10-Q 1 wldn-20180330x10q.htm 10-Q wldn_Current_folio_10Q

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 30, 2018

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from            to          

 

Commission file number 001-33076

 

WILLDAN GROUP, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware

 

14-195112

(State or Other Jurisdiction of
Incorporation or Organization)

 

(IRS Employer Identification No.)

 

 

 

2401 East Katella Avenue, Suite 300
Anaheim, California

 

92806

(Address of Principal Executive Offices)

 

(Zip Code)

 

Registrant’s Telephone Number, Including Area Code: (800) 424-9144

 

Not Applicable

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report).

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒  No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ☒  No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐

 

Accelerated filer ☒

 

 

 

Non-accelerated filer ☐

 

Smaller reporting company ☐

(Do not check if a smaller reporting company)

 

Emerging growth company ☐

 

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐  No ☒

 

As of May 3, 2018, there were 8,863,085 shares of common stock, $0.01 par value per share, of Willdan Group, Inc. issued and outstanding.

 

 

 

 


 

WILLDAN GROUP, INC.

FORM 10-Q QUARTERLY REPORT

 

TABLE OF CONTENTS

 

 

2


 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

 

This Quarterly Report on Form 10-Q (this 10-Q) contains statements that constitute forward-looking statements as that term is defined by the Private Securities Litigation Reform Act of 1995. These statements concern our business, operations and financial performance and condition as well as our plans, objectives and expectations for our business operations and financial performance and condition, which are subject to risks and uncertainties. All statements other than statements of historical fact included in this 10-Q are forward-looking statements. These statements may include words such as aim, anticipate, assume, believe, can have, could, due, estimate, expect, goal, intend, likely, may, objective, plan, potential, positioned, predict, should, target, will, would and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events or trends. For example, all statements we make relating to our plans and objectives for future operations, growth or initiatives and strategies are forward-looking statements.

These forward-looking statements are based on current expectations, estimates, forecasts and projections about our business and the industry in which we operate and our managements beliefs and assumptions. We derive many of our forward-looking statements from our own operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution predicting the impact of known factors is very difficult, and we cannot anticipate all factors that could affect our actual results.

All of our forward-looking statements are subject to risks and uncertainties that may cause our actual results to differ materially from our expectations. Important factors that could cause actual results to differ materially from our expectations include, but are not limited to:

 

 

 

 

 

 

 

our ability to adequately complete projects in a timely manner,

 

 

 

our ability to compete successfully in the highly competitive energy market,

 

 

 

changes in state, local and regional economies and government budgets,

 

 

 

our ability to win new contracts, to renew existing contracts (including with our two primary customers) and to compete effectively for contracts awarded through bidding processes, and

 

 

 

our ability to successfully integrate our acquisitions and execute on our growth strategy.

 

The above is not a complete list of factors or events that could cause actual results to differ from our expectations, and we cannot predict all of them. All written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements disclosed in this 10-Q and under Risk Factors, Managements Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in our Annual Report on Form 10-K for the year ended December 29, 2017, as such disclosures may be amended, supplemented or superseded from time to time by other reports we file with the Securities and Exchange Commission, including subsequent Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q, and public communications. You should evaluate all forward-looking statements made in this 10-Q and otherwise in the context of these risks and uncertainties.

Potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on any forward-looking statements we make. These forward-looking statements speak only as of the date of this 10-Q and are not guarantees of future performance or developments and involve known and unknown risks, uncertainties and other factors that are in many cases beyond our control. Except as required by law, we undertake no obligation to update or revise any forward-looking statements publicly, whether as a result of new information, future developments or otherwise.

 

 

3


 

PART I. FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

WILLDAN GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

March 30,

 

December 29,

 

 

 

2018

 

2017

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

5,353,000

 

$

14,424,000

 

Accounts receivable, net of allowance for doubtful accounts of $466,000 and $369,000 at March 30, 2018 and December 29, 2017, respectively

 

 

20,598,000

 

 

38,441,000

 

Contract assets

 

 

42,296,000

 

 

24,732,000

 

Other receivables

 

 

1,985,000

 

 

1,833,000

 

Prepaid expenses and other current assets

 

 

3,265,000

 

 

3,760,000

 

Total current assets

 

 

73,497,000

 

 

83,190,000

 

Equipment and leasehold improvements, net

 

 

5,189,000

 

 

5,306,000

 

Goodwill

 

 

37,714,000

 

 

38,184,000

 

Other intangible assets, net

 

 

10,658,000

 

 

10,666,000

 

Other assets

 

 

924,000

 

 

826,000

 

Total assets

 

$

127,982,000

 

$

138,172,000

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

15,620,000

 

$

20,826,000

 

Accrued liabilities

 

 

16,596,000

 

 

23,293,000

 

Contingent consideration payable

 

 

2,757,000

 

 

4,246,000

 

Contract liabilities

 

 

6,458,000

 

 

7,321,000

 

Notes payable

 

 

 —

 

 

383,000

 

Capital lease obligations

 

 

298,000

 

 

289,000

 

Total current liabilities

 

 

41,729,000

 

 

56,358,000

 

Contingent consideration payable

 

 

4,467,000

 

 

5,062,000

 

Notes payable

 

 

2,500,000

 

 

2,500,000

 

Capital lease obligations, less current portion

 

 

223,000

 

 

160,000

 

Deferred lease obligations

 

 

676,000

 

 

614,000

 

Deferred income taxes, net

 

 

2,552,000

 

 

2,463,000

 

Other noncurrent liabilities

 

 

468,000

 

 

363,000

 

Total liabilities

 

 

52,615,000

 

 

67,520,000

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Preferred stock, $0.01 par value, 10,000,000 shares authorized, no shares issued and outstanding

 

 

 —

 

 

 —

 

Common stock, $0.01 par value, 40,000,000 shares authorized; 8,861,000 and 8,799,000 shares issued and outstanding at March 30, 2018 and December 29, 2017, respectively

 

 

89,000

 

 

88,000

 

Additional paid-in capital

 

 

52,934,000

 

 

50,976,000

 

Retained earnings

 

 

22,344,000

 

 

19,588,000

 

Total stockholders’ equity

 

 

75,367,000

 

 

70,652,000

 

Total liabilities and stockholders’ equity

 

$

127,982,000

 

$

138,172,000

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

4


 

WILLDAN GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 30,

 

March 31,

 

 

    

2018

    

2017

 

 

 

 

 

 

 

 

 

Contract revenue

 

$

54,595,000

 

$

68,351,000

 

 

 

 

 

 

 

 

 

Direct costs of contract revenue (inclusive of directly related depreciation and amortization):

 

 

 

 

 

 

 

Salaries and wages

 

 

10,998,000

 

 

10,801,000

 

Subcontractor services and other direct costs

 

 

24,069,000

 

 

39,895,000

 

Total direct costs of contract revenue

 

 

35,067,000

 

 

50,696,000

 

 

 

 

 

 

 

 

 

General and administrative expenses:

 

 

 

 

 

 

 

Salaries and wages, payroll taxes and employee benefits

 

 

10,025,000

 

 

9,315,000

 

Facilities and facility related

 

 

1,209,000

 

 

1,124,000

 

Stock-based compensation

 

 

1,064,000

 

 

476,000

 

Depreciation and amortization

 

 

1,064,000

 

 

909,000

 

Other

 

 

4,192,000

 

 

3,867,000

 

Total general and administrative expenses

 

 

17,554,000

 

 

15,691,000

 

Income from operations

 

 

1,974,000

 

 

1,964,000

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

Interest expense, net

 

 

(23,000)

 

 

(33,000)

 

Other, net

 

 

10,000

 

 

37,000

 

Total other (expense) income, net

 

 

(13,000)

 

 

4,000

 

Income before income taxes

 

