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**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**x**** ****Quarterly Report Pursuant to Section 13or 15(d) of the Securities Exchange Act of 1934**

 

**For the quarterly period ended September 24,2010**

 

**OR**

 

**o**** ****Transition Report Pursuant to Section 13or 15(d) of the Securities Exchange Act of 1934**

 

**For the transition period from              to              **

 

**Commission file number 1-9947**

 

**TRC COMPANIES, INC.**

(Exact name of registrant as specified in its charter)

** **

| **Delaware**                                                    | ** ** | **06-0853807**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |       | (I.R.S. Employer  Identification No.) |
|                                                            |       |                                  |
| **21  Griffin Road North**                                      |       |                                  |
| **Windsor,  Connecticut**                                       |       | **06095**                             |
| (Address of  principal executive offices)                       |       | (Zip Code)                            |

 

Registrant’stelephone number, including area code:  **(860) 298-9692**

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months, and (2) has been subject to such filingrequirements for the past 90 days. YES  x  NO  o

 

Indicate by check mark whether the Registrant hassubmitted electronically and posted on its corporate Web site, if any, every InteractiveData File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T (§232.405 of this chapter) during the preceding 12 months (orfor such shorter period that the Registrant was required to submit and post suchfiles). Yes o No o

 

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,a non-accelerated filer or a smaller reporting company. See the definitions of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act (Check one):

 

| Large accelerated filer  o           |   | Accelerated filer  o          |
|------------------------------------------------|--------|-----------------------------------------|
|                                           |   |                                    |
| Non-accelerated filer  x             |   | Smaller reporting  company  o |
| (Do not check if a  smaller reporting company) |   |                                    |

 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).  YES  o  NO  x

 

On October 28,2010 there were 19,897,494 shares of the registrant’s common stock, $.10 parvalue, outstanding.

 

 

 

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**TRCCOMPANIES, INC.**

**CONTENTSOF QUARTERLY REPORT ON FORM 10-Q**

**QUARTERENDED SEPTEMBER 24, 2010**

 
| **PART I - Financial Information** | ** **                                                                                                                       |
|--------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------|
|                                                   |                                                                                                                             |   |
| Item  1.                                               | Condensed Consolidated  Financial Statements (Unaudited)                                                                         |   |
|                                                   |                                                                                                                             |   |
|                                                   | Condensed  Consolidated Statements of Operations for the three months ended  September 24, 2010 and September 25, 2009 | 3 |
|                                                   |                                                                                                                             |   |
|                                                   | Condensed  Consolidated Balance Sheets as of September 24, 2010 and  September 25, 2009                                | 4 |
|                                                   |                                                                                                                             |   |
|                                                   | Condensed Consolidated  Statements of Cash Flows for the three months ended September 24, 2010  and September 25, 2009 | 5 |
|                                                   |                                                                                                                             |   |
|                                                   | Notes to  Condensed Consolidated Financial Statements                                                                            | 6 |
|                                                   |                                                                                                                             |   |
| Item 2.                                                | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                      | 22 |
|                                                   |                                                                                                                             |   |
| Item 3.                                                | Quantitative  and Qualitative Disclosures about Market Risk                                                                      | 33 |
|                                                   |                                                                                                                             |   |
| Item 4.                                                | Controls and  Procedures                                                                                                         | 33 |
|                                                   |                                                                                                                             |   |
| **PART II - Other  Information**                  |                                                                                                                             |
|                                                   |                                                                                                                             |   |
| Item 1.                                                | Legal Proceedings                                                                                                                | 34 |
|                                                   |                                                                                                                             |   |
| Item 1A.                                               | Risk Factors                                                                                                                     | 34 |
|                                                   |                                                                                                                             |   |
| Item 2.                                                | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                     | 34 |
|                                                   |                                                                                                                             |   |
| Item 3.                                                | Defaults  Upon Senior Securities                                                                                                 | 34 |
|                                                   |                                                                                                                             |   |
| Item 5.                                                | Other Information                                                                                                                | 34 |
|                                                   |                                                                                                                             |   |
| Item 6.                                                | Exhibits                                                                                                                         | 34 |
|                                                   |                                                                                                                             |   |
| **Signature**                                          |                                                                                                                             | 35 |
|                                                   |                                                                                                                             |   |
| **Certifications**                                     | 36                                                                                                                               |

 

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**PART I:  FINANCIAL INFORMATION**

 

**TRC COMPANIES, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

(inthousands, except per share data)

(Unaudited)

 
| ** **                                                                      | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                      | ** ** | **September 24,**           | ** ** | **September 25,** | ** ** |
| ** **                                                                      | ** ** | **2010**                         | ** ** | **2009** | ** ** |
|                                                                            |       |                             |       |   |   |
| **Gross  revenue**                                                              | ** ** | **$**                            | **78,818** |   | $ | 82,357 |   |
| Less subcontractor  costs and other direct reimbursable charges                 | ** ** | **21,228**                       |       | 25,397 |   |
| **Net  service revenue**                                                        | ** ** | **57,590**                       |       | 56,960 |   |
|                                                                            |       |                             |       |   |   |
| **Interest  income from contractual arrangements**                              | ** ** | **88**                           |       | 180 |   |
| **Insurance  recoverables and other income**                                    | ** ** | **597**                          |       | 3,283 |   |
|                                                                            |       |                             |       |   |   |
| **Operating  costs and expenses:**                                              | ** ** | ** **                       |       |   |   |
| Cost of services                                                                | ** ** | **46,574**                       |       | 50,880 |   |
| General and  administrative expenses                                            | ** ** | **6,538**                        |       | 6,678 |   |
| Provision for doubtful  accounts                                                | ** ** | **578**                          |       | 686 |   |
| Depreciation and  amortization                                                  | ** ** | **1,228**                        |       | 1,950 |   |
| **Total  operating costs and expenses**                                         | ** ** | **54,918**                       |       | 60,194 |   |
| **Operating  income**                                                           | ** ** | **3,357**                        |       | 229 |   |
| Interest expense                                                                | ** ** | **(197**                         | **)**      | (264 | ) |
| **Income  (loss) from operations before taxes and equity in losses**            | ** ** | **3,160**                        |       | (35 | ) |
| Federal and state  income tax provision                                         | ** ** | **(464**                         | **)**      | (56 | ) |
| **Income  (loss) from operations before equity in losses**                      | ** ** | **2,696**                        |       | (91 | ) |
| Equity in losses from  unconsolidated affiliates, net of taxes                  | ** ** | **(13**                          | **)**      | (15 | ) |
| **Net  income (loss)**                                                          | ** ** | **2,683**                        |       | (106 | ) |
| Net loss applicable to  noncontrolling interest                                 | ** ** | **21**                           |       | 27 |   |
| **Net  income (loss) applicable to TRC Companies, Inc.**                   | ** ** | **2,704**                        |       | (79 | ) |
| Accretion charges on  preferred stock                                           | ** ** | **(3,799**                       | **)**      | (834 | ) |
| **Net  loss applicable to TRC Companies, Inc.’s common shareholders** | ** ** | **$**                            | **(1,095** | **)** | $ | (913 | ) |
|                                                                            |       |                             |       |   |   |
| **Basic  and diluted loss per common share**                                    | ** ** | **$**                            | **(0.06**  | **)** | $ | (0.05 | ) |
|                                                                            |       |                             |       |   |   |
| **Basic  and diluted weighted average common shares outstanding**               | ** ** | **19,684**                       |       | 19,404 |   |

 

See*accompanying notes to condensed consolidated financial statements.*

 

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**TRC COMPANIES, INC.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

(inthousands, except share data)

(Unaudited)

 
| ** **                                                                                                                                                                                                                                                         | ** ** | **September 24,** | ** **  | **June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|-------------|-------------------|------------|
| ** **                                                                                                                                                                                                                                                         | ** ** | **2010**               | ** **  | **2010**          | ** ** |
| **ASSETS**                                                                                                                                                                                                                                                         | ** ** | ** **             |        |              |       |
| **Current  assets:**                                                                                                                                                                                                                                               | ** ** | ** **             |        |              |       |
| Cash and cash  equivalents ($35 related to VIE at September 24, 2010)                                                                                                                                                                                         | ** ** | **$**                  | **903**     |              | $          | 14,709 |   |
| Accounts receivable,  less allowance for doubtful accounts                                                                                                                                                                                                         | ** ** | **94,792**             |        | 87,104            |       |
| Insurance recoverable -  environmental remediation                                                                                                                                                                                                                 | ** ** | **35,881**             |        | 35,664            |       |
| Restricted investments  ($309 related to VIE at September 24, 2010)                                                                                                                                                                                           | ** ** | **12,675**             |        | 14,744            |       |
| Prepaid expenses and  other current assets                                                                                                                                                                                                                         | ** ** | **13,858**             |        | 9,123             |       |
| Income taxes refundable                                                                                                                                                                                                                                            | ** ** | **179**                |        | 388               |       |
| Total current assets                                                                                                                                                                                                                                               | ** ** | **158,288**            |        | 161,732           |       |
|                                                                                                                                                                                                                                                               |       |                   |        |              |       |
| **Property  and equipment**                                                                                                                                                                                                                                        | ** ** | **47,101**             |        | 47,287            |       |
| Less accumulated  depreciation and amortization                                                                                                                                                                                                                    | ** ** | **(35,708**            | **)**       | (35,535           | )          |
| Property and equipment,  net                                                                                                                                                                                                                                       | ** ** | **11,393**             |        | 11,752            |       |
| **Goodwill**                                                                                                                                                                                                                                                       | ** ** | **14,870**             |        | 14,870            |       |
| **Investments  in and advances to unconsolidated affiliates and construction joint ventures**                                                                                                                                                                      | ** ** | **112**                |        | 117               |       |
| **Long-term  restricted investments**                                                                                                                                                                                                                              | ** ** | **46,424**             |        | 46,426            |       |
| **Long-term  prepaid insurance**                                                                                                                                                                                                                                   | ** ** | **43,696**             |        | 44,529            |       |
| **Other  assets****($4,339  related to VIE at September 24, 2010)**                                                                                                                                                                                           | ** ** | **8,305**              |        | 8,369             |       |
| Total assets                                                                                                                                                                                                                                                       | ** ** | **$**                  | **283,088** |              | $          | 287,795 |   |
|                                                                                                                                                                                                                                                               |       |                   |        |              |       |
| **LIABILITIES AND EQUITY**                                                                                                                                                                                                                                         | ** ** | ** **             |        |              |       |
| **Current  liabilities:**                                                                                                                                                                                                                                          | ** ** | ** **             |        |              |       |
| Current portion of  long-term debt ($2,700 related to VIE at September 24, 2010)                                                                                                                                                                              | ** ** | **$**                  | **5,344**   |              | $          | 3,629 |   |
| Accounts payable                                                                                                                                                                                                                                                   | ** ** | **27,446**             |        | 35,871            |       |
| Accrued compensation  and benefits                                                                                                                                                                                                                                 | ** ** | **24,253**             |        | 22,393            |       |
| Deferred revenue                                                                                                                                                                                                                                                   | ** ** | **22,481**             |        | 26,486            |       |
| Environmental remediation  liabilities ($23 related to VIE at September 24, 2010)                                                                                                                                                                             | ** ** | **512**                |        | 623               |       |
| Other accrued  liabilities ($696 related to VIE at September 24, 2010)                                                                                                                                                                                        | ** ** | **43,254**             |        | 43,781            |       |
| Total current  liabilities                                                                                                                                                                                                                                         | ** ** | **123,290**            |        | 132,783           |       |
| **Non-current  liabilities:**                                                                                                                                                                                                                                      | ** ** | ** **             |        |              |       |
| Long-term debt, net of  current portion                                                                                                                                                                                                                            | ** ** | **5,757**              |        | 5,815             |       |
| Long-term income taxes  payable                                                                                                                                                                                                                                    | ** ** | **4,449**              |        | 4,149             |       |
| Long-term deferred  revenue                                                                                                                                                                                                                                        | ** ** | **103,858**            |        | 102,452           |       |
| Long-term environmental  remediation liabilities ($121 related to VIE at September 24, 2010)                                                                                                                                                                  | ** ** | **6,219**              |        | 6,404             |       |
| Total liabilities                                                                                                                                                                                                                                                  | ** ** | **243,573**            |        | 251,603           |       |
| Preferred stock, $.10  par value; 500,000 shares authorized, 7,209 shares issued and outstanding as  convertible, liquidation preference value of $20,114 and $22,277 as of  September 24, 2010 and June 30, 2010, respectively                          | ** ** | **12,038**             |        | 8,239             |       |
| **Commitments  and contingencies**                                                                                                                                                                                                                                 | ** ** | ** **             |        |              |       |
| **Equity:**                                                                                                                                                                                                                                                        | ** ** | ** **             |        |              |       |
| Common stock, $.10 par  value; 40,000,000 shares authorized, 19,802,043 and 19,798,561 shares issued  and outstanding, respectively, at September 24, 2010, and 19,637,535 and  19,634,053 shares issued and outstanding, respectively, at June 30, 2010 | ** ** | **1,980**              |        | 1,964             |       |
| Additional paid-in  capital                                                                                                                                                                                                                                        | ** ** | **160,643**            |        | 163,897           |       |
| Accumulated deficit                                                                                                                                                                                                                                                | ** ** | **(135,179**           | **)**       | (137,883          | )          |
| Accumulated other  comprehensive income                                                                                                                                                                                                                            | ** ** | **212**                |        | 133               |       |
| Treasury stock, at cost                                                                                                                                                                                                                                            | ** ** | **(33**                | **)**       | (33               | )          |
| Total shareholders’  equity applicable to TRC Companies, Inc.                                                                                                                                                                                            | ** ** | **27,623**             |        | 28,078            |       |
| Noncontrolling interest                                                                                                                                                                                                                                            | ** ** | **(146**               | **)**       | (125              | )          |
| Total equity                                                                                                                                                                                                                                                       | ** ** | **27,477**             |        | 27,953            |       |
| Total liabilities and  equity                                                                                                                                                                                                                                      | ** ** | **$**                  | **283,088** |              | $          | 287,795 |   |

 

*See accompanying notes tocondensed consolidated financial statements.*

 

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**TRC COMPANIES, INC.**

**CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS**

(in thousands)

(Unaudited)

 
| ** **                                                                            | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                            | ** ** | **September 24,**           | ** ** | **September 25,** | ** ** |
| ** **                                                                            | ** ** | **2010**                         | ** ** | **2009** | ** ** |
| **Cash flows from operating activities:**                                             |       |                             | ** ** | ** ** | ** ** |
| Net  income (loss)                                                                    | ** ** | **$**                            | **2,683**  |   | $ | (106 | ) |
| Adjustments  to reconcile net income (loss) to net cash used in operating activities: |       |                             | ** ** | ** ** | ** ** |
| Non-cash  items:                                                                      |       |                             | ** ** | ** ** | ** ** |
| Depreciation  and amortization                                                        | ** ** | **1,228**                        |       | 1,950 |   |
| Stock-based  compensation expense                                                     | ** ** | **721**                          |       | 586 |   |
| Provision  for doubtful accounts                                                      | ** ** | **578**                          |       | 686 |   |
| Other  non-cash items                                                                 | ** ** | **(164**                         | **)**      | 153 |   |
| Changes  in operating assets and liabilities:                                         |       |                             | ** ** | ** ** | ** ** |
| Accounts  receivable                                                                  | ** ** | **(8,266**                       | **)**      | (1,160 | ) |
| Insurance  recoverable - environmental remediation                                    | ** ** | **(217**                         | **)**      | (3,263 | ) |
| Income  taxes                                                                         | ** ** | **509**                          |       | 89 |   |
| Restricted  investments                                                               | ** ** | **2,019**                        |       | 2,542 |   |
| Prepaid  expenses and other current assets                                            | ** ** | **(3,455**                       | **)**      | (1,945 | ) |
| Long-term  prepaid insurance                                                          | ** ** | **833**                          |       | 829 |   |
| Other  assets                                                                         | ** ** | **48**                           |       | — |   |
| Accounts  payable                                                                     | ** ** | **(8,284**                       | **)**      | (1,615 | ) |
| Accrued  compensation and benefits                                                    | ** ** | **1,860**                        |       | (2,744 | ) |
| Deferred  revenue                                                                     | ** ** | **(2,599**                       | **)**      | (1,102 | ) |
| Environmental  remediation liabilities                                                | ** ** | **(296**                         | **)**      | (344 | ) |
| Other  accrued liabilities                                                            | ** ** | **(1,717**                       | **)**      | 82 |   |
| **Net cash used in operating activities**                                             | ** ** | **(14,519**                      | **)**      | (5,362 | ) |
| ** **                                                                            | ** ** | ** **                       | ** ** | ** ** | ** ** |
| **Cash flows from investing activities:**                                             |       |                             | ** ** | ** ** | ** ** |
| Additions  to property and equipment                                                  | ** ** | **(1,008**                       | **)**      | (753 | ) |
| Restricted  investments                                                               | ** ** | **248**                          |       | 256 |   |
| Earnout  payments on acquisitions                                                     | ** ** | **(77**                          | **)**      | — |   |
| Proceeds  from sale of fixed assets                                                   | ** ** | **21**                           |       | 27 |   |
| **Net cash used in investing activities**                                             | ** ** | **(816**                         | **)**      | (470 | ) |
| ** **                                                                            | ** ** | ** **                       | ** ** | ** ** | ** ** |
| **Cash flows from financing activities:**                                             |       |                             | ** ** | ** ** | ** ** |
| Payments  on long-term debt and other                                                 | ** ** | **(859**                         | **)**      | (1,445 | ) |
| Proceeds  from long-term debt and other                                               | ** ** | **2,559**                        |       | 2,485 |   |
| Shares  repurchased to settle tax withholding obligations                             | ** ** | **(171**                         | **)**      | — |   |
| Payments  of issuance costs related to convertible preferred stock                    | ** ** | **—**                       |       | (134 | ) |
| **Net cash provided by financing activities**                                         | ** ** | **1,529**                        |       | 906 |   |
| ** **                                                                            | ** ** | ** **                       | ** ** | ** ** | ** ** |
| **Decrease in cash and cash equivalents**                                             | ** ** | **(13,806**                      | **)**      | (4,926 | ) |
| Cash  and cash equivalents, beginning of period                                       | ** ** | **14,709**                       |       | 8,469 |   |
| **Cash and cash equivalents, end of period**                                          | ** ** | **$**                            | **903**    |   | $ | 3,543 |   |

 

*See accompanying notes to condensed consolidated financial statements.*

 

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**TRCCOMPANIES, INC.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

September 24,2010 and September 25, 2009

(inthousands, except per share data)

(Unaudited)

 

**Note 1.  Company Background andBasis of Presentation**

 

TRC Companies, Inc., through its subsidiaries (collectively, the “Company”),provides integrated engineering, consulting, and construction managementservices. Its project teams assist its commercial, industrial and governmentclients implement environmental, energy and infrastructure projects frominitial concept to delivery and operation. The Company provides its servicesalmost entirely in the United States of America.

