Willdan(WLDN) - 2021 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This part presents the company's unaudited condensed consolidated financial statements and management's discussion and analysis Item 1. Financial Statements This section provides the unaudited condensed consolidated financial statements and comprehensive notes for the periods ended July 2, 2021 Condensed Consolidated Balance Sheets This section presents the company's financial position, including assets, liabilities, and equity, as of July 2, 2021 | Metric | July 2, 2021 (in thousands) | January 1, 2021 (in thousands) | | :-------------------------------- | :-------------------------- | :--------------------------- | | Total assets | $380,487 | $410,323 | | Total liabilities | $209,674 | $241,159 | | Total stockholders' equity | $170,813 | $169,164 | - Total assets decreased by $29.8 million from January 1, 2021, to July 2, 2021, primarily driven by a decrease in cash and cash equivalents and accounts receivable[18] - Total liabilities decreased by $31.5 million, mainly due to reductions in accounts payable, accrued liabilities, and notes payable[18] Condensed Consolidated Statements of Comprehensive Income This section details the company's revenues, expenses, and net income (loss) for the three and six months ended July 2, 2021 | Metric | Three Months Ended July 2, 2021 (in thousands) | Three Months Ended July 3, 2020 (in thousands) | Six Months Ended July 2, 2021 (in thousands) | Six Months Ended July 3, 2020 (in thousands) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | :------------------------------------- | :------------------------------------- | | Contract revenue | $84,154 | $83,549 | $163,240 | $189,575 | | Income (Loss) from operations | $(7,072) | $(3,841) | $(11,261) | $(12,110) | | Net income (loss) | $(4,601) | $(4,985) | $(8,367) | $(13,139) | | Basic EPS | $(0.37) | $(0.43) | $(0.68) | $(1.13) | | Diluted EPS | $(0.37) | $(0.43) | $(0.68) | $(1.13) | - For the three months ended July 2, 2021, contract revenue was relatively flat year-over-year, while net loss improved slightly from $(4,985) thousand to $(4,601) thousand[19] - For the six months ended July 2, 2021, contract revenue decreased by 13.9% YoY to $163,240 thousand, but net loss improved significantly from $(13,139) thousand to $(8,367) thousand[19] Condensed Consolidated Statements of Stockholders' Equity This section outlines changes in the company's equity components from January 1, 2021, to July 2, 2021 | Metric | January 1, 2021 (in thousands) | July 2, 2021 (in thousands) | | :-------------------------------- | :--------------------------- | :-------------------------- | | Common Stock | $122 | $127 | | Additional Paid-in Capital | $149,014 | $158,793 | | Accumulated Other Comprehensive Loss | $(488) | $(256) | | Retained Earnings | $20,516 | $12,149 | | Total Stockholders' Equity | $169,164 | $170,813 | - Total stockholders' equity increased from $169,164 thousand at January 1, 2021, to $170,813 thousand at July 2, 2021, primarily due to increases in additional paid-in capital and a reduction in accumulated other comprehensive loss, partially offset by a decrease in retained earnings[20] Condensed Consolidated Statements of Cash Flows This section reports the cash inflows and outflows from operating, investing, and financing activities for the six months ended July 2, 2021 | Cash Flow Activity | Six Months Ended July 2, 2021 (in thousands) | Six Months Ended July 3, 2020 (in thousands) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | | Operating activities | $(708) | $29,231 | | Investing activities | $(3,057) | $(2,929) | | Financing activities | $(15,226) | $(14,594) | | Net increase (decrease) in cash and cash equivalents | $(18,991) | $11,708 | | Cash and cash equivalents at end of period | $9,414 | $17,160 | - Net cash used in operating activities was $(708) thousand for the six months ended July 2, 2021, a significant decrease from $29,231 thousand provided in the prior year, primarily due to changes in revenue mix and start-up costs for new contracts[22][194] - Net cash used in financing activities increased slightly to $(15,226) thousand, driven by payments for contingent consideration and debt repayments, partially offset by proceeds from stock exercises and employee stock purchase plans[22][198] Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the condensed consolidated financial statements 