 

1,961,000

 

 

1,968,000

 

 

 

 

 

 

 

 

 

Income tax benefit

 

 

(242,000)

 

 

(673,000)

 

Net income

 

$

2,203,000

 

$

2,641,000

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

Basic

 

$

0.25

 

$

0.32

 

Diluted

 

$

0.24

 

$

0.30

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding:

 

 

 

 

 

 

 

Basic

 

 

8,753,000

 

 

8,281,000

 

Diluted

 

 

9,185,000

 

 

8,854,000

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

5


 

WILLDAN GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

Common Stock

 

Paid-in

 

 

 

 

 

 

 

 

  

Shares

    

Amount

    

Capital

    

Retained Earnings

    

Total

 

Balance at December 29, 2017

 

8,799,000

 

$

88,000

 

$

50,976,000

 

$

19,588,000

 

$

70,652,000

 

Shares of common stock issued in connection with employee stock purchase plan

 

30,000

 

 

 —

 

 

616,000

 

 

 —

 

 

616,000

 

Shares of common stock issued in connection with incentive stock plan

 

32,000

 

 

1,000

 

 

278,000

 

 

 —

 

 

279,000

 

Stock-based compensation expense

 

 —

 

 

 —

 

 

1,064,000

 

 

 —

 

 

1,064,000

 

Net income

 

 —

 

 

 —

 

 

 —

 

 

2,203,000

 

 

2,203,000

 

Cumulative effect from adoption of ASC 606

 

 —

 

 

 —

 

 

 —

 

 

553,000

 

 

553,000

 

Balance at March 30, 2018

 

8,861,000

 

$

89,000

 

$

52,934,000

 

$

22,344,000

 

$  

75,367,000

 

 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements

6


 

WILLDAN GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 30,

 

March 31,

 

 

    

2018

    

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

 

$

2,203,000

 

$

2,641,000

 

Adjustments to reconcile net income to net cash used in operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,101,000

 

 

919,000

 

Deferred income taxes, net

 

 

(126,000)

 

 

28,000

 

Provision for doubtful accounts

 

 

96,000

 

 

8,000

 

Stock-based compensation

 

 

1,064,000

 

 

476,000

 

Accretion and fair value adjustments of contingent consideration

 

 

338,000

 

 

167,000

 

Changes in operating assets and liabilities, net of effects from business acquisitions:

 

 

 

 

 

 

 

Accounts receivable

 

 

17,747,000

 

 

(963,000)

 

Contract assets

 

 

(16,796,000)

 

 

(10,191,000)

 

Other receivables

 

 

(152,000)

 

 

471,000

 

Prepaid expenses and other current assets

 

 

495,000

 

 

(559,000)

 

Other assets

 

 

(98,000)

 

 

25,000

 

Accounts payable

 

 

(5,206,000)

 

 

2,475,000

 

Accrued liabilities

 

 

(6,592,000)

 

 

3,377,000

 

Contract liabilities

 

 

(863,000)

 

 

(256,000)

 

Deferred lease obligations

 

 

62,000

 

 

(6,000)

 

Net cash used in operating activities

 

 

(6,727,000)

 

 

(1,388,000)

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchase of equipment and leasehold improvements

 

 

(144,000)

 

 

(583,000)

 

Net cash used in investing activities

 

 

(144,000)

 

 

(583,000)

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Payments on contingent consideration

 

 

(2,622,000)

 

 

(1,508,000)

 

Payments on notes payable

 

 

(383,000)

 

 

(1,272,000)

 

Principal payments on capital lease obligations

 

 

(90,000)

 

 

(121,000)

 

Proceeds from stock option exercise

 

 

279,000

 

 

1,300,000

 

Proceeds from sales of common stock under employee stock purchase plan

 

 

616,000

 

 

344,000

 

Net cash used in financing activities

 

 

(2,200,000)

 

 

(1,257,000)

 

Net decrease in cash and cash equivalents

 

 

(9,071,000)

 

 

(3,228,000)

 

Cash and cash equivalents at beginning of period

 

 

14,424,000

 

 

22,668,000

 

Cash and cash equivalents at end of period

 

$

5,353,000

 

$

19,440,000

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

Interest

 

$

23,000

 

$

33,000

 

Income taxes

 

 

36,000

 

 

249,000

 

Supplemental disclosures of noncash investing and financing activities:

 

 

 

 

 

 

 

Equipment acquired under capital leases

 

 

162,000

 

 

32,000

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

7


 

WILLDAN GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

March 30, 2018
(Unaudited)

 

1.BASIS OF PRESENTATION, ORGANIZATION AND OPERATIONS OF THE COMPANY

 

Basis of Presentation

 

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and reflect all adjustments, which consist of only normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the consolidated results for the interim periods presented.  The Company operates and reports its quarterly financial results based on the 13-week period ending on the Friday closest to March 31, June 30 and September 30 and the 13 or 14-week period ending on the Friday closest to December 31, as applicable, with consideration of business days.  Results for the interim periods are not necessarily indicative of results for the full year.  Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations.  The condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 29, 2017.

 

Nature of Business

 

Willdan Group, Inc. and subsidiaries (the “Company”) is a provider of professional technical and consulting services, including comprehensive energy services, for utilities, private industry, and public agencies at all levels of government, primarily in California and New York.  The Company also has operations in Arizona, Connecticut, Colorado, Florida, Illinois, Kansas, Nevada, New Jersey, Ohio, Oregon, Texas, Utah, Washington and Washington, D.C.  The Company enables its clients to provide a wide range of specialized services without having to incur and maintain the overhead necessary to develop staffing in-house.  The Company provides a broad range of complementary services including energy and sustainability, engineering, construction management and planning, economic and financial consulting and national preparedness and interoperability.  The Company’s clients primarily consist of public and governmental agencies, including cities, counties, public utilities, redevelopment agencies, water districts, school districts and universities, state agencies, federal agencies, a variety of other special districts and agencies, private utilities and industry and tribal governments.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of Willdan Group, Inc. and its wholly-owned subsidiaries, Willdan Energy Solutions (“WES”), Willdan Engineering, Willdan Infrastructure, Public Agency Resources, Willdan Financial Services and Willdan Homeland Solutions and their respective subsidiaries.  All significant intercompany balances and transactions have been eliminated in consolidation.

 

The Company accounts for variable interest entities in accordance with Accounting Standards Codification (“ASC”) 810, Consolidation.  Under ASC 810, a variable interest entity (“VIE”) is created when: (a) the equity investment at risk in the entity is not sufficient to permit the entity to finance its activities without additional subordinated financial support provided by other parties, including the equity holders; (b) the entitys equity holders as a group either (i) lack the direct or indirect ability to make decisions about the entity, (ii) are not obligated to absorb expected losses of the entity or (iii) do not have the right to receive expected residual returns of the entity; or (c) the entitys equity holders have voting rights that are not proportionate to their economic interests, and the activities of the entity involve or are conducted on behalf of the equity holder with disproportionately few voting rights.  If an entity is deemed to be a VIE pursuant to ASC 810, the enterprise that has both (i) the power to direct the activities of a VIE that most significantly impact the entitys economic performance and (ii) the obligation to absorb the expected losses of the entity or right to receive benefits from the entity that could be potentially significant to the VIE is considered the primary

8


 

beneficiary and must consolidate the VIE.  In accordance with ASC 810, the Company performs ongoing reassessments of whether an enterprise is the primary beneficiary of a VIE.

