<Page>
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 2002
OR
/ / 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)
<Table>
Delaware 06-0853807
--------------------------------------------------------------- ---------------------------------------------
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
5 Waterside Crossing
Windsor, Connecticut 06095
--------------------------------------------------------------- ---------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (860) 289-8631
-----------------------------------
</Table>
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, and (2) has been subject to such filing requirements
for the past 90 days. YES /X/ NO / /
On May 14, 2002 there were 12,485,407 shares of the registrant's common stock,
$.10 par value, outstanding.
================================================================================
<Page>
TRC COMPANIES, INC.
CONTENTS OF QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED MARCH 31, 2002
<Table>
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements:
Consolidated Statements of Operations for the three and nine months ended
March 31, 2002 and 2001................................................................ 3
Condensed Consolidated Balance Sheets at March 31, 2002 and
June 30, 2001.......................................................................... 4
Condensed Consolidated Statements of Cash Flows for the nine months
ended March 31, 2002 and 2001.......................................................... 5
Notes to Condensed Consolidated Financial Statements........................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................................. 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk.................................. 17
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................................................ 17
SIGNATURE.................................................................................................... 18
</Table>
-2-
<Page>
PART I: FINANCIAL INFORMATION
TRC COMPANIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<Table>
<Caption>
Three Months Ended Nine Months Ended
March 31, March 31,
(in thousands, except per share amounts) 2002 2001 2002 2001
------------- --------------- ------------- ------------
GROSS REVENUE $ 72,236 $ 47,305 $ 196,717 $ 128,834
Less subcontractor costs
and direct charges 23,333 15,243 65,293 40,935
------------- --------------- ------------- ------------
NET SERVICE REVENUE 48,903 32,062 131,424 87,899
------------- --------------- ------------- ------------
OPERATING COSTS AND EXPENSES:
Cost of services 39,669 26,031 106,090 71,391
General and administrative expenses 1,320 990 3,723 2,815
Depreciation and amortization (note 2) 833 916 2,259 2,607
------------- --------------- ------------- ------------
41,822 27,937 112,072 76,813
------------- --------------- ------------- ------------
INCOME FROM OPERATIONS 7,081 4,125 19,352 11,086
Interest expense 263 343 880 1,237
------------- --------------- ------------- ------------
INCOME BEFORE TAXES 6,818 3,782 18,472 9,849
Federal and state income tax provision 2,608 1,437 7,065 3,682
------------- --------------- ------------- ------------
NET INCOME 4,210 2,345 11,407 6,167
Dividends and accretion charges
on preferred stock 178 - 203 -
------------- --------------- ------------- ------------
NET INCOME AVAILABLE TO
COMMON SHAREHOLDERS $ 4,032 $ 2,345 $ 11,204 $ 6,167
============= =============== ============= ============
EARNINGS PER SHARE (NOTE 3):
Basic $ 0.33 $ 0.21 $ 0.94 $ 0.57
Diluted 0.30 0.19 0.85 0.52
============= =============== ============= ============
AVERAGE SHARES OUTSTANDING (NOTE 3):
Basic 12,320 10,971 11,866 10,773
Diluted 14,086 12,146 13,364 11,790
============= =============== ============= ============
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
-3-
<Page>
TRC COMPANIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
March 31, June 30,
(in thousands, except share data) 2002 2001
----------- --------
ASSETS (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 3,089 $ 851
Accounts receivable, less allowance for doubtful accounts (note 4) 87,551 61,090
Insurance recoverable - environmental remediation (note 6) 2,005 4,055
Deferred income tax benefits 2,410 1,882
Prepaid expenses and other current assets 2,480 1,353
--------- ---------
97,535 69,231
--------- ---------
PROPERTY AND EQUIPMENT, AT COST 34,887 28,913
Less accumulated depreciation and amortization 20,851 19,075
--------- ---------
14,036 9,838
--------- ---------
GOODWILL, NET OF ACCUMULATED AMORTIZATION (NOTE 7) 77,205 38,943
--------- ---------
INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES 5,901 5,134
--------- ---------
LONG-TERM INSURANCE RECEIVABLE (NOTES 4 AND 5) 4,760 2,046
--------- ---------
LONG-TERM INSURANCE RECOVERABLE - ENVIRONMENTAL REMEDIATION (NOTE 6) 1,237 2,011
--------- ---------
OTHER ASSETS 1,070 469
--------- ---------
$ 201,744 $ 127,672
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of debt $ 462 $ 368
Accounts payable 12,748 7,821
Accrued compensation and benefits 10,848 7,734