1. Organization and Operations of the Company Willdan Group provides energy and infrastructure services through two segments, with COVID-19 impacting operations and credit facility amendments - Willdan Group, Inc. operates in two financial reporting segments: Energy and Engineering and Consulting, providing services for energy solutions and government infrastructure[24][25] - The COVID-19 pandemic negatively impacted the company's operations, especially the direct install business in California's Energy segment, which historically accounted for ~40% of gross revenue[29][32] - As of August 4, 2021, the company's largest program for LADWP, which was the last suspended due to COVID-19, resumed, and no contracts have been cancelled due to the pandemic[31] - The company amended its credit facility for increased covenant flexibility due to $781 million in new California Investor Owned Utility contracts signed in December 2020[35] 2. Recent Accounting Pronouncements The company adopted ASU 2019-12 with no material impact and is evaluating reference rate reform pronouncements - Adopted ASU No. 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes," effective January 2, 2021, with no material impact[42] - Currently evaluating ASU No. 2020-04 and ASU No. 2021-01, "Reference Rate Reform (Topic 848)," which provide optional expedients for contract modifications and hedging relationships affected by LIBOR discontinuation[43] 3. Revenues Revenue is recognized under ASC Topic 606 for various contract types, with estimates and adjustments applied under specific methods - Revenue is recognized in accordance with ASC Topic 606, based on identifying performance obligations, determining transaction price, allocating it, and recognizing revenue as obligations are satisfied[45] | Segment | Contract Type | Revenue Recognition Method | | :------------------------ | :------------------ | :------------------------- | | Energy | Time-and-materials | Time-and-materials | | | Unit-based | Unit-based | | | Software license | Unit-based | | | Fixed price | Percentage-of-completion | | Engineering and Consulting | Time-and-materials | Time-and-materials | | | Unit-based | Unit-based | | | Fixed price | Percentage-of-completion | - Revenue on fixed price contracts is recognized using the percentage-of-completion method, while time-and-materials and unit-based contracts recognize revenue as work is performed[47][48] - Adjustments to estimated profit on contracts are recognized under the cumulative catch-up method, and estimated losses are recognized immediately[59] 4. Supplemental Financial Statement Data This section details accounts receivable, equipment, goodwill, and intangible assets, noting a sale of receivables and no impairment - During the six months ended July 2, 2021, the Company sold $8.0 million in trade accounts receivable, incurring $0.8 million in discounts[71] | Asset Category | July 2, 2021 (in thousands) | January 1, 2021 (in thousands) | | :-------------------------------- | :-------------------------- | :--------------------------- | | Equipment and leasehold improvements, net | $13,522 | $12,506 | | Goodwill | $130,124 | $130,124 | | Other intangible assets, net | $58,485 | $64,256 | - No impairment was identified for goodwill or long-lived assets, including intangible assets, as of July 2, 2021, despite potential COVID-19 impacts[36][74] 5. Derivative Financial Instruments The company uses an interest rate swap to hedge variable rate debt, with fair value changes recorded in comprehensive income - The Company uses an interest rate swap agreement to hedge variable interest rate exposure on a portion of its Term A Loan, with a notional amount of $35.0 million and a fixed annual interest rate of 2.47%, expiring January 31, 2022[77][79] | Balance Sheet Location | Fair Value of Derivative Instruments as of July 2, 2021 (in thousands) | Fair Value of Derivative Instruments as of January 1, 2021 (in thousands) | | :----------------------- | :--------------------------------------------------- | :----------------------------------------------------- | | Accrued liabilities | $(353) | $(624) | | Other noncurrent (liabilities) assets | $— | $(48) | - The effective portion of the interest rate swap agreement designated as a cash flow hedge before tax effects was $0.4 million as of July 2, 2021[79] 6. Debt Obligations The company's debt includes term loans and a revolving facility, with credit