NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(Unaudited)
Note 1. Company Background and Basis of Presentation
TRC Companies, Inc., through its subsidiaries (collectively, the "Company"), provides integrated engineering, consulting, and construction management services. Its project teams help its commercial and governmental clients implement environmental, power, infrastructure and oil and gas related projects from initial concept to delivery and operation. The Company provides its services almost entirely in the United States of America.
The unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") have been omitted pursuant to those rules and regulations, but the Company's management believes that the disclosures included herein are adequate to make the information presented not misleading. The condensed consolidated financial statements include the accounts of the Company and all of its subsidiaries in which a controlling interest is maintained. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 2016
.
Note 2. New Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board ("FASB") issued an accounting standards update which simplifies employee share-based payment accounting. This standard simplifies the income tax consequences, accounting for forfeitures and classification on the statement of cash flows. The standard requires that, prospectively, all tax effects related to share-based payments be made through the income statement at the time of settlement as opposed to excess tax benefits being recognized in additional paid-in-capital under the current guidance. The standard also removes the requirement to delay recognition of a tax benefit until it reduces current taxes payable. This change is required to be applied on a modified retrospective basis, with a cumulative-effect adjustment to opening retained earnings. Additionally, all tax related cash flows resulting from share-based payments are to be reported as operating activities on the statement of cash flows, a change from the current requirement to present tax benefits as an inflow from financing activities and an outflow from operating activities. Finally, entities will be allowed to withhold an amount up to the employees’ maximum individual tax rate (as opposed to the minimum statutory tax rate) in the relevant jurisdiction without resulting in liability classification of the award. The change in withholding requirements will be applied on a modified retrospective approach. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016, with early adoption permitted. The Company adopted this standard effective for its first quarter of fiscal 2017. The impact of the early adoption resulted in the following:
|
|
•
|
The Company recorded a net tax benefit of
$27
and
$21
within income tax expense for the three and six months ended December 30, 2016, respectively, related to net tax windfalls on share based awards. Prior to adoption this amount would have been recorded as an increase of capital in excess of par value. This change could create volatility in the Company's effective tax rate.
|
|
|
•
|
The Company no longer reflects the cash received from the excess tax benefit within cash flows from financing activities but instead now reflects this benefit within cash flows from operating activities in the Condensed Consolidated Statements of Cash Flows. The Company elected to apply this change in presentation prospectively and thus prior periods have not been adjusted.
|
|
|
•
|
The Company elected not to change its policy on accounting for forfeitures and continues to estimate the total number of awards for which the requisite service period will not be rendered.
|
|
|
•
|
The Company’s statutory withholding requirements have been updated to allow withholding up to the Company's maximum statutory withholding requirements in relevant jurisdictions.
|
|
|
•
|
The Company excluded the excess tax benefits from the assumed proceeds available to repurchase shares in the computation of its diluted earnings per share for the three and six months ended December 30, 2016. This increased diluted weighted average common shares outstanding by
147
and
85
shares, respectively, for the periods.
|
In February 2016, the FASB issued an accounting standards update which will replace most existing lease accounting guidance. This standard establishes a right-of-use model that requires a lessee to record a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than twelve months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. This standard is effective for fiscal years beginning after December 15, 2018, including interim periods within that reporting period. This standard will be effective for the Company's fiscal year beginning July 1, 2019. Early adoption is permitted and should be applied using a modified retrospective approach. The Company is in the process of evaluating the potential impacts of this standard on its condensed consolidated financial statements and related disclosures, including potential early adoption. The Company anticipates the standard will have a material impact on its assets and liabilities due to the addition of right-of-use assets and lease liabilities to the balance sheet; however, it does not expect the standard to have a material impact on its cash flows or results of operations.
In May 2014, the FASB issued an accounting standards update that replaces existing revenue recognition guidance. The updated guidance requires companies to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the new standard requires that reporting companies disclose the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. In March 2016, the FASB further clarified the implementation guidance on principal versus agent considerations. The new standard will be effective for the Company's fiscal year beginning July 1, 2018. Early adoption is permitted under this standard for annual periods beginning after December 15, 2016, and it is to be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying it recognized at the date of initial application. The Company has not yet selected a transition method and is currently evaluating the effect the standard will have on its condensed consolidated financial statements. The Company has developed a project plan that includes a three-phase approach to implementing this standard update. Phase one, the assessment phase, is currently in process. Phase two, which is expected to begin during the third quarter of fiscal 2017, will include conversion activities, such as establishing policies, identifying system impacts and understanding the initial financial impact this standard update will have. Phase three, which is expected to begin during the first quarter of fiscal 2018, will include integrating the standard update into financial reporting processes and systems, and developing a more robust understanding of the financial impact of this standard update on the Company's condensed consolidated financial statements. The Company anticipates that the transition to the new standard could have a material impact on its consolidated financial statements but will be unable to quantify that impact until the third phase of the project has been completed. The Company expects the cost of the activities it is undertaking to transition to the new standard will result in an increase in general and administrative expenses in fiscal 2017 and 2018.
Note 3. Fair Value Measurements
The Company's financial assets or liabilities are measured using inputs from the three levels of the fair value hierarchy. The classification of a financial asset or liability within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. The three levels are as follows:
Level 1 Inputs
- Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. Generally, this includes debt and equity securities and derivative contracts that are traded on an active exchange market (e.g., the New York Stock Exchange) as well as certain U.S. Treasury and U.S. Government and agency mortgage-backed securities that are highly liquid and are actively traded in over-the-counter markets.
Level 2 Inputs
- Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; or valuations based on models where the significant inputs are observable (e.g., interest rates, yield curves, credit risks) or can be corroborated by observable market data.
Level 3 Inputs
- Valuations based on models where significant inputs are not observable. The unobservable inputs reflect the Company's own assumptions about the assumptions that market participants would use.
The following tables present the level within the fair value hierarchy at which the Company's financial assets and certain liabilities were measured on a recurring basis as of
December 30, 2016
and
June 30, 2016
:
Assets and Liabilities Measured at Fair Value on a Recurring Basis as of
December 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
|
|
|
|
|
|
Restricted investments:
|
|
|
|
|
|
|
|
Mutual funds
|
$
|
49
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
49
|
|
Certificates of deposit
|
—
|
|
|
105
|
|
|
—
|
|
|
105
|
|
Municipal bonds
|
—
|
|
|
532
|
|
|
—
|
|
|
532
|
|
Corporate bonds
|
—
|
|
|
256
|
|
|
—
|
|
|
256
|
|
U.S. Government bonds
|
—
|
|
|
216
|
|
|
—
|
|
|
216
|
|
U.S. Treasury Notes
|
1,937
|
|
|
—
|
|
|
—
|
|
|
1,937
|
|
Money market accounts and cash deposits
|
6,377
|
|
|
—
|
|
|
—
|
|
|
6,377
|
|
Total assets
|
$
|
8,363
|
|
|
$
|
1,109
|
|
|
$
|
—
|
|
|
$
|
9,472
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
90
|
|
|
$
|
90
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
90
|
|
|
$
|
90
|
|
Assets and Liabilities Measured at Fair Value on a Recurring Basis as of
June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Restricted investments:
|
|
|
|
|
|
|
|
Mutual funds
|
$
|
71
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
71
|
|
Certificates of deposit
|
—
|
|
|
107
|
|
|
—
|
|
|
107
|
|
Municipal bonds
|
—
|
|
|
547
|
|
|
—
|
|
|
547
|
|
Corporate bonds
|
—
|
|
|
439
|
|
|
—
|
|
|
439
|
|
U.S. Government bonds
|
—
|
|
|
219
|
|
|
—
|
|
|
219
|
|
U.S. Treasury Notes
|
2,009
|
|
|
—
|
|
|
—
|
|
|
2,009
|
|
Money market accounts and cash deposits
|
6,476
|
|
|
—
|
|
|
—
|
|
|
6,476
|
|
Total assets
|
$
|
8,556
|
|
|
$
|
1,312
|
|
|
$
|
—
|
|
|
$
|
9,868
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
233
|
|
|
$
|
233
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
233
|
|
|
$
|
233
|
|
A majority of the Company's investments are priced by pricing vendors and are generally Level 1 or Level 2 investments, as these vendors either provide a quoted market price in an active market or use observable input for their pricing without applying significant adjustments. Broker pricing is used mainly when a quoted price is not available, the investment is not priced by the pricing vendors, or when a broker price is more reflective of fair value in the market in which the investment trades. The Company's broker priced investments are classified as Level 2 investments because the broker prices the investment based on similar assets without applying significant adjustments. The Company's restricted investment financial assets as of
December 30, 2016
and
June 30, 2016
are included within current and long-term restricted investments on the condensed consolidated balance sheets.
