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 non-profit organizations in theU.S. Our experienced engineers, consultants, and staff help our clients realize cost and energy savings by tailoring efficient and cost-effective 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 engineering-related 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). Although some of these measures have since been lifted or scaled back, a recent resurgence of Covid-19 inthe United States has resulted in the reimposition of certain restrictions and may lead to other restrictions being reimplemented in response to efforts to reduce the spread of Covid-19. 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 41 Table of Contents to continue to implement these measures until we determine that the Covid-19 pandemic is adequately contained for 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 and six months endedJuly 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. InCalifornia , phased re-openings began inMay 2020 and were subsequently curtailed inJuly 2020 as result of the resurgence of Covid-19 cases. InNew York , phased re-openings began inJune 2020 . As a result, the most significant pandemic related impacts to our business are now occurring inCalifornia to our direct install business. Our business inNew York has been improving over the last month and allNew York utility programs have restarted. 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 revenue from our direct install programs that serve small businesses, and a significant portion of our direct install work on these programs is just entering recovery as phased re-openings continue. Our other programs, which generated approximately 60% of our revenue in fiscal 2019, are either businesses that have been determined to be "essential" by government authorities or have continued to progress during the pandemic. In addition, some of our programs in the Energy segment, particularly those related to improvements in public schools, have been accelerated to take advantage of empty facilities. In the Engineering and Consulting segment, our revenues have been minimally affected by Covid-19. The services in this segment have generally been deemed "essential" by the government and have continued to operate while abiding social distancing measures. As ofAugust 7, 2020 , though some of our work has been suspended, none of our contracts have been cancelled and proposal activities for new programs have continued to advance. We currently estimate that pandemic related slowdowns and work suspensions are reducing our revenue by approximately 20% from pre-pandemic levels, an improvement from the estimated 40% reduction that we saw in April. 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
furloughed employees began to return to work as government authorities began
lifting restrictions through phased re-openings;
? 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. During the second half of
? our second fiscal quarter, as the initial impact of Covid-19 was ascertained
and operations were adjusted accordingly, salaries were reinstituted with the
exception of corporate staff, whose salaries were reinstituted at the end of
July 2020 ;
? Suspension of cash fees for our Board of Directors, until such time as the
Board of Directors determines;
? Implementing a temporary hiring freeze; and
42
Table of Contents
? Amending our credit facility for increased flexibility.
We believe our financial position is sufficiently flexible to enable us to maneuver in the current economic environment. Throughout the first and second quarter of fiscal year 2020, we enhanced liquidity by minimizing working capital and significantly improving cash collections. In addition, inMay 2020 , we amended our credit facility to modify, among other things, certain covenants to increase our financial flexibility. Combined with availability under our credit facilities, we believe our enhanced liquidity position provides a cushion against liquidity disruptions. We anticipate borrowing additional amounts under our existing credit facility during the second half of fiscal year 2020 to support an expectation of recovery from Covid-19 operating levels and the accompanying need for working capital as a result of the easing of Covid-19 restrictions.
Asset and liability valuation and other estimates used in preparation of financial statements
As ofJuly 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. Although none of our contracts with governmental or other public agencies were materially modified in the second fiscal quarter, 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 and material suppliers to complete a substantial portion of our work, especially in our Energy segment. If our significant subcontractors and material suppliers suffer significant economic harm and must limit or cease operations or file for bankruptcy as a result of the current economic slowdown, our subcontractors and material suppliers may not be able to fulfill their contractual obligations satisfactorily and we may not have the ability to select our subcontractors and material suppliers of choice for new contracts. If our subcontractors and material suppliers 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 our Quarterly Report on Form 10-Q for the fiscal quarter endedApril 3, 2020 . While Covid-19 has had, and we expect it to continue 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.
