WILLDAN GROUP, INC. Our Company
We are a provider of professional, technical and consulting services to utilities, private industry, and public agencies at all levels of government. As resources and infrastructures undergo continuous change, we help organizations and their communities evolve and thrive by providing a wide range of technical services for energy solutions and government infrastructure. Through engineering, program management, policy advisory, and software and data management, we design and deliver trusted, comprehensive, innovative, and proven solutions to improve efficiency, resiliency, and sustainability in energy and infrastructure to our clients.
Our broad portfolio of services operates within two reporting segments: (1) Energy and (2) Engineering and Consulting. The interfaces and synergies between these segments are important elements of our strategy to design and deliver trusted, comprehensive, innovative, and proven solutions for our customers.
Our Energy segment provides specialized, innovative, comprehensive energy solutions to businesses, utilities, state agencies, municipalities, and nonprofit organizations in theU.S. Our experienced engineers, consultants, and staff help our clients realize cost and energy savings by tailoring efficient and costeffective solutions to assist in optimizing energy spend. Our energy efficiency services include comprehensive audit and surveys, program design, master planning, demand reduction, grid optimization, benchmarking analyses, design engineering, construction management, performance contracting, installation, alternative financing, measurement and verification services, and advances in software and data analytics. Our Engineering and Consulting segment provides civil engineeringrelated construction management, building and safety, city engineering, city planning, geotechnical, material testing and other engineering consulting services to our clients. Our engineering services include rail, port, water, mining and other civil engineering projects. We also provide economic and financial consulting to public agencies along with national preparedness and interoperability services, communications, and technology solutions. Lastly, we supplement the engineering services that we offer our clients by offering expertise and support for the various financing techniques public agencies utilize to finance their operations and infrastructure. We also support the mandated reporting and other requirements associated with these financings. We provide financial advisory services for municipal securities but do not provide underwriting services.
Impact of Covid-19 on Our Business
OnJanuary 30, 2020 , the spread of a novel strain of coronavirus ("Covid-19") was declared a Public Health Emergency of International Concern by theWorld Health Organization ("WHO"). OnMarch 11, 2020 , WHO characterized the Covid-19 outbreak as a pandemic. The Covid-19 pandemic has resulted in governmental authorities around the world implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter-in-place or total lock-down orders and business limitations and shutdowns (subject to exceptions for certain essential operations and businesses). The Covid-19 outbreak and restrictions intended to slow the spread of Covid-19 have caused economic and social disruption on an unprecedented scale. It is unclear how long these restrictions will remain in place and they may remain in place in some form for an extended period of time. Given the uncertainties associated with the duration of the pandemic, we cannot reasonably estimate the ultimate impacts of Covid-19 and efforts to limit its spread on our business, financial condition, results of operations or cash flows for the foreseeable future or whether our assumptions used to estimate our future liquidity requirements will be correct. Health and Safety In response to the Covid-19 pandemic, we have taken and will continue to take temporary precautionary measures intended to help minimize the risk of Covid-19 to our employees, including requiring the majority of our employees to work remotely, suspending non-essential travel and restricting in-person work-related meetings. We expect to continue to implement these measures until we determine that the Covid-19 pandemic is adequately contained for 38
Table of Contents
purposes of our business, and we may take further actions as government authorities require or recommend or as we determine to be in the best interests of our employees, customers, business partners and third-party service providers.
