Willdan(WLDN) - 2024 Q1 - Quarterly Report

Cautionary Statement Regarding Forward-Looking Information This section outlines the forward-looking statements within the 10-Q report, highlighting inherent risks and uncertainties that could impact actual results - This 10-Q report contains forward-looking statements concerning the company's business, operations, and financial performance, which are subject to risks and uncertainties[10] - Key factors that could cause actual results to differ materially include the ability to complete projects timely, competition in the energy services market (84% of 2023 revenue), reliance on top ten clients (53% of 2023 contract revenue), changes in economies and government budgets, ability to win/renew contracts, debt payment and covenant compliance, supply chain/labor/inflation management, financing, acquisition integration, and talent retention[12] - The forward-looking statements are based on current expectations, estimates, forecasts, and projections, and are not guarantees of future performance[11][14] Part I. Financial Information This part presents the unaudited condensed consolidated financial statements and management's discussion and analysis of the company's financial condition and results of operations Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements for Willdan Group, Inc. and its subsidiaries, including balance sheets, statements of comprehensive income, statements of stockholders' equity, and statements of cash flows, along with detailed notes explaining the company's accounting policies, recent pronouncements, revenue recognition, supplemental data, debt, leases, commitments, segment information, income taxes, EPS, and contingencies Condensed Consolidated Balance Sheets This section provides a snapshot of the company's financial position, detailing assets, liabilities, and stockholders' equity at specific points in time Condensed Consolidated Balance Sheet Highlights (in thousands) | Metric | March 29, 2024 | December 29, 2023 | | :-------------------------------- | :------------- | :---------------- | | Cash and cash equivalents | $46,925 | $23,397 | | Accounts receivable, net | $50,792 | $69,677 | | Contract assets | $82,409 | $93,885 | | Total current assets | $186,541 | $192,016 | | Total assets | $407,900 | $415,588 | | Total current liabilities | $104,068 | $114,680 | | Total liabilities | $202,385 | $215,743 | | Total stockholders' equity | $205,515 | $199,845 | Condensed Consolidated Statements of Comprehensive Income This section presents the company's financial performance over a period, including revenues, expenses, and net income, along with other comprehensive income items Condensed Consolidated Statements of Comprehensive Income Highlights (Three Months Ended, in thousands, except per share amounts) | Metric | March 29, 2024 | March 31, 2023 | Change ($) | Change (%) | | :-------------------------------- | :------------- | :------------- | :--------- | :--------- | | Contract revenue | $122,489 | $102,603 | $19,886 | 19.4% | | Gross profit | $47,418 | $41,281 | $6,137 | 14.9% | | Income (Loss) from operations | $5,361 | $4,014 | $1,347 | 33.6% | | Income (Loss) before income taxes | $3,928 | $1,688 | $2,240 | 132.7% | | Net income (loss) | $2,942 | $932 | $2,010 | 215.7% | | Basic EPS | $0.22 | $0.07 | $0.15 | 214.3% | | Diluted EPS | $0.21 | $0.07 | $0.14 | 200.0% | Condensed Consolidated Statements of Stockholders' Equity This section details changes in the company's equity accounts, reflecting net income, stock-based compensation, and other comprehensive income Condensed Consolidated Statements of Stockholders' Equity Highlights (in thousands) | Metric | Balance at Dec 29, 2023 | Net Income (Loss) | Stock-based Compensation | Net Unrealized Gain on Derivatives | Balance at Mar 29, 2024 | | :-------------------------------- | :---------------------- | :---------------- | :----------------------- | :--------------------------------- | :---------------------- | | Total Stockholders' Equity | $199,845 | $2,942 | $1,390 | $434 | $205,515 | Condensed Consolidated Statements of Cash Flows This section reports the cash generated and used by the company across operating, investing, and financing activities over a specific period Condensed Consolidated Statements of Cash Flows Highlights (Three Months Ended, in thousands) | Cash Flow Activity | March 29, 2024 | March 31, 2023 | Change ($) | | :-------------------------------- | :------------- | :------------- | :--------- | | Net cash provided by operating activities | $26,949 | $17,292 | $9,657 | | Net cash used in investing activities | $(1,952) | $(3,475) | $1,523 | | Net cash used in financing activities | $(1,469) | $(15,449) | $13,980 | | Net increase (decrease) in cash, cash equivalents and restricted cash | $23,528 | $(1,632) | $25,160 | | Cash, cash equivalents and restricted cash at end of period | $46,925 | $17,853 | $29,072 | Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and additional information supporting the condensed consolidated financial statements, clarifying accounting policies and significant transactions 1. Organization and Operations of