| TRC COMPANIES INC /DE/ Item 1A Risk Factors The risk factors listed below, in addition to those described elsewhere in this report, could materially and adversely affect our business, financial condition, results of operations or cash flows |
| Our business operations could also be affected by additional factors that are not presently known to us or that we currently consider to be immaterial to our operations |
| We are dependent on earnings and cash flow from operations to finance our growth |
| Our strategic objectives include continued expansion of value-added services |
| We depend on our core businesses to generate profits and cash flow to fund our growth |
| Although the services that we provide are spread across a variety of industries, disruptions such as a general economic downturn or higher interest rates could negatively affect the demand for our services across a variety of industries which could adversely affect our ability to generate profits and cash flows that we require to meet our growth objectives |
| 11 ______________________________________________________________________ We are dependent on government contracts |
| Contracts with agencies of the US government and various state and local governments have historically represented between 26prca and 29prca of our net service revenue |
| Therefore, we are materially dependent on various contracts with such governmental agencies |
| Companies engaged in government contracting are subject to certain unique business risks |
| Among these risks are dependence on appropriations and administrative allotment of funds, and changing policies and regulations |
| These contracts may also be subject to renegotiation of profits or termination at the option of the government |
| The stability and continuity of that portion of our business depends on the periodic exercise by the government of contract renewal options, our continued ability to negotiate terms favorable to us and the continued awarding of task orders to us |
| We are dependent on continued regulatory enforcement |
| While we increasingly pursue economically driven markets, our business is materially dependent on the continued enforcement by federal, state and local governments of various environmental regulations |
| In a period of relaxed environmental standards or enforcement, our business could be adversely impacted by private industry being less willing to allocate funds to consulting services related to environmental enforcement |
| We operate in highly competitive industries |
| The markets for many of our services are highly competitive |
| There are numerous professional architectural, engineering and consulting firms and other organizations which offer many of the services offered by us |
| We compete with many companies, some of which have greater resources |
| A potential risk to us is that such competitors will substantially increase resources devoted to their business resulting in increased competitive pressures |
| Competitive factors include reputation, performance, price, geographic location and availability of technically skilled personnel |
| In addition, we face competition from the use by our clients of in-house environmental and other staff |
| We are and will continue to be involved in litigation |
| We are, and expect in the future to be, named as a defendant in legal actions claiming damages in connection with engineering and construction projects and other matters |
| These are typically actions that arise in the normal course of business, including employment-related claims and contractual disputes or claims for personal injury or property damage which occur in connection with services performed relating to project or construction sites |
| To date, we have been able to obtain liability insurance for the operation of our business |
| However, if we sustain damages that materially exceed our insurance coverage or that are not insured, there could be a material adverse effect on our liquidity which could impair our operations |
| If our subcontractors fail to perform their contractual obligations on a project, we could be exposed to loss of reputation and additional financial performance obligations that could result in reduced profits or losses |
| We often hire subcontractors for our projects |
| The success of these projects depends, in varying degrees, on the satisfactory performance of our subcontractors |
| If our subcontractors do not meet their obligations, we may be unable to adequately perform and deliver our contracted services |
| Under these circumstances, we may be required to make additional investments and expend additional resources to ensure the adequate performance and delivery of the contracted services |
| These additional obligations have resulted in reduced profits or, in some cases, significant losses for us with respect to certain projects |
| In addition, the inability of our subcontractors to adequately perform on certain projects could hurt our competitive reputation and ability to obtain future projects |
| Our operations could require us to utilize large sums of working capital, sometimes on short notice and sometimes without the ability to recover the expenditures |
| Circumstances or events which could create large cash outflows include losses resulting from fixed-price contracts, remediation of environmental liabilities, adverse legal awards, unexpected costs or losses resulting from acquisitions, project completion delays, inability of clients to pay, professional liability or personal injury claims, among others |