The Company's long-term debt is not measured at fair value in the condensed consolidated balance sheets. The fair value of debt is the estimated amount the Company would have to pay to transfer its debt, including any premium or discount attributable to the difference between the stated interest rate and market rate of interest at the balance sheet date. Fair values are based on valuations of similar debt at the balance sheet date and supported by observable market transactions when available: Level 2 of the fair value hierarchy. At
December 30, 2016
and
June 30, 2016
the fair value of the Company's debt was not materially different than its carrying value.
Reclassification adjustments for realized gains or losses from available for sale restricted investment securities out of accumulated other comprehensive income are included in the condensed consolidated statements of operations within the insurance recoverables and other income line item.
The Company's contingent consideration liabilities, included in other accrued liabilities on the condensed consolidated balance sheets, are associated with the acquisitions made in the fiscal year ended
June 30, 2015
. The liabilities are measured at fair value using a probability weighted average of the potential payment outcomes that would occur should certain contract metrics be reached. There is no market data available to use in valuing the contingent consideration; therefore, the Company developed its own assumptions related to the achievement of the metrics to evaluate the fair value of these liabilities. As such, the contingent consideration is classified within Level 3 as described below.
Items classified as Level 3 within the valuation hierarchy, consisting of contingent consideration liabilities related to recent acquisitions, were valued based on various estimates, including probability of success, discount rates and amount of time until the conditions of the contingent payments are achieved. The table below presents a roll-forward of the contingent consideration liabilities valued using Level 3 inputs:
|
|
|
|
|
Contingent consideration balance at July 1, 2016
|
$
|
233
|
|
Decrease of liability related to re-measurement of fair value
|
(143
|
)
|
Contingent consideration balance at December 30, 2016
|
$
|
90
|
|
Note 4. Stock-Based Compensation
The Company has
two
plans under which outstanding stock-based awards have been issued: the TRC Companies, Inc. Restated Stock Option Plan (the "Restated Plan"), and the Amended and Restated 2007 Equity Incentive Plan (the "2007 Plan"), (collectively "the Plans"). The Company issues new shares or may utilize treasury shares, when available, to satisfy awards under the Plans. Awards are made by the Compensation Committee of the Board of Directors; however, the Compensation Committee has delegated to the Chief Executive Officer ("CEO") the authority to grant awards for up to
10
shares to employees subject to a limitation of
100
shares in any
12
month period.
Stock-based awards under the Plans consist of stock options, restricted stock awards ("RSA's"), restricted stock units ("RSU's") and performance stock units ("PSU's"). As of
December 30, 2016
,
2,015
shares remained available for grants under the 2007 Plan.
Stock-Based Compensation
The Company measures stock-based compensation cost at the grant date based on the fair value of the award. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods 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 period to the extent actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized in the period of change and will also impact the amount of expense to be recognized in future periods.
During the
three
and
six
months ended
December 30, 2016
and
December 25, 2015
, the Company recognized stock-based compensation expense in cost of services ("COS") and general and administrative expenses within the condensed consolidated statements of operations as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
December 30,
2016
|
|
December 25,
2015
|
|
December 30,
2016
|
|
December 25,
2015
|
Cost of services
|
$
|
1,283
|
|
|
$
|
802
|
|
|
$
|
1,990
|
|
|
$
|
1,449
|
|
General and administrative expenses
|
1,003
|
|
|
709
|
|
|
1,753
|
|
|
1,331
|
|
|
Total stock-based compensation expense
|
$
|
2,286
|
|
|
$
|
1,511
|
|
|
$
|
3,743
|
|
|
$
|
2,780
|
|
Stock Options
The Company uses the Black-Scholes option pricing model for determining the estimated grant date fair value for stock options. The fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period. Use of a valuation model requires management to make certain assumptions with respect to selected model inputs. The risk-free interest rate assumption is based upon observed interest rates appropriate for the expected life of the employee stock options. The average expected life is based on the contractual term of the option and expected employee exercise and historical post-vesting employment termination experience. The Company estimates the volatility of its stock using historical volatility in accordance with current accounting guidance. Management determined that historical volatility of TRC common stock is most reflective of market conditions and the best indicator of expected volatility. The dividend yield assumption is based on the Company's historical and expected dividend payouts. There were no stock options granted during the
six
months ended
December 30, 2016
and
December 25, 2015
.
A summary of stock option activity for the
six
months ended
December 30, 2016
under the Plans is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Weighted-
|
|
Remaining
|
|
|
|
|
|
Average
|
|
Contractual
|
|
Aggregate
|
|
|
|
Exercise
|
|
Term
|
|
Intrinsic
|
|
Options
|
|
Price
|
|
(in years)
|
|
Value
|
Outstanding options as of June 30, 2016 (85 exercisable)
|
85
|
|
|
$
|
8.28
|
|
|
|
|
|
Options exercised
|
(72
|
)
|
|
$
|
8.96
|
|
|
|
|
|
Options expired
|
(1
|
)
|
|
$
|
9.80
|
|
|
|
|
|
Outstanding options as of December 30, 2016
|
12
|
|
|
$
|
4.20
|
|
|
1.5
|
|
$
|
78
|
|
Options exercisable as of December 30, 2016
|
12
|
|
|
$
|
4.20
|
|
|
1.5
|
|
$
|
78
|
|
Options vested and expected to vest as of December 30, 2016
|
12
|
|
|
$
|
4.20
|
|
|
1.5
|
|
$
|
78
|
|
The aggregate intrinsic value is measured using the fair market value at the date of exercise (for options exercised) or as of
December 30, 2016
(for outstanding options), less the applicable exercise price. The closing price of the Company's common stock on the New York Stock Exchange was
$10.60
as of
December 30, 2016
. The total intrinsic value of options exercised for the
six
months ended
December 30, 2016
and
December 25, 2015
was
$55
and
$120
, respectively. The total proceeds received from option exercises for the
six
months ended
December 30, 2016
and
December 25, 2015
was
$638
and
$209
, respectively.
Restricted Stock Awards
Compensation expense for RSA's is recognized ratably over the vesting term, which is generally
four years
. The fair value of the RSA's is determined based on the closing market price of the Company's common stock on the grant date. There were
no
non-vested RSA's as of
December 30, 2016
. There were
no
RSA's granted during the
six
months ended
December 30, 2016
. As of
December 30, 2016
, there was
no
unrecognized compensation expense related to unvested RSA's under the Plans.
Restricted Stock Units
Compensation expense for RSU's is recognized ratably over the vesting term, which is generally
four years
. The fair value of RSU's is determined based on the closing market price of the Company's common stock on the grant date.
A summary of non-vested RSU activity for the
six
months ended
December 30, 2016
is as follows:
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
Restricted
|
|
Average
|
|
Stock
|
|
Grant Date
|
|
Units
|
|
Fair Value
|
Non-vested units as of June 30, 2016
|
904
|
|
|
$
|
8.24
|
|
Units granted
|
595
|
|
|
$
|
6.78
|
|
Units vested
|
(338
|
)
|
|
$
|
8.05
|
|
Units forfeited
|
(30
|
)
|
|
$
|
10.41
|
|
Non-vested units as of December 30, 2016
|
1,131
|
|
|
$
|
7.47
|
|
RSU grants totaled
78
and
595
shares with a total weighted-average grant date fair value of
$848
and
$4,036
during the
three
and
six
months ended
December 30, 2016
. RSU grants totaled
258
and
271
shares with a total weighted-average grant date fair value of
$2,876
and
$3,026
during the
three
and
six
months ended
December 25, 2015
. The total fair value of RSU's vested during the
three
and
six
months ended
December 30, 2016
was
$1,835
and
$2,801
, respectively. The total fair value of RSU's vested during the
three
and
six
months ended
December 25, 2015
was
$1,165
and
$3,946
, respectively.
