Willdan(WLDN) - 2022 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Presents the company's unaudited interim financial statements and management's analysis of performance Item 1. Financial Statements (unaudited) Presents unaudited condensed consolidated financial statements and accompanying notes for the period Condensed Consolidated Balance Sheets | Metric | Sep 30, 2022 (in thousands) | Dec 31, 2021 (in thousands) | Change (in thousands) | | :--- | :--- | :--- | :--- | | Total Assets | $395,111 | $394,422 | $689 | | Cash and cash equivalents | $8,818 | $11,221 | $(2,403) | | Accounts receivable, net | $60,376 | $67,211 | $(6,835) | | Contract assets | $74,924 | $59,288 | $15,636 | | Total Current Assets | $154,121 | $148,959 | $5,162 | | Total Liabilities | $214,900 | $215,201 | $(301) | | Total Stockholders' Equity | $180,211 | $179,221 | $990 | Condensed Consolidated Statements of Comprehensive Income | Metric (in thousands) | 3 Months Ended Sep 30, 2022 | 3 Months Ended Oct 1, 2021 | % Change | 9 Months Ended Sep 30, 2022 | 9 Months Ended Oct 1, 2021 | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Contract revenue | $121,399 | $98,297 | 23.5% | $315,882 | $261,537 | 20.8% | | Gross profit | $37,522 | $38,127 | (1.6)% | $100,472 | $101,145 | (0.7)% | | Income (Loss) from operations | $(755) | $1,443 | (152.3)% | $(11,661) | $(9,818) | 18.8% | | Net income (loss) | $76 | $840 | (91.0)% | $(8,023) | $(7,527) | 6.6% | | Basic EPS | $0.01 | $0.07 | (85.7)% | $(0.62) | $(0.61) | 1.6% | | Diluted EPS | $0.01 | $0.06 | (83.3)% | $(0.62) | $(0.61) | 1.6% | Condensed Consolidated Statements of Stockholders' Equity | Metric (in thousands) | Balance at Dec 31, 2021 | Balance at Sep 30, 2022 | Change | | :--- | :--- | :--- | :--- | | Common Stock Shares | 12,804 | 13,297 | 493 | | Common Stock Amount | $128 | $133 | $5 | | Additional Paid-in Capital | $167,032 | $176,002 | $8,970 | | Retained Earnings | $12,099 | $4,076 | $(8,023) | | Total Stockholders' Equity | $179,221 | $180,211 | $990 | Condensed Consolidated Statements of Cash Flows | Cash Flow Activity (in thousands) | 9 Months Ended Sep 30, 2022 | 9 Months Ended Oct 1, 2021 | Change | | :--- | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $4,503 | $(1,710) | $6,213 | | Net cash (used in) provided by investing activities | $(6,894) | $(4,852) | $(2,042) | | Net cash (used in) provided by financing activities | $(12) | $(17,038) | $17,026 | | Net increase (decrease) in cash and cash equivalents | $(2,403) | $(23,600) | $21,197 | | Cash and cash equivalents at end of period | $8,818 | $4,805 | $4,013 | Notes to Condensed Consolidated Financial Statements 1. Organization and Operations of the Company - Willdan Group, Inc. provides professional, technical, and consulting services for energy solutions and government infrastructure, operating through Energy and Engineering & Consulting segments[25][26] - The COVID-19 pandemic continued to impact operations in fiscal year 2022, particularly small business customers, but no contracts were cancelled as of November 2, 2022[30][31] 2. Recent Accounting Pronouncements - Adopted ASU No. 2020-04 and ASU No. 2021-01 (Reference Rate Reform) effective March 8, 2022, which did not materially impact financial statements[36] 3. Revenues - Revenue is recognized over time for most contracts, which include fixed price (percentage-of-completion), time-and-materials, and unit-based provisions[38][40] | 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 | - Adjustments to contract cost estimates are recognized under the cumulative catch-up method, with estimated losses recognized immediately[49][50] 4. Supplemental Financial Statement Data | Asset Category (in thousands) | Sep 30, 2022 | Dec 31, 2021 | Change | | :--- | :--- | :--- | :--- | | Equipment and leasehold improvements, net | $21,147 | $16,757 | $4,390 | | Goodwill | $130,124 | $130,124 | $0 | | Other intangible assets, net | $44,182 | $52,713 | $(8,531) | | Accrued Liabilities (in thousands) | Sep 30, 2022 | Dec 31, 2021 | Change | | :--- | :--- | :--- | :--- | | Accrued subcontractor costs | $34,624 | $19,727 | $14,897 | | Accrued bonuses | $3,606 | $7,767 | $(4,161) | | Total accrued liabilities | $50,996 | $35,680 | $15,316 | - No goodwill impairment was identified as of September 30, 2022, despite fluctuations in market capitalization below book value, as the indicative fair value exceeded book value[64] 5. Derivative Financial Instruments - The company uses interest rate derivative contracts for hedging variable rate debt, not for trading or speculation[68] - An interest rate swap agreement for $35.0 million at 2.47% fixed rate expired on January 31, 2022[70] - As of September 30, 2022, the company had no derivative financial instruments[73] 6. Debt Obligations | Debt Category (in thousands) | Sep 30, 2022 | Dec 31, 2021 | Change | | :--- | :--- | :--- | :--- | | Outstanding borrowings on Term A Loan | $67,500 | $75,000 | $(7,500) | | Outstanding borrowings on Delayed Draw Term Loan | $41,750 | $24,000 | $17,750 | | Total debt | $109,833 | $101,161 | $8,672 | - The Fifth Amendment (March 8, 2022) extended the covenant relief period, amended Adjusted EBITDA thresholds, increased the maximum Total Leverage Ratio, funded the remaining $20.0 million from the Delayed Draw Term Loan, and transitioned the reference rate from LIBOR to SOFR[81][82][84] - The Sixth Amendment (August 2, 2022) increased the permissible limit for purchase money indebtedness and Capitalized Lease Obligations from $1.5 million to $4.0 million[87] - As of September 30, 2022, the company was non-compliant with minimum Adjusted EBITDA thresholds, which was subsequently waived by the Seventh Amendment (November 1, 2022)[88][132] 7. Leases | Lease Metric (in thousands) | 9 Months Ended Sep 30, 2022 | 9 Months Ended Oct 1, 2021 | | :--- | :--- | :--- | | Operating lease cost | $4,635 | $4,941 | | Finance lease cost: Amortization of assets | $799 | $397 | | Finance lease cost: Interest on lease liabilities | $51 | $22 | | Total net lease cost | $5,485 | $5,360 | | Lease Liability (in thousands) | Sep 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total operating lease liabilities | $13,636 | $16,343 | | Total finance lease obligations | $2,627 | $1,317 | 8. Commitments and Variable Interest Entities - Company made $2.0 million in matching contributions to its 401(k) plan for the nine months ended September 30, 2022[99] - Genesys is consolidated as a Variable Interest Entity (VIE) because the company manages its activities and absorbs its expected losses through a service fee deferral arrangement[101][102] 9. Segment and Geographical Information | Segment (in thousands) | 3 Months Ended Sep 30, 2022 | 3 Months Ended Oct 1, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Oct 1, 2021 | | :--- | :--- | :--- | :--- | :--- | | Energy Contract Revenue | $102,625 | $81,523 | $262,186 | $209,977 | | Engineering & Consulting Contract Revenue | $18,774 | $16,774 | $53,696 | $51,560 | | Total Contract Revenue | $121,399 | $98,297 | $315,882 | $261,537 | | Client Type (9 Months Ended Sep 30, 2022, in thousands) | Energy | Engineering & Consulting | Total | | :--- | :--- | :--- | :--- | | Commercial | $21,638 | $4,330 | $25,968 | | Government | $96,293 | $49,139 | $145,432 | | Utilities | $144,255 | $227 | $144,482 | | Total | $262,186 | $53,696 | $315,882 | - Top 10 customers accounted for 57.2% of consolidated contract revenue for the three months ended September 30, 2022, and 54.5% for the nine months ended September 30, 2022[112] - California and New York clients accounted for 37.2% and 23.4% of contract revenue, respectively, for the three months ended September 30, 2022[115] 10. Income Taxes | Income Tax Benefit (in thousands) | 3 Months Ended Sep 30, 2022 | 3 Months Ended Oct 1, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Oct 1, 2021 | | :--- | :--- | :--- | :--- | :--- | | Income tax (benefit) expense | $(1,526) | $(236) | $(5,588) | $(5,357) | - The income tax benefit for the period was primarily driven by the loss before income tax, state taxes, non-deductible stock and executive compensation, and research and development tax credits[122] - The valuation allowance for deferred tax assets was deemed appropriate as of September 30, 2022, with no changes during the period[119] 11. Earnings Per Share ("EPS") | EPS Metric | 3 Months Ended Sep 30, 2022 | 3 Months Ended Oct 1, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Oct 1, 2021 | | :--- | :--- | :--- | :--- | :--- | | Basic EPS | $0.01 | $0.07 | $(0.62) | $(0.61) | | Diluted EPS | $0.01 | $0.06 | $(0.62) | $(0.61) | - For the nine months ended September 30, 2022, all outstanding equity awards were excluded from diluted EPS calculation due to the net loss, making them anti-dilutive[126] 12. Contingencies - The company is subject to claims and lawsuits, including professional errors or omissions, and maintains professional liability insurance[128] - Liabilities are accrued for probable and reasonably estimable losses, and management does not expect current claims to have a material adverse effect on financial statements[129][130] 13. Subsequent Events - Seventh Amendment to Credit Agreement (November 1, 2022) waived Q3 2022 minimum Adjusted EBITDA non-compliance[132] - The amendment revised maximum Total Leverage Ratio and minimum Adjusted EBITDA thresholds for the Extended Covenant Relief Period[132] - Borrowings under the Credit Agreement will bear interest at SOFR plus 4.00% during the Extended Covenant Relief Period, and Revolving Credit Facility borrowings are restricted