 

TheCompany reported a net loss applicable to the Company’s common shareholders of$1,095 and $913 for the three months ended September 24, 2010 and September 25,2009, respectively, primarily due to preferred stock accretion charges of$3,799 for the three months ended September 24, 2010 and $834 for thethree months ended September 25, 2009. The preferred stock accretioncharges will continue until the preferred stock converts to common stock in December 2010.The Company has a revolving credit facility with a maturity date of July 17,2013 under which no amounts were outstanding as of September 24, 2010 and$29,182 was available for borrowings. The Company will continue to focus onimproving operating profitability and cash flows from operations throughreductions in general and administrative expenses and improvements in cost ofservices through enhanced project management. The Company believes thatexisting cash resources, cash forecasted to be generated from operations andavailability under its credit facility are adequate to meet its requirementsfor the duration of the credit facility and the foreseeable future.

 

Thecondensed consolidated balance sheet as of September 24, 2010, thecondensed consolidated statements of operations for the three months ended September 24,2010 and September 25, 2009, and the condensed consolidated statements ofcash flows for the three months ended September 24, 2010 and September 25,2009 have been prepared pursuant to the interim period reporting requirementsof Form 10-Q and in accordance with accounting principles generallyaccepted in the United States (“U.S. GAAP”). Consequently, the financialstatements are unaudited but, in the opinion of the Company’s management,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 annualfinancial statements prepared in accordance with U.S. GAAP have been condensedor omitted. The condensed consolidated financial statements include theaccounts of the company and all of its subsidiaries in which a controllinginterest is maintained, as well as variable interest entities in which theCompany is considered the primary beneficiary. These condensedconsolidated financial statements should be read in conjunction with theconsolidated financial statements and notes thereto included in the Company’sAnnual Report on Form 10-K as of and for the fiscal year ended June 30,2010.

 

**Note 2.  New Accounting Pronouncements**

 

In June 2009, the Financial Accounting Standards Board (“FASB”)issued guidance intended to improve the relevance, representationalfaithfulness and comparability of the information that a reporting entityprovides in its financial statements about a transfer of financial assets; theeffects of a transfer on its financial position, financial performance and cashflows; and a transferor’s continuing involvement, if any, in transferredfinancial assets. The guidance eliminates the exemption from consolidation forqualifying special-purpose entities (“QSPEs”). As a result, a transferormust evaluate existing QSPEs to determine whether they must be consolidated inthe reporting entity’s financial statements.  This statement limits thecircumstances in which a financial asset or portion of a financial asset shouldbe derecognized when the transferor has not transferred the entire originalfinancial asset to an entity that is not consolidated with the transferor inthe financial statements being presented and/or when the transferor hascontinuing involvement with the transferred financial asset.  Enhanceddisclosures are required to provide financial statement users with greatertransparency about transfers of financial assets and a transferor’s continuinginvolvement with transferred financial assets.  The guidance appliesprospectively to financial asset transfers occurring in fiscal years beginningafter November 15, 2009 and was adopted by the Company on July 1,2010. The adoption of this standard did not have a material impact on theCompany’s consolidated results of operations or financial condition.

 

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In June 2009, the FASB issued an amendment that requires anenterprise to perform an analysis to determine whether the enterprise’svariable interest or interests give it a controlling financial interest in avariable interest entity. This analysis identifies the primary beneficiaryof a variable interest entity as the enterprise that has both of the followingcharacteristics: (1) the power to direct the activities of a variableinterest entity that most significantly impact the entity’s economicperformance and (2) the obligation to absorb losses of the entity thatcould potentially be significant to the variable interest entity or the rightto receive benefits from the entity that could potentially be significant tothe variable interest entity.  Additionally, an enterprise is required toassess whether it has an implicit financial responsibility to ensure that avariable interest entity operates as designed when determining whether it hasthe power to direct activities of the variable interest entity that mostsignificantly impact the entity’s economic performance.  The guidanceapplies prospectively to variable interest entities occurring in fiscal yearsbeginning after November 15, 2009 and was adopted by the Company on July 1,2010. The adoption of this standard did not have a material impact on theCompany’s consolidated results of operations or financial condition (See Note12).

 

In October 2009, the FASB issued Accounting Standards Update (“ASU”)2009-13, *Multiple Deliverable Revenue Arrangements*(“ASU2009-13”), a consensus of the FASB Emerging Issues Task Force. This updateprovides amendments to the criteria of Accounting Standards Codification (“ASC”)Topic 605, *Revenue Recognition*, for separatingconsideration in multiple-deliverable arrangements. The amendments to thisupdate establish a selling price hierarchy for determining the selling price ofa deliverable.  ASU 2009-13 was adoptedprospectively beginning July 1, 2010. The adoption of this standard didnot have a material impact on the Company’s consolidated results of operationsor financial condition.

 

In April 2010, the FASB issued ASU 2010-17, *Revenue Recognition—Milestone Method*(“ASU 2010-17”). ASU2010-17 provides guidance on defining a milestone and determining when it maybe appropriate to apply the milestone method of revenue recognition forresearch or development transactions. Research or development arrangementsfrequently include payment provisions whereby a portion or all of theconsideration is contingent upon milestone events such as successful completionof phases in a study or achieving a specific result from research ordevelopment efforts. The guidance in this ASU applies to milestones in bothsingle-deliverable and multiple-deliverable arrangements involving research ordevelopment transactions. ASU 2010-17 is effective for fiscal years (and interimperiods within those fiscal years) beginning on or after June 15, 2010.Entities can apply this guidance prospectively to milestones achieved afteradoption, however retrospective application to all prior periods is alsopermitted. ASU 2010-17 was adopted prospectively beginning July 1,2010, and the adoption of this standard did not have a material impact on theCompany’s consolidated results of operations or financial condition.

 

**Note 3.  Fair Value Measurements**

 

Effective July 1, 2008, the Company adopted standards set forth inASC Topic 820, *Fair Value Measurements and Disclosures*(“ASCTopic 820”), which includes a new framework for measuring fair value offinancial and non-financial instruments and expands related disclosures. TheCompany does not have any non-financial instruments accounted for at fair valueon a recurring basis. Broadly, the framework within ASC Topic 820 requires fairvalue to be determined based on the exchange price that would be received foran asset or paid to transfer a liability (an exit price) in the principal ormost advantageous market for the asset or liability in an orderly transactionbetween market participants. These standards establish market or observableinputs as the preferred source of values. Assumptions based on hypotheticaltransactions are used in the absence of market inputs.

 

The valuation techniques required are based upon observable andunobservable inputs. Observable inputs reflect market data obtained fromindependent sources, while unobservable inputs reflect the Company’s marketassumptions. These two types of inputs create the following fair valuehierarchy:

 

**Level 1 Inputs** — Unadjusted quoted prices in active marketsthat are accessible at the measurement date for identical, unrestricted assetsor liabilities. Generally this includes debt and equity securities andderivative contracts that are traded on an active exchange market (i.e. NewYork Stock Exchange) as well as certain U.S. Treasury and U.S. Government andagency mortgage-backed securities that are highly liquid and are activelytraded in over-the-counter markets.

 

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**Level 2 Inputs** — Quoted prices for similar assets orliabilities in active markets; quoted prices for identical or similar assets orliabilities in inactive markets; or valuations based on models where thesignificant inputs are observable (e.g., interest rates, yield curves, creditrisks, etc.) or can be corroborated by observable market data.

 

**Level 3 Inputs** — Valuations based on models wheresignificant inputs are not observable. The unobservable inputs reflect theCompany’s own assumptions about the assumptions that market participants woulduse.

 

The following tables present the level within the fair value hierarchyat which the Company’s financial assets and liabilities are measured on arecurring basis as of September 24, 2010 and June 30, 2010.

 

**Assets Measured at Fair Value on a Recurring Basis as of September 24,2010**

 
| ** **               | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
|--------------------------|------------|------------------|------------|------------------|------------|------------------|------------|-----------|------------|
| **Assets**               |       |             |       |             |       |             |       |      |       |
| Mutual  funds            |       | $                | 3,953      |             | $          | —           |       | $         | —     |   | $ | 3,953 |   |
| Certificates  of deposit |       | —           |       | 1,913            |       | —           |       | 1,913     |       |
| Corporate  bonds         |       | —           |       | 1,545            |       | —           |       | 1,545     |       |
| Money  market accounts   |       | 510              |       | —           |       | —           |       | 510       |       |
| **Total**                | ** ** | **$**            | **4,463**  | ** **       | **$**      | **3,458**        | ** ** | **$**     | **—** | ** ** | **$** | **7,921** | ** ** |

 

**Assets Measured at Fair Value on a Recurring Basis as of June 30,2010**

 
| ** **                   | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
|------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|-----------|------------|
| **Assets**                   |       |             |       |             |       |             |       |      |       |
| Mutual  funds                |       | $                | 3,796      |             | $          | —           |       | $         | —     |   | $ | 3,796 |   |
| Certificates  of deposit     |       | —           |       | 1,656            |       | —           |       | 1,656     |       |
| Corporate  bonds             |       | —           |       | 667              |       | —           |       | 667       |       |
| Money  market accounts       |       | 1,927            |       | —           |       | —           |       | 1,927     |       |
| U.S.  government obligations |       | 110              |       | —           |       | —           |       | 110       |       |
| Total                        |       | $                | 5,833      |             | $          | 2,323            |       | $         | —     |   | $ | 8,156 |   |

 

**Note 4.  Changes in Equity andNoncontrolling Interest**

 

Net income applicable to noncontrolling interests’ share in income(loss) are classified below net income (loss) in the condensed consolidatedstatements of operations. Earnings (loss) per share continues to be determinedafter the impact of the noncontrolling interests’ share in net income (loss) ofthe Company. In addition, the liability related to noncontrollinginterests is presented as a separate caption within equity.

 

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A reconciliation of consolidated changes in equity for the three monthsended September 24, 2010 is as follows:

 
| ** **                                                | ** ** | ** **                                    | ** ** | ** **     | ** ** | ** **  | ** ** | ** **      | ** ** | ** **              | ** **   | ** **         | ** ** | ** ** | ** ** | ** **             | ** ** | ** **      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------|------------|-----------------------------------------------|------------|----------------|------------|-------------|------------|-----------------|------------|-------------------------|--------------|--------------------|------------|------------|------------|------------------------|------------|-----------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                                | ** ** | **TRC Companies, Inc. Equity** | ** ** | ** **     | ** ** | ** **  | ** ** |
| ** **                                                | ** ** | ** **                                    | ** ** | ** **     | ** ** | ** **  | ** ** | ** **      | ** ** | **Accumulated**         | ** **   | ** **         | ** ** | ** ** | ** ** | **Total**              | ** ** | ** **      | ** ** | ** ** | ** ** |
| ** **                                                | ** ** | **Common Stock**                         | ** ** | **Additional** | ** ** | ** **  | ** ** | **Other**       | ** ** | **Treasury Stock** | ** **   | **TRC**            | ** ** | **Non-**   | ** ** | ** **             | ** ** |
| ** **                                                | ** ** | **Number**                                    | ** ** | ** **     | ** ** | **Paid-in** | ** ** | **Accumulated** | ** ** | **Comprehensive**       | ** **   | **Number**         | ** ** | ** ** | ** ** | **Shareholders’** | ** ** | **Controlling** | ** ** | **Total**  | ** ** |
| ** **                                                | ** ** | **of Shares**                            | ** ** | **Amount**     | ** ** | **Capital** | ** ** | **Deficit**     | ** ** | **Income**              | ** **   | **of Shares** | ** ** | **Amount** | ** ** | **Equity**             | ** ** | **Interest**    | ** ** | **Equity** | ** ** |
| **Balances as of July 1, 2010**                      |       | 19,638                                        |       | $              | 1,964      |        | $          | 163,897         |       | $                       | (137,883     | )                  | $          | 133        |       | 3                      |       | $               | (33        | )          | $          | 28,078     |       | $          | (125       | )          | $          | 27,953     |       |
|                                                      |       |                                          |       |           |       |        |       |            |       |                    |         |               |       |       |       |                   |       |            |       |       |       |
| Net  income (loss)                                        |       | —                                        |       | —         |       | —      |       | 2,704           |       | —                  |         | —             |       | —     |       | 2,704                  |       | (21             | )          | 2,683      |       |
| Unrealized  gain on available for sale securities         |       | —                                        |       | —         |       | —      |       | —          |       | 79                      |         | —             |       | —     |       | 79                     |       | —          |       | 79         |       |
| Total  comprehensive income (loss)                        |       |                                          |       |           |       |        |       |            |       |                    |         |               |       |       |       | 2,783                  |       | (21             | )          | 2,762      |       |
| Accretion  charges on preferred stock                     |       | —                                        |       | —         |       | (3,799      | )          | —          |       | —                  |         | —             |       | —     |       | (3,799                 | )          | —          |       | (3,799     | )          |
| Stock-based  compensation                                 |       | 221                                           |       | 22             |       | 699         |       | —          |       | —                  |         | —             |       | —     |       | 721                    |       | —          |       | 721        |       |
| Shares  repurchased to settle tax withholding obligations |       | (61                                           | )          | (6             | )          | (165        | )          | —          |       | —                  |         | —             |       | —     |       | (171                   | )          | —          |       | (171       | )          |
| Directors’  deferred compensation                    |       | 4                                             |       | —         |       | 11          |       | —          |       | —                  |         | —             |       | —     |       | 11                     |       | —          |       | 11         |       |
| **Balances as of September 24, 2010**                | ** ** | **19,802**                                    | ** ** | **$**          | **1,980**  | ** **  | **$**      | **160,643**     | ** ** | **$**                   | **(135,179** | **)**              | **$**      | **212**    | ** ** | **3**                  | ** ** | **$**           | **(33**    | **)**      | **$**      | **27,623** | ** ** | **$**      | **(146**   | **)**      | **$**      | **27,477** | ** ** |

 