As of
December 30, 2016
, there was
$7,647
of total unrecognized compensation expense related to unvested RSU's under the Plans, and this expense is expected to be recognized over a weighted-average period of
2.8
years.
Performance Stock Units
Compensation expense for PSU's is recognized over the vesting term, which is generally
four years
, if and when the Company concludes that it is probable that the performance condition will be achieved. The Company reassesses the probability of vesting at each reporting period for awards with performance conditions and adjusts compensation expense based on its probability assessment. The fair value of the PSU's is determined based on the closing market price of the Company's common stock on the grant date.
The number of PSU's earned is determined based on the Company's performance against predefined targets. The range of payout is
zero
to
150%
of the number of granted PSU's. The number of PSU's earned is determined based on actual performance at the end of the performance period. PSU grants totaled
512
and
410
with a total weighted-average grant date fair value of
$3,152
and
$3,668
during the
six
months ended
December 30, 2016
and
December 25, 2015
, respectively. The total fair value of PSU's vested during the
six
months ended
December 30, 2016
, was
$3,107
. The total fair value of PSU's vested during the
six
months ended
December 25, 2015
, was
$4,097
.
At
December 30, 2016
, there was
$6,101
of total unrecognized compensation expense related to non-vested PSU's; this expense is expected to be recognized over a weighted-average period of
2.6
years.
A summary of non-vested PSU activity for the
six
months ended
December 30, 2016
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
PSU
|
|
|
|
Total
|
|
Average
|
|
Original
|
|
PSU
|
|
PSU
|
|
Grant Date
|
|
Awards
|
|
Adjustments (1)
|
|
Awards
|
|
Fair Value
|
Non-vested units as of June 30, 2016
|
895
|
|
|
—
|
|
|
895
|
|
|
$
|
8.74
|
|
Units granted
|
512
|
|
|
56
|
|
|
568
|
|
|
$
|
6.15
|
|
Units vested
|
(320
|
)
|
|
(56
|
)
|
|
(376
|
)
|
|
$
|
7.75
|
|
Units forfeited
|
(89
|
)
|
|
—
|
|
|
(89
|
)
|
|
$
|
9.70
|
|
Non-vested units as of December 30, 2016
|
998
|
|
|
—
|
|
|
998
|
|
|
$
|
7.59
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represents the additional number of PSU's issued based on the final performance condition achieved at the end of the respective performance period.
|
Note 5. Earnings per Share
Basic earnings per share ("EPS") is computed based on the weighted-average number of shares of common stock outstanding during the period. Diluted EPS is computed using the treasury stock method for stock options, warrants, non-vested restricted stock awards and units, and non-vested performance stock units. The treasury stock method assumes conversion of all potentially dilutive shares of common stock with the proceeds from assumed exercises used to hypothetically repurchase stock at the average market price for the period. Diluted EPS is computed by dividing net income applicable to the Company by the weighted-average common shares and potentially dilutive common shares that were outstanding during the period.
The following table sets forth the computations of basic and diluted EPS for the
three
and
six
months ended
December 30, 2016
and
December 25, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
December 30,
2016
|
|
December 25,
2015
|
|
December 30,
2016
|
|
December 25,
2015
|
Net income applicable to TRC Companies, Inc.
|
$
|
3,998
|
|
|
$
|
3,937
|
|
|
$
|
7,637
|
|
|
$
|
8,429
|
|
|
|
|
|
|
|
|
|
Basic weighted-average common shares outstanding
|
31,451
|
|
|
30,968
|
|
|
31,300
|
|
|
30,805
|
|
Effect of dilutive stock options, RSA's, RSU's and PSU's
|
515
|
|
|
401
|
|
|
483
|
|
|
542
|
|
Diluted weighted-average common shares outstanding
|
31,966
|
|
|
31,369
|
|
|
31,783
|
|
|
31,347
|
|
|
|
|
|
|
|
|
|
Earnings per common share applicable to TRC Companies, Inc.
|
|
|
|
|
|
|
|
Basic earnings per common share
|
$
|
0.13
|
|
|
$
|
0.13
|
|
|
$
|
0.24
|
|
|
$
|
0.27
|
|
Diluted earnings per common share
|
$
|
0.13
|
|
|
$
|
0.13
|
|
|
$
|
0.24
|
|
|
$
|
0.27
|
|
Anti-dilutive stock options, RSA's, RSU's and PSU's, excluded from the calculation
|
1,130
|
|
|
1,423
|
|
|
1,161
|
|
|
1,282
|
|
Note 6. Accounts Receivable
The current portion of accounts receivable as of
December 30, 2016
and
June 30, 2016
, were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
December 30,
2016
|
|
June 30,
2016
|
Billed
|
$
|
116,578
|
|
|
$
|
90,194
|
|
Unbilled
|
62,333
|
|
|
64,954
|
|
Retainage
|
3,727
|
|
|
2,429
|
|
|
Total accounts receivable - gross
|
182,638
|
|
|
157,577
|
|
Less allowance for doubtful accounts
|
(8,423
|
)
|
|
(8,297
|
)
|
|
Total accounts receivable, less allowance for doubtful accounts
|
$
|
174,215
|
|
|
$
|
149,280
|
|
Note 7. Other Accrued Liabilities
As of
December 30, 2016
and
June 30, 2016
, other accrued liabilities were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
December 30,
2016
|
|
June 30,
2016
|
Contract costs
|
$
|
40,652
|
|
|
$
|
40,343
|
|
Legal accruals
|
6,389
|
|
|
5,232
|
|
Lease obligations
|
5,162
|
|
|
5,564
|
|
Other
|
7,593
|
|
|
6,887
|
|
|
Total other accrued liabilities
|
$
|
59,796
|
|
|
$
|
58,026
|
|
Note 8. Business Acquisitions, Goodwill and Other Intangible Assets
Fiscal 2016 Acquisition
On
November 30, 2015
, the Company acquired the Professional Services business of Willbros Group ("Willbros") ("Oil and Gas") in an all cash transaction. The
$124,498
purchase price consisted of (i) an initial cash payment of
$119,955
paid at closing, and, (ii) a second cash payment due of
$7,500
payable at the earlier of certain Willbros contract novations (or written approval of a subcontract) and Willbros obtaining certain consents, or March 15, 2016, net of a working capital adjustment due from Willbros of
$2,957
. The second cash payment was made in two tranches, with
$2,354
paid in March 2016 and the remaining balance paid in July 2016 in conjunction with the final net working capital settlement. Goodwill of
$60,294
, all of which is expected to be tax deductible, and other intangible assets of
$44,500
were recorded as a result of this acquisition.
