<Page>
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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 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)
DELAWARE 06-0853807
------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5 WATERSIDE CROSSING
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, and (2) has been subject to such filing requirements
for the past 90 days. YES [X] NO [ ]
On February 12, 2003 there were 13,258,085 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 31, 2002
<Table>
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Statements of Operations for the three and six
months ended December 31, 2002 and 2001................................................ 3
Condensed Consolidated Balance Sheets at
December 31, 2002 and June 30, 2002.................................................... 4
Condensed Consolidated Statements of Cash Flows
for the six months ended December 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.............................................................. 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk.................................. 20
Item 4. Controls and Procedures..................................................................... 20
PART II - OTHER INFORMATION
Item 4: Submission of Matters to a Vote of Security Holders......................................... 21
Item 6. Exhibits and Reports on Form 8-K............................................................ 21
SIGNATURE.................................................................................................... 22
CERTIFICATIONS............................................................................................... 23
</Table>
-2-
PART I: FINANCIAL INFORMATION
TRC COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<Table>
<Caption>
Three Months Ended Six Months Ended
December 31, December 31,
(in thousands, except per share amounts) 2002 2001 2002 2001
--------------- ---------------- ---------------- ---------------
GROSS REVENUE $ 80,207 $ 65,533 $ 158,922 $ 123,090
Less subcontractor costs
and direct charges 25,394 20,881 52,753 41,960
--------------- ---------------- ---------------- ---------------
NET SERVICE REVENUE 54,813 44,652 106,169 81,130
--------------- ---------------- ---------------- ---------------
OPERATING COSTS AND EXPENSES:
Cost of services 45,612 37,270 88,054 66,481
General and administrative expenses 1,571 1,310 3,145 2,403
Depreciation and amortization 1,134 771 2,262 1,426
--------------- ---------------- ---------------- ---------------
48,317 39,351 93,461 70,310
--------------- ---------------- ---------------- ---------------
INCOME FROM OPERATIONS 6,496 5,301 12,708 10,820
Interest expense 327 328 581 617
--------------- ---------------- ---------------- ---------------
INCOME BEFORE TAXES 6,169 4,973 12,127 10,203
Federal and state income tax provision 2,406 1,902 4,730 3,902
--------------- ---------------- ---------------- ---------------
NET INCOME 3,763 3,071 7,397 6,301
Dividends and accretion charges
on preferred stock 181 25 378 25
--------------- ---------------- ---------------- ---------------
NET INCOME AVAILABLE TO
COMMON SHAREHOLDERS $ 3,582 $ 3,046 $ 7,019 $ 6,276
=============== ================ ================ ===============
EARNINGS PER SHARE:
Basic $ 0.28 $ 0.25 $ 0.55 $ 0.54
Diluted 0.26 0.23 0.51 0.48
=============== ================ ================ ===============
AVERAGE SHARES OUTSTANDING:
Basic 13,014 12,053 12,837 11,644
Diluted 14,702 13,471 13,645 13,003
=============== ================ ================ ===============
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
-3-
TRC COMPANIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<Table>
<Caption>
December 31, June 30,
(in thousands, except share data) 2002 2002
-------------- --------------
ASSETS
CURRENT ASSETS:
Cash $ 1,678 $ 1,615
Accounts receivable, less allowance for doubtful accounts (note 6) 94,290 90,895
Insurance recoverable - environmental remediation (note 3) 292 478
Deferred income tax benefits 3,130 2,630
Prepaid expenses and other current assets 2,853 2,100
-------------- --------------
102,243 97,718
-------------- --------------
PROPERTY AND EQUIPMENT, AT COST 40,396 36,500
Less accumulated depreciation and amortization 23,270 21,938
-------------- --------------
17,126 14,562
-------------- --------------
GOODWILL 99,050 81,434
-------------- --------------
INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES 6,225 5,918
-------------- --------------
LONG-TERM INSURANCE RECEIVABLE (NOTE 6) 5,079 3,627
-------------- --------------
LONG-TERM INSURANCE RECOVERABLE - ENVIRONMENTAL REMEDIATION (NOTE 3) 1,116 1,262
-------------- --------------
OTHER ASSETS 1,317 1,336
-------------- --------------
$232,156 $205,857
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 1,030 $ 465
Accounts payable 11,797 13,480
Accrued compensation and benefits 8,782 9,560
Income taxes payable 1,432 4,389
Billings in advance of revenue earned (notes 3 and 7) 8,756 6,576
Environmental remediation liability (note 3) 292 374
Other accrued liabilities 6,729 4,998
-------------- --------------
38,818 39,842
-------------- --------------
NON-CURRENT LIABILITIES:
Long-term debt, net of current portion 34,041 23,888
Deferred income taxes 9,907 9,313
Long-term environmental remediation liability (note 3) 1,116 1,262
-------------- --------------
45,064 34,463
-------------- --------------
MANDATORILY REDEEMABLE PREFERRED STOCK 14,656 14,603
-------------- --------------
SHAREHOLDERS' EQUITY:
Capital stock:
Preferred, $.10 par value; 500,000 shares authorized, 15,000 issued