43
Table of Contents
Results of Operations
Second Quarter and First Half Overview
The following table sets forth, for the periods indicated, certain information derived from our consolidated statements of comprehensive income(1):
Three Months Ended
July 3, June 28,
2020 2019 $ Change % Change
( inthousands, except percentages)
Contract revenue$ 83,549 100.0 %$ 104,396 100.0 %$ (20,847) (20.0) % Direct costs of contract revenue: Salaries and wages 13,650 16.3 15,624 15.0 (1,974) (12.6) Subcontractor services and other direct costs 40,355 48.3 57,623 55.2 (17,268) (30.0) Total direct costs of contract revenue 54,005 64.6 73,247 70.2 (19,242) (26.3) Gross profit 29,544 35.4 31,149 29.8 (1,605) (5.2) General and administrative expenses: Salaries and wages, payroll taxes and employee benefits 15,331 18.3 15,437 14.8 (106) (0.7) Facilities and facilities related 2,642 3.2 2,047 2.0 595 29.1 Stock-based compensation 4,230 5.1 2,224 2.1 2,006 90.2 Depreciation and amortization 5,466 6.5 2,866 2.7 2,600 90.7 Other 5,716 6.8 5,802 5.6 (86) (1.5) Total general and administrative expenses 33,385 40.0 28,376 27.2 5,009 17.7 Income (loss) from operations (3,841) (4.6) 2,773 2.7 (6,614) (238.51) Other income (expense): Interest expense (1,257) (1.5) (1,221) (1.2) (36) 2.9 Other, net 23 0.0 18 0.0 5 27.8 Total other income (expense) (1,234) (1.5) (1,203) (1.2) (31) 2.6
Income (Loss) before income tax expense (5,075) (6.1) 1,570 1.5 (6,645) (423.2) Income tax expense (benefit)
(90) (0.1) (70) (0.1) (20) 28.6
Net income (loss) $ (4,985) (6.0) $ 1,640 1.6 $ (6,625) (403.96)
(1) Percentages are expressed as a percentage of contract revenue and may not
total due to rounding.
44
Table of Contents
Six Months Ended
July 3, June 28,
2020 2019 $ Change % Change
( in thousands, except percentages)
Contract revenue $ 189,575 100.0 % $ 196,189 100.0 % $ (6,614) (3.4)
Direct costs of contract revenue:
Salaries and wages 32,565 17.2 30,534 15.6 2,031 6.7
Subcontractor services and other
direct costs 96,775 51.0 108,571 55.3 (11,796) (10.9)
Total direct costs of contract
revenue 129,340 68.2 139,105 70.9 (9,765) (7.0)
Gross profit 60,235 31.8 57,084 29.1 3,151 5.5
General and administrative
expenses:
Salaries and wages, payroll taxes
and employee benefits 35,743 18.9 30,406 15.5 5,337 17.6
Facilities and facilities related 5,336 2.8 3,819 1.9 1,517 39.7
Stock-based compensation 8,825 4.7 4,041 2.1 4,784 118.4
Depreciation and amortization 9,985 5.3 5,520 2.8 4,465 80.9
Other 12,456 6.6 10,759 5.5 1,697 15.8
Total general and administrative
expenses 72,345 38.2 54,545 27.8 17,800 32.6
Income (loss) from operations (12,110) (6.4) 2,539 1.3 (14,649) (577.0) Other income (expense): Interest expense (2,770) (1.5) (2,342) (1.2) (428) 18.3 Other, net 46 0.0 29 0.0 17 58.6 Total other income (expense) (2,724) (1.4) (2,313) (1.2) (411) 17.8 Income (Loss) before income tax expense (14,834) (7.8) 226 0.1 (15,060) N/M Income tax expense (benefit) (1,695) (0.9) (997) (0.5) (698) 70.0 Net income (loss)$ (13,139) (6.9)$ 1,223 0.6$ (14,362) N/M (1) Percentages are expressed as a percentage of contract revenue and may not total due to rounding. N/M = Not meaningful 45 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 July 3, 2020 Engineering and Energy Consulting Total (in thousands) Contract Type Time-and-materials$ 12,125 18.2% $ 13,689 81.3%$ 25,814 30.9% Unit-based 28,900 43.3% 1,993 11.8% 30,893 37.0% Fixed price 25,683 38.5% 1,159 6.9% 26,842 32.1% Total (1)$ 66,708 100.0% $ 16,841 100.0%$ 83,549 100.0% Client Type Commercial$ 8,889 13.3% $ 1,304 7.7%$ 10,193 12.2% Government 21,701 32.5% 14,939 88.7% 36,640 43.9% Utilities (2) 36,118 54.1% 598 3.6% 36,716 43.9% Total (1)$ 66,708 100.0% $ 16,841 100.0% 83,549 100.0% Geography (3) Domestic$ 66,708 100.0% $ 16,841 100.0% 83,549 100.0% Six months ended July 3, 2020 Engineering and Energy Consulting Total (in thousands) Contract Type Time-and-materials$ 26,136 16.9% $ 27,781 79.2%$ 53,917 28.4% Unit-based 79,789 51.6% 5,098 14.5% 84,887 44.8% Fixed price 48,581 31.4% 2,190 6.2% 50,771 26.8% Total (1)$ 154,506 100.0% $ 35,069 100.0%$ 189,575 100.0% Client Type Commercial$ 17,618 11.4% $ 2,678 7.6%$ 20,296 10.7% Government 43,428 28.1% 31,734 90.5% 75,162 39.6% Utilities (2) 93,460 60.5% 657 1.9% 94,117 49.6% Total (1)$ 154,506 100.0% $ 35,069 100.0% 189,575 100.0% Geography (3) Domestic$ 154,506 100.0% $ 35,069 100.0% 189,575 100.0%
(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 and six
months ended July 3, 2020 .