 

As of March 30, 2018, the Company had one VIE— Genesys Engineering, P.C. (“Genesys”).  Pursuant to New York law, the Company does not own capital stock of Genesys and does not have control over the professional decision making of Genesys’s engineering services.  The Company, however, has entered into an administrative services agreement with Genesys pursuant to which WES, the Company’s wholly-owned subsidiary, will provide Genesys with ongoing administrative, operational and other non-professional support services.  The Company manages Genesys and has the power to direct the activities that most significantly impact Genesys’s performance, in addition to being obligated to absorb expected losses from Genesys.  Accordingly, the Company is the primary beneficiary of Genesys and consolidates Genesys as a VIE.

 

Management also concluded there is no noncontrolling interest related to the consolidation of Genesys because management determined that (i) the shareholder of Genesys does not have more than a nominal amount of equity investment at risk, (ii) WES absorbs the expected losses of Genesys through its deferral of Genesys’s service fees owed to WES, and the Company has, since entering into the administrative services agreement, had to continuously defer the service fees for Genesys, and (iii) the Company believes Genesys will continue to have a shortfall on payment of its service fees for the foreseeable future, leaving no expected residual returns for the shareholder.  For more information regarding Genesys, see Note 2 “Business Combinations.”

 

Segment Information

 

Willdan Group, Inc. is a holding company with six wholly owned subsidiaries.  The Company presents segment information externally consistent with the manner in which the Companys chief operating decision maker reviews information to assess performance and allocate resources.  Willdan Group, Inc. performs administrative functions on behalf of its subsidiaries, such as treasury, legal, accounting, information systems, human resources and certain business development activities, and earns revenue that is only incidental to the activities of the enterprise.  As a result, Willdan Group, Inc. does not meet the definition of an operating segment.  The Company’s Energy segment consists of the business of our subsidiary, WES, which offers energy and sustainability consulting services to utilities public agencies and private industry.  The Company’s Engineering and Consulting segment includes the operation of our remaining subsidiaries, Willdan Engineering, Willdan Infrastructure, Public Agency Resources, Willdan Financial Services and Willdan Homeland Solutions.  Willdan Engineering provides civil engineering-related construction management, building and safety, city engineering, city planning, geotechnical, material testing and other engineering consulting services to our clients.  Willdan Infrastructure, which was launched in fiscal year 2013, provides engineering services to larger rail, port, water, mining and other civil engineering projects.  Public Agency Resources primarily provides staffing to Willdan Engineering.  Willdan Financial Services provides economic and financial consulting to public agencies.  Willdan Homeland Solutions provides national preparedness and interoperability services and communications and technology solutions.  See Note 10 “Segment Information” for revised and restated segment information for the current and prior period.

 

Contract Assets and Liabilities

 

Amounts classified as “Costs and estimated earnings in excess of billings on uncompleted contracts” and “Billings in excess of costs and estimated earnings on uncompleted contracts” on the consolidated balance sheets of our Annual Report on Form 10-K for the year ended December 29, 2017 have been reclassified as “Contract assets” and “Contract liabilities”, respectively, on the condensed consolidated balance sheets and statements of cash flows.

 

Billing practices are governed by the contract terms of each project based upon costs incurred, achievement of milestones or pre-agreed schedules.  Billings do not necessarily correlate with revenue recognized using the cost-to-cost method of revenue recognition.  Contract assets include unbilled amounts typically resulting from revenue under long-term contracts when the cost-to-cost method of revenue recognition is utilized and revenue recognized exceeds the amount billed to the customer and right to payment is not unconditional.  In addition, contract assets include retainage amounts withheld from billings to the Company’s clients pursuant to provisions in the contracts.  Contract liabilities consist of advance payments and billings in excess of revenue recognized and deferred revenue.

9


 

 

The increase in contract assets was primarily attributable to the reclassification of retainage from accounts receivable to contract assets as of December 30, 2017 due to the adoption of ASU 2014-09, offset by normal business operations for the three months ended March 30, 2018.  The decrease in contract liabilities was primarily related to normal business operations for the three months ended March 30, 2018.

 

Contract Accounting

 

The Company enters into contracts with its clients that contain various types of pricing provisions, including fixed price, time-and-materials, unit-based and service related provisions.  The Company recognizes revenues in accordance with Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customer, codified as ASC Topic 606 and the related amendments (“ASC 606”).  As such, the Company identifies a contract with a customer, identifies the performance obligations in the contract, determines the transaction price, allocates the transaction price to each performance obligation in the contract and recognizes revenues when (or as) the Company satisfies a performance obligation.

 

The following table reflects the Company’s two reportable segments and the types of contracts that each most commonly enters into for revenue generating activities.

 

 

 

 

Segment

Contract Type

Revenue Recognition Method

 

Time-and-materials

Time-and-materials

Energy

Unit-based

Unit-based

 

Software license

Unit-based

 

Fixed price

Percentage-of-completion

 

Time-and-materials

Time-and-materials

Engineering and Consulting

Unit-based

Unit-based

 

Fixed price

Percentage-of-completion

 

Service-related

Proportional performance

 

Revenue on the vast majority of the Company’s contracts will continue to be recognized over time because of the continuous transfer of control to the customer.  Revenue on fixed price contracts is recognized on the percentage-of-completion method based generally on the ratio of direct costs incurred to date to estimated total direct costs at completion.  Many of the Company’s fixed price contracts involve a high degree of subcontracted fixed price effort and are relatively short in duration, thereby lowering the risks of not properly estimating the percent complete.  Revenue on time-and-materials and unit-based contracts is recognized as the work is performed in accordance with the specific rates and terms of the contract.  The Company recognizes revenues for time-and-materials contracts based upon the actual hours incurred during a reporting period at contractually agreed upon rates per hour and also includes in revenue all reimbursable costs incurred during a reporting period.  Certain of the Company’s time-and-materials contracts are subject to maximum contract values and, accordingly, when revenue is expected to exceed the maximum contract value, these contracts are generally recognized under the percentage-of-completion method, consistent with fixed price contracts.  For unit-based contracts, the Company recognizes the contract price of units of a basic production product as revenue when the production product is delivered during a period.  Revenue recognition for software licenses issued by the Energy segment is generally recognized at a point in time, utilizing the unit-based revenue recognition method, upon acceptance of the software by the customer and in recognition of the fulfillment of the performance obligation.  Certain additional performance obligations beyond the base software license may be separated from the gross license fee and amortized over time.  Revenue for amounts that have been billed but not earned is deferred, and such deferred revenue is referred to as contract liabilities in the accompanying condensed consolidated balance sheets.

 

To determine the proper revenue recognition method for contracts, the Company evaluates whether two or more contracts should be combined and accounted for as one single contract and whether the combined contract should be accounted for as one performance obligation.  With respect to the Company’s contracts, it is rare that criteria for a single performance obligation are present.  This evaluation requires significant judgment and the decision to combine a group of contracts or separate a single contract into multiple performance obligations could change the amount of revenue and profit recorded in a given period.  Contracts are considered to have a single performance obligation if the promise to

10


 

transfer the individual goods or services is not separately identifiable from other promises in the contracts, which is mainly because the Company provides a significant service of integrating a complex set of tasks and components into a single project or capability.  The Company may enter into certain contracts, which include separate phases or elements.  If each phase or element is negotiated separately based on the technical resources required and/or the supply and demand for the services being provided, the Company evaluates if the contracts should be segmented.  If certain criteria are met, the contracts would be segmented which could result in revenues being assigned to the different elements or phases with different rates of profitability based on the relative value of each element or phase to the estimated total contract revenue.

 

Contracts that cover multiple phases or elements of the project or service lifecycle (development, construction and maintenance and support) may be considered to have multiple performance obligations even when they are part of a single contract.  For contracts with multiple performance obligations, the Company allocates the transaction price to each performance obligation using the best estimate of the standalone selling price of each distinct good or service in the contract.  In cases where the Company does not provide the distinct good or service on a standalone basis, the primary method used to estimate standalone selling price is the expected cost plus a margin approach, under which the Company forecasts the Company’s expected costs of satisfying a performance obligation and then add an appropriate margin for the distinct good or service.

