<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/x/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended December 31, 1998
OR
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ________________ to ________________
COMMISSION FILE NUMBER 1-9947
TRC COMPANIES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 06-0853807
-------------------------------------------------------------- ---------------------------------------
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
</TABLE>
5 Waterside Crossing
WINDSOR, CONNECTICUT 06095
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (860) 289-8631
-----------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. YES /x/ NO / /
On December 31, 1998 there were 6,782,202 shares of the registrant's common
stock, $.10 par value, outstanding.
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TRC COMPANIES, INC.
CONTENTS OF QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED DECEMBER 31, 1998
PART I - FINANCIAL INFORMATION
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<S> <C> <C>
Item 1. Consolidated Financial Statements
Statements of Operations for the three and six months ended
December 31, 1998 and 1997............................................................. 3
Balance Sheets at December 31, 1998 and June 30, 1998....................................... 4
Statements of Cash Flows for the six months ended
December 31, 1998 and 1997............................................................ 5
Notes to Financial Statements............................................................... 6
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition................................................................ 7
PART II - OTHER INFORMATION
Item 1. Legal Proceedings........................................................................... 11
Item 6. Exhibits and Reports on Form 8-K............................................................ 11
SIGNATURE.................................................................................................... 11
</TABLE>
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PART I: FINANCIAL INFORMATION
TRC COMPANIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
1998 1997 (1) 1998 1997 (1)
---------------- ----------------- ---------------- ----------------
<S> <C> <C> <C> <C>
GROSS REVENUE $ 18,987,137 $ 19,053,815 $ 37,393,335 $ 36,614,125
Less subcontractor costs
and direct charges 5,836,595 6,109,816 11,362,499 10,679,959
---------------- ----------------- ---------------- ----------------
NET SERVICE REVENUE 13,150,542 12,943,999 26,030,836 25,934,166
---------------- ----------------- ---------------- ----------------
OPERATING COSTS AND EXPENSES:
Direct labor and fringe benefit costs 5,889,130 5,737,332 11,728,170 11,418,303
Indirect costs and expenses 5,062,628 5,297,530 10,044,789 10,841,313
General and administrative expenses 606,506 604,655 1,207,264 1,284,033
Depreciation and amortization 593,779 668,496 1,173,102 1,337,017
---------------- ----------------- ---------------- ----------------
12,152,043 12,308,013 24,153,325 24,880,666
---------------- ----------------- ---------------- ----------------
INCOME FROM OPERATIONS 998,499 635,986 1,877,511 1,053,500
Interest expense 121,187 223,161 240,005 443,412
---------------- ----------------- ---------------- ----------------
INCOME BEFORE TAXES 877,312 412,825 1,637,506 610,088
Federal and state income tax provision 333,000 157,000 622,000 232,000
---------------- ----------------- ---------------- ----------------
NET INCOME $ 544,312 $ 255,825 $ 1,015,506 $ 378,088
---------------- ----------------- ---------------- ----------------
---------------- ----------------- ---------------- ----------------
EARNINGS PER SHARE -
basic and diluted $ .08 $ .04 $ .15 $ .06
---------------- ----------------- ---------------- ----------------
---------------- ----------------- ---------------- ----------------
AVERAGE SHARES OUTSTANDING:
Basic 6,782,202 6,688,102 6,782,202 6,688,102
Diluted 6,804,393 6,688,902 6,795,972 6,688,752
---------------- ----------------- ---------------- ----------------
</TABLE>
(1) Include operating results of instrumentation business which was
sold in July 1998. See page 7 for comparative results without
instrumentation business.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
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TRC COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
------------------ ------------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 573,266 $ 1,379,388
Accounts receivable, less allowance for doubtful accounts 27,580,078 27,775,396
Inventories 269,015 1,359,410
Deferred income tax benefits 870,000 950,000
Prepaid expenses and other current assets 895,214 588,965
------------------ ------------------
30,187,573 32,053,159
------------------ ------------------
PROPERTY AND EQUIPMENT, AT COST 18,956,265 21,273,379
Less accumulated depreciation and amortization 15,864,146 17,267,575
------------------ ------------------
3,092,119 4,005,804
------------------ ------------------
COSTS IN EXCESS OF NET ASSETS OF ACQUIRED BUSINESSES, NET OF
ACCUMULATED AMORTIZATION 24,404,383 24,873,714
------------------ ------------------
OTHER ASSETS 661,434 670,934
------------------ ------------------
$ 58,345,509 $ 61,603,611
------------------ ------------------
------------------ ------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of debt $ 5,000,000 $ 3,600,000
Accounts payable 2,746,609 4,133,321
Accrued compensation and benefits 2,115,161 2,684,642
Other accrued liabilities 892,155 1,159,570
------------------ ------------------
10,753,925 11,577,533
------------------ ------------------
NONCURRENT LIABILITIES:
Long-term debt 400,000 3,900,000