Financial Position and Results of Operations
The Covid-19 pandemic and efforts to limit its spread negatively impacted our business during the three months endedApril 3, 2020 . InCalifornia andNew York , the states in which we have historically derived a majority of our revenue, mandatory shutdown orders were issued in March. As such, Covid-19 had only a partial impact on our operations during our first fiscal quarter of 2020 and we expect the impact to be more significant in our second quarter. In the Energy segment, we have experienced and expect to continue to experience a negative impact on our direct install programs that serve small businesses as a result of restrictions put in place by governmental authorities that have required temporary shutdowns of all "non-essential" businesses. In fiscal 2019, we derived approximately 40% of our gross contract revenue from our direct install programs that serve small businesses, and a significant portion of our direct install work on these programs is currently suspended and will remain suspended until Covid-19-related restrictions are lifted. Our other energy programs, which generated approximately 60% of our revenue in fiscal 2019, are either direct install work for small businesses that have been determined to be "essential" by government authorities or has continued to progress during the pandemic. In addition, some of our programs in the Energy segment, including certain programs inNew York , are considered "essential" under applicable governmental regulations are being accelerated because of their importance to help fight this pandemic. In the Engineering and Consulting segment, our revenues have been minimally affected. The services in this segment have generally been deemed "essential" by the government and have continued to operate while abiding social distancing measures.
As of
In response to the Covid-19 pandemic and efforts to prevent its spread, we began taking a number of steps during the first quarter of fiscal 2020 aimed at preserving liquidity and positioning ourselves to resume our growth trajectory after work restrictions are lifted. These steps include:
· Executing a reduction in workforce, primarily through an unpaid furlough,
impacting approximately 300 members of our staff. The largest reductions were a
result of government-mandated work restrictions impacting our direct install
programs in California and New York ;
· A temporary freeze on all non-critical spending for travel, capital
expenditures, and other discretionary expenses;
· A temporary cash wage reduction for salaried employees, ranging from 0% for
lower salary bands up to 75% for senior management;
· Suspension of cash fees for our Board of Directors, until such time as the
Board of Directors determines;
· Implementing a temporary hiring freeze; and
· Amending our credit facility for increased flexibility.
We believe our financial position will allow us to withstand the current economic environment. In the first quarter of fiscal year 2020, we enhanced liquidity by minimizing working capital and significantly improving cash collections and, inMay 2020 , we amended our credit facilities to amend certain covenants to increase our financial flexibility. See Part I, Item 1, Note 14, "Subsequent Events" of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for more information. Combined with availability under our credit facilities, we believe our enhanced liquidity position provides a cushion against any unforeseen liquidity 39
Table of Contents
disruptions. We anticipate borrowing additional amounts under our existing credit facility during the second half of fiscal year 2020.
Asset and liability valuation and other estimates used in preparation of financial statements
As ofApril 3, 2020 we did not have any impairment with respect to our goodwill or long-lived assets, including intangible assets. Because the full extent of the impact of the Covid-19 outbreak and efforts to slow its spread are unknown at this time, they could, under certain circumstances, cause impairment and result in a non-cash impairment charge being recorded in future periods. Changes to the estimated future profitability of the business may require that we establish an additional valuation allowance against all or some portion of our net deferred tax assets.
Impact on Clients and Subcontractors and Other Risks