as mandatorily redeemable -- --
Common, $.10 par value; 30,000,000 shares authorized, 14,199,255 shares
issued at December 31, 2002 and 13,497,806 shares issued at June 30,
2002 1,420 1,350
Additional paid-in capital 89,067 79,487
Note receivable (146) (146)
Retained earnings 46,174 39,155
-------------- --------------
136,515 119,846
Less treasury stock, at cost 2,897 2,897
-------------- --------------
133,618 116,949
-------------- --------------
$232,156 $205,857
============== ==============
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
-4-
TRC COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<Table>
<Caption>
Six Months Ended
December 31,
(in thousands) 2002 2001
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,397 $ 6,301
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,262 1,426
Change in deferred taxes and other non-cash items (425) (279)
Changes in assets and liabilities, net of effects from acquisitions:
Accounts receivable 2,749 (3,937)
Long-term insurance receivable (1,452) (2,073)
Prepaid expenses and other current assets (341) 102
Accounts payable (2,394) 2,500
Accrued compensation and benefits (2,819) (2,473)
Billings in advance of revenue earned 2,178 (3,218)
Insurance recoverable (current and long-term) 332 1,881
Environmental remediation liability (current and long-term) (228) (3,206)
Income taxes payable (3,005) 160
Other accrued liabilities (9) 247
------------ ------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 4,245 (2,569)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of businesses, net of cash acquired (9,387) (11,685)
Additions to property and equipment (2,940) (1,951)
Investments in and advances to unconsolidated affiliates (423) (390)
Decrease (increase) in other assets, net (39) 7
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (12,789) (14,019)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of preferred stock, net of issuance costs -- 14,581
Net borrowings under revolving credit facilities 8,159 2,436
Proceeds from exercise of stock options and warrants 448 783
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 8,607 17,800
------------ ------------
INCREASE IN CASH 63 1,212
Cash, beginning of period 1,615 851
------------ ------------
CASH, END OF PERIOD $ 1,678 $ 2,063
============ ============
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
-5-
TRC COMPANIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
December 31, 2002
(in thousands, except per share amounts)
1. BASIS OF PRESENTATION
The Condensed Consolidated Balance Sheet at December 31, 2002, the
Condensed Consolidated Statements of Operations for the three and six
months ended December 31, 2002 and 2001 and the Condensed Consolidated
Statements of Cash Flows for the six months ended December 31, 2002 and
2001 have been prepared pursuant to the interim period reporting
requirements of Form 10-Q. Consequently, the financial statements 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. Also, certain
information and footnote disclosures usually included in financial
statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or 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 for the year ended June 30, 2002.
2. BUSINESS ACTIVITIES
The Company conducts its activities under one business segment which
involves providing technical, financial, risk management, and
construction services to the environmental, energy and infrastructure
markets. The Company does not track its financial performance by these
areas, therefore it is not practicable for the Company to report net
service revenue by these areas. The Company's services and products are
provided to commercial organizations and government agencies primarily in
the United States of America.
3. COMMITMENTS AND CONTINGENCIES
The Company has entered into several long-term contracts pursuant to 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 all 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 remediation cost cap insurance from rated insurance companies
(e.g., American International Group) which provides coverage if cost
increases were to arise 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, the majority of which is deposited in a restricted account held by
the insurance company, and the Company is reimbursed as it performs under
the contract. That portion of the initial fixed fee contract price which
is not deposited with the insurance company is retained by
-6-
the Company and is included under Current Liabilities on the Company's
Condensed Consolidated Balance Sheets under the item termed Billings in
Advance of Revenue Earned and this amount reduces as the Company
performs under the contract and recognizes revenue. 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 its consolidated operating results, financial condition or cash
flows.
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 costs (Current and Long-term Environmental Remediation
Liability items in the Condensed Consolidated Balance Sheets) is fully
funded by the contract price received and is fully insured by an
environmental remediation cost cap policy (Current and Long-term
Insurance Recoverable items in the Condensed Consolidated Balance
Sheets). As of December 31, 2002, the remediation for this project is
substantially complete and the Company has begun long-term maintenance
and monitoring at the site.
The Company indemnifies its directors and officers to the maximum
extent permitted under the laws of the State of Delaware. The duration
of the guarantees and indemnities varies, and in many cases is
indefinite.