Billings in advance of revenue earned (note 8) 6,193 10,752
Environmental remediation liability (note 6) 1,866 5,635
Income taxes payable 2,422 3,647
Other accrued liabilities 5,777 1,266
--------- ---------
40,316 37,223
--------- ---------
NONCURRENT LIABILITIES:
Long-term debt (note 9) 26,100 14,637
Deferred income taxes 8,547 3,826
Long-term environmental remediation liability (note 6) 1,237 2,011
--------- ---------
35,884 20,474
--------- ---------
MANDATORILY REDEEMABLE PREFERRED STOCK (NOTE 10) 14,605 -
--------- ---------
SHAREHOLDERS' EQUITY:
Capital stock (note 11):
Preferred, $.10 par value; 500,000 shares authorized, none issued - -
Common, $.10 par value; 30,000,000 shares authorized, 13,289,986
shares issued at March 31, 2002 and 12,122,967 shares
issued at June 30, 2001 1,329 1,212
Additional paid-in capital 77,251 47,608
Retained earnings 35,256 24,052
--------- ---------
113,836 72,872
Less treasury stock, at cost 2,897 2,897
--------- ---------
110,939 69,975
========= =========
$ 201,744 $ 127,672
========= =========
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
-4-
<Page>
TRC COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<Table>
<Caption>
Nine Months Ended
March 31,
(in thousands) 2002 2001
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 11,407 $ 6,167
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,259 2,607
Change in deferred taxes and other non-cash items (501) 317
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable (4,992) (4,971)
Long-term insurance receivable (2,714) (2,650)
Insurance recoverable (current and long-term) 2,824 3,097
Prepaid expenses and other current assets (242) (387)
Accounts payable 2,402 374
Accrued compensation and benefits 656 1,889
Billings in advance of revenue earned (4,573) 8,124
Environmental remediation liability (current and long-term) (4,543) (3,090)
Income taxes payable (404) 2,131
Other accrued liabilities (701) (782)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 878 12,826
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (2,970) (4,076)
Investments in and advances to unconsolidated affiliates (1,117) (3,314)
Acquisition of businesses, net of cash received (14,022) (1,614)
Decrease in other assets, net 5 56
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (18,104) (8,948)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of preferred stock, net of issuance costs 14,581 -
Net borrowings (repayments) of long-term obligations 3,886 (5,800)
Proceeds from exercise of stock options and warrants 1,006 1,264
Cash payment in lieu of fractional shares on stock split (9) -
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 19,464 (4,536)
-------- --------
INCREASE (DECREASE) IN CASH 2,238 (658)
Cash and cash equivalents, beginning of period 851 1,566
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,089 $ 908
======== ========
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
-5-
<Page>
TRC COMPANIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002
(in thousands, except per share data)
1. The condensed consolidated balance sheet at March 31, 2002 and the
consolidated statements of operations for the three and nine months ended
March 31, 2002 and 2001 and the condensed consolidated statements of cash
flows for the nine months ended March 31, 2002 and 2001 are unaudited, but
in the opinion of the Company, include all adjustments, consisting only of
normal recurring accruals, necessary for a fair presentation of the results
for the interim periods. The June 30, 2001 condensed consolidated balance
sheet data was derived from the audited financial statements but does not
include all disclosures required by accounting principles generally
accepted in the United States of America. Certain footnote disclosures
usually included in financial statements prepared in accordance with
accounting principles generally accepted in the United States of America
have been omitted. These financial statements should be read in conjunction
with the financial statements and notes thereto included in the Company's
Annual Report on Form 10-K, as amended, for the fiscal year ended June 30,
2001.
With respect to the unaudited financial information of TRC Companies, Inc.
for the three and nine months ended March 31, 2002 and 2001, included
herein, PricewaterhouseCoopers LLP reported that they have applied limited
procedures in accordance with professional standards for a review of such
information. However, their separate report dated May 8, 2002 appearing
herein, states that they did not audit and they do not express an opinion
on that unaudited financial information. Accordingly, the degree of
reliance on their report on such information should be restricted in light
of the limited nature of the review procedures applied.
PricewaterhouseCoopers LLP is not subject to the liability provisions of
Section 11 of the Securities Act of 1933 for their report on the unaudited
financial information because that report is not a "report" or a "part" of
the registration statement prepared or certified by PricewaterhouseCoopers
LLP within the meaning of Sections 7 and 11 of the Act.