We primarily work for utilities, municipalities and other public agencies. We expect many governmental and other public agencies will have significant budget shortfalls for 2020 and potentially beyond as a result of the economic slowdown from the measures taken to mitigate the Covid-19 pandemic. These potential budget deficits could result in delayed funding for existing contracts with us, postponements of new contracts or price concessions. Further, most of our clients are not committed to purchase any minimum amount of our services, as our agreements with them are based on a "purchase order" model. As a result, they may discontinue utilizing some or all of our services with little or no notice. In addition, we rely on subcontractors to complete a substantial portion of our work, especially in our Energy segment. If our preferred subcontractors suffer significant economic harm and must limit or cease operations or file for bankruptcy as a result of the current economic slowdown, our subcontractors may not be able to fulfill their contractual obligations satisfactorily and we may not have the ability to select our subcontractors of choice for new contracts. If our subcontractors are not able to fulfill their contractual obligations, it could result in a significant increase in costs for us to complete the projects. The ultimate impact of Covid-19 on our financial condition and results of operations will depend on all of the factors noted above, including other factors that we may not be able to forecast at this time. See the risk factor "The Covid-19 pandemic and health and safety measures intended to slow its spread have adversely affected, and may continue to adversely affect, our business, results of operations and financial condition." under Part II. Item 1A. "Risk Factors" of this Quarterly Report on Form 10-Q. While we expect the impacts of Covid-19 to have an adverse effect on our business, financial condition and results of operations, we are unable to predict the extent of these impacts at this time . 40 Table of Contents Results of Operations First Quarter Overview
The following table sets forth, for the periods indicated, certain information derived from our consolidated statements of comprehensive income(1):
Three Months Ended
April 3, March 29,
2020 2019 $ Change % Change
( in thousands, except percentages)
Contract revenue $ 106,026 100.0 % $ 91,793 100.0 % $ 14,233 15.5 %
Direct costs of contract revenue:
Salaries and wages 18,915 17.8 14,910 16.2 4,005 26.9
Subconsultant services and other
direct costs 56,420 53.2 50,948 55.5 5,472 10.7
Total direct costs of contract
revenue 75,335 71.1 65,858 71.7 9,477 14.4
Gross profit 30,691 28.9 25,935 28.3 4,756 18.3
General and administrative
expenses:
Salaries and wages, payroll taxes
and employee benefits 20,412 19.3 15,744 17.2 4,668 29.6
Facilities and facilities related 2,694 2.5 1,772 1.9 922 52.0
Stock-based compensation 4,595 4.3 1,817 2.0 2,778 152.9
Depreciation and amortization 4,519 4.3 2,654 2.9 1,865 70.3
Other 6,740 6.4 4,182 4.6 2,558 61.2
Total general and administrative
expenses 38,960 36.7 26,169 28.5 12,791 48.9
Income (loss) from operations (8,269) (7.8) (234) (0.3) (8,035) N/M
Other income (expense):
Interest expense (1,513) (1.4) (1,121) (1.2) (392) 35.0
Other, net 23 0.0 11 0.0 12 109.1
Total other income (expenses) (1,490) (1.4) (1,110) (1.2) (380) 34.2Income before income tax expense (9,759) (9.2) (1,344)
(1.5) (8,415) N/M Income tax expense (benefit) (1,605) (1.5) (927) (1.0) (678) 73.1 Net income$ (8,154) (7.7)$ (417) (0.5)$ (7,737) N/M
(1) Percentages are expressed as a percentage of contract revenue and may not
total due to rounding.
N/M = Not meaningful
41
Table of Contents
The following tables provides information about disaggregated revenue of the
Company's two segments Energy and Engineering and Consulting by contract type,
client type and geographical region(1):
Three months ended April 3, 2020
Engineering and
Energy Consulting Total
(in thousands)
Contract Type
Time-and-materials $ 14,011 16.0% $ 14,092 77.3% $ 28,103 26.5%
Unit-based 50,890 58.0% 3,104 17.0% 53,994 50.9%
Fixed price 22,898 26.1% 1,031 5.7% 23,929 22.6%
Total (1) $ 87,799 100.0% $ 18,227 100.0% $ 106,026 100.0%
Client Type
Commercial $ 8,729 9.9% $ 1,374 7.5% $ 10,103 9.5%
Government 21,728 24.7% 16,794 92.1% 38,522 36.3%
Utilities (2) 57,342 65.3% 59 0.3% 57,401 54.1%
Total (1) $ 87,799 100.0% $ 18,227 100.0% 106,026 100.0%
Geography (3)
Domestic $ 87,799 100.0% $ 18,227 100.0% 106,026 100.0%
Three months ended March 29, 2019
Engineering and
Energy Consulting Total
(in thousands)
Contract Type
Time-and-materials $ 4,255 5.7% $ 13,058 76.4% $ 17,313 18.9%
Unit-based 56,872 76.1% 3,571 20.9% 60,443 65.8%
Fixed price 13,565 18.2% 472 2.8% 14,037 15.3%
Total (1) $ 74,692 100.0% $ 17,101 100.0% $ 91,793 100.0%
Client Type
Commercial $ 9,195 12.3% $ 1,298 7.6% $ 10,493 11.4%
Government 8,862 11.9% 15,671 91.6% 24,533 26.7%
Utilities (2) 56,635 75.8% 132 0.8% 56,767 61.8%
Total (1) $ 74,692 100.0% $ 17,101 100.0% 91,793 100.0%
Geography (3)
Domestic $ 74,692 81.4% $ 17,101 18.6% 91,793 100.0%
(1) Percentages are expressed as a percentage of contract revenue and may not
total due to rounding.
