Willdan(WLDN) - 2021 Q4 - Annual Report

Part I Business Willdan Group, Inc. provides energy and engineering consulting services, growing organically and via acquisitions - Willdan Group, Inc. provides professional, technical, and consulting services to utilities, private industry, and public agencies, focusing on energy solutions and government infrastructure[18] Contract Revenue by Segment (Fiscal Years 2019-2021) | Segment | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Energy | 81% | 83% | 84% | | Engineering and Consulting | 19% | 17% | 16% | - The company's growth strategy is centered on a mix of strong organic expansion and strategic acquisitions to broaden its service offerings[20] - In fiscal year 2021, the top 10 customers accounted for 49.2% of consolidated contract revenues, with one customer, the Los Angeles Department of Water and Power (LADWP), representing 10.8%[64] - Geographically, California and New York are the largest markets, accounting for 36.8% and 21.0% of consolidated contract revenue in fiscal year 2021, respectively[65] Our Markets Willdan operates in growing energy services and stable engineering markets, driven by climate change and outsourcing needs - The energy services market is expected to grow due to global warming awareness, climate change issues, and new renewable energy technologies[24] - The engineering and consulting market grows as public agencies and utilities outsource services to avoid the costs of maintaining in-house staff and resources[25][26] Our Services Willdan's Energy segment offers energy solutions; Engineering provides civil engineering, construction, and financial consulting - The Energy segment provides a wide range of services including audits, program design, demand reduction, grid optimization, and performance contracting[33] - The Engineering and Consulting segment offers civil engineering, construction management, building and safety services, city planning, geotechnical services, and financial consulting[42] - Key projects in the Energy segment include managing Con Edison's Small Business Direct Install program in New York and providing peak-load reduction services for San Diego Gas & Electric[38][40] - Notable projects in the Engineering and Consulting segment include providing comprehensive engineering and infrastructure services for the City of Elk Grove, California[58] Contract Structure Willdan uses time-and-materials, unit-based (54% of 2021 revenue), and fixed-price contracts Contract Revenue by Pricing Provision (Fiscal Years 2019-2021) | | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Time-and-materials | 24% | 26% | 16% | | Unit-based | 54% | 46% | 65% | | Fixed price | 22% | 28% | 19% | | Total | 100% | 100% | 100% | - Fixed price contracts carry inherent risks like cost underestimation and project delays, which Willdan mitigates through fixed-price subcontracts[74] - Most contracts can be terminated by clients with prior notice, which could materially affect operations if a major contract is terminated[76] Human Capital Resources Willdan employed 1,560 people as of Dec 31, 2021, emphasizing diverse talent, training, and safety initiatives Employee Count by Segment (2019-2021) | | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Energy | 860 | 748 | 900 | | Engineering and Consulting | 619 | 531 | 487 | | Holding Company Employees | 81 | 74 | 64 | | Total | 1,560 | 1,353 | 1,451 | - The company established a Diversity, Equity, and Inclusion (DE&I) Working Group in 2020 and the Willdan Clean Energy Academy (WCEA) to offer free training to disadvantaged workers in New York City and Los Angeles[90][92] Workplace Safety Incident Metrics (2019-2021) | Metric | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | RCR (Recordable Case Rate) | 0.83 | 0.78 | 1.06 | | LTIR (Lost-Time Incident Rate) | 0.74 | 0.35 | 0.53 | Risk Factors The company faces multiple risks including COVID-19 impacts, project execution, debt, customer loss, and cybersecurity threats - The COVID-19 pandemic has adversely affected business, particularly direct install programs, and its ultimate impact remains uncertain[111][113] - The company's engagements often involve large-scale, complex projects, and failure to meet deadlines or performance standards can lead to significant additional costs and reputational damage[115] - Substantial leverage and debt service obligations could make it difficult to satisfy obligations, obtain future financing, and comply with financial covenants[143] - The loss of key utility programs or clients could significantly harm revenue, as most agreements are based on a "purchase order" model and do not commit clients to minimum service purchases[150][151] - The growth strategy of acquiring other companies involves risks such as diverting management attention, integration challenges, and assuming undisclosed liabilities[170][171] - Cybersecurity attacks are an evolving threat that could lead to disruptions in critical systems, unauthorized release of confidential information, and corruption of