the Company This note describes Willdan Group, Inc.'s business, its service offerings, and its operational segments, along with its fiscal year structure - Willdan Group, Inc. provides professional, technical, and consulting services to utilities, private industry, and public agencies, focusing on energy solutions and government infrastructure[23] - The Company operates in two financial reporting segments: Energy and Engineering and Consulting, which are integral to its strategy of delivering comprehensive solutions[24] - Fiscal year 2024 will comprise 52 weeks, with all quarters consisting of 13 weeks each, consistent with fiscal year 2023[26] 2. Recent Accounting Pronouncements This note outlines recently issued accounting standards from the FASB, detailing their effective dates and impact on financial disclosures - The FASB issued ASU 2023-09 (Income Tax Disclosures), effective for fiscal years beginning after December 15, 2024, requiring enhanced disclosures for income tax rate reconciliation and payments[28] - ASU 2023-07 (Segment Reporting) expands segment disclosure requirements for significant expenses and other segment items, effective for fiscal years beginning after December 15, 2023[29] - ASU 2023-06 (Disclosure Improvements) amends U.S. GAAP to reflect SEC updates and simplifications to disclosure requirements, with varying effective dates[30] 3. Revenues This note details the company's revenue recognition policies, including the methods used for different contract types and segments - The Company recognizes revenue in accordance with ASC Topic 606, identifying performance obligations, determining transaction price, allocating it, and recognizing revenue as obligations are satisfied[32] Revenue Recognition Methods by Segment | 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 most contracts is recognized over time due to continuous transfer of control to the customer, with fixed price contracts using the percentage-of-completion method[34] - Contract modifications are generally accounted for as part of the original contract due to significant integration, with adjustments recognized on a cumulative catch-up basis[45] 4. Supplemental Financial Statement Data This note provides additional details on specific balance sheet accounts, including restricted cash, equipment, accrued liabilities, and goodwill Restricted Cash Reconciliation (in thousands) | Metric | March 29, 2024 | December 29, 2023 | | :-------------------------------------------------------------------------------- | :------------- | :---------------- | | Cash and cash equivalents | $46,925 | $23,397 | | Restricted cash | — | — | | Total cash, cash equivalents, and restricted cash shown in the consolidated statement of cash flows | $46,925 | $23,397 | Equipment and Leasehold Improvements, Net (in thousands) | Category | March 29, 2024 | December 29, 2023 | | :-------------------------------- | :------------- | :---------------- | | Subtotal (Gross) | $63,886 | $61,867 | | Accumulated depreciation and amortization | $(36,347) | $(34,770) | | Equipment and leasehold improvements, net | $27,539 | $27,097 | Accrued Liabilities (in thousands) | Category | March 29, 2024 | December 29, 2023 | | :------------------------ | :------------- | :---------------- | | Accrued subcontractor costs | $22,896 | $30,196 | | Accrued bonuses | $4,542 | $14,423 | | Total accrued liabilities | $38,411 | $54,129 | - Goodwill remained at $131.1 million as of March 29, 2024, with no impairment believed to have occurred[58] 5. Derivative Financial Instruments This note explains the company's use of interest rate derivative contracts, specifically an interest rate swap, to manage interest rate risk on its variable-rate debt - The Company uses interest rate derivative contracts, specifically an interest rate swap agreement, to hedge interest rate exposures on its variable rate debt, not for speculative purposes[60][62] - An interest rate swap agreement with a notional amount of $50.0 million and a fixed annual rate of 4.77% was entered into on November 30, 2023, expiring September 29, 2026[62] Fair Value of Derivative Instruments (in thousands) | Balance Sheet Location | March 29, 2024 | December 29, 2023 | | :----------------------- | :------------- | :---------------- | | Current assets | $140 | $46 | | Other noncurrent liabilities | $(431) | $(887) | 6. Debt Obligations This note details the company's outstanding debt, including term loans and revolving credit facilities, and confirms compliance with financial covenants Debt Obligations (in thousands) | Metric | March 29, 2024 | December 29, 2023 | | :-------------------------------- | :------------- | :---------------- | | Outstanding borrowings on Term Loan | $96,250 | $98,125 | | Total debt | $96,424 | $98,452 | | Long-term debt portion | $86,571 | $88,979 | - As of March 29, 2024, the Company was in compliance with all financial covenants related to its Term Loan and Revolving Credit Facility[65] - The composite interest rate, excluding upfront fees and issuance cost amortization, was 7.7% as of March 29, 2024[66] 7. Leases This note describes the company's operating and finance