2. In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards ("SFAS") No. 141, "Business Combinations",
and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS 141 requires
that all business combinations be accounted for under the purchase method
and that certain acquired intangible assets in a business combination be
recognized as assets apart from goodwill. SFAS 142 requires that ratable
amortization of goodwill and other intangible assets with an indefinite
life be replaced with periodic tests of impairment and that identifiable
intangible assets other than goodwill be amortized over their useful lives.
SFAS 141 is effective for all business combinations completed after June
30, 2001. The Company elected to early adopt the provisions of SFAS 142
effective July 1, 2001.
-6-
<Page>
The table below shows the effect on net income had SFAS 142 been adopted in
prior periods.
<Table>
<Caption>
Three Months Ended Nine Months Ended
March 31, March 31,
2002 2001 2002 2001
-------- -------- --------- -------
NET INCOME:
Reported net income $ 4,210 $ 2,345 $ 11,407 $ 6,167
Add back: goodwill amortization (net of taxes) - 293 - 687
-------- -------- --------- -------
Adjusted net income $ 4,210 $ 2,638 $ 11,407 $ 6,854
======== ======== ========= =======
BASIC EARNINGS PER SHARE:
Reported basic earnings per share $ 0.33 $ 0.21 $ 0.94 $ 0.57
Add back: goodwill amortization (net of taxes) - 0.02 - 0.06
-------- -------- --------- -------
Adjusted basic earnings per share $ 0.33 $ 0.23 $ 0.94 $ 0.63
======== ======== ========= =======
DILUTED EARNINGS PER SHARE:
Reported diluted earnings per share $ 0.30 $ 0.19 $ 0.85 $ 0.52
Add back: goodwill amortization (net of taxes) - 0.02 - 0.06
-------- -------- --------- -------
Adjusted diluted earnings per share $ 0.30 $ 0.21 $ 0.85 $ 0.58
======== ======== ========= =======
</Table>
-7-
<Page>
3. For purposes of computing Diluted Earnings per Share the Company uses the
treasury stock method. Additionally, when computing dilution related to the
Preferred Stock, conversion is assumed as of the beginning of the period.
The following table sets forth the computations of Basic and Diluted
Earnings per Share:
<Table>
<Caption>
Three Months Ended Three Months Ended
March 31, March 31,
2002 2002 2001 2001
---------- ---------- ---------- ---------
Diluted Basic Diluted Basic
---------- ---------- ---------- ---------
Net income $ 4,210 $ 4,210 $ 2,345 $ 2,345
Dividends and accretion
charges on preferred stock - 178 - -
---------- ---------- ---------- ---------
Net income available to common shareholders $ 4,210 $ 4,032 $ 2,345 $ 2,345
========== ========== ========== =========
Weighted average common shares outstanding 12,320 12,320 10,971 10,971
Potential common shares:
Stock options and warrants 1,230 - 1,175 -
Convertible preferred stock 536 - - -
---------- ---------- ---------- ---------
Total potential common shares 14,086 12,320 12,146 10,971
========== ========== ========== =========
Earnings per share $ 0.30 $ 0.33 $ 0.19 $ 0.21
========== ========== ========== =========
<Caption>
Nine Months Ended Nine Months Ended
March 31, March 31,
2002 2002 2001 2001
---------- ---------- ---------- ---------
Diluted Basic Diluted Basic
---------- ---------- ---------- ---------
Net income $ 11,407 $ 11,407 $ 6,167 $ 6,167
Dividends and accretion
charges on preferred stock - 203 - -
---------- ---------- ---------- ---------
Net income available to common shareholders $ 11,407 $ 11,204 $ 6,167 $ 6,167
========== ========== ========== =========
Weighted average common shares outstanding 11,866 11,866 10,773 10,773
Potential common shares:
Stock options and warrants 1,291 - 1,017 -
Convertible preferred stock 207 - - -
---------- ---------- ---------- ---------
Total potential common shares 13,364 11,866 11,790 10,773
========== ========== ========== =========
Earnings per share $ 0.85 $ 0.94 $ 0.52 $ 0.57
========== ========== ========== =========
</Table>
-8-
<Page>
4. The current portion of Accounts Receivable at March 31, 2002 and June 30,
2001 is comprised of the following:
<Table>
<Caption>
March 31, June 30,
2002 2001
----------- ------------
(Unaudited)
Amounts billed $ 54,314 $ 35,758
Unbilled costs 36,337 27,677
Retainage 2,748 1,939
------------ ------------
93,399 65,374
Less allowance for
doubtful accounts 5,848 4,284
------------ ------------
$ 87,551 $ 61,090
============ ============
</Table>
Unbilled Costs generally represent billable amounts recognized as revenue
primarily in the last month of the period. Management expects that
substantially all Unbilled Costs will be billed and collected within one
year. The majority of Amounts Billed are expected to be collected within 60
days from the invoice date. Retainage represents amounts billed but not
paid by the customer which, pursuant to the contract is due at completion.