A reconciliation of consolidated changes in equity for the three monthsended September 25, 2009 is as follows:

 
| ** **                                                | ** ** | ** **                                    | ** ** | ** **     | ** ** | ** **  | ** ** | ** **      | ** ** | ** **              | ** ** | ** **         | ** ** | ** ** | ** ** | ** **             | ** ** | ** **      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------|------------|-----------------------------------------------|------------|----------------|------------|-------------|------------|-----------------|------------|-------------------------|------------|--------------------|------------|------------|------------|------------------------|------------|-----------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                                | ** ** | **TRC Companies, Inc. Equity** | ** ** | ** **     | ** ** | ** **  | ** ** |
| ** **                                                | ** ** | ** **                                    | ** ** | ** **     | ** ** | ** **  | ** ** | ** **      | ** ** | **Accumulated**         | ** ** | ** **         | ** ** | ** ** | ** ** | **Total**              | ** ** | ** **      | ** ** | ** ** | ** ** |
| ** **                                                | ** ** | **Common Stock**                         | ** ** | **Additional** | ** ** | ** **  | ** ** | **Other**       | ** ** | **Treasury Stock** | ** ** | **TRC**            | ** ** | **Non-**   | ** ** | ** **             | ** ** |
| ** **                                                | ** ** | **Number**                                    | ** ** | ** **     | ** ** | **Paid-in** | ** ** | **Accumulated** | ** ** | **Comprehensive**       | ** ** | **Number**         | ** ** | ** ** | ** ** | **Shareholders’** | ** ** | **Controlling** | ** ** | **Total**  | ** ** |
| ** **                                                | ** ** | **of Shares**                            | ** ** | **Amount**     | ** ** | **Capital** | ** ** | **Deficit**     | ** ** | **Income (Loss)**  | ** ** | **of Shares** | ** ** | **Amount** | ** ** | **Equity**             | ** ** | **Interest**    | ** ** | **Equity** | ** ** |
| **Balances as of July 1, 2009**                      |       | 19,358                                        |       | $              | 1,936      |        | $          | 168,459         |       | $                       | (121,434   | )                  | $          | (305       | )          | 3                      |       | $               | (33        | )          | $          | 48,623     |       | $          | —     |       | $          | 48,623     |       |
|                                                      |       |                                          |       |           |       |        |       |            |       |                    |       |               |       |       |       |                   |       |            |       |       |       |
| Net  loss                                                 |       | —                                        |       | —         |       | —      |       | (913            | )          | —                  |       | —             |       | —     |       | (913                   | )          | (27             | )          | (940       | )          |
| Unrealized  gain on available for sale securities         |       | —                                        |       | —         |       | —      |       | —          |       | 414                     |       | —             |       | —     |       | 414                    |       | —          |       | 414        |       |
| Total  comprehensive loss                                 |       |                                          |       |           |       |        |       |            |       |                    |       |               |       |       |       | (499                   | )          | (27             | )          | (526       | )          |
| Accretion  charges on preferred stock                     |       | —                                        |       | —         |       | (834        | )          | 834             |       | —                  |       | —             |       | —     |       | —                 |       | —          |       | —     |       |
| Stock-based  compensation                                 |       | 231                                           |       | 23             |       | 563         |       | —          |       | —                  |       | —             |       | —     |       | 586                    |       | —          |       | 586        |       |
| Shares  repurchased to settle tax withholding obligations |       | (71                                           | )          | (7             | )          | (261        | )          | —          |       | —                  |       | —             |       | —     |       | (268                   | )          | —          |       | (268       | )          |
| Directors’  deferred compensation                    |       | 5                                             |       | —         |       | 22          |       | —          |       | —                  |       | —             |       | —     |       | 22                     |       | —          |       | 22         |       |
| **Balances as of September 25, 2009**                | ** ** | 19,523                                        |       | $              | 1,952      |        | $          | 167,949         |       | $                       | (121,513   | )                  | $          | 109        |       | 3                      |       | $               | (33        | )          | $          | 48,464     |       | $          | (27        | )          | $          | 48,437     |       |

 

**Note 5.  Restructuring Reserve**

 

Asummary of restructuring reserve activity for the three months ended September 24,2010 is as follows:

 
| ** **                                       | ** ** | **Facility  Closures** | ** ** |
|--------------------------------------------------|------------|------------------------|------------|
| Liability  balance as of July 1, 2010       |       | $                      | 888        |   |
| Payments                                         |       | (152                   | )          |
| Liability  balance as of September 24, 2010 | ** ** | **$**                  | **736**    | ** ** |

 

As of September 24, 2010, $736 of facility closure costs remainaccrued and are expected to be paid over various remaining lease terms throughfiscal 2013.

 

**Note 6.  Stock-Based Compensation**

 

As of September 24, 2010, the Company had two plans under whichstock options have been issued: the TRC Companies, Inc. Restated StockOption Plan, and the Amended and Restated 2007 Equity Incentive Plan,collectively, (“the Plans”). The Company issues new shares or utilizes treasuryshares, when available, to satisfy awards under the Plans. Options are awardedby the Compensation Committee of the Board of Directors, however, theCompensation Committee has delegated to the Chief Executive Officer theauthority to grant options for up to 10 shares to employees subject to alimitation of 100 shares in any 12 month period.

 

Stock-based awards under the Plans consist of stock options, restrictedstock awards (“RSA’s”), restricted stock units (“RSU’s”) and performance stockunits (“PSU’s”).

 

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*Stock-Based Compensation*

 

TheCompany measures stock-based compensation cost at the grant date based on thefair value of the award. The value of the portion of the award that isultimately expected to vest is recognized as expense over the requisite serviceperiods in the Company’s condensed consolidated statements of operations.Stock-based compensation expense includes the estimated effects of forfeitures,and estimates of forfeitures will be adjusted over the requisite service periodto the extent actual forfeitures differ, or are expected to differ from suchestimates. Changes in estimated forfeitures will be recognized in theperiod of change and will also impact the amount of expense to be recognized infuture periods. During the three months ended September 24, 2010 and September 25,2009, the Company recognized compensation expense in cost of services andgeneral and administrative expenses on the condensed consolidated statements ofoperations with respect to stock options, RSA’s, RSU’s and PSU’s as follows:

 
| ** **                              | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------|------------|----------------------------------|------------|
| ** **                              | ** ** | **September 24,**           | ** ** | **September 25,** | ** ** |
| ** **                              | ** ** | **2010**                         | ** ** | **2009** | ** ** |
| Cost  of services                       | ** ** | **$**                            | **315**    |   | $ | 282 |   |
| General  and administrative expenses    | ** ** | **406**                          |       | 304 |   |
| Total  stock-based compensation expense | ** ** | **$**                            | **721**    |   | $ | 586 |   |

 

*Stock Options*

 

TheCompany uses the Black-Scholes option pricing model for determining theestimated grant-date fair value for stock options. The fair value is thenamortized on a straight-line basis over the requisite service periods of theawards, which is generally the vesting period. Use of a valuation modelrequires management to make certain assumptions with respect to selected modelinputs. The risk-free interest rate assumption is based upon observed interestrates appropriate for the expected life of the Company’s employee stockoptions. The average expected life is based on the contractual term of theoption and expected employee exercise and historical post-vesting employmenttermination experience. The Company estimates the volatility of its stockusing historical volatility in accordance with current accounting guidance.Management determined that historical volatility of TRC Companies, Inc.stock is most reflective of market conditions and the best indicator ofexpected volatility. The dividend yield assumption is based on the Company’shistory and expected dividend payouts. The Company did not grant any stockoptions during the three months ended September 24, 2010. The assumptionsused to value stock options granted for the three months ended September 25,2009 are as follows:

 
| ** **               | ** ** | **September 25,** | ** ** |
|--------------------------|------------|------------------------|------------|
| ** **               | ** ** | **2009**               | ** ** |
| Risk-free  interest rate |       | 1.99%                  |       |
| Expected  life           |       | 4.0  years             |       |
| Expected  volatility     |       | 72.9%  - 73.6%         |       |
| Expected  dividend yield |       | None                   |       |

 

Theapproximate weighted-average grant date fair values using the Black-Scholesoption pricing model of all stock options granted during the three months endedSeptember 25, 2009 was $2.28.

 

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Asummary of stock option activity for the three months ended September 24,2010 under the Plans is as follows:

 
| ** **                                                             | ** ** | ** **  | ** ** | ** **         | ** ** | **Weighted**              | ** ** | ** **              | ** ** |
|------------------------------------------------------------------------|------------|-------------|------------|--------------------|------------|---------------------------|------------|-------------------------|------------|
| ** **                                                             | ** ** | ** **  | ** ** | **Weighted**       | ** ** | **Average**               | ** ** | **Aggregate**           | ** ** |
| ** **                                                             | ** ** | ** **  | ** ** | **Average**        | ** ** | **Remaining**             | ** ** | **Intrinsic**           | ** ** |
| ** **                                                             | ** ** | ** **  | ** ** | **Exercise ** | ** ** | **Contractual Term** | ** ** | **Value**               | ** ** |
| ** **                                                             | ** ** | **Options** | ** ** | **Price**          | ** ** | **(in years)**       | ** ** | **(in thousands)** | ** ** |
|                                                                   |       |        |       |               |       |                      |       |                    |       |
| **Outstanding options as of June 30, 2010 (1,231  exercisable)**  |       | 1,484       |       | $                  | 11.88      |                      |       |                    |       |   |
| Options  forfeited                                                     |       | (2          | )          | 11.47              |       |                      |       |                    |       |
| Options  expired                                                       |       | (102        | )          | 10.76              |       |                      |       |                    |       |
| **Outstanding options as of September 24, 2010**                  | ** ** | **1,380**   | ** ** | **$**              | **11.96**  | ** **                | ** ** | ** **              | ** ** | ** ** |
| **Options exercisable as of September 24, 2010**                  | ** ** | **1,201**   | ** ** | **$**              | **12.70**  | ** **                | **4.2**    | ** **              | **$**      | **3** | ** ** |
| **Options vested and expected to vest as of  September 24, 2010** | ** ** | **1,361**   | ** ** | **$**              | **12.04**  | ** **                | **4.3**    | ** **              | **$**      | **11** | ** ** |
| **Options available for future grants**                                | ** ** | **1,722**   | ** ** | ** **         | ** ** | ** **                | ** ** | ** **              | ** ** |

 

Theaggregate intrinsic value is measured using the fair market value at the dateof exercise (for options exercised) or as of September 24, 2010 (foroutstanding options), less the applicable exercise price. The closing price ofthe Company’s common stock on the New York Stock Exchange was $2.79 as of September 24,2010. There were no options exercised during the three months ended September 24,2010 and September 25, 2009.

 

Asof September 24, 2010, there was $442 of total unrecognized compensationexpense related to non-vested stock option grants under the Plans, and thisexpense is expected to be recognized over a weighted-average period of 1.2years.

 

InJuly 2009 the Company’s shareholders approved amendments to the 2007Equity Incentive Plan to permit option repricings, exchanges and similarprograms. Directors and Executive Officers do not participate in such programs.On September 23, 2010 the Company commenced an option exchange programunder which stock options with exercise prices in excess of $7.25 per share andexpiration dates after June 30, 2011 were eligible for exchange into RSU’swith a four year vesting schedule based on the Black-Scholes value of theexchanged stock options. Where a participant would receive less than fivehundred RSU’s they would be entitled to a cash payment equal to the greater ofthe number of RSU’s times $2.82 or one hundred dollars. As of the terminationdate of the offer 415 stock options had been exchanged for 97 RSU’s and anaggregate of $10 in cash.

 

*Restricted Stock Awards*

 

Compensationexpense for RSA’s granted to employees is recognized ratably over the vestingterm, which is generally three or four years. The fair value of the RSA’s isdetermined based on the closing market price of the Company’s common stock onthe grant date. There were no RSA grants during the three months ended September 24,2010 and September 25, 2009.

 

Asof September 24, 2010, there was $1,341 of total unrecognized compensationexpense related to non-vested RSA’s under the Plans, and this expense isexpected to be recognized over a weighted-average period of 1.8 years.

 

Asummary of non-vested RSA activity for the three months ended September 24,2010 is as follows:

 
| ** **                                          | ** ** | ** **     | ** ** | **Weighted**        | ** ** |
|-----------------------------------------------------|------------|----------------|------------|---------------------|------------|
| ** **                                          | ** ** | **Restricted** | ** ** | **Average**         | ** ** |
| ** **                                          | ** ** | **Stock**      | ** ** | **Grant Date** | ** ** |
| ** **                                          | ** ** | **Awards**     | ** ** | **Fair Value** | ** ** |
|                                                |       |           |       |                |       |
| **Non-vested awards as of June 30, 2010**      |       | 607            |       | $                   | 3.67       |   |
| Awards  vested                                      |       | (193           | )          | 4.11                |       |
| Awards  forfeited                                   |       | (1             | )          | 11.47               |       |
| **Non-vested awards as of September 24, 2010** | ** ** | **413**        | ** ** | **$**               | **3.44**   | ** ** |

 

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*Restricted Stock Units*

 

Compensationexpense for RSU’s granted to employees is recognized ratably over the vestingterm, which is generally four years. The fair value of RSU’s is determinedbased on the closing market price of the Company’s common stock on the grantdate. RSU grants totaled 551 shares at a weighted-average grant date fair valueof $2.88 during the three months ended September 24, 2010. There were noRSU grants during the three months ended September 25, 2009. During thethree months ended September 24, 2010, 28 shares vested with a fair valueof $3.07.

 

Asof September 24, 2010, there was $3,226 of total unrecognized compensationexpense related to non-vested RSU’s under the Plans, and this expense isexpected to be recognized over a weighted-average period of 3.4 years.

 

Asummary of non-vested RSU activity for the three months ended September 24,2010 is as follows:

 
| ** **                                         | ** ** | ** **     | ** ** | **Weighted**        | ** ** |
|----------------------------------------------------|------------|----------------|------------|---------------------|------------|
| ** **                                         | ** ** | **Restricted** | ** ** | **Average**         | ** ** |
| ** **                                         | ** ** | **Stock**      | ** ** | **Grant Date** | ** ** |
| ** **                                         | ** ** | **Units**      | ** ** | **Fair Value** | ** ** |
|                                               |       |           |       |                |       |
| **Non-vested units as of June 30, 2010**      |       | 617            |       | $                   | 3.51       |   |
| Units  granted                                     |       | 551            |       | 2.88                |       |
| Units  vested                                      |       | (28            | )          | 3.07                |       |
| **Non-vested units as of September 24, 2010** | ** ** | **1,140**      | ** ** | **$**               | **3.22**   | ** ** |

 

*Performance Stock Units*

 

Compensationexpense for PSU’s granted to employees is recognized if and when the Companyconcludes that it is probable that the performance condition will beachieved.  The Company reassesses theprobability of vesting at each reporting period for awards with performanceconditions and adjusts compensation expense based on its probabilityassessment. The fair value of the PSU’s is determined based on the closingmarket price of the Company’s common stock on the grant date. During the threemonths ended September 24, 2010, the Company granted 551 PSU’s toemployees at a weighted-average grant date fair value of $2.88. The PSU’s vestover four years upon meeting certain financial targets for the fiscal yearending June 30, 2011.

 

Asof September 24, 2010, the Company determined that the achievement of theperformance condition of the PSU’s granted during the three months ended September 24,2010 is probable, and therefore $39 of compensation expense was recorded.

 

Asof September 24, 2010, there was $1,548 of total unrecognized compensationexpense related to non-vested PSU’s under the Plans, and this expense isexpected to be recognized over a weighted-average period of 2.4 years.

 

*Warrants*

 

Duringthe three months ended September 25, 2009, warrants to purchase 73 sharesof the Company’s common stock were redeemed for cash of $656. The redemption ofthe warrants was treated as an investing outflow in the condensed consolidatedstatement of cash flows for the three months ended September 25, 2009because the warrants related to a prior acquisition. The Company currently has25 warrants outstanding with a strike price of $9.63 and an expiration date of July 13,2011.

 

**Note 7.  Earnings per Share**

 

Uponissuance of the convertible preferred stock in June 2009, accountingguidance defining participating securities and the two class method ofcalculating EPS became applicable to the Company. The relevant guidanceestablishes standards regarding the computation of earnings (loss) per share bycompanies that have securities other than common stock that contractuallyentitle the holder to participate in dividends and earnings of theCompany.  The guidance also requires that earnings applicable tocommon shareholders for the period, after deduction of preferred stockdividends and accretion 

 

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charges,be allocated between the common and preferred shareholders based on theirrespective rights to receive dividends. Basic earnings (loss) per share isthen calculated by dividing the net income (loss) applicable to the Company’scommon shareholders by the weighted-average number of common sharesoutstanding.

 

DilutedEPS is computed using the treasury stock method for stock options, warrants,non-vested restricted stock awards and units, and non-vested performance stockunits. The treasury stock method assumes conversion of all potentially dilutiveshares of common stock with the proceeds from assumed exercises used tohypothetically repurchase stock at the average market price for theperiod.  Diluted EPS is computed by dividing net income applicable to theCompany by the weighted-average common shares and potentially dilutive commonshares that were outstanding during the period.