lease arrangements for office facilities and equipment, including associated costs and balance sheet impacts - The Company leases office facilities under long-term operating leases (expiring through 2029) and equipment under finance leases (expiring through 2028)[68] Summary of Lease Expense (Three Months Ended, in thousands) | Lease Cost Category | March 29, 2024 | March 31, 2023 | | :-------------------- | :------------- | :------------- | | Operating lease cost | $1,527 | $1,493 | | Finance lease cost | $386 | $333 | | Total net lease cost | $1,899 | $1,826 | Lease Information on Consolidated Balance Sheet (in thousands) | Metric | March 29, 2024 | December 29, 2023 | | :-------------------------------- | :------------- | :---------------- | | Operating leases: Right-of-use assets | $12,803 | $12,465 | | Operating leases: Total lease liabilities | $14,625 | $14,295 | | Finance leases: Total finance lease obligations | $2,223 | $2,370 | | Weighted average remaining lease term (Operating) | 3.32 years | 3.43 years | | Weighted average discount rate (Operating) | 6.67% | 6.09% | 8. Commitments and Variable Interest Entities This note covers the company's 401(k) plan matching contributions and the consolidation of Genesys as a Variable Interest Entity - The Company's 401(k) plan includes matching contributions, which amounted to $1.1 million for the three months ended March 29, 2024, up from $1.0 million in the prior year period[76][77] - Genesys, a professional corporation, is consolidated as a Variable Interest Entity (VIE) because Willdan manages its activities and absorbs expected losses through deferred service fees[78][79][80] 9. Segment and Geographical Information This note provides a breakdown of contract revenue by the company's operating segments, client types, and geographical regions Contract Revenue by Segment (Three Months Ended, in thousands) | Segment | March 29, 2024 | March 31, 2023 | Change ($) | Change (%) | | :------------------------ | :------------- | :------------- | :--------- | :--------- | | Energy | $100,746 | $83,285 | $17,461 | 21.0% | | Engineering and Consulting| $21,743 | $19,318 | $2,425 | 12.6% | | Consolidated Total | $122,489 | $102,603 | $19,886 | 19.4% | Contract Revenue by Client Type (Three Months Ended March 29, 2024, in thousands) | Client Type | Energy | Engineering and Consulting | Total | | :------------ | :----- | :------------------------- | :---- | | Commercial | $7,203 | $1,580 | $8,783| | Government | $35,820| $20,098 | $55,918| | Utilities | $57,723| $65 | $57,788| - The top 10 customers accounted for 49.2% of consolidated contract revenue for the three months ended March 29, 2024, down from 52.2% in the prior year[90] - Services to clients in California and New York accounted for 43.5% and 27.1% of consolidated contract revenue, respectively, for the three months ended March 29, 2024[93] 10. Income Taxes This note explains the company's income tax accounting method, effective tax rates, and the primary drivers of changes in tax expense - Income taxes are accounted for under the asset and liability method, recognizing deferred tax assets and liabilities for temporary differences[95] - The Company recorded an income tax expense of $1.0 million for Q1 2024 (25.1% effective tax rate), compared to $0.8 million for Q1 2023 (44.8% effective tax rate)[99] - The reduction in the effective tax rate for Q1 2024 was primarily due to increases in discrete items related to stock compensation deductions[129] 11. Earnings Per Share ("EPS") This note presents the calculation of basic and diluted earnings per share, including net income and weighted-average common shares outstanding Earnings Per Share (Three Months Ended, in thousands, except per share amounts) | Metric | March 29, 2024 | March 31, 2023 | | :-------------------------------- | :------------- | :------------- | | Net income (loss) | $2,942 | $932 | | Weighted-average common shares outstanding (Basic) | 13,605 | 13,266 | | Weighted-average common shares outstanding (Diluted) | 13,910 | 13,470 | | Basic EPS | $0.22 | $0.07 | | Diluted EPS | $0.21 | $0.07 | 12. Contingencies This note addresses the company's exposure to claims and lawsuits, its professional liability insurance, and management's assessment of potential financial impact - The Company is subject to claims and lawsuits, including professional errors or omissions, typical for the engineering and consulting industry[103] - Professional liability insurance is maintained, and liabilities are accrued when a loss is probable and estimable[103][104] - Management, after consulting legal counsel, believes the ultimate liability from current claims and lawsuits is not expected to have a material adverse effect on the financial statements[105] 13. Subsequent Events This note confirms that no subsequent events requiring disclosure occurred after the reporting period up to the date of the 10-Q filing - As of May 2, 2024, there were no subsequent events required to be reported[107] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and results of operations for the three months ended March 29, 2024, compared to the prior year