| We cannot provide assurance that we will have sufficient liquidity or the credit capacity to meet all of our cash needs if we encounter significant working capital requirements as a result of these or other factors |
| If we must write off a significant amount of intangible assets or long-lived assets, our earnings will be negatively impacted |
| Because we have grown in part through acquisitions, goodwill and other acquired intangible assets represent a substantial portion of our assets |
| We also have other identifiable 12 ______________________________________________________________________ intangible assets of dlra13dtta5 million, net of accumulated amortization, as of June 30, 2005 |
| Goodwill and identifiable intangible assets are assessed for impairment at least annually or whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable |
| If we make additional acquisitions, it is likely that we will record goodwill and additional intangible assets on our financial statements |
| We reported a dlra3dtta6 million impairment loss related to our CEG reporting unit for our fiscal year ended June 30, 2005 (see Note 17) |
| We were not required to and did not report an impairment loss for our Engineering & Consulting reporting unit despite recording a dlra3dtta2 million operating loss for fiscal 2005 as the fair value of the E&C reporting unit exceeded the carrying value |
| If we continue to report losses for our Engineering & Consulting segment in the future, the likelihood of needing to record an impairment charge increases |
| If a determination that a significant impairment in value of our goodwill or unamortized intangible assets or long-lived assets occurs, such determination could require us to write off a substantial portion of our assets |
| Such a write off would materially affect our earnings and shareholders’ equity |
| The value of our equity securities could continue to be volatile |
| Our common stock has experienced substantial price volatility |
| In addition, the stock market has experienced extreme price and volume fluctuations that have affected the market price of many companies and that have often been unrelated to the operating performance of these companies |
| The overall market and the price of our common stock may continue to fluctuate greatly |
| The trading price of our common stock may be significantly affected by various factors, including: · Quarter-to-quarter variations in our financial results, including revenue, profits, day sales in receivables, backlog, and other measures of financial performance or financial condition; · Announcements by us or our competitors of significant events, including acquisitions; · Resolution of threatened or pending litigation; · Changes in investors’ and analysts’ perceptions of our business or any of our competitors’ businesses; · Investors’ and analysts’ assessments of reports prepared or conclusions reached by third parties; · Changes in legislation; · Broader market fluctuations; · General economic or political conditions; and · Material internal control weaknesses Additionally, volatility or a lack of positive performance in our stock price may adversely affect our ability to retain key employees, many of whom are granted stock options, the value of which is dependent on the performance of our stock price |
| We may experience adverse impacts on our results of operations as a result of adopting new accounting standards or interpretations |
| Our implementation of and compliance with changes in accounting rules, including new accounting rules and interpretations, could adversely affect our operating results or cause unanticipated fluctuations in our operating results in future periods |
| For example, the Financial Accounting Standards Board has issued its final standard on accounting for equity compensation |
| FASB Statement Nodtta 123(R), Share-Based Payment (“FAS 123(R)”), requires us to recognize, as an expense, the fair value of stock options and other equity-related compensation to employees |
| Since we historically have used equity-related compensation as a component of our total compensation program, the accounting change could make the use of equity-related compensation less attractive to us |
| We will use the modified prospective method for adoption of FAS 123(R), and expect that the related compensation cost to be recognized during fiscal 2006 will range from dlra1dtta5 million to dlra2dtta0 million before income taxes |
| Compliance with changing regulation of corporate governance and public disclosure will result in additional expenses Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new Securities and Exchange Commission (“SEC”) regulations, and New York Stock Exchange rules, are creating additional disclosure and other compliance requirements for us |
| We are committed to maintaining high standards of corporate governance and public disclosure |
| As a result, we intend to invest appropriate resources to comply with evolving standards, and this investment may result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities |
| 13 ______________________________________________________________________ We have defaulted on our credit facility and are currently operating under a forbearance agreement |
| We finance our operations through borrowings under our revolving credit facilities and also through cash generated by our operating activities |
| Our credit facilities have contained covenants and in the future are expected to contain covenants, which, among other things, require us to maintain minimum coverage ratio requirements, maximum leverage ratio requirements, and minimum current assets to total liabilities ratio requirements |