 

Forthe three months ended September 24, 2010 and September 25, 2009, theCompany reported a net loss applicable to common shareholders; therefore, thepotentially dilutive shares are anti-dilutive and are excluded from thecalculation of diluted earnings (loss) per share in accordance with ASC Topic260, *Earnings Per Share*. The holders of theconvertible preferred stock do not have a contractual obligation to share inthe net losses of the Company, and, as such, the undistributed net losses forthe three months ended September 24, 2010 and September 25, 2009 werenot allocated to the convertible preferred stock. Because the effects areanti-dilutive, 7 preferred shares were excluded from the calculation of dilutedEPS for the three months ended September 24, 2010 and September 25,2009 (prior to conversion). The number of outstanding stock options, warrantsand non-vested RSA’s, RSU’s and PSU’s excluded from the diluted EPScalculations (as they were anti-dilutive) were 3,392 and 2,450 for the threemonths ended September 24, 2010 and September 25, 2009, respectively.

 

Thefollowing table sets forth the computations of basic and diluted EPS for thethree months ended September 24, 2010 and September 25, 2009:

 
| ** **                                                                  | ** ** | **September, 24** | ** ** | **September, 25** | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                                  | ** ** | **2010**               | ** ** | **2009**               | ** ** |
| Net  income (loss) applicable to TRC Companies, Inc.                   | ** ** | **$**                  | **2,704**  |                   | $          | (79 | ) |
| Accretion  charges on preferred stock                                       | ** ** | **(3,799**             | **)**      | (834                   | )          |
| Net  loss applicable to TRC Companies, Inc.’s common shareholders | ** ** | **$**                  | **(1,095** | **)**                  | $          | (913 | ) |
| Weighted  average common shares outstanding                                 | ** ** | **19,684**             |       | 19,404                 |       |
| Net  loss per common share                                                  | ** ** | **$**                  | **(0.06**  | **)**                  | $          | (0.05 | ) |

 

**Note 8****. ****Accounts Receivable**

 

The current portion of accounts receivable as of September 24,2010 and June 30, 2010 was comprised of the following:

 
| ** **                            | ** ** | **September 24,** | ** ** | **June 30,** | ** ** |
|---------------------------------------|------------|------------------------|------------|-------------------|------------|
| ** **                            | ** ** | **2010**               | ** ** | **2010**          | ** ** |
|                                  |       |                   |       |              |       |
| Billed                                | ** ** | **$**                  | **61,303** |              | $          | 47,040 |   |
| Unbilled                              | ** ** | **37,607**             |       | 43,736            |       |
| Retainage                             | ** ** | **6,360**              |       | 6,241             |       |
|                                  | ** ** | **105,270**            |       | 97,017            |       |
| Less  allowance for doubtful accounts | ** ** | **(10,478**            | **)**      | (9,913            | )          |
|                                  | ** ** | **$**                  | **94,792** |              | $          | 87,104 |   |

 

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**Note 9. ****Other Accrued Liabilities**

 

As of September 24, 2010 and June 30, 2010, other accruedliabilities were comprised of the following:

 
| ** **                        | ** ** | **September 24,** | ** ** | **June 30,** | ** ** |
|-----------------------------------|------------|------------------------|------------|-------------------|------------|
| ** **                        | ** ** | **2010**               | ** ** | **2010**          | ** ** |
| Contract  costs and loss reserves | ** ** | **$**                  | **26,034** |              | $          | 26,845 |   |
| Legal  costs                      | ** ** | **9,418**              |       | 8,821             |       |
| Lease  obligations                | ** ** | **2,933**              |       | 2,955             |       |
| Audit  costs                      | ** ** | **635**                |       | 1,467             |       |
| Restructuring  reserve            | ** ** | **736**                |       | 888               |       |
| Other                             | ** ** | **3,498**              |       | 2,805             |       |
|                              | ** ** | **$**                  | **43,254** |              | $          | 43,781 |   |

 

**Note 10****. ****Goodwill and Intangible Assets**

 

In accordance with ASC Topic 350, *Intangibles —Goodwill and Other*, goodwill and intangible assets deemed to haveindefinite lives are not amortized but are subject to impairment testing atleast annually, or more frequently if events or changes in circumstancesindicate that goodwill might be impaired. The Company performs impairmentreviews for its reporting units utilizing valuation methods, including thediscounted cash flow method, the guideline company approach, and the guidelinetransaction approach as the best evidence of fair value. The valuationmethodology used to estimate the fair value of the total Company and itsreporting units requires inputs and assumptions (i.e. revenue growth, operatingprofit margins and discount rates) that reflect current market conditions. Theestimated fair value of each reporting unit is compared to the carrying amountof the reporting unit, including goodwill. If the carrying value of thereporting unit exceeds its fair value, the goodwill of the reporting unit ispotentially impaired, and the Company then determines the implied fair value ofgoodwill, which is compared to the carrying value of goodwill to determine ifimpairment exists.

 

Management judgment and assumptions are required in performing theimpairment tests for all reporting units with goodwill and in measuring thefair value of goodwill, indefinite-lived intangibles and long-lived assets.While the Company believes its judgments and assumptions are reasonable,different assumptions could change the estimated fair values or the amount ofthe recognized impairment losses.

 

As of September 24, 2010, the Company had $14,870 of goodwill, andthe Company does not believe there were any events or changes in circumstancessince the last goodwill assessment in the fourth quarter of fiscal year 2010that would indicate the fair value of goodwill was reduced to below itscarrying value, and therefore goodwill was not assessed for impairment duringthe current fiscal quarter.

 

There have been no changes in the carrying amount of goodwill for thethree months ended September 24, 2010. The amounts by operating segment asof September 24, 2010 are as follows:

 
| ** **                 | ** ** | **Gross**        | ** ** | ** **      | ** ** | ** **       | ** ** | ** **           | ** ** | **Gross**              | ** ** | ** **      | ** ** | ** **             | ** ** |
|----------------------------|------------|------------------|------------|-----------------|------------|------------------|------------|----------------------|------------|------------------------|------------|-----------------|------------|------------------------|------------|
| ** **                 | ** ** | **Balance,**     | ** ** | **Accumulated** | ** ** | **Balance,**     | ** ** | ** **           | ** ** | **Balance,**           | ** ** | **Accumulated** | ** ** | **Balance,**           | ** ** |
| ** **                 | ** ** | **July 1,** | ** ** | **Impairment**  | ** ** | **July 1,** | ** ** | **Additions /** | ** ** | **September 24,** | ** ** | **Impairment**  | ** ** | **September 24,** | ** ** |
| **Operating Segment** | ** ** | **2010**         | ** ** | **Losses**      | ** ** | **2010**         | ** ** | **Adjustments**      | ** ** | **2010**               | ** ** | **Losses**      | ** ** | **2010**               | ** ** |
| Energy                     |       | $                | 20,050     |            | $          | (14,506          | )          | $                    | 5,544      |                   | $          | —          | ** ** | **$**                  | **20,050** | ** ** | **$** | **(14,506** | **)** | **$** | **5,544** | ** ** |
| Environmental              |       | 27,191           |       | (17,865         | )          | 9,326            |       | —               | ** ** | **27,191**             | ** ** | **(17,865**     | **)**      | **9,326**              | ** ** |
| Infrastructure             |       | 7,224            |       | (7,224          | )          | —           |       | —               | ** ** | **7,224**              | ** ** | **(7,224**      | **)**      | **—**             | ** ** |
|                       |       | $                | 54,465     |            | $          | (39,595          | )          | $                    | 14,870     |                   | $          | —          | ** ** | **$**                  | **54,465** | ** ** | **$** | **(39,595** | **)** | **$** | **14,870** | ** ** |

 

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Thechanges in the carrying amount of goodwill for the three months ended September 25,2009 by operating segment are as follows:

 
| ** **                 | ** ** | **Gross**        | ** **   | ** **      | ** ** | ** **       | ** ** | ** **           | ** ** | **Gross**              | ** ** | ** **      | ** ** | ** **             | ** ** |
|----------------------------|------------|------------------|--------------|-----------------|------------|------------------|------------|----------------------|------------|------------------------|------------|-----------------|------------|------------------------|------------|
| ** **                 | ** ** | **Balance,**     | ** **   | **Accumulated** | ** ** | **Balance,**     | ** ** | ** **           | ** ** | **Balance,**           | ** ** | **Accumulated** | ** ** | **Balance,**           | ** ** |
| ** **                 | ** ** | **July 1,** | ** **   | **Impairment**  | ** ** | **July 1,** | ** ** | **Additions /** | ** ** | **September 25,** | ** ** | **Impairment**  | ** ** | **September 25,** | ** ** |
| **Operating Segment** | ** ** | **2009**         | ** **   | **Losses**      | ** ** | **2009**         | ** ** | **Adjustments**      | ** ** | **2009**               | ** ** | **Losses**      | ** ** | **2009**               | ** ** |
| Energy                     |       | $                | 26,433       |            | $          | —           |       | $                    | 26,433     |                   | $          | (6,383          | )          | $                      | 20,050     |   | $ | — |   | $ | 20,050 |   |
| Environmental              |       | 20,808           |         | (12,122         | )          | 8,686            |       | 6,383                |       | 27,191                 |       | (12,122         | )          | 15,069                 |       |
| Infrastructure             |       | 7,224            |         | (7,224          | )          | —           |       | —               |       | 7,224                  |       | (7,224          | )          | —                 |       |
|                       |       | $                |  54,465 |            | $          | (19,346          | )          | $                    | 35,119     |                   | $          | —          |       | $                      | 54,465     |   | $ | (19,346 | ) | $ | 35,119 |   |

 

Duringthe three months ended September 25, 2009, the Company made certainchanges to its management reporting structure which resulted in a change in thecomposition of the Company’s operating segments and to the number of reportingunits. The Company reallocated goodwill to its newly formed reportingunits using the relative fair value allocation approach. As a result, there wasa reallocation of goodwill in the amount of $6,383 from the Energy operatingsegment to the Environmental operating segment. The Company had 16 reportingunits as of September 25, 2009 compared to three reporting units as of June 30,2009. This reallocation, in conjunction with the continued downturn in theCompany’s key markets, resulted in an interim impairment test. Accordingly, theCompany assessed the recoverability of goodwill of $35,119 as of September 25,2009 for the seven reporting units within its Energy and Environmentaloperating segments which had associated goodwill. The remaining nine reportingunits, all in the Infrastructure operating segment, have no goodwill associatedwith them due to the impairment charge recorded in fiscal year 2009. As of September 25,2009, the fair value of each of the Company’s reporting units with goodwillexceeded its carrying value, and therefore no further analysis was required.

 

Identifiableintangible assets as of September 24, 2010 and June 30, 2010 areincluded in other assets on the condensed consolidated balance sheets and werecomprised of:

 
| ** **                                   | ** ** | **September 24, 2010** | ** ** | **June 30, 2010** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|-----------------------------|------------|
| ** **                                   | ** ** | **Gross**                        | ** ** | ** **                  | ** ** | **Net** | ** ** | **Gross** | ** ** | ** ** | ** ** | **Net** | ** ** |
| ** **                                   | ** ** | **Carrying**                     | ** ** | **Accumulated**             | ** ** | **Carrying** | ** ** | **Carrying** | ** ** | **Accumulated** | ** ** | **Carrying** | ** ** |
| **Identifiable intangible assets** | ** ** | **Amount**                       | ** ** | **Amortization**            | ** ** | **Amount** | ** ** | **Amount** | ** ** | **Amortization** | ** ** | **Amount** | ** ** |
|                                         |       |                             |       |                        |       |   |   |   |   |   |   |   |   |
| With  determinable lives:                    |       |                             |       |                        |       |   |   |   |   |   |   |   |   |
| Customer  relationships                      |       | $                                | 184        |                        | $          | (41 | ) | $ | 143 |   | $ | 184 |   | $ | (25 | ) | $ | 159 |   |
|                                         |       |                             |       |                        |       |   |   |   |   |   |   |   |   |
| With  indefinite lives:                      |       |                             |       |                        |       |   |   |   |   |   |   |   |   |
| Engineering  licenses                        |       | 426                              |       | —                      |       | 426 |   | 426 |   | — |   | 426 |   |
|                                         | ** ** | **$**                            | **610**    | ** **                  | **$**      | **(41** | **)** | **$** | **569** |   | $ | 610 |   | $ | (25 | ) | $ | 585 |   |

 

Customer relationships represent the onlyidentifiable intangible assets with determinable lives, and they are amortizedover the weighted-average period of approximately three years. The amortizationof intangible assets during the three months ended September 24, 2010 and September 25,2009 was $16 and $65, respectively. Estimated amortization of intangible assetsfor future periods is as follows: remainder of fiscal year 2011 - $46; fiscalyear 2012 - $61; and fiscal year 2013 - $36.

 

Indefinite-lived intangible assets are also subjectto an annual impairment test. On an annual basis, or more frequently if eventsor changes in circumstances indicate that the asset might be impaired, the fairvalue of the indefinite-lived intangible assets is evaluated by the Company todetermine if an impairment charge is required. There were no events orchanges in circumstances that would indicate the fair value of intangibleassets was reduced to below its carrying value during the three months ended September 24,2010, and therefore intangible assets were not assessed for impairment.

 

**Note 11****.  Long-TermDebt**

 

On July 17, 2006, the Company and substantiallyall of its subsidiaries, (the “Borrower”), entered into a secured creditagreement (the “Credit Agreement”) and related security documentation withWells Fargo Capital Finance (“Wells 

 

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Fargo”) as the lead lender and administrative agent,with Textron Financial Corporation (“Textron”) subsequently participating as anadditional lender. The Credit Agreement, as amended, provided the Borrower witha five-year senior revolving credit facility of up to $50,000 based upon aborrowing base formula on accounts receivable. In connection with theclosing of the preferred stock offering and as a result of previously announcedplans to exit the asset based lending business, Textron elected to no longerparticipate in the credit facility. In June 2009, a $15,000 syndicationreserve was established which reduces the maximum revolver amount from $50,000to $35,000 subject to increase upon Wells Fargo completing a syndication toreplace Textron as a participant in the facility. Any amounts outstanding under the Credit Agreement bear interest at thegreater of 5.75% and the prime rate plus a margin of 2.50% to 3.50%, or thegreater of 4.50% and LIBOR plus a margin of 3.50% to 4.50%, based on TrailingTwelve Month Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”),as defined. The Company’s obligations under the Credit Agreement are secured bya pledge of substantially all of its assets and guaranteed by substantially allof its subsidiaries that are not borrowers. The Credit Agreement also containscross-default provisions which become effective if the Company defaults onother indebtedness.

 

Under the Credit Agreement the Company must maintainaverage monthly backlog of $190,000 and, depending on borrowing capacity,maintain a minimum fixed charge ratio of 1:00 to 1:00. The Credit Agreement wasamended as of January 19, 2010 to extend the expiration date of thefacility by two years from July 17, 2011 to July 17, 2013. Theamendment also changed the Consolidated Adjusted EBITDA covenant to $6,100,$9,200, $10,900 and $12,400, for the trailing twelve month periods ending on September 30,2010, December 31, 2010, March 31, 2011 and June 30, 2011,respectively; and $12,500 for each 12 month period ending each fiscal quarterthereafter. The definition of Consolidated Adjusted EBITDA also provides anaggregate allowance for cost reduction efforts, defined in the Credit Agreementas restructuring charges, in the amount of $1,250 in fiscal year 2011 at thePermitted Discretion of the lender as defined in the Credit Agreement.  Additional changes in the January 2010amendment included: (i) an increase to the fee for unused borrowingcapacity depending on borrowing usage; (ii) a reduction of the maximumannual capital expenditure covenant from $10,600 to $7,500 for fiscal year 2010through fiscal year 2012 and $8,500 for fiscal year 2013; and (iii) arevision to the fixed charge ratio covenant which now requires the ratio to becomputed and the covenant applied only if available borrowing capacity underthe facility, measured on a trailing 30 day average basis, is less than$20,000.

 

As of September 24, 2010 and June 30,2010, the Company had no borrowings outstanding pursuant to the CreditAgreement. Letters of credit outstanding were $3,768 and $3,668 as of September 24,2010 and June 30, 2010, respectively. Based upon the borrowing baseformula, the maximum availability was $32,950 and $30,195 as of September 24,2010 and June 30, 2010, respectively. Funds available to borrow under theCredit Agreement after consideration of the reserve amount were $29,182 and $26,527 as of September 24,2010 and June 30, 2010, respectively.