Deferred income taxes 1,721,000 1,671,000
------------------ ------------------
2,121,000 5,571,000
------------------ ------------------
SHAREHOLDERS' EQUITY:
Capital stock:
Preferred, $.10 par value; 500,000 shares authorized, none issued - -
Common, $.10 par value; 30,000,000 shares authorized, 7,410,855
shares issued at December 31, 1998 and June 30, 1998 741,085 741,085
Additional paid-in capital 38,634,234 38,634,234
Retained earnings 8,992,268 7,976,762
------------------ ------------------
48,367,587 47,352,081
Less treasury stock, at cost 2,897,003 2,897,003
------------------ ------------------
45,470,584 44,455,078
------------------ ------------------
$ 58,345,509 $ 61,603,611
------------------ ------------------
------------------ ------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
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TRC COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
1998 1997
---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,015,506 $ 378,088
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,173,102 1,337,017
Change in deferred taxes and other non-cash items, net 5,001 81,000
Changes in assets and liabilities, excluding effects of
disposition of instrumentation business:
Accounts receivable (468,313) 763,574
Inventories (304,225) (141,428)
Prepaid expenses and other current assets (312,228) 372,215
Accounts payable (1,232,877) (319,971)
Accrued compensation and benefits (638,335) (948,883)
Unearned revenue - 997,038
Income taxes (132,427) 291,964
Other accrued liabilities (119,730) (591,564)
---------------- ----------------
NET CASH PROVIDED BY (USED) IN OPERATING ACTIVITIES (1,014,526) 2,219,050
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of instrumentation business 2,750,000 -
Additions to property and equipment, net (434,428) (322,459)
Decrease (increase) in other assets, net (7,168) 60,317
---------------- ----------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 2,308,404 (262,142)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt (3,500,000) -
Net borrowings (repayments) under line of credit 1,400,000 (2,100,000)
---------------- ----------------
NET CASH USED IN FINANCING ACTIVITIES (2,100,000) (2,100,000)
---------------- ----------------
DECREASE IN CASH AND CASH EQUIVALENTS (806,122) (143,092)
Cash and cash equivalents, beginning of period 1,379,388 1,020,065
---------------- ----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 573,266 $ 876,973
---------------- ----------------
---------------- ----------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
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TRC COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
1. The consolidated balance sheet at December 31, 1998 and the consolidated
statements of operations and cash flows for the three and six months
ended December 31, 1998 and 1997 are unaudited, but in the opinion of
the Company, include all adjustments, consisting only of normal
recurring accruals, necessary for a fair presentation of the results for
the interim periods. The results of operations for the three and six
months ended December 31, 1998 are not necessarily indicative of the
results to be expected for the full fiscal year. Certain footnote
disclosures usually included in financial statements prepared in
accordance with generally accepted accounting principles have been
omitted. It is suggested that these financial statements be read in
conjunction with the financial statements and notes thereto included in
the Company's Annual Report to Shareholders for the fiscal year ended
June 30, 1998.
2. Earnings per share is computed in accordance with the provisions of
Statement of Financial Standards No. 128, Earnings per Share. Basic
earnings per share is based upon the weighted average common shares
outstanding. Diluted earnings per share reflect the potential dilutive
effect of outstanding stock options and warrants.
3. The components of inventories were as follows:
<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
----------------- -----------------
<S> <C> <C>
Materials and supplies $ 269,015 $ 774,645
Work-in-progress - 155,443
Finished goods - 429,322
----------------- -----------------
$ 269,015 $ 1,359,410
----------------- -----------------
----------------- -----------------
</TABLE>
The reduction in inventories was directly related to the sale of the
instrumentation business in July 1998.
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<PAGE>
TRC COMPANIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Three and Six Months Ended December 31, 1998 and 1997
OVERVIEW
TRC Companies, Inc. (the "Company") is an environmental engineering and
remediation, water resource and infrastructure company. The Company's key
business sectors include: energy, mining, petrochemical, waste management and
local and federal government.
RESULTS OF OPERATIONS
The Company, in the course of providing its services, routinely subcontracts
drilling, laboratory analyses, construction equipment and other specialized
services. These costs are passed directly through to clients and, in accordance
with industry practice, are included in gross revenue. Because subcontractor
costs and direct charges can change significantly from project to project, the
Company also considers net service revenue as a measure of performance.
In July 1998, the Company completed the sale of its instrumentation business
which resulted in a gain that was not material. Management's discussion and
analysis of revenue and operating costs and expenses for the three and six
months ended December 31, 1998, are compared to the same periods last year on a
pro forma basis, with the results of the instrumentation business excluded.