46
Table of Contents
Three months ended June 28, 2019
Engineering and
Energy Consulting Total
(in thousands)
Contract Type
Time-and-materials $ 3,093 3.6% $ 14,596 76.4% $ 17,689 16.9%
Unit-based 63,757 74.8% 3,592 18.8% 67,349 64.5%
Fixed price 18,433 21.6% 925 4.8% 19,358 18.5%
Total (1) $ 85,283 100.0% $ 19,113 100.0% $ 104,396 100.0%
Client Type
Commercial $ 6,840 8.0% $ 1,328 6.9% $ 8,168 7.8%
Government 14,583 17.1% 17,659 92.4% 32,242 30.9%
Utilities (2) 63,860 74.9% 126 0.7% 63,986 61.3%
Total (1) $ 85,283 100.0% $ 19,113 100.0% 104,396 100.0%
Geography (3)
Domestic $ 85,283 100.0% $ 19,113 100.0% 104,396 100.0%
Six months ended June 28, 2019
Engineering and
Energy Consulting Total
(in thousands, except percentage)
Contract Type
Time-and-materials $ 7,348 4.6% $ 27,654 76.4% $ 35,002 17.8%
Unit-based 120,629 75.4% 7,163 19.8% 127,792 65.1%
Fixed price 31,998 20.0% 1,397 3.9% 33,395 17.0%
Total (1) $ 159,975 100.0% $ 36,214 100.0% Client Type Commercial$ 16,035 10.0% $ 2,626 7.3%$ 18,661 9.5% Government 23,445 14.7% 33,330 92.0% 56,775 28.9% Utilities 120,495 75.3% 258 0.7% 120,753 61.5% Total (1)$ 159,975 100.0% $ 36,214 100.0%
Geography
Domestic$ 159,975 100.0% $ 36,214 100.0%
$ 196,189 100.0%
(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 and six
months ended June 28, 2019 .
Three Months Ended
Contract revenue. Consolidated contract revenue decreased$20.8 million , or 20.0%, in the three months endedJuly 3, 2020 compared to the three months endedJune 28, 2019 , primarily due to decreased contract revenues from our direct install programs for small businesses in our Energy segment combined with decreased revenues from our Engineering and Consulting segment, partially offset by an increase in contract revenue generated from government projects in our Energy segment and incremental contract revenue from the acquisitions ofOnsite Energy Corporation ("Onsite Energy") andEnergy and Environmental Economics, Inc. ("E3, Inc. "). Contract revenues for our direct install programs for small businesses decreased as a result of the business shutdowns resulting from the Covid-19 pandemic and efforts to limit its spread that started inMarch 2020 . Contract revenue in our Energy segment decreased$18.6 million , or 21.8%, in the three months endedJuly 3, 2020 compared to the three months endedJune 28, 2019 . Contract revenue for the Energy segment primarily decreased as a result of decreased contract revenues from our direct install programs for small businesses, partially offset by an increase in revenue generated from government projects, combined with the incremental revenues fromOnsite Energy andE3, Inc. as they are included in our Energy segment. Contract revenues for our direct install programs for small businesses decreased as a result of the effects
of
Covid-19.