 

On July 19, 2006, the Company and substantiallyall of its subsidiaries entered into a three-year subordinated loan agreementwith Federal Partners, L.P. (“Federal Partners”), a stockholder of the Company,pursuant to which the Company borrowed $5,000. The loan bears interest at afixed rate of 9% per annum. The loan was amended on June 1, 2009 inconnection with the preferred stock offering to extend the maturity date from July 19,2009 to July 19, 2012. Federal Partners is an investor in the Company’spreferred stock offering. On July 19, 2006, the Company also issued aten-year warrant to Federal Partners to purchase up to 66 shares of its commonstock at an exercise price equal to $0.10 per share. The estimated fair valueof the warrant of $659 was determined using the Black-Scholes option pricingmodel and the following assumptions: term of 10 years, a risk free interestrate of 4.94%, a dividend yield of 0%, and volatility of 50%. The face amountof the note payable of $5,000 was proportionately allocated to the note and thewarrant in the amount of $4,418 and $582, respectively. The amount allocated tothe warrants of $582 was recorded as a discount on the note and was amortizedover the original three year life of the note. Interest expense amortized forthe three months ended September 24, 2010 and September 25, 2009, was$0 and $9, respectively.

 

In fiscal year 2007, the Company formed a limitedliability company, Center Avenue Holdings, LLC (“CAH”), to purchase andremediate certain property in New Jersey. The Company maintains a 70% ownershipposition in CAH. CAH entered into a term loan agreement with a commercial bankin the amount of approximately $3,200 which bore interest at a fixed rate of10.0% annually. The loan is secured by the CAH property and is non-recourse tothe members of CAH. The proceeds from the loan were used to purchase, and arecurrently funding the remediation of, the property.  In June 2010, the Company entered into amodification of the credit agreement with the lender that reduced the interestrate from 10.0% to 6.5% in return for a principal payment of $500 made uponconsummation of the modification

 

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followed by a second principal payment of $250 dueon December 1, 2010 and extended the maturity date of the loan from January 31,2010 until April 1, 2011 (See Note 12).

 

In July 2010, the Company financed $2,559 ofinsurance premiums payable in nine equal monthly installments of approximately$288 each, including a finance charge of 2.890%. As of September 24, 2010,the balance outstanding was $1,712.

 

**Note 12.  Variable Interest Entity**

 

TheCompany’s condensed consolidated financial statements include the financialresults of a variable interest entity in which it is the primary beneficiary.In determining whether the Company is the primary beneficiary of an entity, itconsiders a number of factors, including its ability to direct the activitiesthat most significantly affect the entity’s economic success, the Company’scontractual rights and responsibilities under the arrangement and thesignificance of the arrangement to each party. These considerations impact theway the Company accounts for its existing collaborative and joint venturerelationships and determines the consolidation of companies or entities withwhich the Company has collaborative or other arrangements. 

 

TheCompany consolidates the operations of CAH, as it retains the contractual powerto direct the activities of CAH which most significantly and directly impactits economic performance. The activity of CAH is not significant to the overallperformance of the Company. The assets of CAH are restricted, from thestandpoint of the Company, in that they are not available for the Company’sgeneral business use outside the context of CAH.

 

Thefollowing table sets forth the assets and liabilities of CAH included in thecondensed consolidated balance sheets of the Company:

 

| ** **                                      | ** ** | **September 24,  2010** | ** ** | **June 30,  2010** | ** ** |
|-------------------------------------------------|------------|------------------------------|------------|-------------------------|------------|
| **Current assets:**                             |       |                         |       |                    |       |
| Cash and cash equivalents                       |       | $                            | 35         |                    | $          | 64 |   |
| Restricted investments                          |       | 309                          |       | 309                     |       |
| Total current assets                            |       | 344                          |       | 373                     |       |
|                                            |       |                         |       |                    |       |
| Other assets                                    |       | 4,339                        |       | 4,336                   |       |
| Total assets                                    |       | $                            | 4,683      |                    | $          | 4,709 |   |
|                                            |       |                         |       |                    |       |
| **Current liabilities:**                        |       |                         |       |                    |       |
| Current portion of long-term debt               |       | $                            | 2,700      |                    | $          | 2,700 |   |
| Environmental remediation liabilities           |       | 23                           |       | 50                      |       |
| Other accrued liabilities                       |       | 696                          |       | 693                     |       |
| Total current liabilities                       |       | 3,419                        |       | 3,443                   |       |
|                                            |       |                         |       |                    |       |
| Long-term environmental remediation liabilities |       | 121                          |       | 108                     |       |
| Total liabilities                               |       | $                            | 3,540      |                    | $          | 3,551 |   |

 

TheCompany and its other partner do not generally have an obligation to makeadditional capital contributions to CAH. However, through the end of the firstfiscal quarter ended September 24, 2010, the Company has provided approximately$591 of support it was not contractually obligated to provide. The additionalsupport was primarily for debt service payments on the note payable.  Ultimately, the Company expects the proceedsfrom the available for sale property (a component of other assets in the condensedconsolidated balance sheets) will be sufficient to repay the debt and anyremaining unfunded liabilities, however, to the extent a sale does not occurprior to maturity of the liabilities or the sales proceeds are insufficient tofund any remaining liabilities, the Company intends to fund CAH’s obligationsas they become due.

 

**Note 13.  Income Taxes**

 

During the year ended June 30, 2008, theCompany determined it to be more likely than not that its net deferred taxasset would not be realized.  A valuation allowance was recorded againstthe Company’s net deferred tax assets. The Company has reassessed thisconclusion during the current quarter and concluded that it remains more likelythan not that these assets will not be realized, and therefore a full valuationallowance remains.

 

The Company recorded a tax expense of $464 for thethree months ended September 24, 2010 primarily related to interestexpense on its uncertain tax positions.

 

The Company records a liability for uncertain taxpositions under the measurement criteria of ASC Topic 740, *Income Taxes*. As of September 24, 2010 the recordedliability was $4,449. The Company is currently under Internal Revenue Service (“IRS”)examination for the fiscal years 2003 through 2008.  On December 18,2009, the IRS formally assessed the Company certain adjustments related to ExitStrategy projects. The Company does not agree with these adjustments andfiled an appeal on February 19, 2010. If the IRS prevails in its position,the Company would owe additional federal taxes of $9,995 (including interest)for these periods.

 

The Company expects that the total amount ofunrecognized tax benefits could increase or decrease within the next twelvemonths. It is reasonably possible that the unrecognized tax benefits coulddecrease by approximately $3,000 or increase by approximately $6,000 due to thetiming of the resolution of the IRS examination.

 

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**Note 14.  Operating Segments**

 

TheCompany manages its business under the following three operating segments:

 

***Energy:***  The Energy operating segment providesservices to a range of clients including energy companies, utilities, othercommercial entities, and state and federal governments. The Company’s servicesinclude program management, engineer/procure/construct projects, design, andconsulting. The Company’s typical projects involve upgrade and new constructionfor electrical transmission and distribution systems, energy efficiency programdesign and management, and alternative energy development. This operatingsegment also provides services to support energy savings projects for stategovernment entities and end users.

 

***Environmental: ***TheEnvironmental operating segment provides services to a wide range of clients,including industrial, transportation, energy and natural resource companies, aswell as federal, state and municipal agencies, and is organized to focus on keyareas of demand including: environmental management of buildings, air qualitymeasurements and modeling of potential air pollution impacts,  assessment and remediation of contaminatedsites, environmental licensing and permitting of a wide variety of projects,and natural and cultural resource assessment and management.

 

***Infrastructure:***  The Infrastructure operating segment providesservices related to the expansion of infrastructure capacity, therehabilitation of overburdened and deteriorating infrastructure systems, andthe management of risks related to security of public and private facilities.The Company’s client base is predominantly state and municipal governments aswell as selected commercial developers. Primary services include: roadway andsurface transportation design; structural design of bridges; constructionengineering inspection and construction management for roads and bridges; civilengineering for municipalities and public works departments; and geotechnicalengineering services. Major markets include the northeast United States, Texas,Louisiana and California.

 

The Company’s chief operating decision makeris its Chief Executive Officer (“CEO”).The Company’s CEO manages the business by evaluating the financial results ofthe three operating segments focusing primarily on segment revenue and segmentprofit. The Company utilizes segment revenue and segment profit because itbelieves they provide useful information for effectively allocating resourcesamong operating segments; evaluating the health of its operating segments basedon metrics that management can actively influence; and gauging its investmentsand its ability to service, incur or pay down debt. Specifically, the Company’sCEO evaluates segment revenue and segment profit and assesses the performanceof each operating segment based on these measures, as well as, among otherthings, the prospects of each of the operating segments and how they fit intothe Company’s overall strategy. The Company’s CEO then decides how resourcesshould be allocated among its operating segments. The Company does not trackits assets by operating segment, and consequently, it is not practical to showassets by operating segment. Segment profit includes all operating expensesexcept the following: costs associated with providing corporate shared services(including certain depreciation and amortization), goodwill and intangibleasset write-offs, stock-based compensation expense and amortization ofintangible assets.  Depreciation expenseis primarily allocated to operating segments based upon their respective use oftotal operating segment office space. Assets solely used by Corporate are notallocated to the operating segments. Inter-segment balances and transactionsare not material. The accounting policies of the operating segments are the sameas those for the Company as a whole, except as discussed herein.

 

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The following tables present summarized financialinformation for the Company’s operating segments (as of and for the periodsnoted below).

 
| ** **                                       | ** ** | **Energy** | ** ** | **Environmental** | ** ** | **Infrastructure** | ** ** | **Total**  | ** ** |
|--------------------------------------------------|------------|------------|------------|-------------------|------------|--------------------|------------|------------|------------|
| **Three months ended  September 24, 2010:** | ** ** | ** ** | ** ** | ** **        | ** ** | ** **         | ** ** | ** ** | ** ** |
| Gross revenue                                    | ** ** | **$**      | **17,125** | ** **        | **$**      | **46,780**         | ** ** | **$**      | **14,670** | ** ** | **$** | **78,575** | ** ** |
| Net service revenue                              | ** ** | **14,934** | ** ** | **31,174**        | ** ** | **10,809**         | ** ** | **56,917** | ** ** |
| Segment profit                                   | ** ** | **2,269**  | ** ** | **7,544**         | ** ** | **1,629**          | ** ** | **11,442** | ** ** |
| Depreciation and amortization                    | ** ** | **240**    | ** ** | **449**           | ** ** | **150**            | ** ** | **839**    | ** ** |
|                                             |       |       |       |              |       |               |       |       |       |
| **Three months ended  September 25, 2009:** | ** ** | ** ** | ** ** | ** **        | ** ** | ** **         | ** ** | ** ** | ** ** |
| Gross revenue                                    |       | $          | 18,895     |              | $          | 46,719             |       | $          | 16,209     |   | $ | 81,823 |   |
| Net service revenue                              |       | 14,880     |       | 28,509            |       | 12,480             |       | 55,869     |       |
| Segment profit                                   |       | 1,820      |       | 5,939             |       | 1,432              |       | 9,191      |       |
| Depreciation and amortization                    |       | 257        |       | 831               |       | 267                |       | 1,355      |       |

 
| ** **                                                                          | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                          | ** ** | **September 24,** | ** ** | **September 25,** | ** ** |
| ** **                                                                          | ** ** | **2010**               | ** ** | **2009** | ** ** |
| **Gross revenue**                                                                   | ** ** | ** **             | ** ** | ** ** | ** ** |
| Gross revenue from reportable operating segments                                    | ** ** | **$**                  | **78,575** |   | $ | 81,823 |   |
| Reconciling items (1)                                                               | ** ** | **243**                |       | 534 |   |
| Total consolidated gross revenue                                                    | ** ** | **$**                  | **78,818** |   | $ | 82,357 |   |
|                                                                                |       |                   |       |   |   |
| **Net service revenue**                                                             | ** ** | ** **             | ** ** | ** ** | ** ** |
| Net service revenue from reportable operating  segments                             | ** ** | **$**                  | **56,917** |   | $ | 55,869 |   |
| Reconciling items (1)                                                               | ** ** | **673**                |       | 1,091 |   |
| Total consolidated net service revenue                                              | ** ** | **$**                  | **57,590** |   | $ | 56,960 |   |
|                                                                                |       |                   |       |   |   |
| **Income (loss) from operations  before taxes and equity in losses**                | ** ** | ** **             | ** ** | ** ** | ** ** |
| Segment profit                                                                      | ** ** | **$**                  | **11,442** |   | $ | 9,191 |   |
| Corporate shared services (2)                                                       | ** ** | **(6,975**             | **)**      | (7,781 | ) |
| Stock-based compensation expense                                                    | ** ** | **(721**               | **)**      | (586 | ) |
| Unallocated depreciation and amortization                                           | ** ** | **(389**               | **)**      | (595 | ) |
| Interest expense                                                                    | ** ** | **(197**               | **)**      | (264 | ) |
| Total consolidated income (loss) from operations  before taxes and equity in losses | ** ** | **$**                  | **3,160**  |   | $ | (35 | ) |
|                                                                                |       |                   |       |   |   |
| **Depreciation and amortization**                                                   | ** ** | ** **             | ** ** | ** ** | ** ** |
| Depreciation and amortization from reportable  operating segments                   | ** ** | **$**                  | **839**    |   | $ | 1,355 |   |
| Unallocated depreciation and amortization                                           | ** ** | **389**                |       | 595 |   |
| Total consolidated depreciation and amortization                                    | ** ** | **$**                  | **1,228**  |   | $ | 1,950 |   |

 

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

 

**Note 15.  Legal Matters**

 

The Company and its subsidiaries are subject to claimsand lawsuits typical of those filed against engineering and consultingcompanies. The Company carries liability insurance, including professionalliability insurance, against such 

 

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claims, subject to certain deductibles and policy limits.Except as described herein, management is of the opinion that the resolution ofthese claims and lawsuits will not likely have a material adverse effect on theCompany’s operating results, financial position and cash flows.

 

The Arena Group v. TRC Environmental Corporation and TRCCompanies, Inc., District Court Harris County, Texas, 2007.  A former landlord of a subsidiaryof the Company has sued for damages alleging breach of a lease for certainoffice space in Houston, Texas which the subsidiary vacated. The plaintiff isalleging damages of approximately $7,600. This case is scheduled for trial in February 2011,and the Company believes that it has meritorious defenses, however an adversedetermination in this matter could have a material adverse effect on theCompany’s business, operating results, financial position and cash flows.

 

In re: World Trade Center Lower Manhattan Disaster SiteLitigation, United States District Court for the Southern District of New York,2006.  Asubsidiary of the Company has been named as a defendant (along with a number ofother defendants) in a number of cases which are pending in the United StatesDistrict Court for the Southern District of New York and are styled under thecaption “In Re World Trade Center Lower Manhattan Disaster Site Litigation.”The Complaints allege that the plaintiffs were workers involved inconstruction, demolition, excavation, debris removal and clean-up in thebuildings surrounding the World Trade Center site, allege that plaintiffs wereinjured and seek unspecified damages for those injuries. The Company believesthe subsidiary has meritorious defenses and is adequately insured, however anadverse determination in this matter could have a material adverse effect onthe Company’s business, operating results, financial position and cash flows.

 

Raymond Millich Sr. v. Eugene Chavez and TRC Companies, Inc.;Octabino Romero v. Eugene Chavez and TRC Companies, Inc.; Cindie Oliver v.Eugene Chavez and TRC Companies, Inc., District Court La Plata County,Colorado, 2007.  While returning from a jobsite in a Companyvehicle, two employees of a subsidiary of the Company were involved in aserious motor vehicle accident. Although the Company’s employees were notseriously injured, three individuals were killed and another two injured.  Suits were filed against the Company and thedriver of the subsidiary’s vehicle seeking damages for wrongful death andpersonal injury.  A settlement has beenreached in these cases which is covered by insurance.

 

Luis Gonzalez, Jr. et al v. Pacific Gas &Electric, TRC Solutions, Inc., et al; Marie Esther Gonzalez v. Pacific Gas &Electric, TRC Solutions, Inc., et al; Jamie Ramos v. Pacific Gas &Electric, TRC Solutions, Inc., et al, California Superior Court, SanFrancisco County, 2008.  A subsidiary ofthe Company is named as a defendant in three lawsuits concerning a boilerstructure that collapsed on or about January 28, 2008 during planneddemolition work at the Hunters Point Power Plant in California. Twoemployees of subcontractor LVI/ICONCO were injured and one was killed. Thetwo injured workers as well as the deceased employee’s representatives havefiled lawsuits. The Company’s subsidiary was hired as the prime contractor bysite owner PG&E. The Company’s subsidiary subcontracted the demolitionwork to LVI/ICONCO who procured insurance on behalf of the Company and PG&Ewhich is providing coverage to the subsidiary for these claims. The caseis scheduled for trial in April 2011, and the Company believes that it hasmeritorious defenses and is adequately insured, however an adversedetermination in this matter could have a material adverse effect on theCompany’s business, operating results, financial position and cash flows.