agreement amendments providing covenant flexibility and compliance maintained | Debt Type | July 2, 2021 (in thousands) | January 1, 2021 (in thousands) | | :-------------------------------- | :-------------------------- | :--------------------------- | | Outstanding borrowings on Term A Loan | $80,000 | $85,000 | | Outstanding borrowings on Delayed Draw Term Loan | $25,500 | $27,000 | | Total debt | $105,955 | $113,996 | | Long-term debt portion | $91,795 | $98,178 | - The company's Credit Facilities include a $100.0 million Term A Loan, a $50.0 million Delayed Draw Term Loan, and a $50.0 million Revolving Credit Facility, all maturing on June 26, 2024[84] - The Fourth Amendment (April 30, 2021) extended the covenant relief period, adjusted maximum Leverage Ratio, removed prohibitions on delayed draw term loans and permitted acquisitions, and increased the maximum earn-out payments[90] - As of July 2, 2021, the company was in compliance with all covenants contained in the Credit Agreement, as amended[93] 7. Leases The company leases office facilities and equipment, recognizing lease liabilities and right-of-use assets, with total net lease cost of $3.6 million | Lease Type | July 2, 2021 (in thousands) | January 1, 2021 (in thousands) | | :-------------------------------- | :-------------------------- | :--------------------------- | | Operating leases: Right-of-use assets | $17,411 | $20,130 | | Operating leases: Total lease liabilities | $18,670 | $21,493 | | Finance leases: Total equipment and leasehold improvements, net | $858 | $544 | | Finance leases: Total finance lease obligations | $845 | $484 | | Metric | Six Months Ended July 2, 2021 (in thousands) | Six Months Ended July 3, 2020 (in thousands) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | | Operating lease cost | $3,345 | $3,508 | | Finance lease cost: Amortization of assets | $258 | $310 | | Finance lease cost: Interest on lease liabilities | $13 | $17 | | Total net lease cost | $3,616 | $3,835 | - Weighted average remaining lease term for operating leases is 4.11 years (July 2, 2021) and for finance leases is 2.66 years (July 2, 2021)[100] 8. Commitments and Variable Interest Entities The company makes 401(k) matching contributions and consolidates Genesys as a Variable Interest Entity due to control and loss absorption - The company made matching contributions of $1.3 million to its employee benefit plans for the six months ended July 2, 2021[105] - Genesys, a professional corporation, is consolidated as a Variable Interest Entity (VIE) because the company manages it, directs its key activities, and absorbs its expected losses through a service fee deferral arrangement[107][108] 9. Segment and Geographical Information The company reports in Energy and Engineering & Consulting segments, with significant revenue concentration from top customers and key geographical regions | Segment | Contract Revenue (Six Months Ended July 2, 2021, in thousands) | Segment Profit (Loss) Before Income Tax Expense (Six Months Ended July 2, 2021, in thousands) | | :------------------------ | :--------------------------------------------------- | :------------------------------------------------------------------------------------ | | Energy | $128,454 | $(7,745) | | Engineering and Consulting | $34,786 | $4,834 | | Unallocated Corporate | $— | $(10,577) | | Consolidated Total | $163,240 | $(13,488) | | Client Type | Six Months Ended July 2, 2021 (in thousands) | Six Months Ended July 3, 2020 (in thousands) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | | Commercial | $15,413 | $20,296 | | Government | $59,439 | $75,162 | | Utilities | $88,388 | $94,117 | | Total | $163,240 | $189,575 | - For the six months ended July 2, 2021, the top 10 customers accounted for 46.2% of consolidated contract revenue[116] - Services to clients in California accounted for 34.5% and New York for 21.8% of contract revenue for the six months ended July 2, 2021[119] 10. Income Taxes The company uses the asset and liability method for income taxes, recording a $5.1 million tax benefit for the six months ended July 2, 2021, and is under New York state tax examination - The company recorded an income tax benefit of $5.1 million for the six months ended July 2, 2021, compared to $1.7 million for the same period in 2020[124] - The tax benefit is primarily attributable to loss before income tax, state taxes, excess tax benefit on stock compensation, R&D