47
Table of Contents
Contract revenue in our Engineering and Consulting segment decreased $2.2
million , or 11.9%, in the three months ended July 3, 2020 compared to the three
months ended June 28, 2019 . Contract revenue for the Engineering and Consulting
segment decreased primarily due to a reduction in scope of work from one of our
customers. 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
decreased $19.2 million , or 26.3%, in the three months ended July 3, 2020
compared to the three months ended June 28, 2019 , primarily as a result of
decreased contract revenues from our direct install programs for small
businesses in our Energy segment, partially offset by an increase in contract
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 decreased $16.9 million ,
or 27.3%, to $45.1 million for the three months ended July 3, 2020 compared to
the three months ended June 28, 2019 , primarily as a result of the decrease in
our contract revenues related to direct install programs for small businesses as
described above, partially offset by increases in contract revenues related to
government projects combined with the acquisitions of Onsite Energy and E3, Inc.
in the Energy segment mentioned above which collectively contributed $3.6
million in direct costs of contract revenue during the three months ended July
3, 2020 . Direct costs of contract revenue for the Engineering and Consulting
segment decreased $2.3 million , or 20.6%, to $8.9 million for the three months
ended July 3, 2020 compared to the three months ended June 28, 2019 , primarily
due to the reduction in contract revenues.
Subcontractor services and other direct costs decreased by $17.3 million and
salaries and wages decreased by $2.0 million for the three months ended July 3,
2020 compared to the three months ended June 28, 2019 . Within direct costs of
contract revenue, salaries and wages increased to 16.3% of contract revenue for
the three months ended July 3, 2020 from 15.0% for the three months ended June
28, 2019 . Subcontractor services and other direct costs decreased to 48.3% of
contract revenue for the three months ended July 3, 2020 from 55.2% of contract
revenue for the three months ended June 28, 2019 . Salaries and wages within
direct costs of contract revenue increased as a percentage of contract revenue
primarily as a result of our acquisition of Onsite Energy and E3, Inc. , which
contain a higher percentage of labor costs and lower percentage of material
costs and installation subcontracting. Subcontractor services and other direct
costs decreased as a percentage of contract revenue primarily as a result of the
decrease in contract revenues from our direct install programs for small
businesses, as described above.
General and administrative expenses. General and administrative ("G&A") expenses
increased by $5.0 million , or 17.7%, in the three months ended July 3, 2020
compared to the three months ended June 28, 2019 . The increase in G&A expenses
consisted of an increase of $2.8 million in the Energy segment and an increase
of $2.9 million in the unallocated corporate expenses, partially offset by a
decrease of $0.7 million in the Engineering and Consulting segment. The increase
in G&A expenses in the Energy segment was primarily attributed to intangible
amortization due to our acquisitions of Onsite Energy and E3, Inc. , and
increased stock-based compensation expense.
Of the $5.0 million increase in G&A expenses, $2.0 million resulted from an
increase in stock-based compensation, $2.6 million resulted from an increase in
depreciation and amortization, $0.6 million resulted from an increase in
facilities and facility related expenses, partially offset by a decrease of $0.1
million in other general and administrative expenses combined with a decrease of
$0.1 million in salaries and wages, payroll taxes and employee benefits. The
increase in stock-based compensation expenses was primarily related to new stock
grants to current employees and executives. The increase in facilities and
facility related expenses was primarily due to the addition of offices in
connection with the acquisitions of Onsite Energy and E3, Inc. The increase in
depreciation and amortization was primarily due to an increase in amortization
of intangible assets derived from the acquisitions of Onsite Energy , and E3,
Inc. The decrease in other general and administrative expenses was primarily due
to lower traveling expenses as a result of the measures put in place for
Covid-19, combined with lower acquisition costs and lower professional services.
The decrease in salaries and wages, payroll taxes and employee benefits was
primarily attributable to our actions related to placing a temporary cash wage
reduction for salaried employees, as well as instituting a reduction in
workforce, primarily through unpaid furloughs, aimed at preserving liquidity as
a result of the Covid-19 pandemic, partially offset by the addition of employees
from the acquisitions of Onsite Energy and E3, Inc. During the second half of
the three months ended July 3, 2020 , furloughed employees began to return to
work as government authorities began lifting
48
Table of Contents
restrictions through phased re-openings, although some states have halted re-openings as described above. In addition, during this time, as the initial impact of Covid-19 was ascertained and operations were adjusted accordingly, salaries were reinstituted with the exception of corporate staff, whose salaries were reinstituted at the end ofJuly 2020 . Income (loss) from operations. Our operating loss was$3.8 million for the three months endedJuly 3, 2020 as a result of the factors noted above. As a percentage of contract revenue, operating loss was 4.6% for the three months endedJuly 3, 2020 compared to an operating income of 2.7% for the three months endedJune 28, 2019 . The decrease in operating margin was primarily attributable to decreases in contract revenue as a result of Covid-19 combined with increases in stock-based compensation and intangible asset amortization from acquisitions, partially offset by increases in governmental contract revenue.