The following summarizes the estimated fair values of the Oil and Gas assets acquired and liabilities assumed at the acquisition date, as well as measurement period adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 30, 2015
(As Initially Reported)
|
|
Measurement
Period
Adjustments
|
|
November 30, 2015
(As Adjusted)
|
Cash and cash equivalents
|
$
|
355
|
|
|
$
|
—
|
|
|
$
|
355
|
|
Accounts receivable
|
26,406
|
|
|
1,857
|
|
|
28,263
|
|
Prepaid expenses and other current assets
|
7,276
|
|
|
(48
|
)
|
|
7,228
|
|
Property and equipment
|
3,552
|
|
|
—
|
|
|
3,552
|
|
Identifiable intangible assets:
|
|
|
|
|
|
|
Customer relationships and backlog
|
43,500
|
|
|
—
|
|
|
43,500
|
|
|
Internally developed software
|
1,000
|
|
|
—
|
|
|
1,000
|
|
|
|
Total identifiable intangible assets
|
44,500
|
|
|
—
|
|
|
44,500
|
|
Goodwill
|
64,673
|
|
|
(4,379
|
)
|
|
60,294
|
|
Other non-current assets
|
20,683
|
|
|
—
|
|
|
20,683
|
|
Accounts payable
|
(2,587
|
)
|
|
43
|
|
|
(2,544
|
)
|
Accrued compensation and benefits
|
(7,199
|
)
|
|
(2
|
)
|
|
(7,201
|
)
|
Other accrued liabilities
|
(5,210
|
)
|
|
100
|
|
|
(5,110
|
)
|
Current portion of long-term debt
|
(6,447
|
)
|
|
(38
|
)
|
|
(6,485
|
)
|
Long-term debt, net of current portion
|
(18,547
|
)
|
|
—
|
|
|
(18,547
|
)
|
Non-controlling interest
|
—
|
|
|
(490
|
)
|
|
(490
|
)
|
|
Net assets acquired
|
$
|
127,455
|
|
|
$
|
(2,957
|
)
|
|
$
|
124,498
|
|
Customer relationships and backlog represent the fair value of existing contracts and the underlying customer relationships. The backlog has a
1
year life and customer relationships have lives ranging from
12 years
to
15 years
(weighted average lives of
6 years
). The internally developed software has a life of approximately
5 years
(weighted average life of
5 years
).
The goodwill recognized is attributable to the future strategic growth opportunities arising from the acquisition, Oil and Gas's highly skilled assembled workforce (which does not qualify for separate recognition) and the expected cost synergies of the combined operations.
The unaudited pro forma financial information summarized in the following table gives effect to the Oil and Gas acquisition assuming it occurred on July 1, 2014. These unaudited pro forma operating results do not assume any impact from revenue, cost or other operating synergies that are expected as a result of the acquisition. Pro forma adjustments have been made to reflect amortization of the identified intangible assets for the related periods, as well as the amortization of deferred debt issuance costs incurred. Identifiable intangible assets are being amortized on a basis approximating the economic value derived from those assets. These unaudited pro forma operating results are presented for illustrative purposes only and are not indicative of the operating results that would have been achieved had the acquisition occurred on July 1, 2014, nor does the information project results for any future period.
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
December 25, 2015
|
Gross revenue
|
|
$
|
368,254
|
|
Net service revenue
|
|
$
|
262,121
|
|
Net income applicable to TRC Companies, Inc.
|
|
$
|
6,419
|
|
|
|
|
Basic earnings per common share
|
|
$
|
0.21
|
|
Diluted earnings per common share
|
|
$
|
0.20
|
|
Goodwill
The Company assesses goodwill for impairment on an annual basis as of each fiscal April period end, or at an interim date when events or changes in the business environment would more likely than not reduce the fair value of a reporting unit below its carrying value. As of
December 30, 2016
, the Company had
$75,337
of goodwill, and does not believe there were any events or changes in circumstances since the last goodwill assessment as of April 29, 2016 that would indicate the fair value of goodwill was more likely than not reduced to below its carrying value. Accordingly, goodwill was not tested for impairment during the current fiscal quarter.
The carrying amount of goodwill for the
six
months ended
December 30, 2016
by operating segment are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Balance,
|
|
Accumulated
|
|
Balance,
|
|
|
|
Balance,
|
|
Accumulated
|
|
Balance,
|
|
|
July 1,
|
|
Impairment
|
|
July 1,
|
|
Additions /
|
|
December 30,
|
|
Impairment
|
|
December 30,
|
Operating Segment
|
|
2016
|
|
Losses
|
|
2016
|
|
Adjustments
|
|
2016
|
|
Losses
|
|
2016
|
Power
|
|
$
|
28,506
|
|
|
$
|
(14,506
|
)
|
|
$
|
14,000
|
|
|
$
|
—
|
|
|
$
|
28,506
|
|
|
$
|
(14,506
|
)
|
|
$
|
14,000
|
|
Environmental
|
|
40,889
|
|
|
(17,865
|
)
|
|
23,024
|
|
|
—
|
|
|
40,889
|
|
|
(17,865
|
)
|
|
23,024
|
|
Infrastructure
|
|
7,224
|
|
|
(7,224
|
)
|
|
—
|
|
|
—
|
|
|
7,224
|
|
|
(7,224
|
)
|
|
—
|
|
Oil and Gas
|
|
60,294
|
|
|
(21,981
|
)
|
|
38,313
|
|
|
—
|
|
|
60,294
|
|
|
(21,981
|
)
|
|
38,313
|
|
|
|
$
|
136,913
|
|
|
$
|
(61,576
|
)
|
|
$
|
75,337
|
|
|
$
|
—
|
|
|
$
|
136,913
|
|
|
$
|
(61,576
|
)
|
|
$
|
75,337
|
|
Other Intangible Assets
Identifiable intangible assets as of
December 30, 2016
and
June 30, 2016
are included in other assets on the condensed consolidated balance sheets and were comprised of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 30, 2016
|
|
June 30, 2016
|
|
|
Gross
|
|
|
|
Net
|
|
Gross
|
|
|
|
Net
|
|
|
Carrying
|
|
Accumulated
|
|
Carrying
|
|
Carrying
|
|
Accumulated
|
|
Carrying
|
Identifiable intangible assets
|
|
Amount
|
|
Amortization
|
|
Amount
|
|
Amount
|
|
Amortization
|
|
Amount
|
With determinable lives:
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
59,218
|
|
|
$
|
(19,791
|
)
|
|
$
|
39,427
|
|
|
$
|
59,218
|
|
|
$
|
(14,933
|
)
|
|
$
|
44,285
|
|
Contract backlog
|
|
900
|
|
|
(900
|
)
|
|
—
|
|
|
900
|
|
|
(525
|
)
|
|
375
|
|
Technology
|
|
1,000
|
|
|
(217
|
)
|
|
783
|
|
|
1,000
|
|
|
(117
|
)
|
|
883
|
|
|
|
61,118
|
|
|
(20,908
|
)
|
|
40,210
|
|
|
61,118
|
|
|
(15,575
|
)
|
|
45,543
|
|
With indefinite lives:
|
|
|
|
|
|
|
|
|
|
|
|
|
Engineering licenses
|
|
426
|
|
|
—
|
|
|
426
|
|
|
426
|
|
|
—
|
|
|
426
|
|
|
|
$
|
61,544
|
|
|
$
|
(20,908
|
)
|
|
$
|
40,636
|
|
|
$
|
61,544
|
|
|
$
|
(15,575
|
)
|
|
$
|
45,969
|
|
Identifiable intangible assets with determinable lives are amortized over their estimated useful lives and are also reviewed for impairment if events or changes in circumstances indicate that their carrying amount may not be realizable.
Identifiable intangible assets with determinable lives are being amortized over a weighted-average period of approximately
7
years. The weighted-average period of amortization is approximately
7
years for customer relationship assets. The amortization of intangible assets for the
three
and
six
months ended
December 30, 2016
was
$2,617
and
$5,333
. The amortization of intangible assets for the
three
and
six
months ended
December 25, 2015
was
$1,076
and
$1,916
.
Estimated amortization expense of intangible assets for the remainder of fiscal year 2017 and succeeding fiscal years is as follows:
|
|
|
|
|
|
|
Fiscal Year
|
|
Amount
|
2017
|
|
$
|
4,826
|
|
2018
|
|
9,183
|
|
2019
|
|
8,367
|
|
2020
|
|
7,821
|
|
2021
|
|
7,274
|
|
2022 and Thereafter
|
|
2,739
|
|
|
Total
|
|
$
|
40,210
|
|
On an annual basis, or more frequently if events or changes in circumstances indicate that the asset might be impaired, the fair value of the indefinite-lived intangible assets is evaluated by the Company to determine if an impairment charge is required. The Company performed its most recent annual impairment assessment as of April 29, 2016, which resulted in no impairments to intangible assets. There were no events or changes in circumstances that would indicate the fair value of intangible assets was reduced to below its carrying value during the
six months ended
December 30, 2016
, and therefore intangible assets were not tested for impairment.