period. It covers an overview of the company, detailed analysis of revenue, costs, and profitability, liquidity and capital resources, the impact of inflation, and key accounting policies Our Company This section provides an overview of Willdan Group, Inc.'s core business, its service offerings, and its two primary financial reporting segments - Willdan Group, Inc. delivers professional, technical, and consulting services for energy solutions, greenhouse gas reduction, and government infrastructure[109] - The company operates through two financial reporting segments: Energy and Engineering and Consulting, leveraging synergies between them[110] - The Energy segment provides comprehensive energy solutions, including audits, program design, construction management, and software analytics, while the Engineering and Consulting segment offers civil engineering, building and safety, city planning, and economic consulting services[111][112] Results of Operations This section analyzes the company's financial performance, detailing changes in contract revenue, gross profit, operating income, and net income for the reporting period First Quarter Financial Performance (in thousands, except percentages) | Metric | March 29, 2024 | March 31, 2023 | $ Change | % Change | | :-------------------------------- | :------------- | :------------- | :------- | :------- | | Contract revenue | $122,489 | $102,603 | $19,886 | 19.4% | | Direct costs of contract revenue | $75,071 | $61,322 | $13,749 | 22.4% | | Gross profit | $47,418 | $41,281 | $6,137 | 14.9% | | General and administrative expenses | $42,057 | $37,267 | $4,790 | 12.9% | | Income (loss) from operations | $5,361 | $4,014 | $1,347 | 33.6% | | Total other income (expense) | $(1,433) | $(2,326) | $893 | (38.4)% | | Income (Loss) before income tax expense | $3,928 | $1,688 | $2,240 | 132.7% | | Income tax expense (benefit) | $986 | $756 | $230 | 30.4% | | Net income (loss) | $2,942 | $932 | $2,010 | 215.7% | - Consolidated contract revenue increased by 19.4% due to incremental revenues in both the Energy segment (up 21.0% from construction management and utility programs) and the Engineering and Consulting segment (up 12.6% from increased demand)[118][119][120] - Gross profit margin decreased to 38.7% from 40.2% primarily due to changes in the mix of revenues, with subcontractor services and other direct costs increasing significantly (30.9%)[121][123][124] - Operating income increased by 33.6% to $5.4 million, and net income surged by 215.7% to $2.9 million, driven by increased operating income, lower net other expenses, and a reduced effective tax rate[127][128][129][130] Liquidity and Capital Resources This section discusses the company's sources of liquidity, cash flow activities, and its contractual obligations, highlighting its financial flexibility Cash Flow Summary (Three Months Ended, in thousands) | Cash Flow Activity | March 29, 2024 | March 31, 2023 | | :-------------------------------- | :------------- | :------------- | | Operating activities | $26,949 | $17,292 | | Investing activities | $(1,952) | $(3,475) | | Financing activities | $(1,469) | $(15,449) | - Primary liquidity sources include cash from operations, cash and cash equivalents ($46.9 million as of March 29, 2024), and available borrowings under the $50.0 million Revolving Credit Facility (no amounts borrowed)[132][133] - Cash flows from operating activities increased to $26.9 million (Q1 2024) from $17.3 million (Q1 2023), primarily due to increased earnings and lower working capital requirements[135] Contractual Obligations as of March 29, 2024 (in thousands) | Contractual Obligations | Total | Less than 1 Year | 1 - 3 Years | 3 - 5 Years | More than 5 Years | | :---------------------- | :------- | :--------------- | :---------- | :---------- | :---------------- | | Debt | $95,495 | $8,924 | $86,571 | $— | $— | | Interest payments on debt | $16,238 | $6,998 | $9,240 | $— | $— | | Operating leases | $14,625 | $4,677 | $7,585 | $2,279 | $84 | | Finance leases | $2,223 | $1,111 | $1,015 | $97 | $— | | Total | $128,581 | $21,710 | $104,411 | $2,376 | $84 | Impact of Inflation This section assesses the historical and potential future impact of inflation on the company's operations, including mitigation strategies and risks - Historically, inflation has not materially impacted operations due to the average duration of projects and the ability to renegotiate prices[146] - The Company mitigates future price increases by using fixed price purchase orders and including cost escalation factors in proposals[149] - Despite mitigation efforts, significant price increases in equipment, supply chain disruptions, and inflationary pressures on utility clients could materially impact results[147][149] Components of Revenue and Expense This section breaks down the company's contract types and describes the primary elements contributing to direct costs of revenue and general and administrative expenses - As of March 29, 2024, contract types were 20% time-and-materials, 42% unit-based, and 38% fixed price, showing a shift towards unit-based and fixed price contracts compared to March 31, 