Total other expense, net. Total other expense, net was flat for the three months
ended
Income tax expense (benefit). Income tax benefit was flat for the three months endedJuly 3, 2020 compared to the three months endedJune 28, 2019 . Changes within the tax benefit amount were primarily attributable to fluctuations within various tax deductions and tax credits.
Net income (loss). As a result of the above factors, our net loss was
Six Months Ended
Contract revenue. Consolidated contract revenue decreased$6.6 million , or 3.4%, in the six months endedJuly 3, 2020 compared to the six months endedJune 28, 2019 , primarily due to decreased contract revenues from our direct install programs for small businesses in our Energy segment, partially offset by an increase in contract revenue generated from government projects in our Energy segment and incremental contract revenue from the acquisitions ofOnsite Energy andE3, Inc. Contract revenues for our direct install programs for small businesses decreased as a result of the business shutdowns resulting from the Covid-19 pandemic and efforts to limit its spread that started inMarch 2020 , and continued through substantially all of the second quarter. Contract revenue in our Energy segment decreased$5.5 million , or 3.4%, in the six months endedJuly 3, 2020 compared to the six months endedJune 28, 2019 . Contract revenue for the Energy segment primarily decreased as a result of decreased contract revenues from our direct install programs for small businesses, partially offset by an increase in revenue generated from the acquisitions ofOnsite Energy andE3, Inc. Contract revenues for our direct install programs for small businesses decreased as a result of the effects of Covid-19. Contract revenue in our Engineering and Consulting segment decreased$1.1 million , or 3.2%, in the six months endedJuly 3, 2020 compared to the six months endedJune 28, 2019 . Contract revenue for the Engineering and Consulting segment decreased primarily due to decreased subcontractor revenues combined with a reduction of scope of work related to one of our customers. 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 decreased$9.8 million , or 7.0%, in the six months endedJuly 3, 2020 compared to the six months endedJune 28, 2019 , primarily as a result of decreased contract revenues from our direct install programs for small businesses in our Energy segment, partially offset by an increase in contract revenue generated from government projects in our Energy segment, combined with additional direct costs of contract revenue related to our acquisitions ofOnsite Energy and E3., Inc. Direct cost of contract revenue in our Energy segment decreased$8.2 million , or 7.0%, to$110.1 million for the six months endedJuly 3, 2020 compared to the six months endedJune 28, 2019 , primarily as a result of the decrease in our contract revenues related to direct install programs for small businesses as described above, partially offset by increases in contract revenues related to government projects combined with the acquisitions ofOnsite Energy andE3, Inc. in the Energy segment mentioned above which collectively contributed$6.5 million in direct costs of contract 49
Table of Contents
revenue during the six months endedJuly 3, 2020 . Direct costs of contract revenue for the Engineering and Consulting segment decreased$1.5 million , or 7.4%, to$19.3 million for the six months endedJuly 3, 2020 compared to the six months endedJune 28, 2019 , primarily due to the reduction of revenues. Subcontractor services and other direct costs decreased by$11.8 million and salaries and wages increased by$2.0 million for the six months endedJuly 3, 2020 compared to the six months endedJune 28, 2019 . Within direct costs of contract revenue, salaries and wages increased to 17.2% of contract revenue for the six months endedJuly 3, 2020 from 15.6% for the six months endedJune 28, 2019 . Subcontractor services and other direct costs decreased to 51.0% of contract revenue for the six months endedJuly 3, 2020 from 55.3% of contract revenue for the six months endedJune 28, 2019 . Salaries and wages within direct costs of contract revenue increased as a percentage of contract revenue primarily as a result of our acquisition ofOnsite Energy andE3, Inc. , which contain