tax credits, commercial building energy efficiency deduction, and benefits from the CARES Act and CAA 2021[124][126][127][128] - The company received a $0.8 million tax benefit related to the net operating loss carryback provisions of the CARES Act during the three months ended July 2, 2021[127] - The State of New York is examining the company's 2017, 2018, and 2019 state tax returns, with the impact currently undeterminable[129] 11. Earnings Per Share ("EPS") Basic and diluted EPS calculations are presented, with no dilutive effects from equity awards due to net losses for the periods | Metric | Three Months Ended July 2, 2021 | Three Months Ended July 3, 2020 | Six Months Ended July 2, 2021 | Six Months Ended July 3, 2020 | | :-------------------------------- | :------------------------------ | :------------------------------ | :---------------------------- | :---------------------------- | | Net income (loss) | $(4,601) | $(4,985) | $(8,367) | $(13,139) | | Weighted-average common shares outstanding (Basic) | 12,421 | 11,682 | 12,284 | 11,593 | | Basic EPS | $(0.37) | $(0.43) | $(0.68) | $(1.13) | | Diluted EPS | $(0.37) | $(0.43) | $(0.68) | $(1.13) | - All outstanding equity awards were excluded from diluted EPS calculations for the periods presented due to net losses, making their inclusion anti-dilutive[133] 12. Contingencies The company faces routine claims and lawsuits, with management believing ultimate liability will not materially affect financial statements 13. Subsequent Events No subsequent events required to be reported were identified as of August 5, 2021 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section provides management's analysis of financial condition, operations, liquidity, and critical accounting policies, including COVID-19 impacts Our Company Willdan Group, Inc. provides professional, technical, and consulting services for energy solutions and government infrastructure through two segments - Willdan Group, Inc. provides professional, technical, and consulting services for energy solutions and government infrastructure, operating through two segments: Energy and Engineering & Consulting[139][140] - The Energy segment offers comprehensive energy solutions, including audits, program design, demand reduction, and software analytics[141] - The Engineering and Consulting segment provides civil engineering, construction management, building and safety, and economic/financial consulting services[142] Impact of Covid-19 on Our Business COVID-19 negatively impacted the Energy segment's direct install business, while the company amended its credit facility and assessed asset impairment - COVID-19 negatively impacted operations, particularly the direct install business in California's Energy segment, which resumed in late June 2021[143][144] - The Engineering and Consulting segment was less affected as its services were deemed "essential"[146] - The company amended its credit facility for increased covenant flexibility due to new California utility contracts and believes its financial position is flexible[148] - No goodwill or long-lived asset impairment was noted as of July 2, 2021, but future impacts of COVID-19 could cause impairment[149] - Clients (utilities, municipalities) may face budget shortfalls, potentially delaying funding or new contracts, and reliance on subcontractors poses risks if they face economic harm[151][152] Results of Operations This section analyzes the company's financial performance, including revenue, gross profit, and net income (loss), for the reported periods Second Quarter and First Half Overview Consolidated contract revenue was flat for Q2 but decreased 13.9% for the first half, with improved gross profit margins and reduced net losses | Metric | 3 Months Ended July 2, 2021 (in thousands) | 3 Months Ended July 3, 2020 (in thousands) | % Change | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | :------- | | Contract revenue | $84,154 | $83,549 | 0.7% | | Gross profit | $30,886 | $29,544 | 4.5% | | Gross profit margin | 36.7% | 35.4% | 1.3 pp | | Income (loss) from operations | $(7,072) | $(3,841) | 84.1% | | Net income (loss) | $(4,601) | $(4,985) | (7.7)% | | Metric | 6 Months Ended July 2, 2021 (in thousands) | 6 Months Ended July 3, 2020 (in thousands) | % Change | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | :------- | | Contract revenue | $163,240 | $189,575 | (13.9)% | | Gross profit | $63,018 | $60,235 | 4.6% | | Gross profit margin | 38.6% | 31.8% | 6.8 pp | | Income (loss) from operations | $(11,261) | $(12,110) | (7.0)% | | Net income (loss) | $(8,367) | $(13,139) | (36.3)% | - Gross profit margin increased for both periods, driven by a shift in revenue mix towards projects with a higher percentage of labor costs and lower material/subcontracting costs[170][184] Three Months Ended July 2, 2021 Compared to Three Months Ended July 3, 2020 Consolidated contract revenue remained flat, with varied segment performance, increased G&A expenses, and an improved net loss due to tax benefits - Energy segment utility contract revenues increased $9.6 million due to the lifting of COVID-19 business suspensions, while governmental and commercial revenues decreased due to the absence of accelerated projects seen in Q2 2020[165] - Engineering and Consulting segment contract revenue increased $0.9 million (5.1%), primarily from incremental government revenues[166] - General and administrative expenses increased by $4.6 million (13.7%), mainly due to restored wage reductions and increased stock-based compensation[171][172] - Net loss improved to $4.6 million from $5.0 million, primarily driven by income tax benefits and higher margin revenues, partially offset by increased G&A[176] Six Months Ended July 2, 2021 Compared to Six Months Ended July 3, 2020 Consolidated contract revenue decreased by 13.9%, primarily in the Energy segment, while gross profit improved and net loss significantly reduced - Consolidated contract revenue decreased by $26.3 million (13.9%) due to decreased direct install program revenues in the Energy segment and one fewer week in Q1 2021[177][178] - Direct costs of contract revenue decreased by $29.1 million (22.5%), mainly due to lower direct install program revenues and reduced pass-through construction management costs[180] - General and administrative expenses increased by $1.9 million (2.7%), primarily from restored wage reductions and increased stock-based compensation, partially offset by lower depreciation and facilities expenses[185][186] - Net loss improved to $8.4 million from $13.1 million, driven by cost control, income tax benefits, and higher margin revenues[191] Liquidity and Capital Resources This section discusses the company's cash position, debt obligations, and cash flow activities from operating, investing, and financing | Cash Flow Activity | Six Months Ended July 2, 2021 (in thousands) | Six Months Ended July 3, 2020 (in thousands) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | | Operating activities | $(708) | $29,231 | | Investing activities | $(3,057) | $(2,929) | | Financing activities | $(15,226) | $(14,594) | | Net increase (decrease) in cash and cash equivalents | $(18,991) | $11,708 | - As of July 2, 2021, the company had $9.4 million in cash and cash equivalents, with $80.0 million outstanding on its Term A Loan, $25.5 million on its Delayed Draw Term Loan, and no outstanding borrowings on its $50.0 million Revolving Credit Facility (with $4.1 million in letters of credit issued)[192] - Cash flows used in operating activities were $0.7 million for the six months ended July 2, 2021, primarily due to changing revenue mix and start-up costs for new contracts[194] - Contractual obligations as of July 2, 2021, totaled $132.5 million, including $105.3 million in long-term debt, $7.8 million in interest payments, and $18.7 million in operating leases[200] - The company is obligated to pay up to $12.0 million in contingent consideration for the E3, Inc. acquisition and up to $12.0 million for Integral Analytics, with $9.5 million payable as of July 2, 2021[202][203] Components of Revenue and Expense This section outlines the types of contracts, revenue recognition methods, and primary components of direct and general and administrative expenses - Services are provided under time-and-materials (26% of contracts), unit-based (53% of contracts), and fixed price contracts, with revenue recognized based on work performed or percentage-of-completion[210][211] - Direct costs of contract revenue primarily include salaries, material costs, subcontractor services, and equipment expenses for revenue-producing projects[217] - General and administrative expenses cover marketing, support staff, management, payroll taxes, benefits, facility costs, depreciation, amortization, and professional services[219] Critical Accounting Policies