data, potentially harming the company's reputation and operations[193][194] Unresolved Staff Comments The company reports that there are no unresolved staff comments from the SEC - None[196] Properties Willdan's corporate headquarters is in Anaheim, California, with 47 additional leased offices across the U.S. and Canada - The company's corporate headquarters is in a leased 18,000 sq. ft. office in Anaheim, California[197] - Willdan leases a total of approximately 262,000 square feet of office space across 47 U.S. locations and one Canadian office, with leases expiring through 2027[197] Legal Proceedings The company is subject to ordinary course claims and lawsuits, maintaining professional liability insurance and reserves for probable losses - The company is subject to claims and lawsuits arising in the ordinary course of business and carries professional liability insurance for such claims[198] - Management believes that the ultimate liability from current legal proceedings is not expected to have a material adverse effect on the company's financial statements[200] Mine Safety Disclosures This item is not applicable to the company - Not applicable[201] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Information for Items 10-14 is incorporated by reference from the company's 2022 Proxy Statement - The company's common stock is traded on the Nasdaq Global Market under the symbol "WLDN"[203] - No cash dividends were declared or paid in fiscal years 2021, 2020, or 2019, and none are anticipated in the foreseeable future[205][206] - There were no issuer repurchases of equity securities during the period[211] Reserved This item is reserved Management's Discussion and Analysis of Financial Condition and Results of Operations In FY2021, revenue decreased by 9.5% to $353.8 million, but gross profit increased, improving gross margin to 38.4% Consolidated Financial Summary (in thousands) | Metric | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Contract Revenue | $353,755 | $390,980 | $443,099 | | Gross Profit | $135,874 | $129,393 | $134,973 | | Income (Loss) from Operations | $(8,691) | $(16,227) | $9,363 | | Net Income (Loss) | $(8,417) | $(14,496) | $4,841 | - Contract revenue decreased by 9.5% in FY2021 compared to FY2020, mainly due to a decrease in construction management activities in the Energy segment and one fewer week in the fiscal year[232] - Gross margin increased to 38.4% in FY2021 from 33.1% in FY2020, primarily due to a change in revenue mix away from lower-margin construction management services[238] - The COVID-19 pandemic negatively impacted direct install programs in California through the first half of fiscal 2021. The last suspended program, for LADWP, resumed in late June 2021[218][219] - Cash flow from operating activities was $9.8 million in FY2021, a decrease from $47.0 million in FY2020, primarily due to increased working capital demand as utility programs resumed[262][267] Results of Operations For fiscal 2021, contract revenue fell 9.5% to $353.8 million, while gross profit rose 5.0% to $135.9 million, improving net loss - 2021 vs. 2020: Contract revenue decreased by $37.2 million (9.5%), primarily in the Energy segment due to reduced construction management activities. Gross profit increased by 5.0% due to a favorable change in revenue mix, leading to a higher gross margin (38.4% vs. 33.1%)[232][238] - 2021 vs. 2020: The net loss for fiscal 2021 was $8.4 million, an improvement from a net loss of $14.5 million in fiscal 2020, driven by higher gross profit margins and lower operating expenses[246] - 2020 vs. 2019: Contract revenue decreased by $52.1 million (11.8%), primarily due to COVID-19 related suspensions of direct install programs. This led to an operating loss of $16.2 million in 2020 compared to an operating income of $9.4 million in 2019[247][258] Liquidity and Capital Resources Willdan had $11.2 million in cash as of Dec 31, 2021, with sufficient liquidity from operations and credit facilities Net Cash Flow Summary (in thousands) | Activity | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Operating activities | $9,803 | $47,025 | $11,621 | | Investing activities | $(8,454) | $(5,059) | $(78,348) | | Financing activities | $(18,533) | $(19,013) | $56,920 | - As of December 31, 2021, the company had $11.2 million in cash and cash equivalents, a $100 million Term A Loan with $75.0 million outstanding, and a $50.0 million Revolving Credit Facility with no amount borrowed[263] Contractual Obligations as of Dec 31, 2021 (in thousands) | Obligation | Total | Less than 1 Year | 1 - 3 Years | 3 - 5 Years | More than 5 Years | | :--- | :--- | :--- | :--- | :--- | :--- | | Long term debt | $100,574 | $15,036 | $85,538 | $— | $— | | Interest payments on debt | $6,151 | $2,756 | $3,395 | $— | $— | | Operating leases | $16,342 | $5,575 | $6,589 | $3,753 | $425 | | Finance leases | $1,317 | $539 | $702 | $76 | $— | | Total | $124,384 | $23,906 | $96,224 | $3,829 | $425 | Critical Accounting Policies Willdan's financial statements rely on