 

The Company provides quality of workmanship warranties to customers that are included in the sale and are not priced or sold separately or do not provide customers with a service in addition to assurance of compliance with agreed-upon specifications and industry standards.  The Company does not consider these types of warranties to be separate performance obligations.

 

In some cases, the Company has a Master Service or blanket agreement with a customer under which each task order releases the Company to perform specific portions of the overall scope in the service contract and is typically accounted for as a separate contract because the task order establishes the enforceable rights and obligations, and payment terms.

 

Under ASC 606, variable consideration should be considered when determining the transaction price and estimates should be made for the variable consideration component of the transaction price, as well as assessing whether an estimate of variable consideration is constrained.  For certain of the Company’s contracts, variable consideration can arise from modifications to the scope of services resulting from unapproved change orders or customer claims.  Variable consideration is included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved.  The Company estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on assessments of legal enforceability, the Company’s performance, and all information (historical, current and forecasted) that is reasonably available to the Company.

 

Due to the nature of the work required to be performed on many of the Company’s performance obligations, the estimation of total revenue and cost at completion is complex, subject to many variables and requires significant judgment.  As a significant change in one or more of these estimates could affect the profitability of the Company’s contracts, the Company reviews and updates the Company’s contract-related estimates regularly through a Company-wide disciplined project review process in which management reviews the progress and execution of the Company’s performance obligations and the estimate at completion (EAC).  As part of this process, management reviews information including, but not limited to, any outstanding key contract matters, progress towards completion and the related program schedule and the related changes in estimates of revenues and costs.  Management must make assumptions and estimates regarding labor productivity and availability, the complexity of the work to be performed, the cost and availability of materials, the performance of subcontractors, and the availability and timing of funding from the customer, amount other variables.

 

The Company recognizes adjustments in estimated profit on contracts under the cumulative catch-up method.  Under this method, the impact of the adjustment on profit recorded to date is recognized in the period the adjustment is identified.  Revenue and profit in future periods of contract performance is recognized using the adjusted estimate.  If at any time the estimate of contract profitability indicates an anticipated loss on the contract, the Company recognizes the full amount of estimated loss in the period it is identified.

11


 

 

Contracts are often modified to account for changes in contract specifications and requirements.  The Company considers contract modifications to exist when the modification either creates new rights or obligations or changes the existing enforceable rights or obligations.  Most of the Company’s contract modifications are for goods or services that are not distinct from existing contracts due to the significant integration provided in the context of the contract and are accounted for as if they were part of the original contract.  The effect of a contract modification that is not distinct from the existing contract on the transaction price and the Company’s measure of progress for the performance obligation to which it relates, is recognized as an adjustment to revenue (either as an increase in or a reduction of revenue) on a cumulative catch-up basis.

 

For contract modifications that result in the promise to deliver goods or services that are distinct from the existing contract and the increase in price of the contract is for the same amount as the standalone selling price of the additional goods or services included in the modification, the Company accounts for such contract modifications as a separate contract.

 

The Company includes claims to vendors, subcontractors and others as a receivable and a reduction in recognized costs when enforceability of the claim is established by the contract and the amounts are reasonably estimable and probable of being recovered.  The amounts are recorded up to the extent of the lesser of the amounts management expects to recover or to costs incurred.

 

Billing practices are governed by the contract terms of each project based upon costs incurred, achievement of milestones or pre-agreed schedules. Billings do not necessarily correlate with revenue recognized using the cost-to-cost method of revenue recognition.

 

Direct costs of contract revenue consist primarily of that portion of technical and nontechnical salaries and wages that has been incurred in connection with revenue producing projects.  Direct costs of contract revenue also include production expenses, subcontractor services and other expenses that are incurred in connection with revenue producing projects.

 

Direct costs of contract revenue exclude that portion of technical and nontechnical salaries and wages related to marketing efforts, vacations, holidays and other time not spent directly generating revenue under existing contracts.  Such costs are included in general and administrative expenses.  Additionally, payroll taxes, bonuses and employee benefit costs for all Company personnel are included in general and administrative expenses in the accompanying consolidated statements of operations since no allocation of these costs is made to direct costs of contract revenue.  No allocation of facilities costs is made to direct costs of contract revenue.  Other companies may classify as direct costs of contract revenue some of the costs that the Company classifies as general and administrative costs.  The Company expenses direct costs of contract revenue when incurred.

 

Included in revenue and costs are all reimbursable costs for which the Company has the risk or on which the fee was based at the time of bid or negotiation.  No revenue or cost is recorded for costs in which the Company acts solely in the capacity of an agent and has no risks associated with such costs.

 

Accounts receivable are carried at original invoice amount less an estimate made for doubtful accounts based upon a review of all outstanding amounts on a quarterly basis.  Management determines allowances for doubtful accounts through specific identification of amounts considered to be uncollectible and potential write-offs, plus a non-specific allowance for other amounts for which some potential loss has been determined to be probable based on current and past experience.  The Company’s credit risk is minimal with governmental entities and large public utilities, but disputes may arise related to these receivable amounts.  Accounts receivable are written off when deemed uncollectible.  Recoveries of accounts receivable previously written off are recorded when received.

 

Retainage, included in contract assets, represents amounts withheld from billings to the Company’s clients pursuant to provisions in the contracts and may not be paid to us until the completion of specific tasks or the completion of the project and, in some instances, for even longer periods.  At March 30, 2018 and December 29, 2017, the Company included retainage of approximately $8.1 million and $8.6 million, respectively, within contract assets.

12


 

 

Goodwill

 

Goodwill represents the excess of costs over fair value of the assets acquired.  The Company completes its annual testing of goodwill as of the last day of the first month of its fourth fiscal quarter each year to determine whether there is impairment.  Goodwill, which has an indefinite useful life, is not amortized, but instead tested for impairment at least annually or more frequently if events and circumstances indicate that the asset might be impaired.  Impairment losses for reporting units are recognized to the extent that a reporting unit’s carrying amount exceeds its fair value.

 

Fair Value of Financial Instruments

 

The Company’s financial instruments consist primarily of cash, cash equivalents, accounts receivable, contract assets, other receivables, prepaid expenses and other current assets, accounts payable, accrued liabilities, contingent consideration and contract liabilities, and approximate their fair values because of the relatively short period of time between the origination of these instruments and their expected realization or payment.  The carrying amounts of debt obligations and contingent consideration approximate their fair values since the terms are comparable to terms currently offered by local lending institutions for loans of similar terms to companies with comparable credit risk.

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements.  Estimates also affect the reported amounts of revenue and expenses during the reporting period.  Actual results could differ from those estimates.

 

Liquidity

 

As of March 30, 2018, the Company had $5.4 million of cash and cash equivalents.  The Company’s primary source of liquidity is cash generated from operations.  The Company also has a revolving line of credit with BMO Harris Bank, N.A. (“BMO”), which matures on January 20, 2020 (see Note 7).  The Company believes that its cash and cash equivalents on hand, cash generated by operating activities and funds available under its line of credit (if needed and if available) will be sufficient to finance its operating activities for at least the next 12 months.  

 

Adoption of New Accounting Standards

 

On December 30, 2017, the Company adopted ASC 606 using the modified retrospective method applied to those contracts which were not completed as of December 29, 2017. Results for operating periods beginning after December 30, 2017 are presented under ASC 606, while comparative information has not been restated and continues to be reported in accordance with the accounting standards in effect for those periods.