4. ACQUISITIONS
During the six months ended December 31, 2002, the Company completed the
acquisitions of the following companies:
o Cubix Corporation, a provider of air emissions monitoring and
testing services for industrial, petrochemical and energy customers.
o Essex Environmental Inc., a provider of environmental planning,
training and compliance management services to energy and
infrastructure customers.
o Novak Engineering, Inc., a provider of power transmission,
distribution planning and design services for utilities,
municipalities and regional electrical cooperatives.
o SGS Witter, Inc., a provider of electrical power transmission,
distribution planning and design services for utilities,
municipalities and rural electrical cooperatives.
The aggregate purchase price for these acquisitions was $16,094 (before
contingent consideration) including $8,407 of cash, 403 shares of the
Company's common stock valued at $6,437 and a $1,250 three-year
promissory note. The Company may make additional purchase price payments
in the future if certain financial goals are achieved by the acquired
companies. As a result of these acquisitions, goodwill of $11,728 was
recorded, of which $5,106 is tax deductible, in accordance with Statement
of Financial Accounting Standards (SFAS) No. 142. Additionally,
intangible assets acquired were recorded which are immaterial to the
Company's financial position. The acquisitions have been accounted for
using the purchase method of accounting in accordance with
-7-
SFAS No. 141. The initial purchase price allocations have been completed,
however it is anticipated that there will be changes to the initial
allocations as fair values of property and equipment are finalized. Any
such changes are not expected to have a material impact on the results of
operations or financial condition of the Company in future periods.
The following pro forma information for the three and six months ended
December 31, 2002 and 2001 presents summarized results of operations as
if current year acquisitions had occurred at the beginning of the periods
presented after giving effect to adjustments, including increased
interest expense on acquisition borrowings, amortization of intangible
assets (excluding goodwill and indefinite-lived intangible assets) and
related income tax effects:
<Table>
<Caption>
Three Months Ended Six Months Ended
December 31, December 31,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Net service revenue $ 55,207 $ 48,908 $ 112,395 $ 89,437
------------- ------------- ------------- -------------
Net income 3,726 3,299 7,310 6,635
------------- ------------- ------------- -------------
Earnings per share--diluted $ 0.25 $ 0.24 $ 0.51 $ 0.49
============= ============= ============= =============
</Table>
The 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.
During the six months ended December 31, 2002, the Company recorded
additional purchase price payments related to acquisitions completed in
prior fiscal years of $5,888, including 172 shares of the Company's
common stock valued at $2,239, with these payments resulting in
additional goodwill. At December 31, 2002 and 2001, the Company had
liabilities for additional purchase price payments of $3,853 and
$2,826, respectively. These amounts are included under Current
Liabilities on the Company's Condensed Consolidated Balance Sheets
under the item termed Other Accrued Liabilities.
At December 31, 2002, the Company had $99,050 of goodwill, representing
the cost of acquisitions in excess of fair values assigned to the
underlying net assets of acquired companies. In accordance with SFAS No.
142, goodwill and intangible assets deemed to have indefinite lives are
not amortized, but are subject to annual impairment testing. The
assessment of goodwill involves the estimation of the fair value of the
Company's "reporting unit" as defined by SFAS No. 142. Management
completed this assessment during the second quarter of fiscal 2003 based
on the best information available as of the date of the assessment and
determined that no impairment existed.
-8-
5. EARNINGS PER SHARE
For purposes of computing Diluted Earnings per Share (EPS) 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.