critical accounting policies requiring significant judgment, including contract accounting, goodwill, business combinations, and income taxes - Contract Accounting: Revenue on fixed-price contracts is recognized using the percentage-of-completion method, which requires significant judgment in estimating total revenue and costs at completion[298][308] - Goodwill: Goodwill is tested for impairment annually at the reporting unit level. This involves significant estimates of future revenue, profitability, and cash flows to determine fair value[317][322] - Business Combinations: The acquisition method requires significant estimates for the fair value of identifiable assets acquired and liabilities assumed[323] - Income Taxes: The company must make a judgmental assessment of the recoverability of deferred tax assets, which includes evaluating historical income and forecasting future taxable income to determine if a valuation allowance is needed[328] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk from variable-rate debt; a 1% increase would raise annual interest expense by $1.0 million - The company is subject to interest rate risk from its variable-rate Term A Loan, revolving credit facility, and delayed draw term loan[336] - A one-percentage-point increase in the effective interest rate would result in an approximate $1.0 million increase in annual interest expense based on debt levels at year-end 2021[340] - The company has addressed the transition from LIBOR by amending its credit agreement in March 2022 to utilize the Secured Overnight Financing Rate (SOFR) as the new reference rate[342] Financial Statements and Supplementary Data This section contains the company's audited consolidated financial statements for FY2021 and the independent auditor's unqualified opinion - The independent auditor, Crowe LLP, issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting as of December 31, 2021[348] - The auditor identified two Critical Audit Matters: (1) the estimation of costs to complete on fixed-price contracts, and (2) the estimated realization of deferred income tax assets for net operating losses[356][358][359] Consolidated Balance Sheet Summary (in thousands) | | Dec 31, 2021 | Jan 1, 2021 | | :--- | :--- | :--- | | Total Current Assets | $148,959 | $155,904 | | Total Assets | $394,422 | $403,024 | | Total Current Liabilities | $117,207 | $116,670 | | Total Liabilities | $215,201 | $233,860 | | Total Stockholders' Equity | $179,221 | $169,164 | Consolidated Statement of Comprehensive Income Summary (in thousands) | | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Contract Revenue | $353,755 | $390,980 | $443,099 | | Gross Profit | $135,874 | $129,393 | $134,973 | | Income (Loss) from Operations | $(8,691) | $(16,227) | $9,363 | | Net Income (Loss) | $(8,417) | $(14,496) | $4,841 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reported no changes in or disagreements with its accountants on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure during the fiscal year ended December 31, 2021 - There were no disagreements with accountants on accounting and financial disclosure[563] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2021, with no material changes - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2021[565] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2021, based on the COSO framework[566] - There were no changes in internal control over financial reporting during the fourth quarter of 2021 that materially affected, or are reasonably likely to materially affect, internal controls[568] Other Information On March 8, 2022, the company amended its Credit Agreement to extend covenant relief, fund a loan, and transition to SOFR - On March 8, 2022, the company entered into the Fifth Amendment to its Credit Agreement[569] - The amendment extended the covenant relief period, funded the remaining $20.0 million from the Delayed Draw Term Loan, and transitioned the reference interest rate from LIBOR to SOFR[569][570] Disclosure Regarding Foreign Jurisdictions That Prevent Inspections This item is not applicable to the company - None[574] Part III Directors, Executive Officers, Corporate Governance, Executive Compensation, and Other Matters Information for Items 10-14 is incorporated by reference from the company's 2022 Proxy Statement - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the company's Proxy Statement for its 2022 Annual Meeting of Stockholders[577][579][580] - The company's Code of Ethical Conduct is available on its website and applies to the CEO and CFO[578] Part IV Exhibits, Financial Statement Schedules This section lists documents filed as part of the Annual Report on Form 10-K, including financial statements and various exhibits - The report includes a list of all exhibits filed, such as the Amended and Restated Credit Agreement and its subsequent amendments, stock incentive plans, and various certifications required by the Sarbanes-Oxley Act[587][588] Form 10-K Summary This item is not applicable to the company - None[590]