Statements of operations for the three and six months ended December 31, 1998
and the same periods of last year on a pro forma basis follow (dollars in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended December 31, Six Months Ended December 31,
Pro forma Pro forma
1998 1997 1998 1997
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
GROSS REVENUE $18,987 $18,314 $37,399 $35,076
----------- ----------- ----------- ------------
NET SERVICE REVENUE 13,151 12,204 26,031 24,396
----------- ----------- ----------- ------------
OPERATING COSTS AND EXPENSES:
Direct labor and fringe benefit costs 5,889 5,434 11,728 10,786
Indirect costs and expenses 5,063 5,024 10,045 10,250
General and administrative expenses 607 605 1,208 1,284
Depreciation and amortization 594 610 1,173 1,222
----------- ----------- ----------- ------------
12,153 11,673 24,154 23,542
----------- ----------- ----------- ------------
INCOME FROM OPERATIONS 998 531 1,877 854
Interest expense 121 223 240 443
----------- ----------- ----------- ------------
INCOME BEFORE TAXES 877 308 1,637 411
Federal and state income tax provision 333 117 622 156
----------- ----------- ----------- ------------
NET INCOME $ 544 $ 191 $ 1,015 $ 255
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
EARNINGS PER SHARE $ 0.08 $ 0.03 $ 0.15 $ 0.04
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
</TABLE>
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<PAGE>
On a pro forma basis, net service revenue increased by approximately 8%
during the three months ended December 31, 1998 to $13.2 million. For the six
months ended December 31, 1998, net service revenue increased by
approximately 7% to $26.0 million. These increases reflect initiation of
management's growth plan described in the Company's 1998 annual report to
shareholders.
Direct labor and fringe benefit costs increased by approximately 8% during
both the three and six months ended December 31, 1998, primarily due to the
increase in revenue. As a percentage of revenue, indirect costs and expenses
decreased approximately 2% in both the three and six month periods. These
improvements resulted from management's continuing program to increase staff
utilization and reduce operational overhead.
General and administrative expenses remained relatively even for the three and
six months ended December 31, 1998, indicating a reduction relative to
revenue. This continuing improvement also reflects management's intent to
eliminate non-productive overhead costs.
Depreciation and amortization expense decreased approximately 3% and 4%,
respectively, during the three and six months ended December 31, 1998. These
decreases were due to the comparative reduction in capital expenditures over
the last several years, combined with the effect of equipment which became
fully depreciated.
The Company reported income from operations of $1.0 million and $1.9 million,
respectfully, for the three and six months ended December 31, 1998, up from
$.5 million and $.9 million respectively, in the same periods last year. The
continued improvement in operating performance was primarily due to the
increase in revenue and reductions in operational overhead.
Interest expense decreased by approximately 46% during both the three and six
month periods ended December 31, 1998, resulting from management's debt
reduction program.
The provisions for federal and state income taxes reflect an effective rate
of approximately 38% for the three and six months ended December 31, 1998 and
1997. The Company believes that there will be sufficient taxable income in
future periods to enable utilization of the deferred tax benefits shown on
the Company's consolidated balance sheet on page 4.
IMPACT OF INFLATION
The Company's operations have not been materially affected by inflation or
changing prices because of the short-term nature of many of its contracts, and
the fact that most contracts of a longer term are subject to adjustment or have
been priced to cover anticipated increases in labor and other costs.
-8-
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LIQUIDITY AND CAPITAL RESOURCES
The Company relies on cash provided by operations and borrowings based upon the
strength of its balance sheet to fund operations. The Company's liquidity is
assessed in terms of its overall ability to generate cash to fund its operating
and investing activities, and to reduce debt. Of particular importance in the
management of liquidity are cash flows generated from operating activities,
acquisitions, capital expenditure levels and an adequate bank line of credit.
Cash flows used in operating activities during the six months ended December 31,
1998 were approximately $1.0 million. The cash generated by net income and the
non-cash charges against income for depreciation and amortization were offset
primarily by the acceleration of accounts payable and the timing of the payments
of payroll costs relative to the end of the quarter.
Investing activities provided approximately $2.3 million during the six months
ended December 31, 1998 consisting of approximately $2.8 million from the sale
of the Company's instrumentation business in July 1998, partially offset by
capital expenditures for equipment to support business growth of approximately
$.4 million. In connection with proposed business acquisitions during the
remainder of fiscal 1999, the Company expects to use approximately $4 million in
cash. The Company also expects to make capital expenditures of approximately $.5
million during the remainder of fiscal 1999.