Long-Term Insurance Receivable at March 31, 2002 and June 30, 2001 of
$4,760 and $2,046, respectively, relate to unbilled costs on Exit Strategy
contracts and represent amounts held by the insurance company until
completion of certain milestones.
5. The Company has entered into several long-term contracts under its Exit
Strategy program under which the Company is obligated to complete the
remediation of environmental conditions at a site for a fixed fee. The
Company assumes the risk for remediation costs for pre-existing site
environmental conditions and believes that through in-depth technical
analysis, comprehensive cost estimation and creative remedial approaches it
is able to execute pricing strategies which protect the Company's return on
these projects. As additional protection, the Company obtains a finite risk
cost cap insurance policy from rated insurance companies (e.g., American
International Group) which provides coverage for cost increases arising
from unknown or changed conditions up to a specified maximum amount
significantly in excess of the estimated cost of remediation. Upon signing
of the contract, the Company receives the fixed fee contract price of which
a substantial portion is deposited in a restricted account held by the
insurance company. The insurance company then pays the Company from the
deposited funds as work is performed. The Company believes that it is
adequately protected from risks on these projects and that adverse
developments, if any, will not have a material impact on the Company's
consolidated operating results, financial condition or cash flows.
-9-
<Page>
6. One Exit Strategy contract entered into by the Company also involved the
Company entering into a consent decree with government authorities and
assuming the obligation for the settling responsible parties' environmental
remediation liability for the site. The Company's expected remediation cost
is fully funded by the contract price received and is fully insured by a
finite risk cost cap insurance policy for amounts significantly in excess
of the estimated cost of remediation. Accordingly, the Company has recorded
the Environmental Remediation Liability for the site with offsetting
recoverables from the insurance company. In general, the Insurance
Recoverable and Environmental Remediation Liability amounts for these items
will be equivalent and will reduce over time as this Exit Strategy project
is completed. For example, the Long-Term Environmental Remediation
Liability of $1,237 at March 31, 2002, equals the Long-Term Insurance
Recoverable - Environmental Remediation of $1,237. Also, the current
Environmental Remediation Liability of $1,866 at March 31, 2002 is matched
by the Insurance Recoverable - Environmental Remediation of $2,005, which
includes that liability as well as other amounts payable to the Company
under the insurance policy.
7. On October 15, 2001, the Company completed the acquisition of the
SITE-Blauvelt group of companies ("SITE"). SITE is a transportation
infrastructure firm headquartered in Mt. Laurel, New Jersey with offices in
a number of other states. The purchase price of $22,940 (after closing
adjustments but before contingent consideration) consisted of approximately
870,000 shares of the Company's common stock and resulted in Goodwill of
$18,958 being recorded in accordance with SFAS 141. Additionally,
intangible assets acquired were recorded and are immaterial to the
Company's financial condition. The significant assets and liabilities
acquired were Accounts Receivable of $16,712, Debt of $5,663 and Deferred
Income Tax Liabilities of $5,952. The Company may make additional payments
if certain financial goals are achieved in each of the next three years.
The acquisition has been accounted for using the purchase method of
accounting in accordance with SFAS 141.
In addition to the SITE acquisition, the Company completed the acquisition
of several other companies during the nine months ended March 31, 2002. The
gross purchase price for these acquisitions was approximately $13,390
(before contingent consideration) consisting of a combination of cash and
shares of the Company's common stock. As a result of these acquisitions,
Goodwill of $10,567 was recorded in accordance with SFAS 142. Additionally,
intangible assets acquired were recorded and are immaterial to the
Company's financial condition. These acquisitions have also been accounted
for using the purchase method of accounting in accordance with SFAS 141.