 

13


 

The Company recognized the cumulative effect of initially applying ASC 606 as an adjustment to retained earnings in the balance sheet as of December 30, 2017 as follows:

 

 

 

 

 

 

 

 

 

 

Balance at

 

Adjustments

 

Balance at

 

 

December 29,

 

Due to

 

December 30,

 

 

2017

 

ASC 606

 

2017

Assets

 

 

 

 

 

 

Accounts receivable, net of allowance for doubtful accounts

$

38,441,000

 

(8,560,000)

$

29,881,000

Contract assets

 

24,732,000

 

9,328,000

 

34,060,000

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

Deferred income taxes, net

 

2,463,000

 

(215,000)

 

2,248,000

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

Retained earnings

$

19,588,000

 

553,000

$

20,141,000

 

The impact of adoption on the Company’s condensed consolidated balance sheet and cash flows for the period ended March 30, 2018 was as follows:

 

 

 

 

 

 

 

 

 

For the period March 30, 2018

 

 

As

 

Balances Without

 

Effect of Change

 

 

Reported

 

Adoption of ASC 606

 

Higher/(Lower)

Assets

 

 

 

 

 

 

Accounts receivable, net of allowance for doubtful accounts

$

20,598,000

 

28,718,000

$

(8,120,000)

Contract assets

$

42,296,000

 

33,549,000

$

8,747,000

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

Deferred income taxes, net

 

2,552,000

 

2,750,000

 

(198,000)

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

Retained earnings

$

22,344,000

 

21,915,000

$

429,000

 

 

 

 

.

 

 

 

 

For the period March 30, 2018

 

 

As

 

Balances Without

 

Effect of Change

 

 

Reported

 

Adoption of ASC 606

 

Higher/(Lower)

Cash flows from operating activities

 

 

 

 

 

 

Accounts receivable, net of allowance for doubtful accounts

$

17,747,000

 

9,627,000

$

8,120,000

Contract assets

 

(16,796,000)

 

(8,676,000)

 

(8,120,000)

Total cash flows used in operating activities

$

951,000

 

951,000

$

0

 

 

The impact of adoption on the Company’s opening balance sheet was primarily related to deferred revenues and unrecognized license renewals associated with software license agreements currently in force reclassified to retained earnings, net of the deferred income tax impact and reclassification of amounts between accounts receivable net of allowance for doubtful accounts and contract assets based on whether an unconditional right to consideration has been established or not.  The impact of adoption on the Company’s statement of operations was not material for the period ended March 30, 2018.

 

The impact of adoption on the Company’s balance sheet was primarily related to conforming the Company’s software license contracts recorded over time based on previously acceptable methods to recognizing the full amount of most non-cancellable software licenses upon acceptance of the software by the customer.

 

14


 

Recent Accounting Pronouncements

 

Revenue Recognition

 

Effective December 30, 2017, the Company adopted ASU 2014-09 using the modified retrospective approach.  The adoption of ASU 2014-09 did not have a material impact on the Company’s condensed consolidated financial statements

 

In 2017, the Company established an implementation team, which included senior managers from its finance and accounting group.  The implementation team evaluated the impact of adopting ASU 2014-09 on the Company’s contracts expected to be uncompleted as of December 30, 2017 (the date of adoption).  The evaluation included reviewing the Company’s accounting policies and practices to identify differences that would result from applying the requirements of the new standard.  The Company identified and made changes to its processes, systems and controls to support recognition and disclosure under the new standard.  The implementation team worked closely with various professional consultants and attended several formal conferences and seminars to conclude on certain interpretative issues.

 

The Company recognizes engineering and consulting contract revenue over time using the percentage of completion method, based primarily on contract cost incurred to date compared to total estimated contract cost.  Revenue on the vast majority of the Company’s contracts will continue to be recognized over time because of the continuous transfer of control to the customer.  Revenue recognition for software licenses issued by the Energy segment is recognized at a point in time, upon acceptance of the software by the customer and in recognition of the fulfillment of the performance obligation.  Certain additional performance obligations beyond the base software license may be separated from the gross license fee and amortized over time.

 

Statement of Cash Flows

 

In August 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU 2016-15, Statement of Cash Flows: Clarification of Certain Cash Receipts and Cash Payments, which eliminates the diversity in practice related to the classification of certain cash receipts and payments in the statement of cash flows, by adding or clarifying guidance on eight specific cash flow issues.  ASU 2016-15 is effective for annual and interim reporting periods beginning after December 15, 2017 and early adoption is permitted.  ASU 2016-15 provides for retrospective application for all periods presented.  Effective December 30, 2017, the Company adopted ASU 2016-15 and the impact did not have a material effect on the Company’s condensed consolidated financial statements.

 

Leases

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842).  The FASB issued this update to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.  The updated guidance is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years.  Early adoption of the update is permitted.  The Company is evaluating the impact of the adoption of this update on its consolidated financial statements and related disclosures.  The Company has developed a detailed plan to implement the new standard and, through a cross functional team, is assessing contractual arrangements that may qualify as leases under the new standard.  The impact of the new standard will be an increase to right of use assets and lease liabilities on the Company’s consolidated balance sheet, primarily as a result of operating leases currently not recognized on the balance sheet.

 

Proposed Accounting Standards

 

A variety of proposed or otherwise potential accounting standards are currently being studied by standard-setting organizations and certain regulatory agencies.  Because of the tentative and preliminary nature of such proposed standards, the Company has not yet determined the effect, if any, that the implementation of such proposed standards would have on its consolidated financial statements.

 

 

 

15


 

2.BUSINESS COMBINATIONS

 

Acquisition of Integral Analytics

 

On July 28, 2017, the Company and the Company’s wholly-owned subsidiary, WES, acquired all of the outstanding shares of Integral Analytics, Inc. (“Integral Analytics”), a data analytics and software company, pursuant to the Stock Purchase Agreement, dated July 28, 2017 (the “Purchase Agreement”), by and among Willdan Group, WES, Integral Analytics, the stockholders of Integral Analytics (the “IA Stockholders”) and the Sellers’ Representative (as defined therein).  The Company believes the addition of Integral Analytics’ capabilities will improve the ability to target locational energy savings and microgrids and can provide a clear technical advantage on energy programs.

 

Pursuant to the terms of the Purchase Agreement, WES will pay the IA Stockholders a maximum purchase price of $30.0 million, consisting of (i) $15.0 million in cash paid at closing (subject to certain post-closing tangible net asset value adjustments), (ii) 90,611 shares of common stock, par value $0.01 per share, of Willdan Group, Inc. (“Common Stock”) issued at closing, equaling $3.0 million, calculated based on the volume-weighted average price of shares of Common Stock for the ten trading days immediately prior to, but not including, the closing date of the acquisition of Integral Analytics (the “Closing Date”) and (iii)  up to $12.0 million in cash for a percentage of sales attributable to the business of Integral Analytics during the three years after the Closing Date, as more fully described below (such potential payments of up to $12.0 million, being referred to as “Earn-Out Payments” and $12.0 million in respect thereof, being referred to as the “Maximum Payout”).  The Company used cash on hand for the $15.0 million cash payment paid at closing.

 

The size of the Earn-Out Payments to be paid will be determined based on two factors.  First, the IA Stockholders will receive 2% of gross contracted revenue for new work sold by the Company in close collaboration with Integral Analytics during the three years following the Closing Date (the “Earn-Out Period”).  Second, the IA Stockholders will receive 20% of the gross contracted revenue specified in each executed and/or effective software licensing agreement, entered into by the Company or one of its affiliates that contains pricing either equal to or greater than standard pricing, of software offered for licensing by Integral Analytics during the Earn-Out Period.  The amounts due to the IA Stockholders pursuant to these two factors will in no event, individually or in the aggregate, exceed the Maximum Payout.  Earn-Out Payments will be made in quarterly installments for each year of the Earn-Out Period.  For the purposes of both of these factors credit will be given to Integral Analytics for the gross contracted revenue in the quarter in which the contract/license is executed, regardless of when the receipt of payment thereunder is expected.  The amount of gross contracted revenue for contracts with unfunded ceilings or of an indeterminate contractual value will be mutually agreed upon.  Further, in the event of a change of control of WES during the Earn-Out Period, any then-unpaid amount of the Maximum Payout will be paid promptly to the IA Stockholders, even if such Earn-Out Payments have not been earned at that time.  The Company has agreed to certain covenants regarding the operation of Integral Analytics during the Earn-Out Period, of which a violation by the Company could result in damages being paid to the IA Stockholders in respect of the Earn-Out.  In addition, the Earn-Out Payments will be subject to certain subordination provisions in favor of BMO, the Company’s senior secured lender.