| At June 30, 2005, we failed to comply with these covenants and were required to enter into forbearance agreements with our lenders, and we are currently operating under a forbearance agreement |
| Any future failure to comply with the covenants under our credit facilities could result in further events of default which, if not cured or waived, could trigger prepayment obligations |
| If we were forced to refinance borrowings under our credit facilities, we can provide no assurance that we would be successful in obtaining such refinancing |
| Even if such refinancing were available, the terms could be less favorable and our results of operations and financial condition could be adversely affected by increased loan fees and interest rates on amounts borrowed |
| We have established a new management team |
| During the past year, we have made several changes in our senior management team, including our Chief Executive Officer, Chief Operating Officer and Chief Financial Officer |
| In addition, searches are underway for a variety of other management positions within our company |
| Because of the lack of familiarity of the new management team with our company, there is the risk that our new management team will not be able to execute our business plan and that initiatives could be implemented that would adversely affect the business |
| We are highly dependent on key personnel |
| The success of our business depends on our ability to attract and retain qualified employees |
| We need talented and experienced personnel in a number of areas including our core business activities |
| An inability to attract and retain qualified personnel could harm our business |
| Turnover among certain critical staff could have a material adverse effect on our ability to implement our strategies and on our results of operations |
| We have found material weaknesses in our internal controls that require remediation |
| As we disclose in Part II, Item 9A, “Controls and Procedures” of this Form 10-K, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures and internal control over financial reporting were not effective as of June 30, 2005 |
| While we are taking immediate steps to correct our internal control weaknesses, the material weaknesses in internal control over financial reporting that have been identified will not be remediated until numerous internal controls are implemented and operate for a period of time, are tested, and we are able to conclude that such internal controls are operating effectively |
| Pending the successful completion of such implementation and testing of the internal controls, we will perform additional procedures to reduce the risk that material weaknesses in internal control over financial reporting result in material errors to the financial statements |
| We cannot provide assurance that these procedures will be successful in identifying material errors that may exist in the financial statements |
| Any failure to implement and maintain the improvements in the internal control over our financial reporting, or difficulties encountered in the implementation of these improvements in our controls, could result in errors in the financial statements that would not be prevented or detected, or cause us to fail to meet our reporting obligations |
| We cannot assure you that we will not identify additional material weaknesses in our internal controls in the future |
| Any failure to improve the identified material weakness or any identification of any additional material weaknesses could cause investors to lose confidence in our reported financial information which could have a negative impact on the trading price of our stock |
| There are risks associated with our acquisition strategy |
| A significant portion of our historic growth strategy has been to acquire other companies that enable us to expand our capabilities in key strategic service and geographic areas |
| In the future, we may continue to acquire companies on a selective basis as an element of our long-term growth objectives |
| Our ability to make acquisitions is currently restricted under our revolving credit agreement |
| Acquisitions involve risks that include the risk of paying more than the target company is worth and the risk of not successfully integrating the target company into our operations due to differences in culture between the companies or other factors |
| Our services expose us to significant risks of liability and it may be difficult to obtain or maintain adequate insurance coverage |
| Our services involve significant risks that may substantially exceed the fees we derive from our services |
| Our business activities expose us to potential liability for professional negligence, personal injury and property damage among other things |
| 14 ______________________________________________________________________ We cannot predict the magnitude of such potential liabilities |
| In addition, our ability to perform certain services is dependent on our ability to obtain adequate insurance as well as bid and performance bonds |
| We obtain insurance from insurance companies to cover our potential risks and liabilities |
| It is possible that we may not be able to obtain adequate insurance to meet our needs, may have to pay an excessive amount for the insurance coverage we want, or may not be able to acquire any insurance for certain types of business risks |