 

Paul Clark v. TRC Environmental Corporation; UnitedStates District Court, Western District of Washington, 2009.  A subsidiary of the Company isnamed as defendant in a lawsuit for wrongful termination by a former employeewho seeks unspecified damages arising out of his at-will employment with the Company’ssubsidiary.  The Company believes that ithas meritorious defenses and is adequately insured, however an adversedetermination in this matter could have a material adverse effect on theCompany’s business, operating results, financial position and cash flows.

 

Judy Kroshus et al v. United Sates of America, et al,United States District Court, District of Nevada, 2009.  A subsidiary of the Company andthree of its current and former employees have been named as defendants in anaction brought by various plaintiffs who live in or around a residentialsubdivision that sustained flood damage on or about January 5, 2008.  Plaintiffs allege that the flood was causedby the breach of a nearby canal and that the City of Fernley retained theCompany’s subsidiary to provide engineering services, including review andapproval of certain residential subdivision plans. Plaintiffs claim that theysustained unspecified personal injuries and that their homes and real propertywere damaged as a result of the negligence and errors and omission of variousdefendants including the Company’s subsidiary. Two plaintiffs voluntarilydiscontinued their claims against the Company’s subsidiary and its employees inMay 2010.  

 

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The Company has filed a motion to dismiss the remainingPlaintiffs’ claims against the Company’s subsidiary. The Company believes thatit has meritorious defenses and is adequately insured, however an adversedetermination in this matter could have a material adverse effect on theCompany’s business, operating results, financial position and cash flows.

 

U.S. Real Estate Limited Partnership, LP v. Lauth Group, Inc.et al., California Superior Court, Solano County, 2009.  A subsidiary of the Company was named as a cross-defendant (alongwith a number of other parties) by the general contractor who was sued in theunderlying action by the owner of the subject property.  The plaintiffsought damages to repair and/or replace a distribution warehouse facilityincluding the associated roadway.  The claims against the Company’ssubsidiary, which performed geotechnical engineering services, were limited toa relatively small portion of the project related to the exterior concreteroadway. A global settlement was recently reached in this case which fullyresolves all claims against all parties including the Company’s subsidiary.

 

Portside Village v. K.B. Homes, California SuperiorCourt Solano County, 2006.  A subsidiary of the Company is named as adefendant in a lawsuit claiming unspecified damages for alleged constructionand design defects including alleged differential settlement in townhouseunits, excessive overall site settlement, and improper drainage.  The subsidiary provided certain geotechnicalengineering services with respect to the project.  The case is scheduled for trial in January 2011,and the Company believes it has meritorious defenses and is adequately insured,however an adverse determination in this matter could have a material adverseeffect on the Company’s business, operating results, financial position, andcash flows.

 

The Company records actual or potentiallitigation-related losses in accordance with ASC Topic 450, *Contingencies.* Asof September 24, 2010 and June 30, 2010, the Company had recorded$7,872 and $7,126, respectively, of reserves in the Company’s financialstatements for probable and estimable liabilities related to thelitigation-related losses in which the Company was then involved, the principalof which are described above. The Company also has insurance recoveryreceivables related to the aforementioned litigation-related reserves of $4,120and $2,840 as of September 24, 2010 and June 30, 2010, respectively.

 

The Company periodically adjusts the amount of suchreserves when such actual or potential liabilities are paid or otherwisedischarged, new claims arise, or additional relevant information about existingor potential claims becomes available. The Company believes that it is reasonably possible that the amount ofpotential litigation related liabilities could increase by as much as $12,404,of which $5,888 would be covered by insurance.

 

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**TRC COMPANIES, INC.**

 

**Item 2. ****MANAGEMENT’SDISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**Three Months Ended September 24,2010 and September 25,2009**

 

Beginning with the fiscal quarter ended September 28, 2007, weestablished our fiscal quarter end as the last Friday of the quarter. Webelieve the last Friday of the fiscal quarter period reporting is moreconsistent with our operating cycle, as well as the reporting periods of ourindustry peers. The three months ended September 24, 2010 contains oneless day than the same period in the prior fiscal year.

 

You should read the following discussion of our results of operationsand financial condition in conjunction with our condensed consolidatedfinancial statements and related notes included elsewhere in this Form 10-Qand with our Annual Report on Form 10-K for the fiscal year ended June 30,2010. This discussion contains forward-looking statements that are based uponcurrent expectations and assumptions, and, by their nature, suchforward-looking statements are subject to risks and uncertainties. We haveattempted to identify such statements using words such as “may”, “expects”, “plans”,“anticipates”, “believes”, “estimates”, or other words of similar import. Wecaution the reader that there may be events in the future that management isnot able to accurately predict or control which may cause actual results todiffer materially from the expectations described in the forward-lookingstatements. The factors in the sections captioned “Critical Accounting Policies”and “Risk Factors” in our Annual Report on Form 10-K for the fiscal yearended June 30, 2010 and below in this Form 10-Q provide examples ofrisks, uncertainties and events that may cause our actual results to differmaterially from the expectations described in the forward-looking statements.

 

OVERVIEW

 

Weare a firm that provides engineering, consulting, and construction managementservices. Our project teams assist our commercial, industrial and governmentclients implement environmental, energy and infrastructure projects frominitial concept to delivery and operation. We provide our services tocommercial organizations and governmental agencies almost entirely in theUnited States of America.

 

Wederive our revenue from fees for professional and technical services. As aservice company, we are more labor-intensive than capital-intensive. Ourrevenue is driven by our ability to attract and retain qualified and productiveemployees, identify business opportunities, secure new and renew existingclient contracts, provide outstanding service to our clients and executeprojects successfully. Our income or loss from operations is derived from ourability to generate revenue and collect cash under our contracts in excess ofour direct costs, subcontractor costs, other contract costs, and general andadministrative (“G&A”) expenses.

 

Inthe course of providing our services we routinely subcontract services.Generally these subcontractor costs are passed through to our clients and, inaccordance with accounting principles generally accepted in the United Statesof America (“U.S. GAAP”) and consistent with industry practice, are included ingross revenue. Because subcontractor services can change significantly fromproject to project, changes in gross revenue may not be indicative of businesstrends. Accordingly, we also report net service revenue (“NSR”), which is grossrevenue less the cost of subcontractor costs and other direct reimbursablecharges, and our discussion and analysis of financial condition and results ofoperations uses NSR as a point of reference.

 

Ourcost of services (“COS”) includes professional compensation and relatedbenefits together with certain direct and indirect overhead costs such asrents, utilities and travel. Professional compensation represents the majorityof these costs. Our G&A expenses are comprised primarily of our corporateheadquarters costs related to corporate executive management, finance,accounting, information technology, administration and legal. These costs aregenerally unrelated to specific client projects and can vary as expenses areincurred to support corporate activities and initiatives.

 

Ourrevenue, expenses and operating results may fluctuate significantly from yearto year as a result of numerous factors, including:

 

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·                  Unanticipated changes in contract performancethat may affect profitability, particularly with contracts that are fixed-priceor have funding limits;

·                  Seasonality of the spending cycle, notablyfor state and local government entities, and the spending patterns of ourcommercial sector clients;

·                  Budget constraints experienced by ourfederal, state and local government clients;

·                  Divestitures or discontinuance of operatingunits;

·                  Employee hiring, utilization and turnoverrates;

·                  The number and significance of clientcontracts commenced and completed during the period;

·                  Creditworthiness and solvency of clients;

·                  The ability of our clients to terminatecontracts without penalties;

·                  Delays incurred in connection with contracts;

·                  The size, scope and payment terms ofcontracts;

·                  Contract negotiations on change orders andcollection of related accounts receivable;

·                  The timing of expenses incurred for corporateinitiatives;

·                  Competition;

·                  Litigation;

·                  Changes in accounting rules;

·                  The credit markets and their effects on ourcustomers; and

·                  General economic or political conditions.

** **

We experience seasonaltrends in our business.  Our revenue is typically lower in the second andthird fiscal quarters, as our business is, to some extent, dependent on fieldwork and construction scheduling and is also affected by federal holidays suchas Thanksgiving, Christmas and New Year’s holidays.  Our revenues arelower during these times of the year because many of our clients’ employees, aswell as our own employees, do not work during these holidays, resulting infewer billable hours charged to projects and thus, lower revenuesrecognized.  In addition to holidays, harsher weather conditions thatoccur in the fall and winter occasionally cause some of our offices to closetemporarily and can significantly affect our project field work. Conversely, our business generally benefits from milder weather conditions inour first and fourth fiscal quarters, which allows for more productivity fromour on-site services.

** **

**Operating Segments**

 

Wemanage our business under the following three operating segments:

 

***Energy:***  The Energy operating segment providesservices to a range of clients including energy companies, utilities, othercommercial entities, and state and federal governments. Our services includeprogram management, engineer/procure/construct projects, design, andconsulting. Our typical projects involve upgrade and new construction forelectrical transmission and distribution systems, energy efficiency programdesign and management, and alternative energy development. This operatingsegment also provides services to support energy savings projects for stategovernment entities and end users.

 

***Environmental:***  The Environmental operating segment providesservices to a wide range of clients, including industrial, transportation,energy and natural resource companies, as well as federal, state and municipalagencies, and is organized to focus on key areas of demand including:environmental management of buildings, air quality measurements and modeling ofpotential air pollution impacts, assessment and remediation of contaminatedsites, environmental licensing and permitting of a wide variety of projects,and natural and cultural resource assessment and management.

 

***Infrastructure:***  The Infrastructure operating segment providesservices related to the expansion of infrastructure capacity, therehabilitation of overburdened and deteriorating infrastructure systems, andthe management of risks related to security of public and private facilities.Our client base is predominantly state and municipal governments as well asselected commercial developers. Primary services include: roadway and surfacetransportation design; structural design of bridges; construction engineeringinspection and construction management for roads and bridges; civil engineeringfor municipalities and public works departments; and geotechnical engineeringservices. Major markets include the northeast United States, Texas, Louisianaand California.

 

Ourchief operating decision maker is our Chief Executive Officer (“CEO”). Our CEOmanages the business by evaluating the financial results of the three operatingsegments, focusing primarily on segment revenue and segment profit. We utilizesegment revenue and segment profit because we believe they provide usefulinformation for effectively allocating resources among operating segments;evaluating the health of our operating segments based on metrics thatmanagement can actively influence; and gauging our investments and our abilityto service, incur or pay down debt. Specifically, our CEO evaluates segmentrevenue and segment profit and assesses the performance of each operating 

 

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segmentbased on these measures, as well as, among other things, the prospects of eachof the operating segments and how they fit into our overall strategy. Our CEOthen decides how resources should be allocated among our operating segments. Wedo not track our assets by operating segment, and consequently, it is notpractical to show assets by operating segment. Segment profit includes all operating expenses except the following:costs associated with providing corporate shared services (including certaindepreciation and amortization), goodwill and intangible asset write-offs,stock-based compensation expense and amortization of intangible assets.  Depreciation expense is primarilyallocated to operating segments based upon their respective use of totaloperating segment office space. Inter-segment balances and transactions are notmaterial. The accounting policies of the operating segments are the same asthose for us as a whole, except as discussed herein.

 

The following table presents the approximate percentage of our NSR byoperating segment for the three months ended September 24, 2010 and September 25,2009:

 
| ** **                 | ** ** | **Three Months Ended** | ** ** |
|----------------------------|------------|----------------------------------|------------|
| ** **                 | ** ** | **September 24,**           | ** ** | **September 25,** | ** ** |
| **Operating Segment** | ** ** | **2010**                         | ** ** | **2009** | ** ** |
| Energy                     | ** ** | **26.2**                         | **%**      | 26.6 | % |
| Environmental              | ** ** | **54.8**                         | **%**      | 51.0 | % |
| Infrastructure             | ** ** | **19.0**                         | **%**      | 22.4 | % |
|                       | ** ** | **100.0**                        | **%**      | 100.0 | % |

 

**Business Trend Analysis**

 

***Energy:*** The utilities in the United States are in the earlystages of a multi-year upgrade of the electric transmission grid to improvecapacity, reliability and dispatch of renewable sources of generation. Years ofunderinvestment coupled with an increasingly favorable regulatory environmenthave provided a good business opportunity for those serving this market.Electric utilities throughout the United States will be investing over $50billion in the performance of this work over the next several years. Thecurrent downturn within the US economy has slowed the pace of this investment,yet it does not appear to have affected the long term plan of investment.Energy efficiency services continue to benefit from increasing state andfederal funds targeted at energy efficiency.  The American Recovery andReinvestment Act of 2009 (“ARRA”), Regional Green House Gas Initiative and newlyestablished System Benefit Charges at the state or utility level aresignificantly expanding the marketplace for energy efficiency programmanagement services. Investment within the renewable portfolios also remainsstrong. We are well established in the Northeast and Mid-Atlantic regions andare focused on growing our presence in the Texas and California markets wheredemand for services is the highest.

 

***Environmental:*****Market demand forenvironmental services has stabilized following a recent decline caused bygeneral economic conditions. While the economic decline served totemporarily halt the long term pattern of growth historically enjoyed by thisoperating segment, the fundamental compliance drivers for environmentalservices remained in place. A rapidly evolving regulatory compliance arena(more recently focused upon climate change issues and clean power usage anddevelopment), the continuing need to support transactions, and the need toenhance our aging transportation and energy infrastructure all remain ascritical drivers for environmental services.  Due to ARRA and otherfactors it now appears that historical long term growth rates in theenvironmental market may return in the near future.

 

***Infrastructure:*** Demand for services isexpected to continue to be flat for fiscal year 2011 due to general economicconditions, heavy budget cuts and deficit issues, the lack of a new federaltransportation bill, and revenue shortfalls at state and municipal levels.Recent estimates indicate that approximately $2.0 trillion needs to be investedover the next five years in national infrastructure alone to restore the systemto a state of good repair. In January 2010, the current administrationcommitted $8 billion in federal stimulus to high speed rail. The Senate versionof the Jobs Bill passed in mid March 2010 included $15 billion forinfrastructure funding (plus a $20 billion Highway Trust Fund Transfer tomaintain Federal Obligations through 2010), and the TransportationReauthorization Act has included several short extensions and $500 billion inlong term commitments. The long-term outlook for the infrastructure operatingsegment also remains strong due to alternative funding mechanisms (e.g., aproposed National Infrastructure Bank); the continued attractiveness of PublicPrivate Partnerships; potential additional economic stimulus initiatives; andthe continued need to upgrade, replace or repair aging transportationinfrastructure.

 

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**Critical AccountingPolicies**

 

Our financial statements have been prepared in accordance with U.S.GAAP. These principles require the use of estimates and assumptions that affectamounts reported and disclosed in the financial statements and relatednotes.  Actual results could differ fromthese estimates and assumptions. We use our best judgment in the assumptionsused to value these estimates which are based on current facts and circumstances,prior experience and other assumptions that are believed to be reasonable. Ouraccounting policies are described in Note 2 to the consolidated financialstatements contained in Item 8 of the Annual Report on Form 10-K as of andfor the year ended June 30, 2010.

 

**Resultsof Operations**

 

We reported a net loss applicable to our common shareholders of $1.1million and $0.9 million for the three months ended September 24, 2010 andSeptember 25, 2009, respectively, primarily due to preferred stock accretioncharges of $3.8 million for the three months ended September 24, 2010 and$0.8 million for the three months ended September 25, 2009. The preferredstock accretion charges will continue until the preferred stock converts tocommon stock in December 2010.We expect to record $3.5 million ofadditional preferred stock accretion charges through the December 1, 2010conversion date.

 

Overall, results for the first quarter of fiscal 2011 reflect acontinuation of the challenging economic and industry trends we have seen overthe past year as current quarter NSR remained relatively flat for the threemonths ended September 24, 2010 compared to same period in the prior year.Although we are seeing indications of the recovery in spending by ourindustrial clients, many remain cautious regarding spending on new capitalprojects. While the demand environment is beginning to recover, wecontinued to further streamline our cost structure during the current quarter.As a percentage of NSR, operating income increased to 5.8% for the three monthsended September 24, 2010 from 0.4% for the same period in the prior yearas discussed below.