 

WES has also established a bonus pool for the employees of Integral Analytics to be paid based on Integral Analytics’ performance against certain targets.

 

The acquisition was accounted for as a business combination in accordance with ASC 805.  Under ASC 805, the Company recorded the acquired assets and assumed liabilities at their estimated fair value with the excess allocated to goodwill.  Goodwill represents the value the Company expects to achieve through the operational synergies and the expansion into new markets.  The Company estimates that the entire $15.9 million of goodwill resulting from the acquisition will be tax deductible.  Consideration for the acquisition includes the following preliminary information:

 

 

 

 

 

 

    

Integral Analytics

Cash paid

 

$

15,000,000

Other payable for working capital adjustment

 

 

113,000

Issuance of common stock

 

 

3,100,000

Contingent consideration

 

 

5,600,000

Total consideration

 

$

23,813,000

 

16


 

The following table summarizes the preliminary amounts for the acquired assets recorded at their estimated fair value as of the acquisition date:

 

 

 

 

 

 

    

Integral Analytics

Current assets

 

$

626,000

Non-current assets

 

 

2,000

Cash

 

 

397,000

Property, plant and equipment

 

 

5,000

Liabilities

 

 

(946,000)

Customer relationships

 

 

1,200,000

Tradename

 

 

990,000

Developed technology

 

 

3,410,000

In-process technology

 

 

2,220,000

Goodwill

 

 

15,909,000

Net assets acquired

 

$

23,813,000

 

The following unaudited pro forma financial information for the three months ended March 30, 2018 and March 31, 2017 assumes that acquisition of all the outstanding shares of Integral Analytics occurred on December 31, 2016 as follows:

 

 

 

 

 

 

 

 

 

 

Three months ended

 

 

March 30,

 

March 31,

In thousands (except per share data)

    

2018

    

2017

Pro forma revenue

 

$

54,595

 

$

69,279

 

 

 

 

 

 

 

Pro forma income from operations

 

 

1,974

 

 

1,087

Pro forma net income

 

$

2,218

 

$

1,459

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

Basic

 

$

0.25

 

$

0.18

Diluted

 

$

0.24

 

$

0.16

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

Basic

 

 

8,753

 

 

8,281

Diluted

 

 

9,185

 

 

8,854

 

This pro forma supplemental information does not purport to be indicative of what the company’s operating results would have been had this transaction occurred on December 31, 2016 and may not be indicative of future operating results.

 

During the three months ended March 30, 2018, the acquisition of all of the outstanding shares of Integral Analytics contributed $0.5 million in revenue and $0.6 million of loss from operations.  There were no acquisition related costs recorded during the three month period ended March 30, 2018.

 

 

17


 

3.GOODWILL AND OTHER INTANGIBLE ASSETS

 

As of March 30, 2018, the Company had $37.7 million of goodwill, which primarily relates to the Energy reporting segment and the acquisitions of substantially all of the assets of Genesys and 360 Energy Engineers, LLC (“360 Energy”) and the acquisitions of Integral Analytics and Abacus Resource Management Company (“Abacus”).  The remaining goodwill relates to the Engineering and Consulting reporting segment and the acquisition of Economists.com, LLC.  The changes in the carrying value of goodwill by reporting unit for the three months ended March 30, 2018 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 29,

 

Additions /

 

March 30,

 

Reporting Unit

    

2017

    

Adjustments

    

2018

 

Energy

 

$

37,435,000

 

$

(470,000)

 

$

36,965,000

 

Engineering and Consulting

 

 

749,000

 

 

 —

 

 

749,000

 

 

 

$

38,184,000

 

$

(470,000)

 

$

37,714,000

 

 

The gross amounts and accumulated amortization of the Company’s acquired identifiable intangible assets with finite useful lives as of March 30, 2018 included in other intangible assets, net in the accompanying condensed consolidated balance sheets, were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 30, 2018

 

December 29, 2017

 

 

 

 

 

 

 

Gross

 

Accumulated

 

Gross

 

Accumulated

 

Amortization

 

 

    

Amount

    

Amortization

    

Amount

    

Amortization

    

Period (yrs)

 

Backlog

 

$

1,398,000

 

$

1,077,000

 

$

1,398,000

 

$

989,000

 

 

 

5.0

 

Tradename

 

 

3,729,000

 

 

2,255,000

 

 

3,779,000

 

 

2,050,000

 

2.5

-

6.0

 

Non-compete agreements

 

 

1,331,000

 

 

816,000

 

 

1,331,000

 

 

745,000

 

 

 

4.0

 

Developed Technology

 

 

3,410,000

 

 

284,000

 

 

2,760,000

 

 

144,000

 

 

 

8.0

 

In-process Research & Technology

 

 

2,220,000

 

 

 —

 

 

1,650,000

 

 

 —

 

 

 

10.0

 

Customer relationships

 

 

4,460,000

 

 

1,458,000

 

 

4,960,000

 

 

1,284,000

 

5.0

-

8.0

 

 

 

$

16,548,000

 

$

5,890,000

 

$

15,878,000

 

$

5,212,000

 

 

 

 

 

 

The Company’s amortization expense for acquired identifiable intangible assets with finite useful lives was $0.7 million for the fiscal three months ended March 30, 2018 as compared to $0.5 million for the fiscal three months ended March 31, 2017.  Estimated amortization expense for acquired identifiable intangible assets for the remainder of fiscal year 2018 is $2.2 million and the succeeding years are as follows:

 

 

 

 

 

 

Fiscal year:

 

 

 

 

2019

    

$

2,050,000

    

2020

 

 

1,637,000

 

2021

 

 

1,072,000

 

2022

 

 

963,000

 

2023

 

 

894,000

 

Thereafter

 

 

1,874,000

 

 

 

$

8,490,000

 

 

 

4.EARNINGS PER SHARE (EPS)

 

Basic EPS is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding.  Diluted EPS is computed by dividing net income by the weighted-average number of common shares outstanding and dilutive potential common shares for the period.  Potential common shares include the weighted-average dilutive effects of outstanding stock options and restricted stock awards using the treasury stock method.

 

18


 

The following table sets forth the number of weighted-average common shares outstanding used to compute basic and diluted EPS:

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

 

 

March 30,

 

March 31,

 

 

    

2018

    

2017

 

Net income

 

$

2,203,000

 

$

2,641,000

 

Weighted-average common shares outstanding

 

 

8,753,000

 

 

8,281,000

 

Effect of dilutive stock options and restricted stock awards

 

 

432,000

 

 

573,000

 

Weighted-average common shares outstanding-diluted

 

 

9,185,000

 

 

8,854,000

 

Earnings per share:

 

 

 

 

 

 

 

Basic

 

$

0.25

 

$

0.32

 

Diluted

 

$

0.24

 

$

0.30

 

 

For the three months ended March 30, 2018, 209,000 options were excluded from the calculation of dilutive potential common shares, as compared to 10,000 options for the three months ended March 31, 2017.  These options were not included in the computation of dilutive potential common shares because the assumed proceeds per share exceeded the average market price per share for the 2018 and 2017 periods.  Accordingly, the inclusion of these options would have been anti-dilutive.