| An inability to obtain certain insurance, as well as bid and performance bonds, could result in our decision to cease providing certain services that could result in lower revenues, lower profits, or losses |
| Our liability for damages due to legal proceedings may harm our operating results or financial condition |
| Various legal proceedings are currently pending against us and certain of our subsidiaries alleging, among other things, breach of contract or tort |
| We cannot predict the outcome of these proceedings with certainty |
| In some actions, parties are seeking damages that exceed our insurance coverage or for which we are not insured |
| If we sustain damages that exceed our insurance coverage or that are not covered by insurance, there could be a material adverse effect on our business, operating results, financial condition or cash flows |
| Our failure to properly manage projects may result in additional costs or claims |
| Our engagements often involve a variety of projects some of which are large-scale and complex |
| Our performance on projects depends in large part upon our ability to manage the relationship with our clients and to effectively manage the project and deploy appropriate resources, including third-party contractors and our own personnel, in a timely manner |
| If we miscalculate the resources or time we need to complete a project with capped or fixed fees, or the resources or time we need to meet contractual milestones, our operating results could be adversely affected |
| Further, any defects, errors or failures to meet our clients’ expectations could result in claims for damages against us |
| Our contracts often limit our liability for damages that arise from negligent acts, errors, mistakes or omissions in rendering services to our clients; however, we cannot be sure that these contractual provisions will protect us from liability for damages in the event we are sued |
| Our use of the percentage-of-completion method of accounting could result in reduction or reversal of previously recorded revenue and profits |
| We account for a significant portion of our contracts on the percentage-of-completion method of accounting |
| Generally our use of this method results in recognition of revenue and profit ratably over the life of the contract based on the proportion of costs incurred to date to total costs expected to be incurred |
| The effect of revisions to revenue and estimated costs, including the achievement of award and other fees, is recorded when the amounts are known and can be reasonably estimated |
| The uncertainties inherent in the estimating process make it possible for actual costs to vary from estimates that could result in reductions or reversals of previously recorded revenue and profit |
| Such differences could be material |
| Our business and operating results could be adversely affected by our inability to accurately estimate the overall risks, revenue or costs on a contract |
| We generally enter into three principal types of contracts with our clients: fixed-price, time-and-materials, and cost-plus |
| Under our fixed-price contracts, we receive a fixed price irrespective of the actual costs we incur and, consequently, we are exposed to a number of risks |
| These risks include: underestimation of costs, problems with new technologies, unforeseen costs or difficulties, delays, price increases for materials, and economic and other changes that may occur during the contract period |
| Under our time-and-materials contracts, we are paid for labor at negotiated hourly billing rates and for other expenses |
| Profitability on these contracts is driven by billable headcount and cost control |
| Many of our time-and-materials contracts are subject to maximum contract values and, accordingly, revenue relating to these contracts is recognized as if these contracts were fixed-price contracts |
| Under our cost-plus contracts, some of which are subject to contract ceiling amounts, we are reimbursed for allowable costs and fees, which may be fixed or performance-based |
| If our costs exceed the contract ceiling or are not allowable under the provisions of the contract or any applicable regulations, we may not be able to obtain reimbursement for all such costs |
| Accounting for a contract requires judgments relative to assessing the contract’s estimated risks, revenue and estimated costs, as well as technical issues |
| Due to the size and nature of many of our contracts, the estimation of overall risk, revenue and cost at completion is difficult and subject to many variables |
| Changes in underlying assumptions, circumstances or estimates may adversely affect future period financial performance |
| If we are unable to accurately estimate the overall revenue or costs on a contract, then we may experience a lower profit or incur a loss on the contract |
| 15 ______________________________________________________________________ Our backlog is subject to cancellation and unexpected adjustments, and is an uncertain indicator of future operating results |
| Our net contract backlog as of June 30, 2005 was approximately dlra213 million |
| We cannot guarantee that the net service revenue projected in our backlog will be realized or, if realized, will result in profits |
| In addition, project cancellations or scope adjustments may occur from time to time with respect to contracts reflected in our backlog |
| These types of backlog reductions could adversely affect our revenue and margins |
| Accordingly, our backlog as of any particular date is an uncertain indicator of our future earnings |