40

The actual results as compared to the covenant requirements under the Credit Agreement as of December 30, 2016
for the measurement periods described below are as follows (in thousands):
Financial Covenant
 
Measurement Period
 
Actual
 
Required
Maximum leverage ratio
 
Trailing 12 Months
 
1.40

 
Not to exceed
3.00 to 1.00
Minimum fixed charge coverage ratio
 
Trailing 12 Months
 
4.17

 
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 Credit Agreement. Amounts outstanding under the 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 December 30, 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 December 30, 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 December 30, 2016 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

41

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


42

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.
 
 
 
February 2, 2017
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)


43

TRC COMPANIES INC /DE/ Reports

Also read