(2) Includes the portion of revenue related to small business programs paid by
the end user/customer.
(3) Revenue from our foreign operations were immaterial for the three months
ended April 3, 2020 and March 29, 2019 .
Three Months Ended
Contract revenue. Consolidated contract revenue increased$14.2 million , or 15.5%, in the three months endedApril 3, 2020 compared to the three months endedMarch 29, 2019 , primarily due to organic growth, including an increase in revenue generated from government projects in our Energy segment, and incremental contract revenue from the acquisitions of Onsite Energy Corporation ("Onsite Energy") andEnergy and Environmental Economics, Inc. ("E3, Inc. "). This increase was partially offset by decreased contract revenue from our direct install programs for small businesses as a result of temporary business shutdowns resulting from the Covid-19 pandemic and efforts to limit its 42
Table of Contents
spread. The impact of Covid-19 on our small business programs was partial for our first fiscal quarter as the measures impacting small businesses were put in place inMarch 2020 . We describe the impact of Covid-19 to our segments below. Contract revenue in our Energy segment increased$13.1 million , or 17.5%, in the three months endedApril 3, 2020 compared to the three months endedMarch 29, 2019 . Contract revenue for the Energy segment primarily increased as a result of organic growth, including an increase in revenue generated from government projects, combined with the incremental revenues from Onsite Energy andE3, Inc. as they are included in our Energy segment. However, such increase was partially offset by the effects of Covid-19 on our Energy segment's direct install programs, as described above. Contract revenue in our Engineering and Consulting segment increased$1.1 million , or 6.6%, in the three months endedApril 3, 2020 compared to the three months endedMarch 29, 2019 . Contract revenue for the Engineering and Consulting segment increased primarily due to increased subcontractor revenues. As described above, our revenues in this segment have been minimally affected by Covid-19 as the services in this segment have generally been deemed "essential" by the government and continue to operate while abiding social distancing measures. Direct costs of contract revenue. Direct costs of consolidated contract revenue increased$9.5 million , or 14.4%, in the three months endedApril 3, 2020 compared to the three months endedMarch 29, 2019 , primarily as a result of additional contract revenues as a result of organic growth, including an increase in revenue generated from government projects in our Energy segment, combined with additional direct costs of contract revenue related to our acquisitions of Onsite Energy and E3., Inc. Direct cost of contract revenue in our Energy segment increased$8.7 million , or 15.5%, to$65.0 million for the three months endedApril 3, 2020 compared to the three months endedMarch 29, 2019 , primarily as a result of the growth in our Energy segment contract revenues combined with the acquisitions of Onsite Energy andE3, Inc. in the Energy segment mentioned above which collectively contributed$2.9 million in direct costs of contract revenue during the three months endedApril 3, 2020 . Direct costs of contract revenue for the Engineering and Consulting segment increased$0.8 million , or 8.1%, to$10.4 million for the three months endedApril 3, 2020 compared to the three months endedMarch 29, 2019 , primarily due to the increased use of subcontractor services under certain of our existing engineering capital improvements projects. Subcontractor services and other direct costs increased by$5.5 million and salaries and wages increased by$4.0 million for the three months endedApril 3, 2020 compared to the three months endedMarch 29, 2019 . Within direct costs of contract revenue, salaries and wages increased to 17.8% of contract revenue for the three months endedApril 3, 2020 from 16.2% for the three months endedMarch 29, 2019 . Subcontractor services and other direct costs decreased to 53.2% of contract revenue for the three months endedApril 3, 2020 from 55.5% of contract revenue for