For the three months ended December 31, 2002 and for the three and six
months ended December 31, 2001, assumed conversion of the Preferred Stock
was dilutive, therefore conversion was assumed for purposes of computing
Diluted EPS. For the six months ended December 31, 2002, assumed
conversion of the Preferred Stock would have slightly increased rather
than decreased EPS (would have been "anti-dilutive"), therefore
conversion was not assumed for purposes of computing Diluted EPS. The
following tables set forth the computations of Basic and Diluted EPS:
<Table>
<Caption>
Three Months Ended Three Months Ended
December 31, 2002 December 31, 2001
--------------------------- ---------------------------
Diluted Basic Diluted Basic
-------------- ---------- ------------- ----------
Net income $ 3,763 $ 3,763 $ 3,071 $ 3,071
Dividends and accretion
charges on preferred stock -- (181) -- (25)
-------------- ---------- ------------- ----------
Net income available to common shareholders $ 3,763 $ 3,582 $ 3,071 $ 3,046
============== ========== =========== ==========
Weighted average common shares outstanding 13,014 13,014 12,053 12,053
Potential common shares:
Stock options and warrants 724 -- 1,343 --
Contingently issuable shares 27 -- -- --
Convertible preferred stock 937 -- 75 --
-------------- ---------- ------------- ----------
Total potential common shares 14,702 13,014 13,471 12,053
============== ========== =========== ==========
Earnings per share $ 0.26 $ 0.28 $ 0.23 $ 0.25
============== ========== =========== ==========
</Table>
-9-
<Table>
<Caption>
Six Months Ended Six Months Ended
December 31, 2002 December 31, 2001
--------------------------- ---------------------------
Diluted Basic Diluted Basic
-------------- ---------- ------------- ----------
Net income $ 7,397 $ 7,397 $ 6,301 $ 6,301
Dividends and accretion
charges on preferred stock (378) (378) -- (25)
-------------- ---------- ------------- ----------
Net income available to common shareholders $ 7,019 $ 7,019 $ 6,301 $ 6,276
============== ========== =========== ==========
Weighted average common shares outstanding 12,837 12,837 11,644 11,644
Potential common shares:
Stock options and warrants 781 -- 1,322 --
Contingently issuable shares 27 -- -- --
Convertible preferred stock -- -- 37 --
-------------- ---------- ------------- ----------
Total potential common shares 13,645 12,837 13,003 11,644
============== ========== =========== ==========
Earnings per share $ 0.51 $ 0.55 $ 0.48 $ 0.54
============== ========== =========== ==========
</Table>
6. ACCOUNTS RECEIVABLE
The current portion of Accounts Receivable at December 31, 2002 and June
30, 2002 is comprised of the following:
<Table>
<Caption>
December 31, June 30,
2002 2002
------------------- -------------------
Amounts billed $ 61,274 $ 57,429
Unbilled costs 36,779 36,292
Retainage 3,495 3,025
------------------- -------------------
101,548 96,746
Less allowance for doubtful accounts 7,258 5,851
------------------- -------------------
$ 94,290 $ 90,895
=================== ==================
</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, are due at
completion. The $94,290 of Accounts Receivable at December 31, 2002,
includes $6,144 of receivables associated with acquisitions made during
the six month period. Therefore, excluding acquisitions, accounts
receivable decreased by approximately $2,749 (as shown in the Condensed
Consolidated Statements of Cash Flows) for the six months ended December
31, 2002.
-10-
Long-Term Insurance Receivables at December 31, 2002 and June 30, 2002 of
$5,079 and $3,627, respectively, relate to unbilled costs on Exit
Strategy contracts and represent amounts held by the insurance company
until completion of certain milestones.
7. BILLINGS IN ADVANCE OF REVENUE EARNED
Billings in Advance of Revenue Earned represent 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 as discussed in Note 3.
8. DEBT
The Company maintains a banking arrangement with Wachovia Bank, N.A. in
syndication with two additional banks that provides a revolving credit
facility of up to $50,000 to support various short-term operating and
investing activities. Borrowings under the agreement bear interest at
Wachovia's base rate or the Eurodollar rate plus or minus applicable
margins and are due and payable in March 2005 when the agreement expires.
Borrowings under the agreement are collateralized by accounts receivable.
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).
9. RECENT ACCOUNTING STANDARDS
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". This standard addresses
financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force (EITF) Issue
No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs
Incurred in a Restructuring)". The provisions of this standard are
effective for exit or disposal activities that are initiated after
December 31, 2002. The impact of adoption is not expected to have a
material impact on the Company's financial statements.
In November 2002, the FASB issued Interpretation 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (FIN 45). FIN 45 elaborates on the
existing disclosure requirements for most guarantees, including loan
guarantees such as standby letters of credit. It also clarifies that at
the time a company issues a guarantee, the company must recognize an
initial liability for the fair value, or market value, of the obligations
it assumes under the guarantee and must disclose that information in its
interim and annual financial statements. The initial recognition and
initial measurement provisions apply on a prospective basis to guarantees
issued or modified after December 31, 2002. The impact of adoption of
the recognition and measurement provisions of FIN 45 are not expected
to have a material impact on the Company's financial statements. The
Company adopted the disclosure requirements of FIN 45 in the quarter
ended December 31, 2002.
-11-
In December 2002, the FASB issued SFAS 148 "Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of FASB Statement No.
123". This standard amends SFAS 123 to provide alternative methods of
voluntarily transitioning to the fair value based method of accounting
for stock based employee compensation. SFAS 148 also amends the
disclosure requirements of SFAS 123 to require disclosure of the method
used to account for stock-based employee compensation and the effect of
the method on reported results in both annual and interim financial
statements. The Company has no current intention to change its policy of
accounting for stock-based compensation but will adopt the disclosure
requirements in the quarter ending March 31, 2003, when the standard
becomes effective for the Company.
In January 2003, the FASB issued Interpretation 46, "Consolidation of
Variable Interest Entities" (FIN 46). In general, a variable interest
entity is a corporation, partnership, trust, or any other legal structure
used for business purposes that either (a) does not have equity investors
with voting rights or (b) has equity investors that do not provide
sufficient financial resources for the entity to support its activities.
FIN 46 requires a variable interest entity to be consolidated by a
company if that company is subject to a majority of the risk of loss from
the variable interest entity's activities or entitled to receive a
majority of the entity's residual returns or both. The consolidation
requirements of FIN 46 apply immediately to variable interest entities
created after January 31, 2003. The consolidation requirements apply to
older entities in the first fiscal year or interim period beginning after
June 15, 2003. Certain of the disclosure requirements apply in all
financial statements issued after January 31, 2003, regardless of when
the variable interest entity was established. The Company is currently
evaluating the provisions of FIN 46, but believes its adoption will
not have a material impact on the Company's financial statements.
-12-
TRC COMPANIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED DECEMBER 31, 2002 AND 2001
RESULTS OF OPERATIONS
The Company derives its revenue from fees for providing engineering, consulting
and construction-related services. The approximate percentages of net service
revenue (NSR, described below) attributable to each type of contract performed
by the Company for the six months ended December 31, 2002, are as follows:
o Time and material 46%
o Fixed price or lump sum 33%
o Cost reimbursable 21%
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, and period to period,
changes in gross revenue may not be indicative of business trends. Accordingly,
the Company considers net service revenue (NSR), which is gross revenue less
subcontractor costs and direct charges, as its primary measure of revenue
performance.
As shown in the Condensed Consolidated Statements of Operations, NSR increased
$10.1 million, or 22.8%, to $54.8 million during the three months ended December
31, 2002, from $44.7 million in the same period last year. For the six months
ended December 31, 2002, NSR increased 30.9% to $106.2 million, compared to
$81.1 million in the same period last year. Approximately 99% and 97% of the NSR
growth for the three and six months ended December 31, 2002, respectively, was
from acquisitions with the remaining growth being organic. NSR from acquired
companies is considered part of acquisition growth during the twelve months
following the date acquired.
Income from operations increased approximately 22.5% and 17.4%, to $6.5 million
and $12.7 million, during the three and six months ended December 31, 2002,
respectively, from $5.3 million and $10.8 million, in the same periods last
year. The operating income growth attributable to acquisitions was approximately
$1.5 million and $2.5 million for the three-and six-month periods, respectively,
while operating income from organic activities decreased by approximately $0.3
million and $0.6 million in the same periods.
Management's objective is to maintain a reasonable balance between increases in
income from operations derived from organic and acquisition growth. For example,
for fiscal years 2000 through 2002 and the first six months of fiscal 2003,
income from operations increases from
-13-
organic and acquisition growth were 45% and 55%, respectively. The decline in
organic contribution this year was due to a reduction in the utilization of the
Company's staff for three primary factors:
o challenging economic conditions which affected several of the Company's
operating centers. Until this fiscal year, these types of market changes
were mitigated by increases in higher-margin business. These effects
generally have not been deep or widespread. The area most affected is the
transportation infrastructure market where the Company relies on funding
from state and local government entities;
o a second factor, partially attributable to economic conditions, was an
unusual number of program management issues which occurred at a variety
of operations during the six months, including issues related to resource
allocations to various projects, and the pursuit of opportunities with
limited opportunity for near-term returns; and,
o costs associated with substantial hiring and project investments the
Company made in key markets which are expected to grow in spite of
current economic conditions. Examples include expansion into the niche
market of Manufactured Gas Plant site remediation and the planning,
design and installation of distributed generation power systems.
During this quarter management implemented actions to reduce operational
inefficiencies, and the investments are now developing backlog and new
opportunities which are expected to yield long-term growth in desirable markets.
As these actions yield results, and especially as economic conditions improve,
management expects that a closer balance between organic and acquisition growth
will again be realized.
The following table presents the percentage relationships of items in the
Condensed Consolidated Statements of Operations to NSR:
-14-
<Table>
<Caption>
Three Months Ended Six Months Ended
December 31, December 31,
2002 2001 2002 2001
----------- ----------- ----------- -----------
NET SERVICE REVENUE 100.0% 100.0% 100.0% 100.0%
----------- ----------- ----------- -----------
OPERATING COSTS AND EXPENSES:
Cost of services 83.2 83.5 82.9 81.9
General and administrative expenses 2.9 2.9 3.0 3.0
Depreciation and amortization 2.0 1.7 2.1 1.8
----------- ----------- ----------- -----------
INCOME FROM OPERATIONS 11.9 11.9 12.0 13.3
Interest expense 0.6 0.7 0.5 0.8
----------- ----------- ----------- -----------
INCOME BEFORE TAXES 11.3 11.2 11.5 12.5
Federal and state income tax provision 4.4 4.3 4.5 4.8
----------- ----------- ----------- -----------
NET INCOME 6.9 6.9 7.0 7.7
Dividends and accretion charges
on preferred stock 0.3 0.1 0.4 0.0
----------- ----------- ----------- -----------
NET INCOME AVAILABLE TO
COMMON SHAREHOLDERS 6.6% 6.8% 6.6% 7.7%
=========== =========== =========== ===========
</Table>
As a percentage of NSR, cost of services increased from 81.9% to 82.9% for the
six month period, but decreased from 83.5% to 83.2% during the three-month
period. The increase for the six-month period was a direct result of the three
staff utilization factors discussed above. The three-month comparison indicates
an improvement, even during the Company's second fiscal quarter which is the
most difficult for maintaining margins due to seasonal effects of holidays and
the beginning of winter conditions.
As a percentage of NSR, general and administrative expenses remained constant at
2.9% and 3.0%, respectively, during the three and six months ended December 31,
2002 and 2001. As a percentage of NSR, depreciation and amortization expense
increased 0.3% for both the three-and six-month periods primarily due to an
increase in depreciation expense associated with acquisitions completed in the
current and prior fiscal year.
Although average outstanding borrowings were higher during the three and six
months ended December 31, 2002, compared to the same periods last year, interest
expense was relatively flat on a comparable basis due to lower average interest
rates. The Company's percentage of debt to capitalization ratio of 19.1%
continues to remain relatively low reflecting management's conservative debt
philosophy.
The provision for federal and state income taxes reflects an effective rate of
39% for the three and six months ended December 31, 2002, compared to an
effective rate of 38.3% in the same periods last year.
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
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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 evidenced in prior years, operating cash flows for the Company are impacted
by the timing of certain transactions, such as the receipt of up-front cash from
new Exit Strategy contracts and the timing of working capital investments and
returns. Given the intermittent nature of such events it is more practical to
evaluate cash flows from operations over a twelve-month period as opposed to
quarter over quarter.
Cash flows provided by operating activities for the six months ended December
31, 2002 were approximately $4.2 million. This represents an increase of
about $6.8 million compared to the same period last year. For the six months
ended December 31, 2002, cash was primarily provided from the $7.4 million of
net income; adjusted upward by: (1) a $2.3 million non-cash charge for
depreciation and amortization expenses, (2) a $2.7 million decrease in
Accounts Receivable from ongoing operations (see Note 6 of Notes to Condensed
Consolidated Financial Statements), and (3) a $2.2 million increase in
Billings in Advance of Revenue Earned (see Note 3 of Notes to Condensed
Consolidated Financial Statements); and adjusted downward by: (1) a $3.0
million income tax payment related to the previous fiscal year, (2) a $2.4
million decrease in Accounts Payable, (3) a $2.8 million decrease in Accrued
Compensation and Benefits, and (4) a $1.5 million increase in Long-Term
Insurance Receivable (see Notes 3 and 7 of Notes to Condensed Consolidated
Financial Statements).
Investing activities used cash of approximately $12.8 million during the six
months ended December 31, 2002, primarily consisting of $9.4 million for
acquisitions (approximately $7.0 million for current year acquisitions and
approximately $2.4 million for additional purchase price payments related to
acquisitions completed in prior years) and approximately $2.9 million in capital
expenditures for additional information technology and other equipment to
support business growth.
Financing activities provided cash of approximately $8.6 million during the six
months ended December 31, 2002, primarily provided by net borrowings from the
Company's revolving credit facility to support operating and investing
activities.
The Company maintains a banking arrangement with Wachovia Bank, N.A. in
syndication with two additional banks that provides a revolving credit facility
of up to $50 million to support various short-term operating and investing
activities. Borrowings under the agreement bear interest at Wachovia's base rate
or the Eurodollar rate plus or minus applicable margins and are due and payable
in March 2005 when the agreement expires. Borrowings under the agreement are
collateralized by accounts receivable. 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). At
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December 31, 2002, outstanding borrowings pursuant to the agreement were $32.6
million, at an average interest rate of 3.2%.
The Company expects that the cash generated from operations, the cash on hand at
December 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.
CRITICAL ACCOUNTING POLICIES
The Company's condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States.
These principles require the use of estimates and assumptions that affect
amounts reported and disclosed in the financial statements and related notes.
Management uses its best judgment in the assumptions used to make these
estimates, which are based on current facts and circumstances, prior experience
and other assumptions that are believed to be reasonable. The Company's
accounting policies are described in Note 1 of the Notes to Consolidated
Financial Statements contained in the Company's Annual Report on Form 10-K for
the year ended June 30, 2002. Management believes the following accounting
policies reflect the more significant judgments and estimates used in
preparation of the Company's condensed consolidated financial statements.
REVENUE ACCOUNTING FOR CONTRACTS: As discussed above (Results of Operations),
the majority of the Company's services are provided on Time and Material or
Cost-type contracts. For these services, the Company recognizes revenue at the
time it provides the services and costs are incurred.
Revenue on Fixed Price contracts is recognized using the efforts-expended
percentage-of-completion method of accounting, by relating costs incurred to
date to the total estimated costs at completion. Revenue adjustments from
changes in total estimated contract costs, which could be material, are
recognized in the period they are determined.
Certain cost-reimbursable contracts with the U.S. federal government, as well as
certain state, municipal and commercial clients provide that contract costs are
subject to audit and adjustment. These audits are conducted by various
governmental auditors, which review the Company's overhead rates and operating
systems. As a result of these audits, certain costs may be disallowed if it is
determined that the Company accounted for these costs incorrectly or in a manner
inconsistent with Cost Accounting Standards.
ALLOWANCE FOR DOUBTFUL ACCOUNTS: Allowances for doubtful accounts are maintained
for estimated losses which could result from the inability or unwillingness of
customers to make required payments. These estimates are reviewed each quarter,
and are adjusted upward or downward as appropriate depending on actual payments
received and management's expectation of customer's anticipated intention
regarding past due invoices.
-17-
INCOME TAXES: At December 31, 2002, the Company had approximately $3.1 million
of deferred income tax benefits. The realization of these benefits is dependent
on the Company's future taxable income and its tax planning strategies.
Management believes that sufficient taxable income will be earned in the future
to realize the deferred income tax benefits. In the event that the Company
determines that future taxable income is not expected to be sufficient, a
valuation allowance for deferred income tax benefits may be required.
BUSINESS ACQUISITIONS: Assets and liabilities acquired in business combinations
are recorded at their estimated fair values at the acquisition date. At December
31, 2002, the Company had approximately $99.1 million of goodwill, representing
the cost of acquisitions in excess of the fair values assigned to the underlying
net assets of acquired companies. In accordance with SFAS No. 142, goodwill and
intangible assets deemed to have indefinite lives are not amortized, but are
subject to annual impairment testing. The assessment of goodwill involves the
estimation of the fair value of the Company's "reporting unit," as defined by
SFAS No. 142. Management completed this assessment during the second quarter of
fiscal 2003 based on the best information available as of the date of the
assessment and determined that no impairment existed.
RECENT ACCOUNTING STANDARDS
See Note 9 of Notes to Condensed Consolidated Financial Statements.
-18-
FORWARD-LOOKING STATEMENTS
Certain statements in this report may be forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Such statements are based on management's
current estimates, expectations and projections about the factors discussed. The
markets and regions in which the Company's customers operate and the services
the Company provides. By their nature such forward-looking statements involve
risks and uncertainties. The Company has attempted to identify such statements
using words such as "may," "expects," "plans," "anticipates," "believes,"
estimates," or other words of similar import. The Company cautions 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, including the
following examples:
o increase in competition by foreign and domestic competitors;
o availability of qualified engineers and other professional staff needed
to perform contracts;
o continuation of income from core activities to finance growth;
o availability of environmental insurance for certain Exit Strategy
projects;
o the timing of new awards and the funding of such awards;
o the ability of the Company to meet project performance or schedule
requirements;
o continuation of regulatory enforcement requirements for a portion of the
Company's services;
o cost overruns on fixed, maximum or unit priced contracts;
o the outcome of pending and future litigation and government proceedings;
o the cyclical nature of the individual markets in which the Company's
customers operate; and,
o the successful closing and/or subsequent integration of any merger or
acquisition transaction.
The preceding list is not all-inclusive, and the Company undertakes no
obligation to update publicly any forward-looking statements, whether as a
result of new information, future events or otherwise. Readers of this
Management's Discussion and Analysis should also read the Company's most recent
Annual Report on Form 10-K for a further description of the Company's
-19-
business, legal proceedings and other information that describes factors that
could cause actual results to differ from such forward-looking statements.
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. 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 facility would not have a material effect on the
Company's operating results, financial condition or cash flows.
ITEM 4. CONTROLS AND PROCEDURES
The Company's management, including the Chief Executive Officer and Chief
Financial Officer, have conducted an evaluation of the effectiveness of
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based
on that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the disclosure controls and procedures are effective in ensuring
that all material information required to be filed in this quarterly report has
been made known to them in a timely fashion. There have been no significant
changes in internal controls, or in factors that could significantly affect
internal controls, subsequent to the date the Chief Executive Officer and Chief
Financial Officer completed their evaluation.