Note 9. Long-Term Debt and Capital Lease Obligations
Revolving Credit Facility
On November 30, 2015, the Company entered into a
five
-year credit agreement (the “Credit Agreement”) with Citizens Bank, N.A. as lender, LC issuer, administrative agent, sole lead arranger, and sole book runner; BMO Harris Bank, N.A. as lender, LC issuer and syndication agent; KeyBank, N.A. as lender and document agent, and
five
other banks as lenders. The Credit Agreement provides the Company with an aggregate borrowing capacity of
$175,000
, consisting of a
$100,000
five
-year secured revolving credit facility (“Revolving Facility”) with a sub-limit of
$15,000
available for the issuance of letters of credit, as well as a
five
-year secured
$75,000
term loan (“Term Loan”).
The proceeds of the Term Loan, together with cash on hand and proceeds from borrowing under the Revolving Facility, were used to pay the purchase price for Willbros Professional Services ("Oil and Gas") and to fund transaction costs incurred in connection with the Oil and Gas acquisition. The Revolving Facility also is available for working capital and general corporate purposes. The Revolving Facility includes borrowing capacity for letters of credit and for borrowings on same-day notice, referred to as “swingline loans.” Borrowings under the Revolving Facility are subject to the satisfaction of customary conditions, including absence of defaults and accuracy of representations and warranties. The Company may request an increase in the amount of the Credit Agreement up to an additional
$75,000
, which may be through additional term or revolving loans.
Borrowings outstanding under the Revolving Facility will mature on November 30, 2020. The Term Loan amortizes in quarterly installments payable on the last day of each March, June, September, and December, commencing on March 31, 2016 in amounts equal to
1.875%
of the term loan made or outstanding, with the balance payable on November 30, 2020 (the "Term Loan Maturity Date"). In addition, the Company is required, subject to certain exceptions, to make payments on the Term Loan (a) based on a stated percentage of Excess Cash Flow, either
50%
or
0%
depending on whether the the Company's consolidated leverage is above or below 2 times adjusted EBITDA as defined in the Credit Agreement, (b) in an amount of
100%
of net cash proceeds from asset sales subject to certain reinvestment rights, (c) in an amount of
100%
of net cash proceeds of any issuance of debt other than debt permitted to be incurred under the Credit Agreement, and (d) in an amount of
100%
of net cash proceeds from events of loss subject to certain reinvestment rights. The borrowings under the Credit Agreement may be reduced, in whole or in part, without premium or penalty.
Amounts outstanding under the Credit Agreement bear interest at the Base Rate (as defined, generally the prime rate) plus a margin of
0.50%
to
1.25%
, or at the Eurodollar Rate (as defined, generally the LIBOR rate) plus a margin of
1.50%
to
2.25%
, based on the Company's Leverage Ratio (as defined). In addition to these borrowing rates, there is a commitment fee which ranges from
0.20%
to
0.375%
on any unused commitments. The applicable fees for issuance of letters of credit under the Revolving Facility is a range from
1.50%
to
2.25%
.
The Company’s obligations under the Credit Agreement are secured by a pledge of substantially all of its assets and guaranteed by its principal operating subsidiaries. The Credit Agreement also contains cross-default provisions which become effective if the Company defaults on other indebtedness.
The Credit Agreement contains various customary restrictive covenants that limit the Company's ability to, among other things: incur additional indebtedness including guarantees; enter into sale/leaseback transactions; make investments, loans or acquisitions; grant or incur liens on its assets; sell its assets; engage in mergers, consolidations, liquidations or dissolutions; engage in transactions with affiliates; and make restricted payments. Under the Credit Agreement the Company is required to maintain a fixed charge coverage ratio of no less than
1.25
to
1.00
and to not permit its leverage ratio to exceed
3.00
to
1.00
. The Credit Agreement also limits the payment of cash dividends to
$10,000
in aggregate during its term.
On November 30, 2015, the Company borrowed
$102,000
under the Credit Agreement to partially fund the Oil and Gas acquisition. The borrowing was comprised of a full borrowing of the
$75,000
term loan and a
$27,000
borrowing under the Revolving Facility. Borrowings under the Term Loan bear interest at a stated rate of
2.11%
and have an effective interest rate of
2.15%
at
December 30, 2016
. As of
December 30, 2016
the Company had
zero
borrowings outstanding under the Credit Agreement's Revolving Facility and
$69,375
outstanding under the Term Loan. Funds available to borrow under the Credit Agreement, after consideration of the letters of credit outstanding, were
$97,346
at
December 30, 2016
.
In accounting for the transaction costs incurred in conjunction with the Credit Agreement, the Company allocated the total costs incurred based on the relative fair values of the Revolving Facility and Term Loan. A total of
$1,916
and
$1,332
were allocated to the Revolving Facility and Term Loan, respectively.
As of
December 30, 2016
, the Term Loan consisted of the following:
|
|
|
|
|
|
Current portion of Term Loan
|
|
$
|
5,625
|
|
|
|
|
Long-term portion of Term Loan
|
|
$
|
63,750
|
|
Less: Debt issuance costs
|
|
(1,000
|
)
|
Net long-term carrying amount
|
|
$
|
62,750
|
|
The scheduled principal amounts due under the Company’s Term Loan obligations as of
December 30, 2016
for the remainder of fiscal year 2017 and succeeding fiscal years are as follows:
|
|
|
|
|
|
|
2017
|
|
$
|
2,813
|
|
2018
|
|
5,625
|
|
2019
|
|
5,625
|
|
2020
|
|
5,625
|
|
2021
|
|
49,687
|
|
|
Total
|
|
$
|
69,375
|
|
Contractor-owned, contractor-operated (CoCo) facility debt
As of
December 30, 2016
, the Company had approximately
$19,090
of debt obligations ("CoCo" debt) assumed in the Oil and Gas acquisition, of which
$7,769
was current. A third party finance company had provided financing to Oil and Gas in conjunction with the construction of fueling facilities for the federal government pursuant to three government contracts. Upon acceptance of the constructed facilities, the federal government pays Oil and Gas in equal monthly installments over the subsequent
five years
. Therefore, as of
December 30, 2016
, the Company also had recorded approximately
$19,090
of receivables which were acquired in the transaction, of which
$7,769
was current. These amounts were recorded within other assets and represent the amount due from the federal government for the construction of the fueling facilities.
As of
December 30, 2016
, the government has provided acceptance and final funding on all three contracts.
The principal amounts due under the Company’s remaining CoCo debt obligations as of
December 30, 2016
for the remainder of fiscal year 2017 and succeeding fiscal years is as follows:
|
|
|
|
|
|
|
2017
|
|
$
|
4,271
|
|
2018
|
|
5,734
|
|
2019
|
|
3,717
|
|
2020
|
|
3,980
|
|
2021
|
|
1,388
|
|
|
Total
|
|
$
|
19,090
|
|
Other Notes Payable
In July 2016, the Company financed
$3,838
of insurance premiums payable in
seven
equal monthly installments of
$552
each, including a finance charge of
2.19%
. As of
December 30, 2016
, the balance outstanding under this agreement was
$552
.
In conjunction with the Oil and Gas acquisition, the Company was required to remit a second cash payment of
$7,500
payable at the earlier of certain Willbros contract novations (or written approval of a subcontract) and Willbros obtaining certain consents, or March 15, 2016. The second cash payment was made in two tranches, with
$2,354
paid in March 2016 and the remaining balance paid in July 2016 in conjunction with the final net working capital settlement.
Note 10. Variable Interest Entity
In determining whether the Company is the primary beneficiary of an entity, it considers a number of factors, including its ability to direct the activities that most significantly affect the entity's economic success, the Company's contractual rights and responsibilities under the arrangement and the significance of the arrangement to each party. These considerations impact the way the Company accounts for its existing collaborative and joint venture relationships and determines the consolidation of companies or entities with which the Company has collaborative or other arrangements.