the three months endedMarch 29, 2019 . Salaries and wages within direct costs of contract revenue increased as a percentage of contract revenue and subcontractor services and other direct costs decreased as a percentage of contract revenue, primarily as a result of changes in the product mix of revenues derived from the acquisitions of Onsite Energy andE3, Inc. which contain a higher percentage labor costs and lower percentage of material costs and installation subcontracting. General and administrative expenses. General and administrative ("G&A") expenses increased by$12.8 million , or 48.9%, in the three months endedApril 3, 2020 compared to the three months endedMarch 29, 2019 . The increase in G&A expenses consisted of an increase of$8.6 million in the Energy segment and an increase of$4.3 million in the unallocated corporate expenses, partially offset by a decrease of$0.1 million in the Engineering and Consulting segment. The increase in G&A expenses in the Energy segment was primarily attributed to incremental expenses of$3.5 million from our additions of Onsite Energy andE3, Inc. and increases in our corporate general and administrative expenses. Of the$12.8 million increase in G&A expenses,$4.7 million resulted from an increase in salaries and wages, payroll taxes and employee benefits,$2.8 million resulted from an increase in stock-based compensation,$1.9 million resulted from an increase in depreciation and amortization,$2.6 million resulted from an increase in other general and administrative expenses and$0.9 million resulted from an increase in facilities and facility related expenses. The 43 Table of Contents increase in salaries and wages, payroll taxes and employee benefits was primarily attributable to the addition of employees from the acquisitions of Onsite Energy, andE3, Inc. Similarly, the increase in facilities and facility related expenses was primarily due to the addition of offices in connection with these acquisitions. The increase in stock-based compensation expenses was primarily related to an increase in stock grants to current employees and executives. The increase in depreciation and amortization was primarily due to an increase in amortization of intangible assets derived from the acquisitions of Onsite Energy, andE3, Inc. The increase in other general and administrative expenses was primarily due to acquisition costs related to the acquisition of Onsite Energy, andE3, Inc. As described above, we have instituted cost-saving measures to manage expenses and eliminate non-essential spending in response to the impact of Covid-19 on our business. Loss from operations. Our operating loss was$8.3 million as a result of the factors noted above. As a percentage of contract revenue, operating loss was 7.8% for the three months endedApril 3, 2020 compared to an operating loss of 0.3% for the three months endedMarch 29, 2019 . The decrease in operating margin was primarily attributable to an overall increase in subcontractor expenses and general and administrative expenses combined with the partial effects of Covid-19, partially offset by increases in contract revenue. Total other expense, net. Total other expense, net, was$1.5 million for the three months endedApril 3, 2020 compared$1.1 million for the three months endedMarch 29, 2019 . This increase in total other expense, net is primarily the result of higher interest expense as a result of borrowings under our credit facilities related to our acquisitions of Onsite Energy, andE3, Inc. Income tax benefit. We recorded an income tax benefit of$1.6 million for the three months endedApril 3, 2020 compared to a tax benefit of$0.9 million for the three months endedMarch 29, 2019 . For the three months endedApril 3, 2020 , the increase in the income tax benefit as compared to the three months endedMarch 29, 2019 was primarily due to increased nondeductible executive compensation and decreased tax deductions related to the vesting of performance based restricted stock units. Net loss. As a result of the above factors, our net loss was$8.2 million for the three months endedApril 3, 2020 , as compared to a net loss of$0.4 million for the three months endedMarch 29, 2019 .