 

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***Consolidated Results***

 

The following table presents the dollar and percentage changes incertain items in the condensed consolidated statements of operations for thethree months ended September 24, 2010 and September 25, 2009:

 
| ** **                                                                  | ** ** | **Three Months Ended** | ** ** | ** **             | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------------|------------|------------------------|------------|------------|------------|
| ** **                                                                  | ** ** | **September 24,**           | ** ** | **September 25,** | ** ** | **Change** | ** ** |
| **(Dollars in thousands)**                                        | ** ** | **2010**                         | ** ** | **2009**               | ** ** | **$**      | ** ** | **%** | ** ** |
| Gross  revenue                                                              | ** ** | **$**                            | **78,818** |                   | $          | 82,357     | ** ** | **$** | **(3,539** | **)** | **(4.3** | **)%** |
| Less  subcontractor costs and other direct reimbursable charges             | ** ** | **21,228**                       |       | 25,397                 | ** ** | **(4,169** | **)**      | **(16.4** | **)** |
| Net  service revenue                                                        | ** ** | **57,590**                       |       | 56,960                 | ** ** | **630**    | ** ** | **1.1** | ** ** |
| Interest  income from contractual arrangements                              | ** ** | **88**                           |       | 180                    | ** ** | **(92**    | **)**      | **(51.1** | **)** |
| Insurance  recoverables and other income                                    | ** ** | **597**                          |       | 3,283                  | ** ** | **(2,686** | **)**      | **(81.8** | **)** |
| Cost  of services                                                           | ** ** | **46,574**                       |       | 50,880                 | ** ** | **(4,306** | **)**      | **(8.5** | **)** |
| General  and administrative expenses                                        | ** ** | **6,538**                        |       | 6,678                  | ** ** | **(140**   | **)**      | **(2.1** | **)** |
| Provision  for doubtful accounts                                            | ** ** | **578**                          |       | 686                    | ** ** | **(108**   | **)**      | **(15.7** | **)** |
| Depreciation  and amortization                                              | ** ** | **1,228**                        |       | 1,950                  | ** ** | **(722**   | **)**      | **(37.0** | **)** |
| Operating  income                                                           | ** ** | **3,357**                        |       | 229                    | ** ** | **3,128**  | ** ** | **1,365.9** | ** ** |
| Interest  expense                                                           | ** ** | **(197**                         | **)**      | (264                   | )          | **67**     | ** ** | **25.4** | ** ** |
| Income  (loss) from operations before taxes and equity in losses            | ** ** | **3,160**                        |       | (35                    | )          | **3,195**  | ** ** | **9,128.6** |   |
| Federal  and state income tax provision                                     | ** ** | **(464**                         | **)**      | (56                    | )          | **(408**   | **)**      | **(728.6** | **)** |
| Income  (loss) from operations before equity in losses                      | ** ** | **2,696**                        |       | (91                    | )          | **2,787**  | ** ** | **3,062.6** | ** ** |
| Equity  in losses from unconsolidated affiliates                            | ** ** | **(13**                          | **)**      | (15                    | )          | **2**      | ** ** | **13.3** | ** ** |
| Net  income (loss)                                                          | ** ** | **2,683**                        |       | (106                   | )          | **2,789**  | ** ** | **2,631.1** |   |
| Net  loss applicable to noncontrolling interest                             | ** ** | **21**                           |       | 27                     | ** ** | **(6**     | **)**      | **(22.2** | **)** |
| Net  income (loss) applicable to TRC Companies, Inc.                   | ** ** | **2,704**                        |       | (79                    | )          | **2,783**  | ** ** | **3,522.8** |   |
| Accretion  charges on preferred stock                                       | ** ** | **(3,799**                       | **)**      | (834                   | )          | **(2,965** | **)**      | **(355.5** | **)** |
| Net  loss applicable to TRC Companies, Inc.’s common shareholders | ** ** | **$**                            | **(1,095** | **)**                  | $          | (913       | )          | **$** | **(182** | **)** | **(19.9** | **)%** |

 

Gross revenue decreased $3.6 million, or 4.3%, to $78.8 million for thethree months ended September 24, 2010 from $82.4 million for the sameperiod in the prior year.  Current quarter gross revenue in our energysegment decreased $1.8 million primarily due to a decline in work performed byour subcontractors. In the comparable period in fiscal year 2010, our projectsexperienced higher levels of subcontracting and procurement activity and,therefore, generating higher gross revenues and other direct costs (“ODC’s”).The wind-down of a large transportation design project in our infrastructuresegment also reduced current fiscal quarter gross revenue by approximately $1.2million compared to the same period in the prior year. The remainder of thedecrease in gross revenue was primarily attributable to certain actions takenin the prior fiscal year to eliminate lower margin work in our infrastructureoperating segment.

 

NSR increased $0.6 million, or 1.1%, to $57.6 million for the threemonths ended September 24, 2010 from $57.0 million for the same period inthe prior year. The increase in current quarter NSR was primarily related tothe effect of adjustments to the estimates at completion on certain ExitStrategy contracts which reduced NSR by approximately $1.9 million in the sameperiod in the prior year. In fiscal year 2011, we did not experience similarestimated cost increases. This increase was offset, in part, by a $1.7 decreasein our infrastructure segment primarily due to the aforementioned actions takento eliminate lower margin work and the wind down of a large transportationdesign project.

 

Interest income from contractual arrangements decreased $0.1 million,or 51.1%, to $0.1 million for the three months ended September 24, 2010from $0.2 million for the same period in the prior year primarily due to lowerone-year constant maturity T-Bill rates and a lower average balance ofrestricted investments in fiscal year 2011 compared to fiscal year 2010.

 

Insurance recoverables and other income decreased $2.7 million, or81.8%, to $0.6 million for the three months ended September 24, 2010 from$3.3 million for the same period in the prior year.  In the first quarterof fiscal year 2010,

 

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certain Exit Strategy projects had estimated cost increases which werenot expected to be funded by the project-specific restricted investments and,therefore, are projected to be funded by the project-specific insurancepolicies procured at project inception to cover, among other things, costoverruns. In fiscal year 2011, we did not experience similar estimated costincreases.

 

COS decreased $4.3 million, or 8.5%, to $46.6 million for the threemonths ended September 24, 2010 from $50.9 million for the same period inthe prior year. The decrease was related, in part, to a $2.1 million decreasein Exit Strategy contract loss reserves. As discussed above, increases to ourExit Strategy cost estimates did not occur at the same level in the currentperiod as compared to the same period last year. In addition, the decrease inCOS was attributable to a $1.7 million reduction in payroll due headcountreductions and a $1.2 million decrease in claims costs associated with our selfinsured medical benefits plan, due, in part, to plan design changes. Thesedecreases were partially offset by higher bonus costs. As a percentage of NSR,COS was 80.9% and 89.3% for the three months ended September 24, 2010 and September 25,2009, respectively.

 

G&A expenses decreased $0.1 million, or 2.1%, to $6.5 million forthe three months ended September 24, 2010 from $6.6 million for the sameperiod in the prior year. The decrease was primarily attributable to a decreasein legal and accounting fees.

 

The provision for doubtful accounts decreased $0.1 million, or 15.7%,to $0.6 million for the three months ended September 24, 2010 from $0.7million for the same period in the prior year. The decrease was primarily dueto the corresponding decrease in gross revenue.

 

Depreciation and amortization expense decreased $0.7 million, or 37.0%,to $1.2 million for the three months ended September 24, 2010 from $1.9million for the same period in the prior year. The decrease in depreciationexpense was principally related to technology equipment becoming fullydepreciated since the same period in the prior year. Also, amortization expensedecreased during the three months ended September 24, 2010 due to acceleratedamortization expense on certain intangible assets in the fourth quarter offiscal year 2010.

 

Interest expense decreased $0.1 million, or 25.4%, to $0.2 million forthe three months ended September 24, 2010 from $0.3 million for the sameperiod in the prior year. The decrease was primarily due to a lower averageoutstanding debt balance during the three months ending September 24, 2010as compared to the prior year.

 

The federal and state income tax provision was $0.5 million for thethree months ended September 24, 2010 compared to $0.1 million for thesame period in the prior year primarilyrelated to interest expense recorded on our uncertain tax positions.

 

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***Costs andExpenses as a Percentage of NSR***

 

Thefollowing table presents the percentage relationships of items in the condensedconsolidated statements of operations to NSR for the three months ended September 24,2010 and September 25, 2009:

 
| ** **                                                                      | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                      | ** ** | **September 24,**           | ** ** | **September 25,** | ** ** |
| ** **                                                                      | ** ** | **2010**                         | ** ** | **2009** | ** ** |
| **Net service revenue**                                                         | ** ** | **100.0**                        | %          | 100.0 | % |
|                                                                            |       |                             |       |   |   |
| **Interest income from contractual  arrangements**                              | ** ** | **0.2**                          |       | 0.3 |   |
| **Insurance recoverables and other  income**                                    | ** ** | **1.0**                          |       | 5.8 |   |
|                                                                            |       |                             |       |   |   |
| **Operating costs and expenses:**                                               |       |                             |       |   |   |
| Cost of services                                                                | ** ** | **80.9**                         |       | 89.3 |   |
| General and administrative expenses                                             | ** ** | **11.4**                         |       | 11.7 |   |
| Provision for doubtful accounts                                                 | ** ** | **1.0**                          |       | 1.2 |   |
| Depreciation and amortization                                                   | ** ** | **2.1**                          |       | 3.5 |   |
| **Total operating costs and  expenses**                                         | ** ** | **95.4**                         |       | 105.7 |   |
| **Operating income**                                                            | ** ** | **5.8**                          |       | 0.4 |   |
| Interest expense                                                                | ** ** | **(0.3**                         | **)**      | (0.5 | ) |
| **Income (loss) from operations  before taxes and equity in losses**            | ** ** | **5.5**                          |       | (0.1 | ) |
| Federal and state income tax provision                                          | ** ** | **(0.8**                         | **)**      | (0.1 | ) |
| **Income (loss) from operations  before equity in losses**                      | ** ** | **4.7**                          |       | (0.2 | ) |
| Equity in losses from unconsolidated affiliates                                 | ** ** | **—**                       |       | — |   |
| **Net income (loss)**                                                           | ** ** | **4.7**                          |       | (0.2 | ) |
| Net loss applicable to noncontrolling interest                                  | ** ** | **—**                       |       | 0.1 |   |
| **Net income (loss) applicable to  TRC Companies, Inc.**                   | ** ** | **4.7**                          |       | (0.1 | ) |
| Accretion charges on preferred stock                                            | ** ** | **(6.6**                         | **)**      | (1.5 | ) |
| **Net loss applicable to TRC  Companies, Inc.’s common shareholders** | ** ** | **(1.9**                         | **)**%     | (1.6 | )% |

 

***Additional Information by Reportable OperatingSegment***

 

**Energy Operating Segment Results**

 
| ** **              | ** ** | **Three Months Ended** | ** ** |
|-------------------------|------------|----------------------------------|------------|
| ** **              | ** ** | **September 24,**           | ** ** | **September 25,** | ** ** | **Change** | ** ** |
| ** **              | ** ** | **2010**                         | ** ** | **2009** | ** ** | **$** | ** ** | **%** | ** ** |
| **Gross revenue**       | ** ** | **$**                            | **17,125** |   | $ | 18,895 | ** ** | **$** | **(1,770** | **)** | **(9.4** | **)%** |
| **Net service revenue** | ** ** | **$**                            | **14,934** |   | $ | 14,880 | ** ** | **$** | **54** | ** ** | **0.4** | **%** |
| **Segment profit**      | ** ** | **$**                            | **2,269**  |   | $ | 1,820 | ** ** | **$** | **449** | ** ** | **24.7** | **%** |

 

Grossrevenue decreased $1.8 million, or 9.4%, to $17.1 million for the three monthsended September 24, 2010 from $18.9 million for the same period of theprior year. Current quarter gross revenue declined primarily due to lowersubcontractor activity on energy services projects which resulted in bothdecreased gross revenue and subcontractor costs.  The completion of a large geothermal projectalso contributed to the decline in gross revenue.

 

NSRincreased $0.05 million, or 0.4%, to $14.93 million for the three months ended September 24,2010 from $14.88 million for the same period of the prior year.  The moderate increase in NSR was primarilydue to increased activity on electric transmission and distribution projects asour clients began to resume investments in capital projects that were delayedthroughout fiscal year 2010.  Thisincrease was offset, in large part, by the aforementioned completion of a largegeothermal project.

 

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TheEnergy operating segment’s profit increased $0.4 million, or 24.7%, to $2.2million for the three months ended September 24, 2010 from $1.8 millionfor the same period of the prior year.  Theincrease in the Energy operating segment’s profit for fiscal year 2010 isprimarily related to improved alignment of costs to our revenue base throughreductions in labor and fringe costs.  Asa percentage of NSR, the Energy operating segment’s profit increased to 15.2%for the three months ended September 24, 2010 from 12.2% for the sameperiod of the prior year.

 

**Environmental Operating Segment Results**

 
| ** **              | ** ** | **Three Months Ended** | ** ** |
|-------------------------|------------|----------------------------------|------------|
| ** **              | ** ** | **September 24,**           | ** ** | **September 25,** | ** ** | **Change** | ** ** |
| ** **              | ** ** | **2010**                         | ** ** | **2009** | ** ** | **$** | ** ** | **%** | ** ** |
| **Gross revenue**       | ** ** | **$**                            | **46,780** |   | $ | 46,719 | ** ** | **$** | **61** | ** ** | **0.1** | **%** |
| **Net service revenue** | ** ** | **$**                            | **31,174** |   | $ | 28,509 | ** ** | **$** | **2,665** | ** ** | **9.3** | **%** |
| **Segment profit**      | ** ** | **$**                            | **7,544**  |   | $ | 5,939 | ** ** | **$** | **1,605** | ** ** | **27.0** | **%** |

 

Grossrevenue increased $0.1 million, or 0.1%, to $46.8 million for the three monthsended September 24, 2010 from $46.7 million for the same period of theprior year. The increase in gross revenue was primarily due to a moderateincrease in demand for our environmental services. This increase was offset inlarge part due to a reduction in requirements for construction and procurementactivity resulting in a reduction to gross revenue and ODC’s.

 

NSRincreased $2.7 million, or 9.3%, to $31.2 million for the three months ended September 24,2010 from $28.5 million for the same period of the prior year. The increase incurrent quarter NSR was primarily related to the effect of adjustments to theestimates at completion on certain Exit Strategy contracts which reduced NSR byapproximately $1.9 million in the same period in the prior year. In fiscal year2011, we did not experience similar adjustments. The remainder of the increasewas due to the overall increase in demand for our environmental services,particularly work associated with air measurements and monitoring.

 

The Environmental operating segment’s profit increased $1.6 million, or27.0%, to $7.5 million for the three months ended September 24, 2010 from$5.9 million for the same period of the prior year. The increase in theEnvironmental operating segment’s profit for fiscal year 2010 was related tothe increase in NSR. As a percentage of NSR, the Environmental operatingsegment’s profit increased to 24.2% for the three months ended September 24,2010 from 20.8% for the same period of the prior year.

 

**Infrastructure Operating Segment Results**

 
| ** **              | ** ** | **Three Months Ended** | ** ** |
|-------------------------|------------|----------------------------------|------------|
| ** **              | ** ** | **September 24,**           | ** ** | **September 25,** | ** ** | **Change** | ** ** |
| ** **              | ** ** | **2010**                         | ** ** | **2009** | ** ** | **$** | ** ** | **%** | ** ** |
| **Gross revenue**       | ** ** | **$**                            | **14,670** |   | $ | 16,209 | ** ** | **$** | **(1,539** | **)** | **(9.5** | **)%** |
| **Net service revenue** | ** ** | **$**                            | **10,809** |   | $ | 12,480 | ** ** | **$** | **(1,671** | **)** | **(13.4** | **)%** |
| **Segment profit**      | ** ** | **$**                            | **1,629**  |   | $ | 1,432 | ** ** | **$** | **197** | ** ** | **13.8** | **%** |

 

Gross revenue decreased $1.5 million, or 9.5%, to $14.7 million for thethree months ended September 24, 2010 from $16.2 million for the sameperiod of the prior year. The decrease in gross revenue for our Infrastructureoperating segment was primarily due the wind-down of a large transportationdesign project. Current quarter revenue also showed the impact of certainactions taken to eliminate lower margin work.

 

NSR decreased $1.7 million, or 13.4%, to $10.8 million for the threemonths ended September 24, 2010 from $12.5 million for the same period ofthe prior year. The decrease in NSR for our Infrastructure operating segmentwas primarily due to the aforementioned actions taken to eliminate lower marginwork and the wind-down of a large transportation design project.

 

The Infrastructure operating segment’s profit increased $0.2 million,or 13.8%, to $1.6 million for the three months ended September 24, 2010from $1.4 million for the same period of the prior year. Our Infrastructuresegment experienced stronger performance for the three months ended September 24,2010, as compared to the same period of the prior year, despite a reduction inthe overall volume of business, as we continue to reduce lower margin work. Asa

 

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percentage of NSR, the Infrastructure operating segment’s profitincreased to 15.1% for the three months ended September 24, 2010 from11.5% for the same period of the prior year.