The following unaudited pro forma information for the nine months ended
March 31, 2002 and 2001 presents summarized results of operations as if
current and prior year acquisitions had occurred at the beginning of the
periods presented after giving effect to adjustments, including goodwill
and intangible asset amortization, increased interest expense on
acquisition borrowings and related income tax effects:
<Table>
<Caption>
Nine Months Ended
March 31,
(Unaudited) 2002 2001
-------- --------
Net service revenue $ 150,511 $ 132,715
--------- ---------
Net income $ 12,704 $ 7,298
--------- ---------
Earnings per share - diluted $ 0.93 $ 0.57
========= =========
</Table>
-10-
<Page>
The unaudited pro forma financial information may not be indicative of the
results that would have occurred had the acquisitions taken place at the
beginning of the periods presented, nor be indicative of the results that
will be obtained in the future.
The Company also made additional purchase price payments during the nine
months ended March 31, 2002 related to acquisitions completed in the last
several years, resulting in additional Goodwill of $8,548 being recorded in
accordance with SFAS 142. The Company also recorded adjustments to purchase
price allocation for an acquisition completed in fiscal 2001 resulting in
additional Goodwill of $189.
8. Billings in Advance of Revenue Earned represents amounts collected in
accordance with contractual terms, in advance of when the work is
performed. These advance payments primarily relate to the Company's Exit
Strategy program.
9. The Company maintains a bank financing arrangement which currently provides
a $32,000 revolving credit facility to assist in funding various operating
and investing activities. Borrowings under the agreement bear interest at
the banks' base rate or the Eurodollar rate plus or minus applicable
margins, are collateralized by all Accounts Receivable of the Company and
are due and payable in March 2005 when the agreement expires. The agreement
contains various covenants including, but not limited to, restrictions
related to net worth, EBITDA, leverage, asset sales, mergers and
acquisitions, creation of liens and dividends on common stock (other than
stock dividends).
10. On December 19, 2001 the Company completed a private placement of $15,000
of a newly designated class of Preferred Stock with Fletcher International,
Ltd., an affiliate of Fletcher Asset Management, Inc. ("Fletcher") of New
York City. The Preferred Stock is convertible into TRC common stock at a
conversion price of $37.66 per share. TRC also granted Fletcher the right,
commencing on December 15, 2002 and ending on December 14, 2003, to
purchase up to 10,000 shares of one or more additional series of Preferred
Stock under similar terms and conditions at a price of $1,000 per share.
The Preferred Stock issued to Fletcher has a five-year term with a 4%
annual dividend, which is payable at TRC's option in either cash or common
stock. TRC will have the right to redeem the Preferred Stock for cash once
the price of its common stock reaches certain predetermined levels.
Following 48 months of issuance, the Preferred Stock is redeemable by
Fletcher in common stock. On the five-year expiration date, any shares of
Preferred Stock still outstanding are to be mandatorily redeemed, at TRC's
option, in either cash or shares of common stock. The Preferred Stock was
recorded net of issuance costs of $419.
11. On February 6, 2002, the Company announced a 3-for-2 stock split of its
common stock. The additional shares were distributed on March 5, 2002 in
the form of a 50% stock dividend to shareholders of record on February 19,
2002. The accompanying financial statements and notes thereto have been
adjusted to reflect the stock split.
-11-
<Page>
TRC COMPANIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three and Nine Months Ended March 31, 2002 and 2001
OVERVIEW
The Company is a leading provider of technical, financial risk management and
construction services to industry and government primarily in the United States
market. The Company's main focus is in the areas of infrastructure improvements
and expansions, environmental management and power development and conservation.
RESULTS OF OPERATIONS
The Company derives its revenue from fees for providing engineering and
consulting services. The types of contracts with our customers and the
approximate percentage of net service revenue from each contract type are as
follows:
- Time and material 51%
- Fixed price or lump sum 32%
- Cost-type with various fee arrangements 17%
In the course of providing its services the Company routinely subcontracts
drilling, laboratory analyses, construction equipment and other services. These
costs are passed directly through to customers and, in accordance with industry
practice, are included in Gross Revenue. Because Subcontractor Costs and Direct
Charges can vary significantly from project to project, the Company considers
Net Service Revenue (NSR), which is Gross Revenue less Subcontractor Costs and
Direct Charges, as its primary measure of revenue growth.