Liquidity and Capital Resources
The following table summarizes our statements of cash flows for the periods
indicated:
Three Months Ended
April 3, March 29,
2020 2019
(in thousands)
Net cash provided by (used in):
Operating activities $ 16,455 $ 10,487
Investing activities (2,139) (23,694)
Financing activities (7,464) 9,009
Net increase (decrease) in cash and cash equivalents
We believe that cash generated by operating activities and available borrowings under the Revolving Credit Facility will be sufficient to finance our operating activities for at least the next 12 months. As ofApril 3, 2020 , we had$12.3 million of cash and cash equivalents. Our primary source of liquidity is cash generated from operations and borrowings under our Revolving Credit Facility. In addition, as ofApril 3, 2020 , we had a$100 million Term A Loan with$92.5 million outstanding, a$50.0 million Revolving Credit Facility with$4.0 million outstanding and$2.7 million in letters of credit issued, and a$50.0 million Delayed Draw Term Loan with$29.3 million outstanding, each scheduled to mature onJune 26, 2024 . As ofApril 3, 2020 , borrowings under our Credit Facilities bore interest at 2.9% based on the Company's consolidated total leverage ratio. Subsequent toApril 3, 2020 , we borrowed$10.0 million under the Revolving Credit Facility, which reduced the future borrowing capacity under the Revolving Credit Facility to$36.0 million . See Part I, Item 1, Note 6, "Debt Obligations" and Note 14 "Subsequent Events", of the Notes to Condensed 44
Table of Contents
Consolidated Financial Statements included in and Part II, Item 8, Note 5, "Debt Obligations", of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K filed with theSEC onMarch 6, 2020 for information regarding our indebtedness, including information about new borrowings and repayments, principal repayment terms, interest rates, covenants, and other key terms of our outstanding indebtedness.
Cash Flows from Operating Activities
Cash flows provided by operating activities were$16.5 million for the three months endedApril 3, 2020 , as compared to cash flows provided by operating activities of$10.5 million for the three months endedMarch 29, 2019 . Cash flow from operating activities primarily consists of net income, adjusted for non-cash charges, such as depreciation and amortization and stock-based compensation, plus or minus changes in operating assets and liabilities. Changes in cash flows provided by operating activities for the three months endedApril 3, 2020 resulted primarily as result of our acquisitions of Onsite Energy andE3, Inc. , and significant reductions in working capital requirements as a result of the reduction of revenues from the suspension of our small business energy programs. Cash flows provided by operating activities for the three months endedMarch 29, 2019 resulted primarily from a net increase in our working capital.
Cash Flows used in Investing Activities
Cash flows used in investing activities were$2.1 million for the three months endedApril 3, 2020 , as compared to cash flows used in investing activities of$23.7 million for the three months endedMarch 29, 2019 . Cash flows used in investing activities for the three months endedApril 3, 2020 were primarily due to cash paid for the purchase of equipment and leasehold improvements. The cash flows used in investing activities for the three months endedMarch 29, 2019 was primarily due to cash paid for the acquisition ofThe Weidt Group .
Cash Flows from Financing Activities
Cash flows used in financing activities were$7.4 million for the three months endedApril 3, 2020 , as compared to cash flows provided by financing activities of$9.0 million for the three months endedMarch 29, 2019 . Cash flows used in financing activities for the three months endedApril 3, 2020 were primarily attributable to repayments of$13.3 million under our term loan facility and revolving line of credit, a payment of$2.9 million in employee payroll taxes related to the vesting of performance-based restricted stock units during the quarter, payments of$1.4 million for contingent consideration related to prior acquisitions, partially offset by$9.0 million of borrowings under our revolving line of credit. The cash flows provided by financing activities for the three months endedMarch 29, 2019 were primarily attributable to borrowings under our revolving line of credit, partially offset by the payment of$2.5 million in employee payroll taxes related to the vesting of performance-based restricted stock units during the quarter.
OffBalance Sheet Arrangements
Other than operating lease commitments, we do not have any offbalance sheet
financing arrangements or liabilities. In addition, our policy is not to enter
into futures or forward contracts. Finally, we do not have any majorityowned
subsidiaries or any interests in, or relationships with, any specialpurpose
entities that are not included in the consolidated financial statements. We
have, however, an administrative services agreement with Genesys in which we
provide Genesys with ongoing administrative, operational and other
non-professional support services. We manage Genesys and have the power to
direct the activities that most significantly impact Genesys' performance, in
addition to being obligated to absorb expected losses from Genesys. Accordingly,
we are the primary beneficiary of Genesys and consolidate Genesys as a variable
interest entity.
45
Table of Contents
Short and Long-term Liquidity
Contractual Obligations
The following table sets forth our known contractual obligations as ofApril 3, 2020 : Less than More than Contractual Obligations Total 1 Year 1 - 3 Years 3 - 5 Years 5 Years ( in thousands) Long term debt (1)$ 126,659 $ 13,722 $ 69,521 $ 43,416 $ - Interest payments on debt outstanding (2) 12,272 2,676 6,067 3,529 - Operating leases 26,528 6,651 10,528 5,330 4,019 Finance leases 689 441 239 9 - Total contractual cash obligations$ 166,148 $ 23,490 $
86,355
--------------------------------------------------------------------------------
(1) Longterm debt includes
million outstanding on our Revolving Credit Facility and
outstanding on our Delayed Draw Term Loan as of April 3, 2020 . We have
assumed no future borrowings or repayments (other than at maturity) for
purposes of this table.
(2) Borrowings under our Delayed Draw Term Loan bear interest at a variable rate.
Future interest payments on our Delayed Draw Term Loan Facility are estimated
using floating rates in effect as of April 3, 2020 .
We are obligated to pay earn-out payments in connection with our acquisitions of
E3, Inc. and Integral Analytics. We are obligated to pay up to (i) $12.0 million
in cash if E3, Inc. exceeds certain financial targets during the three years
after the E3, Inc. closing date, and (ii) $12.0 million in cash based on future
work obtained from the business of Integral Analytics during the four years
after the closing of the acquisition, payable in installments, if certain
financial targets are met during the four years. As of April 3, 2020 , we had
contingent consideration payable of $8.9 million related to these acquisitions.
For the three months ended April 3, 2020 , our statement of operations includes
$0.3 million of accretion (excluding fair value adjustments) related to the
contingent consideration.
Outstanding Indebtedness
See Part I, Item 1, Note 6, "Debt Obligations" and Note 14, "Subsequent Events", of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q, and Part II, Item 8, Note 5, "Debt Obligations", of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year endedDecember 27, 2019 , for information regarding our indebtedness, including information about new borrowings and repayments, principal repayment terms, interest rates, covenants, and other key terms of our outstanding indebtedness.
Subsequent to
On
Interest Rate Swap
We have entered into an interest rate swap agreement to moderate our exposure to
fluctuations in interest rates underlying our variable rate debt. For more
information, see Part I, Item 3, "Quantitative and Qualitative Disclosures About
Market Risk", and Note 5, "Derivatives", to the Notes of Condensed Consolidated
Financial Statements included in this Quarterly Report on Form 10-Q.
Impact of Inflation
46
Table of Contents
Due to the average duration of our projects and our ability to negotiate prices
as contracts end and new contracts begin, we believe our operations have not
been, and, in the foreseeable future, are not expected to be, materially
impacted by inflation.