a higher percentage of labor costs and lower percentage of material costs and installation subcontracting. Subcontractor services and other direct costs decreased as a percentage of contract revenue primarily as a result of the decrease in contract revenues from our direct install programs for small businesses, as described above. General and administrative expenses. General and administrative ("G&A") expenses increased by$17.8 million , or 32.6%, in the six months endedJuly 3, 2020 compared to the six months endedJune 28, 2019 . The increase in G&A expenses consisted of an increase of$11.3 million in the Energy segment and an increase of$7.3 million in the unallocated corporate expenses, partially offset by a decrease of$0.8 million in the Engineering and Consulting segment. The increase in G&A expenses in the Energy segment was primarily attributed to incremental expenses of$7.5 million from our additions ofOnsite Energy andE3, Inc. combined with increases in our corporate general and administrative expenses, partially offset by our cost-saving measures instituted, as described earlier, in response to Covid-19. Of the$17.8 million increase in G&A expenses,$5.3 million resulted from an increase in salaries and wages, payroll taxes and employee benefits,$5.8 million resulted from an increase in stock-based compensation,$4.5 million resulted from an increase in depreciation and amortization,$1.5 million resulted from an increase in facilities and facility related expenses, and$0.7 million from an increase in other general and administrative expenses. The increase in salaries and wages, payroll taxes and employee benefits was primarily attributable to the addition of employees from the acquisitions ofOnsite Energy andE3, Inc. , partially offset by our actions related to placing a temporary cash wage reduction for salaried employees, as well as instituting a reduction in workforce, primarily through unpaid furloughs, aimed at preserving liquidity as a result of the Covid-19 pandemic. During the second half of the three months endedJuly 3, 2020 , furloughed employees began to return to work as government authorities began loosening restrictions through phased re-openings. In addition, during this time, as the initial impact of Covid-19 was ascertained and operations were adjusted accordingly, salaries were reinstituted with the exception of corporate staff, whose salaries were reinstituted at the end ofJuly 2020 . The increase in facilities and facility related expenses was primarily due to the addition of offices in connection with the acquisitions ofOnsite Energy andE3, Inc. The increase in stock-based compensation expenses was primarily related to new 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 ofOnsite Energy , andE3, Inc. The increase in other general and administrative expenses was primarily due to an increase in contingent consideration, partially offset by lower traveling expenses as a result of the measures put in place for Covid-19, combined with lower acquisition costs and lower professional services. Income (loss) from operations. Our operating loss was$12.1 million for the six months endedJuly 3, 2020 as a result of the factors noted above. As a percentage of contract revenue, operating loss was 6.4% for the six months endedJuly 3, 2020 compared to an operating income of 1.3% for the six months endedJune 28, 2019 . The decrease in operating margin was primarily attributable to decreases in contract revenue as a result of Covid-19 combined with increases in stock-based compensation and intangible asset amortization from acquisitions, partially offset by increases in governmental contract revenue. Total other expense, net. Total other expense, net, was$2.8 million for the six months endedJuly 3, 2020 compared to$2.3 million for the six months endedJune 28, 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 ofOnsite Energy , andE3, Inc. 50
Table of Contents
Income tax expense (benefit). We recorded an income tax benefit of$1.7 million for the six months endedJuly 3, 2020 compared to a tax benefit of$1.0 million for the six months endedJune 28, 2019 . The increase in the income tax benefit is primarily attributable to our loss before income tax, partially offset by a decrease in various tax deductions and tax credits.