 

5.EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET

 

Equipment and leasehold improvements consist of the following:

 

 

 

 

 

 

 

 

 

 

 

March 30,

 

December 29,

 

 

    

2018

    

2017

 

Furniture and fixtures

 

$

3,070,000

 

$

3,011,000

 

Computer hardware and software

 

 

8,481,000

 

 

8,355,000

 

Leasehold improvements

 

 

1,138,000

 

 

1,121,000

 

Equipment under capital leases

 

 

1,247,000

 

 

1,095,000

 

Automobiles, trucks, and field equipment

 

 

2,038,000

 

 

2,100,000

 

 

 

 

15,974,000

 

 

15,682,000

 

Accumulated depreciation and amortization

 

 

(10,785,000)

 

 

(10,376,000)

 

Equipment and leasehold improvements, net

 

$

5,189,000

 

$

5,306,000

 

 

 

6.ACCRUED LIABILITIES

 

Accrued liabilities consist of the following:

 

 

 

 

 

 

 

 

 

 

 

March 30,

 

December 29,

 

 

    

2018

    

2017

 

Accrued bonuses

 

$

53,000

 

$

2,687,000

 

Accrued interest

 

 

5,000

 

 

5,000

 

Paid leave bank

 

 

2,730,000

 

 

2,533,000

 

Compensation and payroll taxes

 

 

1,153,000

 

 

1,859,000

 

Accrued legal

 

 

103,000

 

 

103,000

 

Accrued workers’ compensation insurance

 

 

148,000

 

 

305,000

 

Accrued rent

 

 

197,000

 

 

192,000

 

Employee withholdings

 

 

1,246,000

 

 

1,812,000

 

Client deposits

 

 

108,000

 

 

92,000

 

Accrued subcontractor costs

 

 

10,687,000

 

 

13,103,000

 

Other

 

 

166,000

 

 

602,000

 

Total accrued liabilities

 

$

16,596,000

 

$

23,293,000

 

 

 

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7.DEBT

 

Total debt obligations consist of the following:

 

 

 

 

 

 

 

 

 

 

    

March 30,

    

December 29,

 

 

 

2018

 

2017

 

Outstanding borrowings on revolving credit facility

 

$

2,500,000

 

$

2,500,000

 

Deferred purchase price for the acquisition of substantially all of the assets of Genesys, bearing interest at 0.650%, payable in monthly principal and interest installments of $191,667 through March 2018.

 

 

 —

 

 

383,000

 

Total debt obligations

 

 

2,500,000

 

 

2,883,000

 

Less current portion

 

 

 —

 

 

383,000

 

Debt obligations, less current portion

 

$

2,500,000

 

$

2,500,000

 

 

Credit Facility

 

On January 20, 2017, the Company and each of its subsidiaries, as guarantors (the “Guarantors”), entered into an Amended and Restated Credit Agreement (the “Credit Agreement”) with BMO as lender.  The Credit Agreement amended and extended the Company’s prior credit agreement with BMO, which was set to mature on March 24, 2017.  The Credit Agreement provides for a $35.0 million revolving line of credit, including a $10.0 million standby letter of credit sub-facility, and matures on January 20, 2020.  Subject to satisfying certain conditions described in the Credit Agreement, the Company may request that BMO increase the aggregate amount under the revolving line of credit by up to $25.0 million, for a total facility size of $60.0 million; however, BMO is not obligated to do so.  Unlike the prior credit agreement with BMO, the revolving line of credit is no longer subject to a borrowing base limitation and the Credit Agreement no longer includes a delayed draw term loan facility. 

 

Borrowings under the Credit Agreement bear interest at a rate equal to either, at the Company’s option, (i) the highest of the prime rate, the Federal Funds Rate plus 0.5% or one-month LIBOR plus 1% (the “Base Rate”) or (ii) LIBOR, in each case plus an applicable margin ranging from 0.25% to 1.00% with respect to Base Rate borrowings and 1.25% to 2.00% with respect to LIBOR borrowings.  The applicable margin will be based upon the consolidated leverage ratio of the Company.  The Company will also be required to pay a commitment fee for the unused portion of the revolving line of credit, which will range from 0.20% to 0.35% per annum, and fees on any letters of credit drawn under the facility, which will range from 0.94% to 1.50%, in each case, depending on the Company’s consolidated leverage ratio.

 

Borrowings under the revolving line of credit are guaranteed by all of the Company’s direct and indirect subsidiaries and secured by substantially all of the Company’s and the Guarantors’ assets.

 

The Credit Agreement contains customary representations and affirmative covenants, including certain notice and financial reporting requirements.  The Credit Agreement also requires compliance with financial covenants that require the Company to maintain a maximum total leverage ratio and a minimum fixed charge coverage ratio.

 

The Credit Agreement includes customary negative covenants, including (i) restrictions on the incurrence of additional indebtedness by the Company or the Guarantors and the incurrence of additional liens on property, (ii) restrictions on permitted acquisitions, including that the total consideration payable for all permitted acquisitions (including potential future earn-out obligations) shall not exceed $20.0 million during the term of the Credit Agreement and the total consideration for any individual permitted acquisition shall not exceed $10.0 million without BMO’s consent, and (iii) limitations on asset sales, mergers and acquisitions.  Further, the Credit Agreement limits the payment of future dividends and distributions and share repurchases by the Company; however, the Company is permitted to repurchase up to $8.0 million of shares of common stock under certain conditions, including that, at the time of any such repurchase, (a) the Company is able to meet the financial covenant requirements under the Credit Agreement after giving effect to the share repurchase, (b) the Company has at least $5.0 million of liquidity (unrestricted cash or undrawn availability under the revolving line of credit), and (c) no default exists or would arise under the Credit Agreement after giving effect to such repurchase.  In addition, the Credit Agreement includes customary events of default.  Upon the

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occurrence of an event of default, the interest rate will be increased by 2.0%, BMO has the option to make any loans then outstanding under the Credit Agreement immediately due and payable, and BMO is no longer obligated to extend further credit to the Company under the Credit Agreement. 

 

As of March 30, 2018, the Company was in compliance with the financial covenants under the Credit Agreement.

 

Deferred Purchase Price

 

The Asset Purchase and Merger Agreement for the acquisition of substantially all of the assets of Genesys dated March 4, 2016, included deferred payments to Messrs. Braun and Mineo in the amount of $2.3 million (“Deferred Payments”), each.   The Deferred Payments were paid in twenty-four (24) equal monthly installments in the amount of $95,834, inclusive of interest at the rate of 0.65% per annum.   Payments commenced on April 4, 2016 and concluded on March 4, 2018.  From issuance through March 30, 2018, the Company made payments of $4.6 million inclusive of interest and, as of March 30, 2018, there were no outstanding balances for either Messrs. Braun or Mineo.

 

Insurance Premiums

The Company has also financed, from time to time, insurance premiums by entering into unsecured notes payable with insurance companies.  During the Company’s annual insurance renewals in the fourth quarter of its fiscal year ended December 29, 2017, the Company did not elect to finance its insurance premiums for the upcoming fiscal year.

8.COMMITMENTS

 

Leases

 

The Company is obligated under capital leases for certain furniture and office equipment that expire at various dates through the year 2020.

 

The Company also leases certain office facilities under non-cancelable operating leases that expire at various dates through the year 2023.

 

Employee Benefit Plans

 

The Company has a qualified profit sharing plan pursuant to Code Section 401(a) and qualified cash or deferred arrangement pursuant to Code Section 401(k) covering substantially all employees.  Employees may elect to contribute up to 50% of their compensation limited to the amount allowed by tax laws.  Company contributions are made solely at the discretion of the Company’s board of directors.