This section affirms the use of U.S. GAAP and the consistency of critical accounting policies and estimates - The company's unaudited Condensed Consolidated Financial Statements are prepared in accordance with U.S. GAAP, requiring management to make estimates and assumptions that affect reported amounts[220] - There have been no material changes in critical accounting policies and estimates from those disclosed in the Annual Report on Form 10-K for the fiscal year ended January 1, 2021[222] Recent Accounting Standards This section refers to Note 2 for details on recently issued and adopted accounting pronouncements - For a description of recently issued and adopted accounting pronouncements, refer to Part I, Item 1, Note 2 of this Quarterly Report on Form 10-Q[223] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company faces interest rate risk from variable-rate debt and potential LIBOR discontinuation, which could increase annual interest expense - The company is subject to interest rate risk on its variable-rate Term A Loan ($80.0 million outstanding), Delayed Draw Term Loan ($25.5 million outstanding), and Revolving Credit Facility (no borrowed amounts outstanding, $4.1 million in letters of credit issued) as of July 2, 2021[228] - A one percentage point increase in the effective interest rate would increase the company's annual interest expense by approximately $1.1 million[232] - The company faces risk from the potential discontinuation of LIBOR after June 30, 2023, which could lead to conversion of loans to Base Rate Loans or the adoption of alternative reference rates, potentially increasing interest expense by $1.1 million annually for a 1.0% rate increase[233][235][236] Item 4. Controls and Procedures The company's disclosure controls and procedures were effective as of July 2, 2021, with no material changes to internal control over financial reporting - The company's disclosure controls and procedures were effective at a reasonable assurance level as of July 2, 2021[239] - No material changes in internal control over financial reporting occurred during the period covered by this report[240] PART II. OTHER INFORMATION This part provides additional information including legal proceedings, risk factors, equity sales, and exhibits Item 1. Legal Proceedings The company is routinely involved in legal claims and lawsuits, with management believing ultimate liability will not materially affect financial statements - The company is subject to claims and lawsuits, including professional errors or omissions, arising in the ordinary course of business[243] - Liabilities are accrued for probable and reasonably estimable losses, and professional liability insurance is maintained[243][244] - Management believes that the ultimate liability from current claims and lawsuits will not materially adversely affect the company's financial statements[245] Item 1A. Risk Factors No material changes to the risk factors set forth in the Annual Report on Form 10-K for the year ended January 1, 2021 - No material changes to the risk factors set forth in Part I, Item 1A of the Annual Report on Form 10-K for the year ended January 1, 2021[247] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 79,070 shares of common stock to satisfy tax withholding obligations related to restricted stock vesting - The company repurchased 79,070 shares of common stock at an average price of $39.26 per share during the three months ended July 2, 2021[248] - These repurchases were made from employees to satisfy tax withholding obligations incurred from the vesting of restricted stock[248] Item 3. Defaults upon Senior Securities No defaults upon senior securities were reported during the period - No defaults upon senior securities were reported[249] Item 4. Mine Safety Disclosures This item is not applicable to the company - Mine Safety Disclosures are not applicable[250] Item 5. Other Information No other information was required to be reported under this item - No other information was reported[251] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including agreements, corporate documents, and certifications - The exhibits include Stock Purchase Agreements, amendments to the Credit Agreement, corporate organizational documents, and certifications from the CEO and CFO[253] - Inline XBRL documents (Instance, Schema, Calculation, Definition, Label, Presentation Linkbase Documents) are also filed[253][255]