The following table presents the percentage relationships of certain items in
the consolidated statements of operations to NSR:
<Table>
<Caption>
Three Months Ended Nine Months Ended
March 31, March 31,
2002 2001 2002 2001
--------- ----------- ---------- -----------
NET SERVICE REVENUE (NSR) 100.0% 100.0% 100.0% 100.0%
--------- ----------- ---------- -----------
OPERATING COSTS AND EXPENSES:
Cost of services 81.1 81.2 80.7 81.2
General and administrative expenses 2.7 3.1 2.8 3.2
Depreciation and amortization 1.7 2.8 1.7 3.0
--------- ----------- ---------- -----------
INCOME FROM OPERATIONS 14.5 12.9 14.8 12.6
Interest expense .5 1.1 .7 1.4
--------- ----------- ---------- -----------
INCOME BEFORE TAXES 14.0 11.8 14.1 11.2
Federal and state income tax provision 5.3 4.5 5.4 4.2
--------- ----------- ---------- -----------
NET INCOME 8.7 7.3 8.7 7.0
Dividends and accretion charges
on preferred stock .4 - .2 -
========= =========== ========== ===========
NET INCOME AVAILABLE TO
COMMON SHAREHOLDERS 8.3% 7.3% 8.5% 7.0%
========= =========== ========== ===========
</Table>
-12-
<Page>
The year-to-year NSR growth trend realized for each of the past 19 quarters has
continued for the three months ended March 31, 2002. NSR increased by 53%
to $49.0 million, compared to $32.1 million in the same period last year. For
the nine months ended March 31, 2002, NSR increased by 50% to $131.4 million,
compared to $87.9 million in the same period last year.
NSR from acquired companies is considered part of acquisition growth during the
twelve months from the date acquired. Approximately 87% and 71% of the NSR
growth for the three and nine month periods, respectively, was from
acquisitions, while as discussed below operating income growth for these same
periods was greatest from organic (existing business) activities. These
characteristics are due to:
- The relatively larger size of the two recently acquired companies,
compared to the Company's typical smaller size acquisitions.
- The seasonality of the largest acquisition (SITE-Blauvelt), which
added significant NSR with relatively small operating income during
the winter period.
- Increased margins provided by the Company's organic business
activities.
Management's goal continues to be to provide a reasonable balance between
organic and acquisition growth over a several year period.
Cost of Services increased 52% and 49% on a year-to-year basis during the three
and nine month periods, respectively, as a direct result of the Company's
increased revenues. However, as a percentage of NSR, Cost of Services decreased
from 81.2% to 81.1% and 81.2% to 80.7% on a year-to-year basis during the three
and nine month periods, respectively. These reductions were primarily the result
of increased margins for the services performed.
General and Administrative Expenses (G&A) increased approximately 33% and 32% on
a year-to-year basis during the three and nine month periods, respectively,
primarily from additional costs required to support the Company's growth.
However, as a percentage of NSR, G&A expenses decreased from 3.1% to 2.7% and
3.2% to 2.8% on a year-to-year basis during the three and nine month periods,
respectively. These decreases are due to the Company's ability to obtain and
manage the increased revenue without adding a proportional amount of overhead.
This decrease results in higher margins for all services performed.
Depreciation and Amortization expense decreased by approximately 9% and 13%,
respectively, during the three and nine month periods, compared to the prior
year. These decreases were primarily due to the Company's early adoption of SFAS
142, "Goodwill and Other Intangible Assets". In accordance with SFAS 142, the
Company no longer amortizes Goodwill. The decrease associated with the adoption
of SFAS 142 was, however, partially offset by an increase in depreciation
expense associated with equipment acquired through acquisitions.
Income from Operations increased from approximately $4.1 million to $7.1 million
(72%) during the three month period and from approximately $11.1 million to
$19.4 million (75%) during the nine month period as compared to the same periods
in the prior year. Approximately 56% and 66% of the increase for the three and
nine month periods, respectively, was from organic growth. The remaining 44% and
34% of the Income from Operations growth was from acquisitions completed
-13-
<Page>
during the past twelve months. The improvement in operating income performance
was primarily due to:
- The Company's focus toward higher margin, economically driven markets;
- The growth in revenue, without comparable increases in overhead; and
- The favorable impact resulting from the adoption of SFAS 142.
The favorable organic growth percentages reflect the Company's successful
efforts to obtain higher margin revenue for its services, and management's
objective to maintain a reasonable balance between organic and acquisition
related growth.
Interest Expense decreased during the three and nine month periods, as compared
to the same periods last year, primarily due to lower average interest rates.
The Company's percentage of debt to capitalization ratio continues to remain
relatively low, reflecting management's conservative debt philosophy.
The provision for federal and state income taxes reflects an effective rate of
38.3% in the three and nine months compared to effective rates of 38% and 37.4%,
respectively, in the same periods last year. The increases were primarily due to
an increase in the federal income tax rate bracket as a result of the Company's
income growth. The Company believes that there will be sufficient taxable income
in future periods to enable utilization of available deferred income tax
benefits.