to $10.0 million. Share repurchases are prohibited during this period[133][132] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Provides management's perspective on financial condition, operational results, and critical accounting policies Our Company - Willdan Group, Inc. offers professional, technical, and consulting services for energy solutions and government infrastructure[136] - The company operates in two segments: Energy (specialized energy solutions, program design, construction management, software) and Engineering & Consulting (civil engineering, construction management, financial consulting)[137][138][139] Historical and Current Impact of Covid-19 - COVID-19 continued to impact operations in fiscal year 2022, particularly small business customers, though no contracts were cancelled[140][141] - Potential budget shortfalls for utility and public agency clients due to COVID-19 could result in delayed funding, postponed new contracts, or price concessions[145] - Reliance on subcontractors and material suppliers, especially in the Energy segment, poses a risk if they face economic harm, potentially increasing costs or delaying projects[146] Results of Operations - Consolidated contract revenue increased by 23.5% for the three months and 20.8% for the nine months ended September 30, 2022, driven by new governmental projects and resumption of suspended projects[155][169] - Gross profit decreased by 1.6% for the three months and 0.7% for the nine months, with gross margin declining from 38.8% to 30.9% (3 months) and 38.7% to 31.8% (9 months), primarily due to higher project startup costs and changes in revenue mix[161][175] - Operating income shifted to a loss of $0.8 million for the three months (from $1.4 million income) and the operating loss increased to $11.7 million for the nine months (from $9.8 million loss). Net income decreased significantly for the three months, and net loss increased for the nine months[164][168][179][182] Three Months Ended September 30, 2022 Compared to Three Months Ended October 1, 2021 | Metric (in thousands) | Sep 30, 2022 | Oct 1, 2021 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Contract revenue | $121,399 | $98,297 | $23,102 | 23.5% | | Direct costs of contract revenue | $83,877 | $60,170 | $23,707 | 39.4% | | Gross profit | $37,522 | $38,127 | $(605) | (1.6)% | | General and administrative expenses | $38,277 | $36,684 | $1,593 | 4.3% | | Income (loss) from operations | $(755) | $1,443 | $(2,198) | (152.3)% | | Net income (loss) | $76 | $840 | $(764) | (91.0)% | - Energy segment revenue increased by 25.9% due to new governmental projects, partially offset by decreased utility program revenues and non-recurring software licensing sales. Engineering and Consulting segment revenue increased by 11.9% from governmental clients[156][157] - Gross margin decreased from 38.8% to 30.9% due to changes in revenue mix towards projects with higher material/subcontracting costs and higher project startup costs[161] Nine Months Ended September 30, 2022 Compared to Nine Months Ended October 1, 2021 | Metric (in thousands) | Sep 30, 2022 | Oct 1, 2021 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Contract revenue | $315,882 | $261,537 | $54,345 | 20.8% | | Direct costs of contract revenue | $215,410 | $160,392 | $55,018 | 34.3% | | Gross profit | $100,472 | $101,145 | $(673) | (0.7)% | | General and administrative expenses | $112,133 | $110,963 | $1,170 | 1.1% | | Income (loss) from operations | $(11,661) | $(9,818) | $(1,843) | 18.8% | | Net income (loss) | $(8,023) | $(7,527) | $(496) | 6.6% | - Energy segment revenue increased by 24.9% due to new governmental projects and resumed COVID-19 suspended projects, partially offset by non-recurring software licensing sales. Engineering and Consulting segment revenue increased by 4.1% from governmental clients[170][171] - Gross margin decreased from 38.7% to 31.8% due to changes in revenue mix, reduction in software licensing revenues, and higher project startup costs[175] Liquidity and Capital Resources - Primary liquidity sources are cash from operations and borrowings under the Revolving Credit Facility[184] | Debt Outstanding (in thousands) | Sep 30, 2022 | | :--- | :--- | | Term A Loan | $67,500 | | Delayed Draw Term Loan | $41,750 | | Revolving Credit Facility (letters of credit) | $4,100 | | Cash and cash equivalents | $8,818 | - The Seventh Amendment (November 1, 2022) restricted Revolving Credit Facility borrowing capacity to $10.0 million and conditioned accordion feature access, which may impact liquidity if higher-than-expected costs persist[186][184] - Cash flows from operating activities improved to $4.5 million for the nine months ended September 30, 2022, from a $1.7 million use in the prior year, favorably impacted by lower working