Components of Revenue and Expense
Contract Revenue
We generally provide our services under contracts, purchase orders or retainer letters. The agreements we enter into with our clients typically incorporate one of three principal types of pricing provisions: time-and-materials, unit-based, and fixed price. Revenue on our time-and-materials and unit-based contracts are recognized as the work is performed in accordance with specific terms of the contract. As ofApril 3, 2020 , approximately 27% of our contracts are time-and-materials contracts and approximately 51% of our contracts are unit-based contracts, compared to approximately 20% for time-and-materials contracts and approximately 66% for unit-based contracts as ofMarch 29, 2019 . Some of these contracts include maximum contract prices, but contract maximums are often adjusted to reflect the level of effort to achieve client objectives and thus the majority of these contracts are not expected to exceed the maximum. Contract revenue on our fixed price contracts is determined 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 our 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. Adjustments to contract cost estimates are made in the periods in which the facts requiring such revisions become known. When the revised estimate indicates a loss, such loss is recognized in the current period in its entirety. Claims and change orders that have not been finalized are evaluated to determine whether or not a change has occurred in the enforceable rights and obligations of the original contract. If these non-finalized changes qualify as a contract modification, a determination is made whether to account for the change in contract value as a modification to the existing contract, or a separate contract and revenue under the claims or change orders is recognized accordingly. Costs related to un-priced change orders are expensed when incurred, and recognition of the related revenue is based on the assessment above of whether or not a contract modification has occurred. Estimated profit for unpriced change orders is recognized only if collection is probable. Our contracts come up for renewal periodically and at the time of renewal may be subject to renegotiation, which could impact the profitability on that contract. In addition, during the term of a contract, public agencies may request additional or revised services which may impact the economics of the transaction. Most of our contracts permit our clients, with prior notice, to terminate the contracts at any time without cause. While we have a large volume of contracts, the renewal, termination or modification of a contract, in particular contracts with Consolidated Edison, theCity of Elk Grove , DASNY, and utility programs associated withLos Angeles Department of Water and Power and Duke Energy Corp., may have a material effect on our consolidated operations. Some of our contracts include certain performance guarantees, such as a guaranteed energy saving quantity. Such guarantees are generally measured upon completion of a project. In the event that the measured performance level is less than the guaranteed level, any resulting financial penalty, including any additional work that may be required to fulfill the guarantee, is estimated and charged to direct expenses in the current period. We have not experienced any significant costs under such guarantees.
Direct Costs of Contract Revenue
Direct costs of contract revenue consist primarily of that portion of salaries
and wages that have been incurred in connection with revenue producing projects.
Direct costs of contract revenue also include material costs, subcontractor
services, equipment and other expenses that are incurred in connection with
revenue producing projects. Direct costs of contract revenue exclude that
portion of 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
47Table of Contents
and administrative expenses. Additionally, payroll taxes, bonuses and employee benefit costs for all of our personnel are included in general and administrative expenses since no allocation of these costs is made to direct costs of contract revenue. Other companies may classify as direct costs of contract revenue some of the costs that we classify as general and administrative costs. We expense direct costs of contract revenue when incurred.
General and Administrative Expenses
G&A expenses include the costs of the marketing and support staffs, other marketing expenses, management and administrative personnel costs, payroll taxes, bonuses and employee benefits for all of our employees and the portion of salaries and wages not allocated to direct costs of contract revenue for those employees who provide our services. G&A expenses also include facility costs, depreciation and amortization, professional services, legal and accounting fees and administrative operating costs. Within G&A expenses, "Other" includes expenses such as professional services, legal and accounting, computer costs, travel and entertainment, marketing costs and acquisition costs. We expense general and administrative costs when incurred.
Critical Accounting Policies
We have prepared the accompanying unaudited Condensed Consolidated Financial Statements in accordance with generally accepted accounting principles in theU.S. ("GAAP"). To prepare these financial statements in conformity with GAAP, we must make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amount of revenue and expenses in the reporting period. Our actual results may differ from these estimates. We have adopted accounting policies and practices that are generally accepted in the industry in which we operate. There have been no material changes in our critical accounting policies and estimates from those disclosed in our Annual Report on Form 10K for our fiscal year endedDecember 27, 2019 . Please refer to Part II, Item 7 of our Annual Report on Form 10K for the fiscal year endedDecember 27, 2019 for a discussion of our critical accounting policies and estimates.
Recent Accounting Standards
For a description of recently issued and adopted accounting pronouncements, including adoption dates and expected effects on our results of operations and financial condition, see Part I, Item 1, Note 2, "Recent Accounting Pronouncements", of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
© Edgar Online, source