 

The Company has a discretionary bonus plan for regional managers, division managers and others as determined by the president and chief executive officer of the Company.  Bonuses are awarded if certain financial goals are achieved.  The financial goals are not stated in the plan; rather they are judgmentally determined each year.  In addition, the board of directors may declare discretionary bonuses to key employees and all employees are eligible for bonuses for outstanding performance.  The Company’s compensation committee of the board of directors determines the compensation of the president and chief executive officer and other executive officers.

 

Post-Employment Health Benefits

 

In May 2006, the Company’s board of directors approved providing lifetime health insurance coverage for Win Westfall, the Company’s former chief executive officer and former member of the board of directors, and his spouse and for Linda Heil, the widow of the Company’s former chief executive officer, Dan Heil.  These benefits relate to past services provided to the Company.  Accordingly, there is no unamortized compensation cost for the benefits.

 

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9.INCOME TAXES

 

Income taxes are accounted for under the asset and liability method.  Deferred tax assets and liabilities are recognized for the future tax consequences of temporary differences between the financial reporting basis and tax basis of the Company’s assets and liabilities, subject to a judgmental assessment of the recoverability of deferred tax assets.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.  A valuation allowance is recorded when it is more-likely-than-not that some of the deferred tax assets may not be realized.  Significant judgment is applied when assessing the need for valuation allowances.  Areas of estimation include the Company’s consideration of future taxable income and ongoing prudent and feasible tax planning strategies.  Should a change in circumstances lead to a change in judgment about the utilization of deferred tax assets in future years, the Company would adjust the related valuation allowances in the period that the change in circumstances occurs, along with a corresponding increase or charge to income.

 

On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted into law, which, among other items, lowered the U.S. corporate tax rate from 35% to 21%, effective January 1, 2018.  Shortly after the Tax Act was enacted, the SEC issued guidance under Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”) to address the application of GAAP and direct taxpayers to consider the impact of the Tax Act as “provisional” when a registrant does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete the accounting for the change in tax law.  SAB 118 provided a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740.  As of March 30, 2018, the Company has not yet completed its accounting for the income tax effects of the Tax Act, and although the Company does not believe there will be any material adjustments in subsequent reporting periods, the ultimate impact may differ from the provisional amounts, due to, among other things, the limitation on the deductibility of certain executives’ compensation pursuant to Section 162(m) of the Internal Revenue Code, and a detailed evaluation of the contractual terms of the Company’s fourth quarter 2017 capital additions to determine whether they qualify for the 100% expensing pursuant to the Tax Act.  There have not been any revisions to previously estimated amounts during the three month period ended March 30, 2018, and the Company expects its accounting to be complete when the 2017 U.S. corporate income tax return is filed in 2018.

 

During each fiscal year, management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to utilize existing deferred tax assets.  For fiscal year 2017, the Company ultimately determined that it was more-likely-than-not that the entire California net operating loss will not be utilized prior to expiration.  Significant pieces of objective evidence evaluated included the Company’s history of utilization of California net operating losses in prior years for each of its subsidiaries, as well as the Company’s forecasted amount of net operating loss utilization for certain members of the combined group.  As a result, the Company recorded a valuation allowance in the amount of $87,000 at the end of fiscal year 2017 related to California net operating losses.  There was no change to the valuation allowance during the three month period ended March 30, 2018.

 

For acquired business entities, if the Company identifies changes to acquired deferred tax asset valuation allowances or liabilities related to uncertain tax positions during the measurement period and they relate to new information obtained about facts and circumstances that existed as of the acquisition date, those changes are considered a measurement period adjustment and the Company records the offset to goodwill.  The Company records all other changes to deferred tax asset valuation allowances and liabilities related to uncertain tax positions in current period income tax expense.

 

For acquired business entities, if the Company identifies changes to acquired deferred tax asset valuation allowances or liabilities related to uncertain tax positions during the measurement period and they relate to new information obtained about facts and circumstances that existed as of the acquisition date, those changes are considered a measurement period adjustment and the Company records the offset to goodwill.  The Company records all other changes to deferred tax asset valuation allowances and liabilities related to uncertain tax positions in current period income tax expense.

 

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The Company recognizes the tax benefit from uncertain tax positions if it is more likely than not that the tax positions will be sustained on examination by the tax authorities, based on the technical merits of the position.  The tax benefit is measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.  The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense.  As of March 30, 2018, the Company recorded a liability of $0.4 million for uncertain tax positions related to miscellaneous tax deductions taken in open tax years.  Included in this amount are $0.4 million of tax benefits that, if recognized, would affect the effective tax rate.  No interest and penalties have been recorded related to unrecognized tax benefits as of March 30, 2018.

 

Based on management’s estimates and determination of an effective tax rate for the year, the Company recorded an income tax benefit of $242,000 for the three months ended March 30, 2018, as compared to an income tax benefit of $673,000 for the three months ended March 31, 2017, respectively.  During the three months ended March 30, 2018, the difference between the effective tax rate and the federal statutory rate is primarily attributable to tax deductions related to Section 179D deductions.  In accordance with ASU 2016-09 (see Note 1 “Basis of Presentation, Organization and Operations of the Company”), the income tax benefit related to Section 179D deductions has been included as a reduction of 48.1% to the Company’s effective tax rate for the three months ended March 30, 2018.  The effective tax rate also varies from the federal statutory rate due to the impact of state income tax expense and certain expenses that are non-deductible for tax purposes, including meals and entertainment, compensation expense related to employee stock purchase and incentive stock options.

 

The Company has been notified that its tax return for the fiscal year ended December 30, 2016 will be examined by the Internal Revenue Service.  The Company has not determined the impact of such examination due to the examination process having not yet commenced.

 

10.SEGMENT INFORMATION

 

During the three months ended March 30, 2018, the Company revised its segment reporting to conform to changes in its internal management reporting.  Segment information has been revised for comparison purposes for all periods presented in the condensed consolidated financial statements.  As a result, beginning with the three months ended March 30, 2018, the Company’s two segments are Energy and Engineering and Consulting, and the Company’s chief operating decision maker, which continues to be our chief executive officer, receives and reviews financial information in this format.

 

The Company’s principal segment, Energy, which consists of WES, remains unchanged and provides energy efficiency consulting services to utilities, state agencies, municipalities, private industry and non-profit organizations.  The Engineering and Consulting segment, which consists of Willdan Engineering, Willdan Infrastructure, Public Agency Resources, Willdan Financial Services and Willdan Homeland Solutions is a combination of the Company’s remaining previously reported segments, which were the Engineering Services segment, Public Finance Services segment and Homeland Security Services segment.  The former Public Finance Services segment and former Homeland Security Services segment represent an insignificant portion of the Engineering and Consulting segment.  The Engineering and Consulting segment offers a broad range of engineering and planning services to the Company’s public and private sector clients, expertise and support for the various financing techniques employed by public agencies to finance their operations and infrastructure along with the mandated reporting and other requirements associated with these financings, and national preparedness, homeland security consulting, public safety and emergency response services to cities, related municipal service agencies and other entities.

 

The accounting policies applied to determine the segment information are the same as those described in the summary of significant accounting policies included in the Company’s Annual Report on Form 10-K for the year ended December 29, 2017.  There were no intersegment sales in the three month periods ended March 30, 2018 and March 31, 2017.  The Company’s chief operating decision maker evaluates the performance of each segment based upon income or loss from operations before income taxes.  Certain segment asset information including expenditures for long-lived assets has not been presented as it is not reported to or reviewed by the chief operating decision maker.  In addition, enterprise-wide service line contract revenue is not included as it is impracticable to report this information for each group of similar services.

 

23


 

Financial information with respect to the reportable segments as of and for the fiscal three months ended March 30, 2018 and as of and for the fiscal three months ended March 31, 2017 is as follows: