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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 September 30, 1998
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
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5 Waterside Crossing
Windsor, Connecticut 06095
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (860) 289-8631
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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 September 30, 1998 there were 6,782,202 shares of the registrant's common
stock, $.10 par value, outstanding.
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TRC COMPANIES, INC.
CONTENTS OF QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1998
PART I - Financial Information
Item 1. Consolidated Financial Statements
Statements of Operations for the three months ended
September 30, 1998 and 1997................................. 3
Balance Sheets at September 30, 1998 and June 30, 1998......... 4
Statements of Cash Flows for the three months ended
September 30, 1998 and 1997.............................. 5
Notes to Financial Statements.................................. 6
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition..................................... 7
PART II - Other Information
Item 1. Legal Proceedings..............................................12
Item 6. Exhibits and Reports on Form 8-K...............................12
Signature..................................................................12
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PART I: FINANCIAL INFORMATION
TRC COMPANIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
September 30,
1998 1997 (1)
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Gross revenue $18,406,198 $17,560,310
Less subcontractor costs and direct charges 5,525,904 4,570,143
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Net service revenue 12,880,294 12,990,167
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Operating costs and expenses:
Direct labor and fringe benefit costs 5,839,040 5,680,971
Indirect costs and expenses 4,982,161 5,543,783
General and administrative expenses 600,758 679,378
Depreciation and amortization 579,323 668,521
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12,001,282 12,572,653
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Income from operations 879,012 417,514
Interest expense 118,818 220,251
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Income before taxes 760,194 197,263
Federal and state income tax provision 289,000 75,000
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Net income $ 471,194 $ 122,263
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Earnings per share - basic and diluted $ .07 $ .02
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Average shares outstanding:
Basic 6,782,202 6,688,102
Diluted 6,787,551 6,688,601
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(1) Includes operating results of instrumentation business which was sold in
July 1998. See page 7 for comparative results without the instrumentation
business.
The accompanying notes are an integral part of the financial statements.
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TRC COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, June 30,
1998 1998
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ASSETS
Current assets:
Cash and cash equivalents $ 988,113 $ 1,379,388
Accounts receivable, less allowance for doubtful accounts 28,417,340 27,775,396
Inventories 246,651 1,359,410
Deferred income tax benefits 890,000 950,000
Prepaid expenses and other current assets 831,865 588,965
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31,373,969 32,053,159
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Property and equipment, at cost 19,171,535 21,273,379
Less accumulated depreciation and amortization 15,929,024 17,267,575
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3,242,511 4,005,804
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Costs in excess of net assets of acquired businesses, net of
accumulated amortization 24,639,049 24,873,714
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Other assets 649,171 670,934
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$59,904,700 $61,603,611
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of debt $ 6,200,000 $ 3,600,000
Accounts payable 3,077,256 4,133,321
Accrued compensation and benefits 2,526,934 2,684,642
Other accrued liabilities 1,078,238 1,159,570
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12,882,428 11,577,533
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Noncurrent liabilities:
Long-term debt 400,000 3,900,000
Deferred income taxes 1,696,000 1,671,000
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2,096,000 5,571,000
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Shareholders' equity:
Capital stock:
Preferred, $.10 par value; 500,000 shares authorized, none issued -- --
Common, $.10 par value; 30,000,000 shares authorized, 7,410,855
shares issued at September 30, 1998 and June 30, 1998 741,085 741,085
Additional paid-in capital 38,634,234 38,634,234
Retained earnings 8,447,956 7,976,762
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47,823,275 47,352,081
Less treasury stock, at cost 2,897,003 2,897,003
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44,926,272 44,455,078
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$59,904,700 $61,603,611
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The accompanying notes are an integral part of the financial statements.
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TRC COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
September 30,
1998 1997
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Cash flows from operating activities:
Net income $ 471,194 $ 122,263
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 579,323 668,521
Change in deferred taxes and other non-cash items 20,001 28,000
Changes in assets and liabilities:
Accounts receivable (1,305,575) (54,069)
Inventories (281,861) 32,900
Prepaid expenses and other current assets (248,879) (533,273)
Accounts payable (902,230) (114,562)
Accrued compensation and benefits (226,562) (56,374)
Income taxes 74,573 17,964
Other accrued liabilities (200,647) (711,662)
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Net cash used in operating activities (2,020,663) (600,292)
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Cash flows from investing activities:
Proceeds from sale of instrumentation business 2,750,000 --
Additions to property and equipment, net (234,041) (168,833)
Decrease (increase) in other assets, net 13,429 (28,654)
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Net cash provided by (used in) investing activities 2,529,388 (197,487)
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Cash flows from financing activities:
Repayment of long-term debt (3,500,000) --
Net borrowings under line of credit 2,600,000 150,000
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Net cash provided by (used in) financing activities (900,000) 150,000
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Decrease in cash and cash equivalents (391,275) (647,779)
Cash and cash equivalents, beginning of period 1,379,388 1,020,065
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Cash and cash equivalents, end of period $ 988,113 $ 372,286
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The accompanying notes are an integral part of the financial statements.
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TRC COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
1. The consolidated balance sheet at September 30, 1998 and the consolidated
statements of operations and cash flows for the three months ended
September 30, 1998 and 1997 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 results of operations for the three months ended September
30, 1998 are not necessarily indicative of the results to be expected for
the full fiscal year. Certain footnote disclosures usually included in
financial statements prepared in accordance with generally accepted
accounting principles have been omitted. It is suggested that these
financial statements be read in conjunction with the financial statements
and notes thereto included in the Company's Annual Report to Shareholders
for the fiscal year ended June 30, 1998.
2. Earnings per share is computed in accordance with the provisions of
Statement of Financial Standards No. 128, Earnings per Share. Basic
earnings per share is based upon the weighted average common shares
outstanding. Diluted earnings per share reflect the potential dilutive
effect of outstanding stock options and warrants.
3. The components of inventories were as follows:
September 30, June 30,
1998 1998
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Materials and supplies $ 246,651 $ 774,645
Work-in-progress -- 155,443
Finished goods -- 429,322
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$ 246,651 $1,359,410
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TRC COMPANIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Three Months Ended September 30, 1998 and 1997
Overview
TRC Companies, Inc. provides a broad range of environmental management,
engineering and remediation services to industry and government.
Results of Operations
The Company, in the course of providing its services, routinely subcontracts
drilling, laboratory analyses, construction equipment and other specialized
services. These costs are passed directly through to clients and, in accordance
with industry practice, are included in gross revenue. Because subcontractor
costs and direct charges can change significantly from project to project, the
Company also considers net service revenue as a measure of performance.
In July 1998, the Company completed the sale of its instrumentation business
which resulted in a gain that was not material. Management's discussion and
analysis of revenue and operating costs and expenses for the three months ended
September 30, 1998, is compared to the same period last year on a proforma basis
with the results of the instrumentation business excluded. Summarized
information for the three months ended September 30, 1998, the same period of
last year on a proforma basis with the results of the instrumentation business
excluded, and as previously reported for such period follows:
Three Months Ended September 30,
1997
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1998 Proforma As reported
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Gross revenue $18,406 $16,762 $17,560
Net service revenue 12,880 12,192 12,990
Income from operations 879 324 417
Income before taxes 760 104 197
Net income $ 471 $ 64 $ 122
Earnings per share $0.07 $0.01 $0.02
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The following table presents the percentage relationships of certain items in
the consolidated statements of operations to net service revenue. Percentages
for the three months ended September 30, 1997 are presented on a proforma basis
with the results of the instrumentation business excluded, and as previously
reported:
Three Months Ended September 30,
1997
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1998 Proforma As reported
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Net service revenue 100.0% 100.0% 100.0%
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Operating costs and expenses:
Direct labor and fringe benefit costs 45.3 43.9 43.7
Indirect costs and expenses 38.7 42.8 42.7
General and administrative expenses 4.7 5.6 5.2
Depreciation and amortization 4.5 5.0 5.2
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Income from operations 6.8 2.7 3.2
Interest expense 0.9 1.9 1.7
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Income before taxes 5.9 0.8 1.5
Federal and state income tax provision 2.2 0.3 0.5
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Net income 3.7% 0.5% 1.0%
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Gross revenue increased by 9.8% during the three months ended September 30, 1998
to $18.4 million, from $16.8 million in the same period last year. Net service
revenue increased by 5.6% during the three months ended September 30, 1998 to
$12.9 million, from $12.2 million in the same period last year. The increase in
revenue resulted primarily from continued growth in core businesses as the
market for the Company's services improves.
Direct labor and fringe benefit costs increased by 9.1% during the three months
ended September 30, 1998, as compared to the same period last year, primarily
due to the increase in revenue. Indirect costs and expenses decreased by 5.6%
during the three months ended September 30, 1998, as compared to the same period
last year. This improvement was primarily due to the continuation of programs to
increase staff utilization and reduce operational overhead.
General and administrative expenses decreased by 11.6% during the three months
ended September 30, 1998, as compared to the same period last year. This
decrease was the direct result of cost reduction efforts undertaken since the
fourth quarter of fiscal 1997.
Depreciation and amortization expense decreased by 5.2% during the three months
ended September 30, 1998, as compared to the same period last year. This
decrease was due to the comparative reduction in capital expenditures over the
last several fiscal years, combined with the effect of other equipment which
became fully depreciated.
The Company reported income from operations of $.9 million for the three months
ended September 30, 1998, up from $.3 million in the same period last year. The
continued improvement in operating performance was primarily due to the increase
in revenue and reductions in operational overhead.
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Interest expense decreased by 46.1% during the three months ended September 30,
1998, as compared to the same period last year. This decrease resulted primarily
from lower levels of debt outstanding.
The provisions for federal and state income taxes reflect an effective rate of
approximately 38% for the three months ended September 30, 1998 and 1997. The
Company believes that there will be sufficient taxable income in future periods
to enable utilization of the deferred 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 relies on cash provided by operations and borrowings based upon the
strength of its balance sheet to fund operations. 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 flows used in operating activities during the three months ended September
30, 1998 were approximately $2 million. The cash generated by net income and the
non-cash charges against income for depreciation and amortization was offset by
growth in accounts receivable and the timing of payments to subcontractors
associated with the growth in revenue in the current and prior three month
periods, and by the increase in prepaid expenses relative to the fiscal 1999
liability insurance program.
Investing activities provided approximately $2.5 million during the three months
ended September 30, 1998 consisting of approximately $2.8 million from the sale
of the Company's instrumentation business in July 1998, partially offset by
capital expenditures for equipment to support business growth of approximately
$.2 million. The Company expects to make capital expenditures of approximately
$.5 million during the remainder of fiscal 1999.
The Company maintains a bank financing arrangement to assist in funding various
operating and financing activities. The Company has available a $10 million
revolving credit facility secured by accounts receivable which expires July
2001. Borrowings under the agreement bear interest at the bank's base rate or
the Eurodollar rate plus 1 3/4% The agreement requires the Company to meet
certain financial ratios. At September 30, 1998, outstanding borrowings pursuant
to the agreement were $2.6 million, at an average interest rate of 7.6%. The
Company intends to repay the outstanding balance over the next several months
from available cash flow.
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At September 30, 1998, the Company had outstanding a $3,500,000 subordinated
note due July 1, 1999, issued in March 1994 in connection with the acquisition
of Environmental Solutions, Inc. and subsequently amended in July 1997. Interest
on the note accrues at the greater of the interest rate paid on the Company's
bank debt or 7 3/4%. The Company also had outstanding at September 30, 1998 a
$.5 million 7 3/4% subordinated note issued in connection with the purchase of
Hydro-Geo Consultants, Inc. in March 1998. The note is repayable in five equal
installments beginning in March 1999.
The Company expects to increase its available cash flow over the remainder of
fiscal 1999, primarily from operations and from reductions in working capital
derived mainly from the collection of accounts receivable. The cash generated
from operations, the cash on hand at September 30, 1998 and available borrowings
under the bank line of credit will be sufficient to meet the Company's cash
requirements for the remainder of fiscal 1999.
Year 2000 Compliance
The Company recognizes the need to ensure that its critical management,
financial and operating systems will recognize and process transactions for the
year 2000 and beyond. As a result, all computer systems and applications are
being reviewed and, where appropriate, detailed plans have been, or are being,
developed and implemented on a schedule intended to permit the Company's systems
to be fully compliant with year 2000 requirements.
Systems critical to our business operations which have been identified as non
year 2000 compliant are either being replaced or upgraded through program
modifications. Our objective is to have our upgraded and replaced systems
operational by June 30, 1999. In addition to our in-house efforts, we are asking
certain vendors, major customers, service suppliers, communication providers,
banks and other financial institutions whose systems failures could have a
significant impact on our business operations to verify their year 2000
readiness.
The costs specific to the year 2000 issue are not expected to have a material
impact on the Company's future operating results, financial condition or cash
flows. Although the Company expects to be fully year 2000 compliant on a timely
basis, if the Company's critical suppliers and customers do not address this
issue successfully, year 2000 issues could potentially have a material impact on
the Company's operations and financial condition.
The Company is currently developing contingency plans to be implemented as part
of its efforts to identify and mitigate any year 2000 issues. These plans will
be completed by June 30, 1999.
New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information, which establishes new standards for
reporting information about operating segments in annual and interim financial
statements. The standard also requires descriptive information about the way the
operating segments are determined, the products and services provided by the
segments and the nature of differences between reportable segment measurements
and those used for the consolidated enterprise. This standard will be effective
for the Company in fiscal 1999.
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Adoption in interim financial statements is not required until the year after
initial adoption; however, comparative prior period information is required.
Adoption is not expected to have a material impact on the financial position or
results of operations of the Company.
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.
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PART II: OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Item 3, Legal Proceedings, in the Company's Annual
Report on Form 10-K for the year ended June 30, 1998, for a description
of existing litigation against the Company.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits -
27 Financial Data Schedule (for SEC purposes only)
(b) Reports on Form 8-K - There were no reports on Form 8-K filed during
the quarter ended September 30, 1998.
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.
November 16, 1998 by: /s/ Harold C. Elston, Jr.
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Harold C. Elston, Jr.
Senior Vice President, Secretary and Treasurer
(Chief Accounting Officer)
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