WBA
Willbros Engineers LLC, which the Company acquired in fiscal
2016
, was party to an option and service arrangement with the equity owners of WBA, a limited liability company. WBA is considered a VIE due to the lack of decision-making rights by its equity holders. The Company consolidates the operations of WBA, as it retains the contractual power to direct the activities of WBA which most significantly and directly impact its economic performance. The Company also has the obligation to absorb losses and the right to receive residual returns of WBA. The activity of WBA is not significant to the overall performance of the Company. The assets of WBA are available for the Company's general business use outside the context of WBA. In consolidation, as of
December 30, 2016
,
$558
of cash and cash equivalents,
$234
of accounts receivable and
$3
of other current liabilities were attributable to WBA.
While the Company is currently in the process of winding down the operations of WBA, it has an obligation to fund operating activities not covered by WBA’s available cash and cash flow from operations. During fiscal year 2017, the Company provided
$9
of financial support to WBA. The Company does not expect ongoing funding obligations to be material.
Note 11. Income Taxes
The Company's effective tax rate was approximately
35.5%
and
39.9%
for the
six
months ended
December 30, 2016
and
December 25, 2015
respectively. The primary reconciling items between the federal statutory rate of
35.0%
and the Company's overall effective tax rate for the
six
months ended
December 30, 2016
were the effect of state income taxes offset by tax benefits related to the U.S. Research and Development credit, U.S. Domestic Production Activities deduction and the effective settlement of uncertain tax positions. The primary reconciling items between the federal statutory rate of
35.0%
and the Company's overall effective tax rate for the
six
months ended
December 25, 2015
were the effect of state income taxes.
As of
December 30, 2016
, the recorded liability for uncertain tax positions under the measurement criteria of Accounting Standards Codification ("ASC") Topic 740, Income Taxes, was
$960
. The effective settlement of uncertain tax positions resulted in a decrease in the recorded liability of
$1,344
during the
six
months ended
December 30, 2016
, which resulted in a net decrease to the provision for income taxes of
$294
. The Company does not expect the amount of unrecognized tax benefits to materially change within the next twelve months.
As a result of the early adoption of ASU 2016-09 in the first quarter of fiscal 2017, excess tax benefits and tax deficiencies will be prospectively classified to the statement of operations instead of additional paid-in capital. The Company's effective tax rate for the
six
months ended
December 30, 2016
was not materially impacted by the adoption of ASU 2016-09. The Company recorded a net tax benefit of
$21
during the
six
months ended
December 30, 2016
which decreased the provision for income taxes.
In the first quarter of fiscal year 2017, the IRS concluded its income tax examination for fiscal year 2014. No adjustments were proposed.
Note 12. Operating Segments
To more clearly communicate the Company's capabilities and focus to the marketplace, beginning in fiscal 2017, the Company renamed its Energy segment “Power” and its Pipeline Services segment “Oil and Gas.” The Company manages its business under the following
four
operating segments:
Power (formerly Energy):
The Power operating segment provides services to a range of clients including energy companies, power utilities, other commercial entities, and state and federal government entities. The Company's services include program management, engineer/procure/construct projects, design, and consulting. The Company's typical projects involve upgrades, design and new construction for electric transmission and distribution systems and substations; energy efficiency program design and management; security assessments; and renewable energy development and power generation.
Environmental:
The Environmental operating segment provides services to a wide range of clients including industrial, transportation, energy and natural resource companies, as well as federal, state and municipal agencies. The Environmental operating segment is organized to focus on key areas of demand including: environmental management of buildings and facilities; air quality measurements and modeling of potential air pollution impacts; water quality and water resource management; assessment and remediation of contaminated sites and buildings; hazardous waste management; construction monitoring, inspection and management; environmental, health and safety management and sustainability advisory services; compliance auditing and strategic due diligence; environmental licensing and permitting of a wide variety of projects; and natural and cultural resource assessment, protection and management.
Infrastructure:
The Infrastructure operating segment provides services related to the expansion of infrastructure capacity and the rehabilitation of overburdened and deteriorating infrastructure systems. The Company's client base is predominantly state and municipal governments as well as select commercial developers. In addition, the Company provides infrastructure services on projects originating in its other operating segments. Primary services include: roadway, bridge and related surface transportation design; structural design and inspection of bridges; program management; construction engineering inspection and construction management for roads and bridges; civil engineering for municipalities and public works departments; geotechnical engineering services; and, design and construction management.
Oil & Gas (formerly Pipeline Services):
Acquired in November 2015, the Oil & Gas operating segment provides pipeline and facilities engineering; engineer, procure, and construct ("EPC") services; engineer, procure, construct and management ("EPCm") services; field services and integrity services to the oil and gas transmission and midstream markets, as well as at government facilities. The Company specializes in providing engineering services to assist clients in designing, engineering and constructing or expanding pipeline systems, compressor stations, pump stations, fuel storage facilities, terminals, and field gathering and production facilities. The Company's expertise extends to the engineering of a wide range of project peripherals, including various types of support buildings and utility systems, power generation and electrical transmission systems, communications systems, fire protection, water and sewage treatment, water transmission, roads and railroad sidings. The Company also provides project management, engineering and material procurement services to the refining industry and government agencies, including mechanical, civil, structural, electrical instrumentation/controls and environmental engineering. The Company provides full-service integrity management program offerings including program development, data services, risk analysis, corrosion evaluation, and integrity engineering. The Company is partnered with Google to provide a cloud-based pipeline life-cycle integrity management solution, Integra Link™, which utilizes Google’s geospatial technology platform to help oil and gas pipeline companies visualize and utilize their data and information.
The Company's chief operating decision maker ("CODM") is its CEO. The Company's CEO manages the business by evaluating the financial results of the four operating segments focusing primarily on segment revenue and segment profit. The Company utilizes segment revenue and segment profit because it believes they provide useful information for effectively allocating resources among operating segments; evaluating the health of its operating segments based on metrics that management can actively influence; and gauging its investments and its ability to service, incur or pay down debt. Specifically, the Company's CEO evaluates segment revenue and segment profit and assesses the performance of each operating segment based on these measures, as well as, among other things, the prospects of each of the operating segments and how they fit into the Company's overall strategy. The Company's CEO then decides how resources should be allocated among its operating segments. The Company does not track its assets by operating segment, and consequently, it is not practical to show assets by operating segment. Segment profit includes all operating expenses except the following: costs associated with providing corporate shared services (including certain depreciation and amortization), goodwill and intangible asset write-offs, and stock-based compensation expense. Depreciation expense is primarily allocated to operating segments based upon their respective use of total operating segment office space. Assets solely used at the Corporate level are not allocated to the operating segments. Inter-segment balances and transactions are not material. The accounting policies of the operating segments are the same as those for the Company as a whole, except as discussed herein.
On July 1, 2016 the Company made certain changes to its management reporting structure which resulted in a change to the composition of the Infrastructure operating segment. Certain corporate employees were transferred to the Infrastructure operating segment. As a result, beginning in fiscal year 2017 the Company reports its financial performance based on the current reporting structure. The Company has recast certain prior period amounts to conform to the way it internally manages and monitors segment performance. These changes had no impact on consolidated net income or cash flows and were not material to the segment measurements presented.