-20-
PART II: OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of the Company's shareholders was held on November 22, 2002.
Proxies for the meeting were solicited pursuant to Regulation 14A. At the
meeting, the following matters were voted upon:
All nominees for director were elected for the ensuing year as follows:
<Table>
<Caption>
DIRECTOR VOTES IN FAVOR VOTES WITHHELD TERM EXPIRING
-------- -------------- -------------- -------------
Richard D. Ellison 11,669,381 383,521 November 22, 2003
Edward G. Jepsen 11,669,381 383,521 November 22, 2003
Edward W. Large 11,669,381 383,521 November 22, 2003
John M.F. MacDonald 11,669,381 383,521 November 22, 2003
J. Jeffrey McNealey 11,669,381 383,521 November 22, 2003
</Table>
The shareholders approved an amendment to the Stock Option Plan, to among other
things increase by 1,000,000 the shares of common stock for which options may be
granted under the Stock Option Plan. The proposal was adopted as 5,183,102
shares voted for the proposal and 2,231,884 shares voted against it, with 68,160
shares abstaining and 5,305,118 shares not voting.
The shareholders ratified the appointment of Deloitte & Touche LLP as the
Company's independent accountants for the fiscal year ending June 30, 2003. The
proposal was adopted as 12,017,374 shares voted for the proposal and 25,074
shares voted against it, with 10,454 shares abstaining.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.3.2 Amendment, dated February 14, 2003, to Revolving Credit
Agreement by and among Wachovia Bank, N.A. (lead arranger and
administrative agent), Merrill Lynch Business Financial
Services Inc. (individual lender), Banknorth, N.A. (individual
lender) and TRC Companies, Inc. and its subsidiaries.
15 Letter re: unaudited interim financial information
99 Independent Accountants' Report
-21-
(b) Reports on Form 8-K
On October 25, 2002, a Form 8-K was filed reporting that the Company had
retained Deloitte & Touche LLP as its independent accountants to audit
the Company's consolidated financial statements for the year ending June
30, 2003.
On December 27, 2002, a Form 8-K was filed reporting that the Company had
retained Deloitte & Touche LLP as its independent accountants to audit
the Company's 401(k) Retirement and Savings Plan for the year ending June
30, 2003
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 14, 2003 by: /s/ John W. Hohener
-----------------------------------
John W. Hohener
Senior Vice President and Chief
Financial Officer
(Chief Accounting Officer)
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CERTIFICATION
OF CHIEF EXECUTIVE OFFICER
TRC COMPANIES, INC.
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF
2002 (CHAPTER 63, TITLE 18 U.S.C.SS.1350(A) AND (B))
I, Richard D. Ellison, certify that:
1. I have reviewed this quarterly report on Form 10-Q for the quarterly
period ended December 31, 2002 of TRC Companies, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: February 14, 2003
/s/ RICHARD D. ELLISON
- -----------------------------------
Richard D. Ellison
Chief Executive Officer
-23-
CERTIFICATION
OF CHIEF FINANCIAL OFFICER
TRC COMPANIES, INC.
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF
2002 (CHAPTER 63, TITLE 18 U.S.C.SS.1350(A) AND (B))
I, John W. Hohener, certify that:
1. I have reviewed this quarterly report on Form 10-Q for the quarterly
period ended December 31, 2002 of TRC Companies, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: February 14, 2003
/s/ JOHN W. HOHENER
- -----------------------------------
John W. Hohener
Senior Vice President and
Chief Financial Officer
-24-
CERTIFICATION
ACCOMPANYING FORM 10-Q REPORT
OF
TRC COMPANIES, INC.
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF
2002 (CHAPTER 63, TITLE 18 U.S.C.SS.1350(A) AND (B))
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chapter 63, Title 18
U.S.C. ss.1350(a) and (b)), each of the undersigned hereby certifies that the
Quarterly Report on Form 10-Q for the period ended December 31, 2002 of TRC
Companies, Inc. ("Company") fully complies with the requirements of Section
13(a) or Section 15(d) of the Securities Exchange Act of 1934 and that the
information contained in such Report fairly presents, in all material respects,
the financial condition and results of operations of the Company.
Date: February 14, 2003 /s/ RICHARD D. ELLISON
---------------------------------------
Richard D. Ellison
Chief Executive Officer
Date: February 14, 2003 /s/ JOHN W. HOHENER
---------------------------------------
John W. Hohener
Senior Vice President and
Chief Financial Officer
-25-