TRC Use of Non-GAAP Financial Measures

In addition to financial measures prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), from time to time we may use or publicly disclose certain "non-GAAP financial measures" in the course of our financial presentations, earnings releases, earnings conference calls, and otherwise. For these purposes, the U.S. Securities and Exchange Commission (“SEC”) defines a "non-GAAP financial measure" as a numerical measure of historical or future financial performance, financial positions, or cash flows that (i) exclude amounts, or is subject to adjustments that effectively exclude amounts, included in the most directly comparable measure calculated and presented in accordance with GAAP in financial statements, and (ii) include amounts, or is subject to adjustments that effectively include amounts, that are excluded from the most directly comparable measure so calculated and presented.

Non-GAAP financial measures are provided as additional information to investors in order to provide them with an alternative method for assessing our financial condition and operating results. These measures are not in accordance with, or a substitute for, GAAP, and may be different from or inconsistent with non-GAAP financial measures used by other companies.

Pursuant to the requirements of Regulation G, whenever we refer to a non-GAAP financial measure, we will also generally present, on this Web site, the most directly comparable financial measure calculated and presented in accordance with GAAP, along with a reconciliation of the differences between the non-GAAP financial measure we reference with such comparable GAAP financial measure.

Our most recently reported non-GAAP results and a reconciliation of those results to the most directly comparable GAAP measures can be found here.

The reasons that we use these measures and other information relating to these measures are included below.

Consolidated Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA) and Consolidated Adjusted EBITDA

To calculate Consolidated EBITDA and Consolidated Adjusted EBITDA we begin with net income applicable to TRC Companies, Inc.’s common shareholders and add to it the interest expense, federal and state income tax provision, depreciation and amortization expense and net loss applicable to noncontrolling interest as depicted in the income statement to compute Consolidated EBITDA. To compute Consolidated Adjusted EBITDA per the definition in our revolving credit facility, we first subtract any interest expense related to Excluded Indebtedness as defined in the credit facility. Next we add back any interest and penalties paid on federal and state income taxes and noncash losses and certain expenses as defined in the definitions in the credit facility including stock-based compensation expense.

Management presents Consolidated EBITDA and Consolidated Adjusted EBITDA, which are non-U.S. GAAP measures, because we believe that they are useful tools for us, our lender and our investors to measure our ability to meet debt service, capital expenditure and working capital requirements. Consolidated EBITDA and Consolidated Adjusted EBITDA, as presented, may not be comparable to similarly titled measures reported by other companies, because not all companies calculate EBITDA in an identical manner. Consolidated EBITDA and Consolidated Adjusted EBITDA are not intended to represent cash flows for the period or funds available for management’s discretionary use nor are they represented as an alternative to operating income as an indicator of operating performance and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with U.S. GAAP. Our Consolidated EBITDA and Consolidated Adjusted EBITDA should be evaluated in conjunction with U.S. GAAP measures such as operating income, net income, cash flows from operations and other measures of equal or greater importance. In addition, our covenants in the revolving credit agreement contain ratios based on a Consolidated Adjusted EBITDA measure as further defined in Note 9. Long-Term Debt and Capital Lease Obligations to the condensed consolidated financial statements and in the Liquidity and Capital Resources section of Part I Financial Information and Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations section of the report. Consolidated EBITDA is presented based on both the definition used in our Credit Agreement as well as a more typical calculation method.

Gross Margin and Gross Margin Percentage

We use the term "gross margin" to refer to GAAP gross margin, excluding depreciation expense. We use the related term "gross margin percentage" to refer to gross margin as a percentage of GAAP revenue. We believe that these non-GAAP measures, when taken together with our GAAP financial measures, allow us and our investors to better evaluate short-term and long-term profitability trends. The GAAP Gross Margin is typically Net Service Revenue less cost of services and depreciation expense.

Adjusted Diluted Earnings Per Common Share

Adjusted Diluted Earnings Per Common Share is defined as reported earnings per common share excluding the tax impact of the reversal of a portion of the valuation allowance. We do not believe that this excluded item is indicative of our ongoing operating results, and it is not considered when we are forecasting our future results. We believe Adjusted Diluted Earnings Per Common Share is of value to our current and potential investors when comparing our results from past, present and future periods.

Free Cash Flow

Free cash flow is used in addition to and in conjunction with results presented in accordance with GAAP, and free cash flow should not be relied upon to the exclusion of GAAP financial measures. Free cash flow reflects an additional way of viewing our liquidity that, when viewed with our GAAP results, provides a more complete understanding of factors and trends affecting our cash flows.

Free cash flow, which we reconcile to “Net cash used in operating activities,” is cash flow from operations reduced by “Additions to property and equipment.” We use free cash flow, and ratios based on it, to conduct and evaluate our business because, although it is similar to cash flow from operations, we believe it is a useful measure of cash flows since purchases of fixed assets are a necessary component of ongoing operations.

Non GAAP Summary

The non-GAAP financial measures described above are not meant to be considered superior to, or a substitute for, our financial statements prepared in accordance with GAAP. There are material limitations associated with non-GAAP financial measures because they may exclude charges that adjust our reported results and, therefore, should not be relied upon as the sole financial measures to evaluate our financial results. Management compensates and believes that investors should compensate for these limitations by viewing the non-GAAP financial measures in conjunction with the GAAP financial measures. In addition, the non-GAAP financial measures included in this earnings announcement may be different from, and therefore may not be comparable to, similar measures used by other companies.

The non-GAAP financial measures listed above are also used by our management to evaluate our operating performance, communicate our financial results to our Board of Directors and the banks in our revolving credit facility, benchmark our results against our historical performance and the performance of our peers, evaluate investment opportunities including acquisitions and discontinued operations, and determine incentive compensation, as applicable.