2023[150] - Direct costs of contract revenue primarily include salaries and wages for revenue-producing projects, material costs, subcontractor services, and equipment expenses[156] - General and administrative (G&A) expenses encompass marketing, support staff, management, administrative personnel costs, payroll taxes, benefits, facility costs, depreciation, amortization, and professional services[158] Critical Accounting Policies This section confirms that there have been no material changes to the company's critical accounting policies and estimates since its last annual report - There have been no material changes to the Company's critical accounting policies and estimates from those disclosed in its Annual Report on Form 10-K for the fiscal year ended December 29, 2023[160] Recent Accounting Standards This section directs readers to the detailed notes within the financial statements for information 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 the Condensed Consolidated Financial Statements[161] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section details the company's exposure to market risk, specifically interest rate risk, due to its variable-rate debt. It outlines the outstanding debt, the interest rate swap used for hedging, and the potential impact of interest rate fluctuations on annual interest expense - The Company is exposed to interest rate risk from its Term Loan ($96.3 million outstanding) and Revolving Credit Facility, both bearing variable interest rates[164] - An interest rate swap agreement for a $50.0 million notional amount, with a fixed rate of 4.77% expiring September 29, 2026, is used to hedge a portion of the Term Loan's variable interest rate[167] - A one percentage point increase in the effective interest rate would increase the Company's annual interest expense by approximately $0.5 million in fiscal year 2024[168] Item 4. Controls and Procedures This section confirms management's evaluation of the effectiveness of the company's disclosure controls and procedures and states that no material changes occurred in internal control over financial reporting during the period - The Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective at a reasonable assurance level as of March 29, 2024[170] - No change in internal control over financial reporting occurred during the period that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting[171] Part II. Other Information This part provides additional information on legal proceedings, risk factors, equity security sales, defaults, mine safety, and exhibits Item 1. Legal Proceedings This section addresses the company's involvement in legal claims and lawsuits, its professional liability insurance coverage, and its policy for accruing and disclosing loss contingencies. Management assesses that the ultimate liability from current proceedings is not expected to materially affect the financial statements - The Company is subject to claims and lawsuits, including professional errors or omissions, common in the engineering and consulting professions[174] - Professional liability insurance is maintained, and liabilities for probable and estimable losses are accrued[174][175] - Management believes that the ultimate liability related to current outstanding claims and lawsuits will not have a material adverse effect on the Company's financial statements[176] Item 1A. Risk Factors This section states that there are no new material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K - There are no material changes to the risk factors set forth in Part I, Item 1A, Risk Factors in the Annual Report on Form 10-K for the year ended December 29, 2023[177] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports on the repurchase of common stock from employees to cover tax withholding obligations related to restricted stock vesting during the first quarter of 2024 Repurchases of Common Stock for Tax Withholding (Fiscal Quarter Ended March 29, 2024) | Period | Total Number of Shares Purchased | Average Price Paid Per Share | | :-------------------------------- | :----------------------------- | :--------------------------- | | February 24, 2024 – March 29, 2024 | 31,872 | $24.55 | Item 3. Defaults upon Senior Securities This section indicates that there were no defaults upon senior securities during the reporting period - There were no defaults upon senior securities[180] Item 4. Mine Safety Disclosures This section states that the disclosure requirements for mine safety are not applicable to the company - Mine Safety Disclosures are not applicable to the Company[181] Item 5. Other Information This section indicates that there is no other information to report under Rule 10b5-1 - No other information is reported under Rule 10b5-1[182] Item 6. Exhibits This section lists all exhibits filed as part of the Form 10-Q, including corporate documents, certifications, and XBRL data files - Exhibits include the First Amended and Restated Certificate of Incorporation, Second Amended and Restated Bylaws, Specimen Stock Certificate, Consulting Agreement, CEO and CFO Certifications (31.1, 31.2, 32.1), and Inline XBRL documents[184]