Net income (loss). As a result of the above factors, our net loss was
Liquidity and Capital Resources
The following table summarizes our statements of cash flows for the periods
indicated:
Six Months Ended
July 3, June 28,
2020 2019
(in thousands)
Net cash provided by (used in):
Operating activities $ 29,231 $ 12,495
Investing activities (2,929) (25,375)
Financing activities (14,594) 25,223
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 ofJuly 3, 2020 , we had$17.2 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 ofJuly 3, 2020 , we had a$100 million Term A Loan with$90.0 million outstanding, and a$50.0 million Revolving Credit Facility with no borrowed amounts outstanding and$2.7 million in letters of credit issued, each scheduled to mature onJune 26, 2024 . We also have a$50.0 million Delayed Draw Term Loan with$28.5 million outstanding scheduled to mature onJune 26, 2024 . However, as described in Part I, Item 1, Note 6, "Debt Obligations", of the Notes to Condensed Consolidated Financial Statements included in this quarterly report on Form 10-Q, we are not able to access additional borrowings under the Delayed Draw Term Loan during our Covenant Relief Period. As ofJuly 3, 2020 , borrowings under our Credit Facilities bore interest at 3.3% based on the Company's consolidated total leverage ratio. See Part I, Item 1, Note 6, "Debt Obligations", 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 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$29.2 million for the six months endedJuly 3, 2020 , as compared to cash flows provided by operating activities of$12.5 million for the six months endedJune 28, 2019 . Cash flow from operating activities primarily consists of net income or net loss, 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 six months endedJuly 3, 2020 resulted primarily as result of our acquisitions ofOnsite Energy andE3, Inc. , improvements in cash collections, 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 six months endedJune 28, 2019 resulted primarily from a net decrease in our working capital through the first half of that year. 51 Table of Contents
Cash Flows used in Investing Activities
Cash flows used in investing activities were$2.9 million for the six months endedJuly 3, 2020 , as compared to cash flows used in investing activities of$25.4 million for the six months endedJune 28, 2019 . Cash flows used in investing activities for the six months endedJuly 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 six months endedJune 28, 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$14.6 million for the six months endedJuly 3, 2020 , as compared to cash flows provided by financing activities of$25.2 million for the six months endedJune 28, 2019 . Cash flows used in financing activities for the six months endedJuly 3, 2020 were primarily attributable to repayments of$35.5 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, payments of$1.4 million for contingent consideration related to prior acquisitions, partially offset by$24.0 million of borrowings under our revolving line of credit. The cash flows provided by financing activities for the six months endedJune 28, 2019 were primarily attributable to borrowings under our term loan, partially offset by the payment of$2.9 million in employee payroll taxes related to the repurchase of shares of our common stock in connection with the vesting of restricted stock awards and performance-based restricted stock units during the six months endedJune 28, 2019 .
Off-Balance Sheet Arrangements
Other than operating lease commitments, we do not have any off-balance sheet
financing arrangements or liabilities. In addition, our policy is not to enter
into futures or forward contracts. Finally, we do not have any majority-owned
subsidiaries or any interests in, or relationships with, any special-purpose
entities that are not included in the consolidated financial statements. We
have, however, an administrative services agreement with Genesys in which we
provide Genesys with ongoing administrative, operational and other
non-professional support services. We manage Genesys and have the power to
direct the activities that most significantly impact Genesys' performance, in
addition to being obligated to absorb expected losses from Genesys. Accordingly,
we are the primary beneficiary of Genesys and consolidate Genesys as a variable
interest entity.
52
Table of Contents
Short and Long-term Liquidity
Contractual Obligations
The following table sets forth our known contractual obligations as ofJuly 3, 2020 : Less than More than Contractual Obligations Total 1 Year 1 - 3
Years 3 - 5 Years 5 Years
( in thousands)
Long term debt (1)$ 118,458 $ 13,866 $ 25,327 $ 79,265 $ - Interest payments on debt outstanding (2) 11,945 3,574 5,973 2,399 - Operating leases 23,929 5,994 10,176 5,872 1,888 Finance leases 588 332 233 23 -
Total contractual cash obligations
(1) Long-term debt includes
borrowed amounts on our Revolving Credit Facility and
outstanding on our Delayed Draw Term Loan as of
no future borrowings or repayments (other than at maturity) for purposes of
this table.
(2) Borrowings under our Credit Facilities bear interest at a variable rate.
Future interest payments on our Credit Facilities are estimated using
floating rates in effect as of July 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 July 3, 2020 , we had
contingent consideration payable of $10.2 million related to these acquisitions.
For the six months ended July 3, 2020 , our statement of operations includes $1.6
million of accretion (excluding fair value adjustments) related to the
contingent consideration.
Outstanding Indebtedness
See Part I, Item 1, Note 6, "Debt Obligations", 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.
As of
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
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.
53
Table of Contents
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 ofJuly 3, 2020 , approximately 31% of our contracts are time-and-materials contracts and approximately 37% of our contracts are unit-based contracts, compared to approximately 17% for time-and-materials contracts and approximately 65% for unit-based contracts as ofJune 28, 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 un-priced 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 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.
54
Table of Contents
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 employeeswho 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 10-K for our fiscal year endedDecember 27, 2019 . Please refer to Part II, Item 7 of our Annual Report on Form 10-K 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