capital requirements[189] - Contractual obligations as of September 30, 2022, totaled $133.5 million, with $26.0 million due within one year, primarily for long-term debt, interest payments, and operating/finance leases[196] - The company has no off-balance sheet financing arrangements, futures, or forward contracts, but consolidates Genesys as a variable interest entity[193] Components of Revenue and Expense - Contract revenue is generated from time-and-materials (20%), unit-based (44%), and fixed price (36%) contracts as of September 30, 2022[202] - Direct costs of contract revenue include salaries, materials, and subcontractor services for revenue-producing projects, while G&A expenses cover marketing, administrative, and unallocated personnel costs[207][209] - Contract renewals, terminations, or modifications, especially with major clients like Consolidated Edison, DASNY, LADWP, and Duke Energy Corp., could materially affect consolidated operations[205] Critical Accounting Policies - Financial statements are prepared in accordance with GAAP, relying on estimates and assumptions[210] - No material changes to critical accounting policies and estimates from the Annual Report on Form 10-K for fiscal year ended December 31, 2021[211] Recent Accounting Standards - Refer to Note 2, "Recent Accounting Pronouncements," for details on recently issued and adopted accounting standards[212] Item 3. Quantitative and Qualitative Disclosures About Market Risk Discusses the company's exposure to market risks, primarily interest rate fluctuations on variable-rate debt Interest Rate Risk - The company is subject to interest rate risk from variable-rate Term A Loan ($67.5 million outstanding) and Delayed Draw Term Loan ($41.75 million outstanding)[215] - A one percentage point increase in the effective interest rate would increase annual interest expense by approximately $1.1 million in 2022[216] - The Fifth Amendment transitioned the reference rate from LIBOR to SOFR and adjusted applicable margins for borrowings under the Credit Agreement[216] Item 4. Controls and Procedures Confirms the effectiveness of disclosure controls and procedures with no material changes to internal controls - Disclosure controls and procedures were effective as of September 30, 2022, based on management's evaluation[219] - No material changes in internal control over financial reporting occurred during the period[220] PART II. OTHER INFORMATION Details legal proceedings, risk factors, equity sales, and other required corporate disclosures Item 1. Legal Proceedings Discloses routine claims and lawsuits, for which management expects no material adverse financial impact - The company faces routine claims and lawsuits, including professional errors or omissions, and carries professional liability insurance[223] - Management believes the ultimate liability from current legal proceedings will not materially adversely affect the financial statements[225] Item 1A. Risk Factors States no material changes to risk factors previously disclosed in the Annual Report on Form 10-K - No material changes to risk factors from the Annual Report on Form 10-K for the year ended December 31, 2021[227] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Reports common stock repurchases from employees to satisfy tax withholding obligations on vested stock | Period | Total Number of Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | July 2, 2022 – July 29, 2022 | — | — | | July 30, 2022 – August 26, 2022 | 175 | $27.65 | | August 27, 2022 – September 30, 2022 | — | — | | TOTAL | 175 | $27.65 | Item 3. Defaults upon Senior Securities Reports no defaults upon senior securities during the period - No defaults upon senior securities were reported[229] Item 4. Mine Safety Disclosures Confirms that mine safety disclosures are not applicable to the company's operations - Mine Safety Disclosures are not applicable[230] Item 5. Other Information Details the Seventh Amendment to the Credit Agreement, which waived a covenant breach and revised terms - Seventh Amendment to Credit Agreement (November 1, 2022) waived Q3 2022 minimum Adjusted EBITDA non-compliance[231] - The amendment revised maximum Total Leverage Ratio and minimum Adjusted EBITDA thresholds for the Extended Covenant Relief Period[231] - Borrowings under the Credit Agreement will bear interest at SOFR plus 4.00% during the Extended Covenant Relief Period, and Revolving Credit Facility borrowings are restricted to $10.0 million. Share repurchases are prohibited during this period[233][231] Item 6. Exhibits Lists exhibits filed with the Form 10-Q, including credit agreements and officer certifications - Exhibits include the Seventh Amendment to the Amended and Restated Credit Agreement, CEO and CFO certifications, and Inline XBRL documents[237]