The following tables present summarized financial information for the Company's operating segments (for the periods noted below):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Power
|
|
Environmental
|
|
Infrastructure
|
|
Oil & Gas
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended December 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
Gross revenue
|
|
$
|
67,860
|
|
|
$
|
80,162
|
|
|
$
|
21,442
|
|
|
$
|
27,483
|
|
|
$
|
196,947
|
|
Net service revenue
|
|
40,288
|
|
|
50,325
|
|
|
14,618
|
|
|
21,332
|
|
|
126,563
|
|
Segment profit
|
|
9,501
|
|
|
9,184
|
|
|
3,474
|
|
|
1,467
|
|
|
23,626
|
|
Depreciation
|
|
438
|
|
|
657
|
|
|
139
|
|
|
311
|
|
|
1,545
|
|
Amortization
|
|
245
|
|
|
254
|
|
|
—
|
|
|
1,992
|
|
|
2,491
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended December 25, 2015:
|
|
|
|
|
|
|
|
|
|
|
Gross revenue
|
|
$
|
48,040
|
|
|
$
|
77,925
|
|
|
$
|
22,307
|
|
|
$
|
8,017
|
|
|
$
|
156,289
|
|
Net service revenue
|
|
39,794
|
|
|
51,424
|
|
|
13,709
|
|
|
5,986
|
|
|
110,913
|
|
Segment profit (loss)
|
|
9,470
|
|
|
9,548
|
|
|
2,532
|
|
|
(1,161
|
)
|
|
20,389
|
|
Depreciation
|
|
492
|
|
|
638
|
|
|
125
|
|
|
267
|
|
|
1,522
|
|
Amortization
|
|
298
|
|
|
300
|
|
|
—
|
|
|
302
|
|
|
900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Power
|
|
Environmental
|
|
Infrastructure
|
|
Oil & Gas
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended December 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
Gross revenue
|
|
$
|
124,854
|
|
|
$
|
154,098
|
|
|
$
|
44,355
|
|
|
$
|
54,121
|
|
|
$
|
377,428
|
|
Net service revenue
|
|
77,388
|
|
|
99,219
|
|
|
31,249
|
|
|
42,671
|
|
|
250,527
|
|
Segment profit
|
|
17,468
|
|
|
18,236
|
|
|
7,782
|
|
|
2,838
|
|
|
46,324
|
|
Depreciation
|
|
881
|
|
|
1,301
|
|
|
277
|
|
|
663
|
|
|
3,122
|
|
Amortization
|
|
493
|
|
|
528
|
|
|
—
|
|
|
4,059
|
|
|
5,080
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended December 25, 2015:
|
|
|
|
|
|
|
|
|
|
|
Gross revenue
|
|
$
|
87,276
|
|
|
$
|
153,768
|
|
|
$
|
42,277
|
|
|
$
|
8,017
|
|
|
$
|
291,338
|
|
Net service revenue
|
|
74,132
|
|
|
102,988
|
|
|
27,272
|
|
|
5,986
|
|
|
210,378
|
|
Segment profit (loss)
|
|
16,782
|
|
|
19,529
|
|
|
5,425
|
|
|
(1,161
|
)
|
|
40,575
|
|
Depreciation
|
|
956
|
|
|
1,262
|
|
|
222
|
|
|
267
|
|
|
2,707
|
|
Amortization
|
|
599
|
|
|
665
|
|
|
—
|
|
|
302
|
|
|
1,566
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
Gross revenue
|
|
December 30, 2016
|
|
December 25, 2015
|
|
December 30, 2016
|
|
December 25, 2015
|
Gross revenue from reportable operating segments
|
|
$
|
196,947
|
|
|
$
|
156,289
|
|
|
$
|
377,428
|
|
|
$
|
291,338
|
|
Reconciling items (1)
|
|
1,715
|
|
|
1,454
|
|
|
2,085
|
|
|
1,864
|
|
Total consolidated gross revenue
|
|
$
|
198,662
|
|
|
$
|
157,743
|
|
|
$
|
379,513
|
|
|
$
|
293,202
|
|
|
|
|
|
|
|
|
|
|
Net service revenue
|
|
|
|
|
|
|
|
|
Net service revenue from reportable operating segments
|
|
$
|
126,563
|
|
|
$
|
110,913
|
|
|
$
|
250,527
|
|
|
$
|
210,378
|
|
Reconciling items (1)
|
|
793
|
|
|
469
|
|
|
1,134
|
|
|
1,167
|
|
Total consolidated net service revenue
|
|
$
|
127,356
|
|
|
$
|
111,382
|
|
|
$
|
251,661
|
|
|
$
|
211,545
|
|
|
|
|
|
|
|
|
|
|
Income from operations before taxes
|
|
|
|
|
|
|
|
|
Segment profit from reportable operating segments
|
|
$
|
23,626
|
|
|
$
|
20,389
|
|
|
$
|
46,324
|
|
|
$
|
40,575
|
|
Corporate shared services (2)
|
|
(13,969
|
)
|
|
(10,582
|
)
|
|
(28,915
|
)
|
|
(20,535
|
)
|
Stock-based compensation expense
|
|
(2,286
|
)
|
|
(1,511
|
)
|
|
(3,743
|
)
|
|
(2,780
|
)
|
Unallocated acquisition and integration expenses
|
|
—
|
|
|
(1,240
|
)
|
|
—
|
|
|
(2,118
|
)
|
Unallocated depreciation and amortization
|
|
(335
|
)
|
|
(358
|
)
|
|
(673
|
)
|
|
(771
|
)
|
Interest income
|
|
286
|
|
|
137
|
|
|
564
|
|
|
137
|
|
Interest expense
|
|
(841
|
)
|
|
(461
|
)
|
|
(1,686
|
)
|
|
(489
|
)
|
Total consolidated income from operations before taxes
|
|
$
|
6,481
|
|
|
$
|
6,374
|
|
|
$
|
11,871
|
|
|
$
|
14,019
|
|
|
|
|
|
|
|
|
|
|
Acquisition and integration expenses
|
|
|
|
|
|
|
|
|
Acquisition and integration expenses from reportable operating segments
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Unallocated acquisition and integration expenses
|
|
—
|
|
|
1,240
|
|
|
—
|
|
|
2,118
|
|
Total consolidated acquisition and integration expenses
|
|
$
|
—
|
|
|
$
|
1,240
|
|
|
$
|
—
|
|
|
$
|
2,118
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
Depreciation and amortization from reportable operating segments
|
|
$
|
4,036
|
|
|
$
|
2,422
|
|
|
$
|
8,202
|
|
|
$
|
4,273
|
|
Unallocated depreciation and amortization
|
|
335
|
|
|
358
|
|
|
673
|
|
|
771
|
|
Total consolidated depreciation and amortization
|
|
$
|
4,371
|
|
|
$
|
2,780
|
|
|
$
|
8,875
|
|
|
$
|
5,044
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Amounts represent certain unallocated corporate amounts not considered in the CODM's evaluation of operating segment performance.
|
|
|
(2)
|
Corporate shared services consist 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 four operating segments.
|
Note 13. Commitments and Contingencies
Exit Strategy Contracts
The Company has entered into a number of long-term contracts pursuant to its Exit Strategy program under which it is obligated to complete the remediation of environmental conditions at covered sites. The Company assumes the risk
for remediation costs for pre-existing environmental conditions and believes that through in-depth technical analysis, comprehensive cost estimation and creative remedial approaches it is able to execute strategies which protect the Company's return on these projects. The Company's client pays a fixed price and, as additional protection, for a majority of the contracts the client also pays for a cleanup cost cap insurance policy. The policy, which includes the Company as a named or additional insured party, provides coverage for cost increases from unknown or changed conditions up to a specified maximum amount significantly in excess of the estimated cost of remediation. The Company believes that it is adequately protected from risk on these projects and that it is not likely that it will incur material losses in excess of applicable insurance. However, because several projects are near the term or financial limits of the insurance, the Company believes it is reasonably possible that events could occur under certain circumstances which could be material to the Company's consolidated financial statements. With respect to these projects, there is a wide range of potential outcomes that may result in costs being incurred beyond the limits or term of insurance, such as: (i) greater than expected volumes of contaminants requiring remediation; (ii) treatment systems requiring operation beyond the insurance term; and (iii) greater than expected allocable share of the ultimate remedy. The Company does not believe these outcomes are likely, and the exact nature, impact and duration of any such occurrence could vary due to a number of factors. Accordingly, the Company is unable to provide an estimate of potential loss with a reasonable degree of accuracy. Nevertheless, if these events were to occur, the Company believes that it is reasonably possible that the amount of costs currently accrued, which represents the Company's best estimate, could increase by as much as
$24,200
, of which
$4,000
would be covered by insurance.