IMPACT OF INFLATION
The Company's operations have not been materially affected by inflation or
changing prices because of the short-term nature of many of its contracts, and
the fact that most contracts of a longer term are subject to adjustment or have
been priced to cover anticipated increases in labor and other costs.
LIQUIDITY AND CAPITAL RESOURCES
The Company primarily relies on cash from operations and financing activities,
including borrowings based upon the strength of its balance sheet, to fund
operations. As discussed below, the cash generated from operations, the cash on
hand at March 31, 2002 and available borrowings under the credit facility will
be sufficient to meet the Company's cash requirements for currently anticipated
activities. The Company's liquidity is assessed in terms of its overall ability
to generate cash to fund its operating and investing activities and to reduce
debt. Of particular importance in the management of liquidity are cash flows
generated from operating activities, acquisitions, capital expenditure levels
and an adequate bank line of credit.
Cash flow from operating activities was $3.4 million for the three months ended
March 31, 2002. Management expects that a similar result will be realized for
the fourth fiscal quarter.
Operating cash flow for the nine months ended March 31, 2002, was $.9 million,
compared to $12.8 million for the same period last year. This variation in
year-to-year operating cash flows was primarily the result of changes in
Billings in Advance of Revenue Earned, which fluctuate primarily
-14-
<Page>
depending on the number of new Exit Strategy contracts entered into during each
period. Billings in Advance of Revenue Earned primarily represents amounts
collected in accordance with contractual terms, in advance of when the work is
performed on Exit Strategy contracts. These prepayments provide the Company with
an advance source of cash for one to several years. During periods when the
amount of prepayments from new Exit Strategy contracts exceeds the amount of
revenue recognized as work is performed on the contracts, Billings in Advance of
Revenue Earned will increase and thereby provide operating cash flow. For
instance, during the nine months ended March 31, 2001, the increase in Billings
in Advance of Revenue Earned contributed $8.1 million towards the total cash
provided by operating activities. However, during periods when the amount of
revenue recognized from work performed exceeds the amount of prepayments from
new Exit Strategy contracts, Billings in Advance of Revenue Earned will decrease
and reduce operating cash flow. During the nine months ended March 31, 2002, the
decrease in Billings in Advance of Revenue Earned reduced operating cash flow by
$4.6 million.
Operating cash flows are also increased by noncash charges for Depreciation
and Amortization (i.e., $2.3 million for the nine month period ended March
31, 2002), and typically decreased by Accounts Receivable associated with the
Company's revenue growth (i.e., $5.0 million for the nine month period). Over
time, operating cash flows can be either increased or decreased by changes in
the Long-Term Insurance Receivable. For the nine month period, operating cash
flows decreased by the $2.7 million increase in the Long-Term Insurance
Receivable. Overall Accounts Receivable and Long-Term Receivable
characteristics for the Company are discussed in the following paragraphs.
Accounts Receivable includes both: (1) billed receivables associated with
invoices submitted for work previously completed and (2) unbilled receivables
(work in progress). The unbilled receivables are primarily related to work
performed in the last month of the reporting period. The magnitude of the
Accounts Receivable for a professional services company is typically evaluated
as days sales outstanding (DSO), which is calculated by dividing both current
and long-term receivables by the most recent six months average daily Gross
Revenue, adjusted to include Gross Revenue from acquired entities to the extent
it is not already included in the Company's Gross Revenue. At March 31, 2002,
the Company's DSO was approximately 115 days. DSO would have been 109 days at
March 31, 2002 if the SITE acquisition were excluded from the calculation. This
compares favorably to DSO of 112 days at June 30, 2001. Management's long-term
goal is to reduce DSO to 100-105 days.
Funding and risk management for Exit Strategy projects is frequently provided by
a finite risk cost cap insurance policy issued by the Company's insurer,
American International Group (AIG). The policy provides risk protection against
potential increases in the cost of the project. The Company generally receives
the contract price as a prepayment from its customer and a substantial portion
of that prepayment is deposited with AIG pursuant to the policy. AIG then
pays the Company from the deposited funds as work is performed. The Long-Term
Insurance Receivable is associated with amounts held by AIG for work
performed but which are currently not yet payable under the terms of the
policy. These amounts will be paid as the Company completes certain project
milestones (e.g., completion of capital improvements). The effect on periodic
operating cash flows will vary depending upon the mix of work performed but
not yet payable and amounts released.