 

**Impactof Inflation**

 

Ouroperations have not been materially affected by inflation or changing pricesbecause most contracts of a longer term are subject to adjustment or have beenpriced to cover anticipated increases in labor and other costs, and theremaining contracts are short term in nature.

 

**Liquidityand Capital Resources**

 

Weprimarily rely on cash from operations and financing activities, includingborrowings under our revolving credit facility, to fund our operations. Ourliquidity is assessed in terms of our overall ability to generate cash to fundour operating and investing activities and to reduce debt.

 

Cashflows used in operating activities were $14.5 million for the three monthsended September 24, 2010, compared to $5.4 million of cash used in thesame period of the prior year. Sources of cash used by operating assets andliabilities for the three months ended September 24, 2010 totaled $24.8million and primarily consisted of the following: (1) an $8.3 millionincrease in accounts receivable due to timing of collections; (2) an $8.3million decrease in accounts payable primarily due to the timing of payments tovendors; (3)  a $3.5 million increase in prepaid expenses and othercurrent assets; and (4) a $2.6 million decrease in deferred revenueprimarily related to revenue earned on Exit Strategy projects. Sources of cashused in operating assets and liabilities for the three months ended September 24,2010 were offset by cash provided by operating assets and liabilities totaling$5.3 million consisting primarily of the following: (1) a $2.0 milliondecrease in restricted investments primarily due to work performed on ExitStrategy projects; and (2) a $1.9 million increase in accrued compensationand benefits. In addition, non-cash items for the three months ended September 24,2010 resulted in net expenses of $2.4 million. The non-cash expense items of$2.5 million consisted primarily of the following: (1) $1.2 million fordepreciation and amortization; (2) $0.7 million for stock-basedcompensation expense; and (3) $0.6 million for the provision for doubtfulaccounts. The non-cash expense items were offset by non-cash income of $0.1million primarily related to other comprehensive income. Typically, we havenegative cash flows from operating activities in the early part of the fiscalyear with improvements coming in the second half of the fiscal year.Receivables and payables are typically maximized at fiscal yearend, and annualbonuses and the majority of insurance premiums are paid during the first halfof the fiscal year.

 

Accountsreceivable include both: (1) billed receivables associated with invoicessubmitted for work performed and (2) unbilled receivables (work inprogress). The unbilled receivables are primarily related to work performed inthe last month of the quarter. The efficiency of the billing and collectionprocess is commonly evaluated as days sales outstanding (“DSO”), which wecalculate by dividing current receivables by the most recent three-monthaverage of daily gross revenue. DSO, which measures the collections turnover ofboth billed and unbilled receivables, increased to 108 days as of September 24,2010 from 93 days as of June 30, 2010. The increase in DSO is primarilydue to seasonality. When comparing the current fiscal quarter DSO to the sameperiod of the prior year, which eliminates the seasonality factor, our DSOdeclined two days from 110 days as of September 25, 2009 to 108 days as ofSeptember 24, 2010. Our goal is to maintain DSO at less than 90 days.

 

UnderExit Strategy contracts the majority of the contract price is typicallydeposited into a restricted account with an insurer. The funds in therestricted account are held by the insurer and used to pay us as work isperformed. The arrangement with the insurer provides for deposited funds toearn interest at the one-year constant maturity T-Bill rate. If the actualinterest rate earned on the deposited funds is less than the rate anticipatedwhen the contract was executed, over time the balance in the restricted accountmay be less than originally expected. However, there is typically an insurancepolicy paid for by the client which provides coverage for cost increases fromunknown or changed conditions up to a specified maximum amount which is typicallysignificantly in excess of the estimated cost of remediation.

 

Cashused in investing activities was approximately $0.8 million for the threemonths ended September 24, 2010, compared to $0.5 million used in the sameperiod of the prior year. Cash used consisted primarily of $1.0 million forproperty and equipment and $0.1 million for earnout payments made on a prioryear acquisition, which were primarily offset by $0.2 million from restrictedinvestments.

 

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Cashprovided by financing activities was approximately $1.5 million for the threemonths ended September 24, 2010, compared to $0.9 million provided for thesame period of the prior year. Cash provided consisted of $2.6 million ofshort-term financing related to fiscal year 2011 insurance premiums offset by$0.9 million for payments made on long-term debt and the short-term insurancefinancing.

 

***Long-Term Debt***

 

On July 17, 2006, we and substantially all ofour subsidiaries, (the “Borrower”), entered into a secured credit agreement(the “Credit Agreement”) and related security documentation with Wells FargoCapital Finance (“Wells Fargo”) as the lead lender and administrative agent,with Textron Financial Corporation (“Textron”) subsequently participating as anadditional lender. The Credit Agreement, as amended, provided us with afive-year senior revolving credit facility of up to $50.0 million based upon aborrowing base formula on accounts receivable. In connection with theclosing of the preferred stock offering and as a result of previously announcedplans to exit the asset based lending business, Textron elected to no longerparticipate in the credit facility. In June 2009,  a $15.0 million syndication reserve wasestablished which reduces the maximum revolver amount from $50.0 million to$35.0 million subject to increase upon Wells Fargo completing a syndication toreplace Textron as a participant in the facility. Any amounts outstanding under the Credit Agreement bear interest at thegreater of 5.75% and the prime rate plus a margin of 2.50% to 3.50%, or thegreater of 4.50% and LIBOR plus a margin of 3.50% to 4.50%, based on TrailingTwelve Month Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”),as defined. Our obligations under the Credit Agreement are secured by a pledgeof substantially all of our assets and guaranteed by substantially all of oursubsidiaries that are not borrowers. The Credit Agreement also containscross-default provisions which become effective if we default on otherindebtedness.

 

Under the Credit Agreement we must maintain averagemonthly backlog of $190.0 million and, depending on borrowing capacity,maintain a minimum fixed charge ratio of 1:00 to 1:00. The Credit Agreement wasamended as of January 19, 2010 to extend the expiration date of thefacility by two years from July 17, 2011 to July 17, 2013. Theamendment also changed the Consolidated Adjusted EBITDA covenant to $6.1million, $9.2 million, $10.9 million and $12.4 million, for the trailing twelvemonth periods ending on September 30, 2010, December 31, 2010, March 31,2011 and June 30, 2011, respectively; and $12.5 million for each 12 monthperiod ending each fiscal quarter thereafter. The definition of ConsolidatedAdjusted EBITDA also provides an aggregate allowance for cost reductionefforts, defined in the Credit Agreement as restructuring charges, in theamount of $3.0 million in fiscal year 2010 and $1.25 million in fiscal year 2011 at the Permitted Discretion of the lender as defined in the CreditAgreement.  Additional changes in the January 2010amendment included: (i) an increase to the fee for unused borrowingcapacity depending on borrowing usage; (ii) a reduction of the maximumannual capital expenditure covenant from $10.6 million to $7.5 million forfiscal year 2010 through fiscal year2012 and $8.5 million for fiscal year2013; and (iii) a revision tothe fixed charge ratio covenant which now requires the ratio to be computed andthe covenant applied only if available borrowing capacity under the facility,measured on a trailing 30 day average basis, is less than $20.0 million.

 

Managementpresents Consolidated Adjusted EBITDA, which is a non-GAAP measure, because webelieve that it is a useful tool for us and our investors to measure ourability to meet debt service, capital expenditure and working capitalrequirements. Consolidated Adjusted EBITDA, as presented, may not be comparableto similarly titled measures reported by other companies, because not allcompanies necessarily calculate EBITDA in an identical manner. ConsolidatedAdjusted EBITDA is not intended to represent cash flows for the period or fundsavailable for management’s discretionary use, nor is it represented as analternative to operating income (loss) as an indicator of operating performanceand should not be considered in isolation or as a substitute for measures ofperformance prepared in accordance with generally accepted accountingprinciples. Our Consolidated Adjusted EBITDA should be evaluated in conjunctionwith GAAP measures such as operating income (loss), net income (loss), cashflow from operations and other measures of equal importance. ConsolidatedAdjusted EBITDA is presented below based on both the definition used in ourCredit Agreement as well as the typical calculation method. Set forth below isa reconciliation of Consolidated Adjusted EBITDA, as calculated under theCredit Agreement, to EBITDA and operating loss for the trailing twelve monthperiods ended September 24, 2010 and September 25, 2009 (inthousands):

 

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| ** **                                               | ** ** | **Trailing Twelve Months** | ** **  |
|----------------------------------------------------------|------------|--------------------------------------|-------------|
| ** **                                               | ** ** | **September 24,**               | ** **  | **September 25,** | ** ** |
| ** **                                               | ** ** | **2010**                             | ** **  | **2009** | ** ** |
| Operating loss                                           | ** ** | **$**                                | **(18,324** | **)** | $ | (18,558 | ) |
| Depreciation and amortization                            | ** ** | **7,327**                            |        | 7,363 |   |
| EBITDA                                                   | ** ** | **(10,997**                          | **)**       | (11,195 | ) |
| Goodwill and intangible asset write-offs                 | ** ** | **20,249**                           |        | 21,438 |   |
| Permitted discretionary cost reduction efforts           | ** ** | **1,513**                            |        | 1,868 |   |
| Consolidated Adjusted EBITDA under the Credit  Agreement | ** ** | **$**                                | **10,765**  |   | $ | 12,111 |   |

 

Theactual covenant results as compared to the covenant requirements under theCredit Agreement as of September 24, 2010 for the measurement periodsdescribed below are as follows (in thousands):

 
| ** **                   | ** ** | **Measurement Period** | ** ** | **Actual**     | ** ** | **Required** | ** **     |
|------------------------------|------------|-----------------------------|------------|----------------|------------|--------------|----------------|
| Consolidated Adjusted EBITDA |       | Trailing  12 months         |       | $              | 10,765     |         | Must  Exceed   |   | $ | 6,100 |   |
| Average Monthly Backlog      |       | Trailing  3 months          |       | $              | 368,582    |         | Must  Exceed   |   | $ | 190,000 |   |
| Capital Expenditures         |       | Fiscal  year 2011           |       | $              | 1,008      |         | Not  to Exceed |   | $ | 7,500 |   |
| Fixed Charge Ratio (1)       |       | Trailing  12 months         |       | Not Applicable |       | Must  Exceed |           | 1:00 to 1:00 |   |

 

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(1)         As of September 24,2010, the fixed charge ratio covenant is not applicable as the availableborrowing capacity under the facility, measured on a trailing 30 day averagebasis, was greater than $20.0 million.

 

As of September 24, 2010 and June 30,2010, we had no borrowings outstanding pursuant to the Credit Agreement.Letters of credit outstanding were $3.8 million and $3.7 million as of September 24,2010 and June 30, 2010, respectively. Based upon the borrowing baseformula, the maximum availability was $33.0 million and $30.1 million as of September 24,2010 and June 30, 2010, respectively. Funds available to borrow under theCredit Agreement after consideration of the reserve amount were $29.2 million and $26.5 million as of September 24,2010 and June 30, 2010, respectively.

 

On July 19, 2006, we and substantially all ofour subsidiaries entered into a three-year subordinated loan agreement withFederal Partners, L.P. (“Federal Partners”), a stockholder of ours, pursuant towhich we borrowed $5.0 million. The loan bears interest at a fixed rate of 9%per annum. The loan was amended on June 1, 2009 in connection with thepreferred stock offering to extend the maturity date from July 19, 2009 toJuly 19, 2012. Federal Partners is an investor in our preferred stockoffering. On July 19, 2006, we also issued a ten-year warrant to FederalPartners to purchase up to 66 shares of our common stock at an exercise priceequal to $0.10 per share. The estimated fair value of the warrant of $0.7million was determined using the Black-Scholes option pricing model and the followingassumptions: term of 10 years, a risk free interest rate of 4.94%, a dividendyield of 0%, and volatility of 50%. The face amount of the note payable of $5.0million was proportionately allocated to the note and the warrant in the amountof $4.4 million and $0.6 million, respectively. The amount allocated to thewarrants of $0.6 million was recorded as a discount on the note and wasamortized over the original three year life of the note. Interest expenseamortized for the three months ended September 24, 2010 and September 25,2009, was $0 and $9 thousand, respectively.

 

In fiscal year 2007, we formed a limited liabilitycompany, Center Avenue Holdings, LLC (“CAH”), to purchase and remediatecertain property in New Jersey. We maintain a 70% ownership position in CAH.CAH entered into a term loan agreement with a commercial bank in the amount ofapproximately $3.2 million which bore interest at a fixed rate of 10.0%annually. The loan is secured by the CAH property and is non-recourse to themembers of CAH. The proceeds from the loan were used to purchase, and arecurrently funding the remediation of, the property.  In June 2010, we entered into amodification of the credit agreement with the lender that reduced the interestrate from 10.0% to 6.5% in return for a principal payment of $0.5 million madeupon consummation of the modification followed by a second principal payment of$0.25 million due in six months and extended the maturity date of the loan fromJanuary 31, 2010 until April 1, 2011. CAH is consolidated into ourcondensed consolidated financial statements with the other party’s ownershipinterest recorded as a noncontrolling interest.

 

In July 2010, we financed approximately $2.6million of insurance premiums payable in nine equal monthly installments ofapproximately $0.3 million each, including a finance charge of 2.890%. As of September 24,2010, the balance outstanding was approximately $1.7 million.

 

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**Item 3.  Quantitativeand Qualitative Disclosures about Market Risk**

 

Wecurrently do not utilize derivative financial instruments. While we currentlydo not have any borrowings outstanding under our credit agreement, to theextent we have borrowings, we would be exposed to interest rate risk under thatagreement. Our credit facility provides for borrowings bearing interest at thegreater of 5.75% and the prime rate plus a margin of 2.50% to 3.50%, or thegreater of 4.50% and LIBOR plus a margin of 3.50% to 4.50%, based on TrailingTwelve Month EBITDA.

 

Borrowingsat these rates have no designated term and may be repaid without penalty anytime prior to the facility’s maturity date. Under its term as amended, thefacility matures on July 17, 2013, or earlier at our discretion, uponpayment in full of loans and other obligations.

 

**Item 4. Controls and Procedures**

 

***Evaluation of DisclosureControls and Procedures***

 

TheCompany has evaluated, under the supervision and with the participation ofmanagement, including the Chief Executive Officer and Chief Financial Officer,the effectiveness of its disclosure controls and procedures, as defined inRules 13a-15(e) and 15d-15(e) of the Exchange Act, as of September 24,2010. Based on that evaluation, the Chief Executive Officer and Chief FinancialOfficer have concluded that the Company’s disclosure controls and procedureswere effective as of September 24, 2010.

 

**Changes*in Internal Control overFinancial Reporting***

 

Therewas no change in our internal control over financial reporting during theCompany’s quarter ended September 24, 2010 that has significantlyaffected, or is reasonably likely to materially affect, the Company’s internalcontrol over financial reporting.

 

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**PART II:  OTHER INFORMATION**

 
| **Item 1.**  | **Legal Proceedings**                                               |
|--------------|---------------------------------------------------------------------|
|         |                                                                |
|         | See  Note 15 under Part I, Item 1, Financial Information. |
|         |                                                                |
| **Item 1A.** | **Risk Factors**                                                    |
|         |                                                                |
|         | No  material changes.                                               |
|         |                                                                |
| **Item 2.**  | **Unregistered Sales of Equity Securities and Use  of Proceeds**    |
|         |                                                                |
|         | None.                                                               |
|         |                                                                |
| **Item 3.**  | **Defaults Upon Senior Securities**                                 |
|         |                                                                |
|         | None.                                                               |
|         |                                                                |
| **Item 5.**  | **Other Information**                                               |
|         |                                                                |
|         | None.                                                               |
|         |                                                                |
| **Item 6.**  | **Exhibits**

                                                 |

 
| 31.1   |   | Certification  of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                                                                                                                    |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                          |
| 31.2   |   | Certification  of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                          |
| 32.1   |   | Certification  of Chief Executive Officer Pursuant to Rule 13a-14(b) and  Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and  (b) of Section 1350, Chapter 63 of Title 18, United States Code). |
|   |   |                                                                                                                                                                                                                                          |
| 32.2   |   | Certification  of Chief Financial Officer Pursuant to Rule 13a-14(b) and  Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and  (b) of Section 1350, Chapter 63 of Title 18, United States Code). |

 

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**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 theundersigned thereunto duly authorized.

 

 
|                   | TRC COMPANIES, INC. |
|------------------------|--------------------------|
|                   |                     | * * |
|                   |                     | * * |
| November 3,  2010 | by:                      | */s/ Thomas W. Bennet, Jr.* |
|                   |                     |   |
|                   |                     | Thomas W. Bennet, Jr. |
|                   |                     | Senior Vice President and Chief Financial Officer |
|                   |                     | (Principal Financial Officer and |
|                   |                     | Principal Accounting Officer) |

 

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