The Company maintains a bank financing arrangement to assist in funding various
operating and financing activities. The Company has available a $10 million
revolving credit facility secured by accounts receivable which expires July
2001. Borrowings under the agreement bear interest at the bank's base rate or
the Eurodollar rate plus 1 3/4% The agreement requires the Company to meet
certain financial ratios. At December 31, 1998, outstanding borrowings pursuant
to the agreement were $1.4 million, at an average interest rate of 7.2%.
At December 31, 1998, the Company had outstanding a $3,500,000 subordinated note
due July 1, 1999, issued in March 1994 in connection with the acquisition of
Environmental Solutions, Inc. and subsequently amended in July 1997. Interest on
the note accrues at the greater of the interest rate paid on the Company's bank
debt or 7 3/4%. The Company also had outstanding at December 31, 1998 a $.5
million 7 3/4% subordinated note issued in connection with the purchase of
Hydro-Geo Consultants, Inc. in March 1998. This note is repayable in five equal
annual installments beginning in March 1999.
The Company expects to increase its available cash flow over the remainder of
fiscal 1999, primarily from continued growth in operating profits and from a
recent management program to significantly accelerate collections of accounts
receivable. The cash generated from operations, the cash on hand at December
31, 1998 and available borrowings under the bank line of credit will be
sufficient to meet the Company's operating and investing cash requirements
for the remainder of fiscal 1999.
YEAR 2000 COMPLIANCE
The Company recognizes the need to ensure that its critical management,
financial and operating systems will recognize and process transactions for the
year 2000 and beyond. As a result, all computer systems and applications are
being reviewed and, where appropriate, detailed plans have
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<PAGE>
been, or are being, developed and implemented on a schedule intended to permit
the Company's systems to be fully compliant with year 2000 requirements.
Systems critical to our business operations which have been identified as
non-year 2000 compliant are either being replaced or upgraded through program
modifications. Our objective is to have upgraded and replaced systems
operational by June 30, 1999. In addition to our in-house efforts, we are
asking certain vendors, major customers, service suppliers, communication
providers, banks and other financial institutions whose systems failures
could have a significant impact on our business operations to verify their
year 2000 readiness.
The costs specific to the year 2000 issue are not expected to have a material
impact on the Company's future operating results, financial condition or cash
flows. Although the Company expects to be fully year 2000 compliant on a timely
basis, if the Company's critical suppliers and customers do not address this
issue successfully, year 2000 issues could potentially have a material impact on
the Company's operations and financial condition.
The Company is currently developing contingency plans to be implemented as part
of its efforts to identify and mitigate any year 2000 issues. These plans will
be completed by June 30, 1999.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information, which establishes new standards for
reporting information about operating segments in annual and interim financial
statements. The standard also requires descriptive information about the way the
operating segments are determined, the products and services provided by the
segments and the nature of differences between reportable segment measurements
and those used for the consolidated enterprise. This standard is effective for
the Company in fiscal 1999. Adoption in interim financial statements is not
required until the year after initial adoption; however, comparative prior
period information is required. Adoption is not expected to have a material
impact on the financial position or results of operations of the Company.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements that describe the Company's
business prospects. These statements involve risks and uncertainties including,
but not limited to, regulatory uncertainty, government funding, level of demand
for the Company's services, industry-wide competitive factors and political,
economic or other conditions. Furthermore, market trends are subject to changes
which could adversely affect future results.
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<PAGE>
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to Item 3, Legal Proceedings, in the Company's
Annual Report on Form 10-K for the year ended June 30, 1998, for a
description of existing litigation against the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 - Financial Data Schedule (for SEC purposes only)
(b) Reports on Form 8-K - There were no reports on Form 8-K filed
during the quarter ended December 31, 1998.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRC COMPANIES, INC.
February 16, 1999 by: /s/Harold C. Elston, Jr.
------------------------------------------
Harold C. Elston, Jr.
Senior Vice President, Secretary and Treasurer
(Chief Accounting Officer)
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 573,266
<SECURITIES> 0
<RECEIVABLES> 30,170,078
<ALLOWANCES> (2,590,000)
<INVENTORY> 269,015
<CURRENT-ASSETS> 30,187,573
<PP&E> 18,956,265
<DEPRECIATION> 15,864,146
<TOTAL-ASSETS> 58,345,509
<CURRENT-LIABILITIES> 10,753,925
<BONDS> 0
0
0
<COMMON> 741,085
<OTHER-SE> 44,729,499
<TOTAL-LIABILITY-AND-EQUITY> 58,345,509
<SALES> 0
<TOTAL-REVENUES> 37,393,335
<CGS> 0
<TOTAL-COSTS> 35,515,824
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 240,005
<INCOME-PRETAX> 1,637,506
<INCOME-TAX> 622,000
<INCOME-CONTINUING> 1,015,506
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,015,506
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