-15-
<Page>
As a result of these factors, some periods will have a high operating cash flow
to Net Income relationship. In others, this relationship will be lower. Over
longer periods the effect should tend to be normalized with an overall positive
operating cash flow trend.
Investing activities used cash of approximately $18.1 million during the nine
months ended March 31, 2002, primarily consisting of $14 million for
acquisitions and earnout payments and $3 million in capital expenditures for
additional information technology and other equipment to support business
growth. During the remainder of fiscal 2002, the Company expects to make
acquisition earnout payments of about $3.2 million and capital expenditures of
approximately $1 million.
Financing activities provided cash of approximately $19.5 million during the
nine months ended March 31, 2002 to support operating and investing activities.
The private placement of a new class of preferred stock on December 19, 2001,
provided $14.6 million (net of issuance costs) and the remaining $4.9 million
was primarily provided by net borrowings from the Company's credit facilities.
During the same period, cash increased from $.8 million at June 30, 2001 to $3.1
million at March 31, 2002.
In March 2002 the Company entered into a new banking arrangement with First
Union National Bank. The agreement provides for a revolving credit facility of
$40 million to provide flexible funding for various short-term operating and
investing activities. The initial availability under the facility is $32
million and is expected to be raised to the agreement amount of $40 million
by June 30, 2002. Borrowings under the agreement bear interest at the banks'
base rate or the Eurodollar rate plus or minus applicable margins and are due
and payable in March 2005 when the agreement expires. At March 31, 2002,
outstanding borrowings pursuant to the agreement were $25.1 million, at an
average interest rate of 3.6%.
We expect that the cash generated from operations, the cash on hand at March 31,
2002 and available borrowings under the revolving credit facility will be
sufficient to meet the Company's cash requirements for currently anticipated
activities. If in the future the Company pursues acquisitions in which the
potential cash consideration approaches or exceeds the availability of current
sources, the Company would either increase its lending facility or pursue
additional financing. The Company plans to maintain its conservative debt
philosophy.
NEW ACCOUNTING GUIDANCE
In June 2001, the Financial Accounting Standards Board issued SFAS No. 143,
"Accounting for Asset Retirement Obligations." The standard requires that legal
obligations associated with the retirement of tangible long-lived assets be
recorded at fair value when incurred and is effective July 1, 2002 for the
Company. The Company is currently reviewing the provisions of SFAS 143 to
determine if and how it applies to the Company.
In August 2001, the Financial Accounting Standards Board issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." The standard
provides guidance on the accounting for the impairment or disposal of long-lived
assets and is effective July 1, 2002 for the Company. The Company is currently
reviewing the provisions of SFAS 144 to determine if and how it applies to the
Company.
In April 2002, the Financial Accounting Standards Board issued SFAS 145,
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections." The standard provides guidance on the
accounting for leases and amends other existing authoritative pronouncements
and is generally effective July 1, 2002 for the Company. The Company is
currently reviewing the provisions of SFAS 145 to determine if and how it
applies to the Company.
-16-
<Page>
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements that describe the Company's
business prospects. These statements involve risks and uncertainties including,
but not limited to, regulatory uncertainty, government funding, level of demand
for the Company's services, industry-wide competitive factors and political,
economic or other conditions. Furthermore, market trends are subject to changes
which could adversely affect future results.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk for changes in interest rates relates
primarily to borrowings under the Company's revolving credit agreement with a
commercial bank. These borrowings bear interest at variable rates and the fair
value of this indebtedness is not significantly affected by changes in market
interest rates. An effective increase or decrease of 10% in the current
effective interest rate under the revolving credit agreement would not have a
material effect on the Company's consolidated operating results, financial
condition or cash flows.
PART II: OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -
10.3 - Revolving Credit Agreement by and among TRC Companies, Inc. and
subsidiaries and First Union National Bank, dated March 20, 2002.
15 - Letter re: unaudited interim financial information
99 - Report of Independent Accountants
(b) Reports on Form 8-K -
On February 13, 2002, the Company filed a Form 8-K reporting that on
February 6, 2002, the Company announced continued strong revenue and
earnings growth for the three and six months ended December 31, 2001.
On March 15, 2002, the Company filed a Form 8-K/A related to the
acquisition of the Site-Blauvelt Engineers Group that was completed on
October 15, 2001.
-17-
<Page>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRC COMPANIES, INC.
May 15, 2002 by: /s/ Harold C. Elston, Jr.
---------------------------------
Harold C. Elston, Jr.
Senior Vice President
(Chief Accounting Officer)
-18-