With respect to one of the projects noted above, the regulatory agency charged with oversight of the project approved a remedial plan that is more expensive than the remedy that had been proposed by the Company. A cost allocation among the potentially responsible parties has not been finalized. However, the Company (and the party from whom it assumed site responsibility) did not contribute in any way to the site contamination, and the Company believes that it has meritorious defenses to liability and that it will not ultimately be responsible for any material remedial costs attributable to the more costly selected remedy. Nevertheless, due to uncertainty over the cost allocation process, it is reasonably possible that the Company's recorded estimate could change. With respect to another one of these projects, the regulatory agency charged with oversight of the project selected a remedy that appears to be consistent with regulatory guidance and the Company’s estimates. However, until the final remedy is formally adopted following a public notice period, it remains reasonably possible that the selected remedial alternative could change and the related costs could increase. The Company's estimated share of the potential remedial cost changes related to these two projects range from
$0
to
$18,600
.
The Company adjusts all of its recorded liabilities as further information develops or circumstances change. The Company is unable to accurately project the time period over which these amounts would ultimately be paid out, however the Company estimates that any potential payments could be made over a
1
to
5
year period.
Contract Damages/ Contract Loss
The Company has entered into contracts which, among other things, require completion of the specified scope of work within a defined period of time or a defined budget. Certain of those contracts provide for the assessment of liquidated or other damages if certain project objectives are not met pursuant to the terms of the contract. At present, the Company does not believe a material assessment of such potential damages is likely.
Furthermore, with respect to one specific fixed price project, there are tasks within the specified scope of work that may result in costs being incurred beyond the currently defined budget. The Company does not believe this outcome is likely, and the exact impact and duration of any such occurrence could vary due to a number of factors. Nevertheless, if these events were to occur, the Company believes that it is reasonably possible that the amount of costs currently accrued, which represents the Company's best estimate, could increase between the range of
$0
to
$6,000
.
Government Contracts
The Company's indirect cost rates applied to contracts with the U.S. Government and various state agencies are subject to examination and renegotiation. Contracts and other records of the Company with respect to federal contracts have been examined through June 30, 2008. The Company believes that adjustments resulting from such examination or renegotiation proceedings, if any, will not likely have a material impact on the Company's business, operating results, financial position and cash flows.
Insurance Captive
During fiscal 2016, the Company became a shareholder in a member-owned heterogeneous (various industries) group captive reinsurance company. The policies of the program are placed with a U.S. insurance carrier, which provides coverage for workers' compensation, general liability and auto liability, with a certain initial layer of loss being reinsured to the carrier by the captive. The Company’s annual premiums are actuarially determined based on historical loss experience, and also include administrative costs and fees. In addition, the captive is designed to have an acceptable level of risk sharing among its members. For a given policy period, if the Company’s actual loss experience is greater than the estimate, the Company is required to make additional payments to the captive up to a maximum predetermined level. If the Company’s loss experience is less than the estimate, the Company may receive a shareholder distribution, when declared by the captive's Board of Directors. The Company records any additional costs or distributions received from the captive in the period in which the Company is notified of the amount due or distribution to be received. The Company has not recorded any additional costs or distributions received related to the captive as of
December 30, 2016
.
Legal Matters
The Company and its subsidiaries are subject to claims and lawsuits typical of those filed against engineering and consulting companies. The Company carries liability insurance, including professional liability insurance, against such claims subject to certain deductibles and policy limits. Except as described herein, management is of the opinion that the resolution of these claims and lawsuits will not likely have a material effect on the Company's operating results, financial position and cash flows.
TRC Environmental Corporation v. LVI Group Services, Inc., United States District Court for the Western District of Texas, Austin Division 2014.
TRC was the prime contractor on a project to demolish and decommission a power plant in Austin, Texas. LVI was a subcontractor on that project, and TRC sued LVI for approximately
$3,000
for breaches in connection with LVI’s work. LVI filed a number of responsive pleadings in this lawsuit including a counterclaim for approximately
$9,900
. TRC believes that its claims against LVI are meritorious and that LVI’s counterclaim is without merit. Nevertheless, an adverse determination on LVI’s counterclaim could have a material adverse effect on the Company’s business, operating results, financial position and cash flows.
The Company records actual or potential litigation-related losses in accordance with ASC Topic 450 "Contingencies". As of
December 30, 2016
and
June 30, 2016
, the Company had recorded litigation accruals of
$5,845
and
$4,869
, respectively. The Company also had insurance recovery receivables related to the aforementioned litigation-related accruals of
$3,022
and
$2,661
as of
December 30, 2016
and
June 30, 2016
, respectively.
The Company periodically adjusts the amount of such liabilities when such actual or potential liabilities are paid or otherwise discharged, new claims arise, or additional relevant information about existing or potential claims becomes available. The Company believes that it is reasonably possible that the amount of potential litigation-related liabilities could increase by as much as
$11,200
, of which
$2,100
would be covered by insurance.
Note 14. Subsequent Events
On January 31, 2017, the Company entered into a credit agreement (the “Credit Agreement”) with Citizens Bank, N.A. as lender, LC issuer, administrative agent, sole lead arranger, and sole book runner; BMO Harris Bank, N.A. as lender, LC issuer and syndication agent; KeyBank, N.A. as lender and documentation agent, and five other banks as lenders. The Credit Agreement provides the Company with a
$250,000
five
-year secured revolving credit facility (“Revolving Facility”) with a sublimit of
$15,000
available for the issuance of letters of credit. The Credit Agreement replaces the Company’s existing credit facility with Citizens Bank, N.A. (the “Prior Credit Agreement”) converting the existing amortizing term loan and revolving borrowing structure to a non-amortizing, fully revolving format.
The Revolving Facility will be available for working capital and general corporate purposes as permitted under the Credit Agreement. The Credit Agreement includes borrowing capacity for letters of credit and for borrowings on same-day notice, referred to as “swingline loans.” Borrowings under the Credit Agreement are subject to the satisfaction of customary conditions, including absence of defaults and accuracy of representations and warranties. Under the terms of the Credit Agreement, the amount of the Revolving Facility may be increased through incremental revolving commitments, subject to a cap of an additional
$75,000
.
The commitments under the Credit Agreement may be reduced, in whole or in part, without premium or penalty. Any borrowings outstanding under the Credit Agreement will mature on January 31, 2022.
Amounts outstanding under the Credit Agreement bear interest at the Base Rate (as defined, generally the prime rate) plus a margin of
0.50%
to
1.75%
, or at the Eurodollar Rate (as defined, generally the Libor rate) plus a margin of
1.50%
to
2.75%
, based on the Company's Leverage Ratio (as defined). In addition to these borrowing rates, there is a commitment fee which ranges from
0.20%
to
0.50%
(based on the Leverage Ratio) on any unused commitments. The applicable fees for issuance of letters of credit under the Revolving Facility is a range of
1.50%
to
2.75%
also based on the Leverage Ratio.
The Company’s obligations under the Credit Agreement are secured by a pledge of substantially all of its assets and guaranteed by its principal operating subsidiaries. The Credit Agreement also contains cross-default provisions which become effective if the Company defaults on other indebtedness.
The Credit Agreement contains customary restrictive covenants that limit our ability to, among other things: incur additional indebtedness or enter into guarantees; enter into sale/leaseback transactions; make investments, loans or acquisitions; grant or incur liens on our assets; sell our assets; engage in mergers, consolidations, liquidations or dissolutions; engage in transactions with affiliates; and make restricted payments. Under the Credit Agreement the Company is required to maintain a fixed charge coverage ratio of no less than
1.25
to
1.00
and to not permit its leverage ratio to exceed
3.00
to
1.00
.
On January 31, 2017 the Company utilized
$15,000
of cash on hand to pay down the existing
$69,375
of Term Loan borrowings outstanding under the Prior Credit Agreement, resulting in
$54,375
borrowed under the Credit Agreement's Revolving Facility.