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 customers.
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
The coronavirus ("Covid-19") pandemic and efforts to limit its spread negatively
impacted our operations during our fiscal year 2020 and continued to impact us,
albeit to a lesser extent, during the first quarter of fiscal year 2021. In
California and New York , the states in which we have historically derived a
majority of our revenue, mandatory shutdown orders were issued in March 2020 . In
New York , phased re-openings began in June 2020 , and all of our New York utility
programs have restarted. In California , phased re-openings began in May 2020 ,
followed by periods of curtailments as a result of resurgences of Covid-19
cases, and subsequent re-openings. As a result, the most significant pandemic
related impacts to the our business occurred in California to our direct install
business. During the last week of June 2021 , our largest program for the Los
Angeles Department of Water and Power ("LADWP") resumed, which was our last
program suspended due to Covid-19. In addition, as of August 4, 2021 , none of
our contracts have been cancelled due to Covid-19.
In the Energy segment, we have experienced a negative impact on our direct
install programs that serve small businesses as a result of restrictions put in
place by governmental authorities that required temporary shutdowns of all
"non-essential" businesses which resulted in a significant portion of our direct
install work on these programs being suspended for varying periods of time
during fiscal year 2020 and continuing in California through our first half of
fiscal 2021. During non-Covid-19 impacted years, such as fiscal year 2019, we
derived approximately 40% of our gross revenue from our direct install programs
that serve small businesses and 60% from our other programs. Our other programs
are either businesses that have been determined to be "essential" by government
authorities or have continued to progress during the pandemic.
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In the Engineering and Consulting segment, our revenues have been less affected by Covid-19 than the revenues in the Energy segment. The services in this segment have generally been deemed "essential" by the government and have continued to operate while abiding social distancing measures.
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 us to resume our growth trajectory after work restrictions are lifted. For more information, see Part II. Item 7. "Management's Discussion and Analysis of Financial Conditions and Results of Operations" of our Annual Report on Form 10-K for the year endedJanuary 1, 2021 . In addition to these actions, subsequent to the end of our first fiscal quarter of 2021, we amended our credit facility for increased covenant flexibility as a result of additional working capital requirements related to$781 million in new California Investor Owned Utility contracts signed inDecember 2020 .
We believe that our financial position is sufficiently flexible to enable us to maneuver in the current economic environment.
Asset and liability valuation and other estimates used in preparation of financial statements
As ofJuly 2, 2021 , we did not have any impairment with respect to 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. Some of these customers could experience significant budget shortfalls for the current year and beyond as a result of the measures taken to mitigate the Covid-19 pandemic and/or revenue shortfalls as a result of reduced economic activity. Although none of our contracts with governmental or public agencies were materially modified during our fiscal year 2020 or during our first half of fiscal half of 2021, 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 services, as our agreements with them are based on a "purchase order" or "master service agreement" 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 or cause significant delays to the realization of revenues under those 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 I. Item 1A. "Risk Factors" of our Annual Report on Form 10-K for the year endedJanuary 1, 2021 . 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 or duration of these impacts at this time. 36 Table of Contents Health and Safety In response to the Covid-19 pandemic, we have taken and will continue to take 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 it has determined that the Covid-19 pandemic is adequately contained for purposes of our business, and may take further actions as government authorities require or recommend or as it determines to be in the best interests of our employees, customers, business partners and third-party service providers. 37 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 2, July 3,
2021 2020 $ Change % Change
(inthousands, except percentages)
Contract revenue$ 84,154 100.0 %$ 83,549 100.0 %$ 605 0.7 % Direct costs of contract revenue: Salaries and wages 16,366 19.4 13,650 16.3 2,716 19.9 Subcontractor services and other direct costs 36,902 43.9 40,355 48.3 (3,453) (8.6) Total direct costs of contract revenue 53,268 63.3
54,005 64.6 (737) (1.4) Gross profit 30,886 36.7 29,544 35.4 1,342 4.5 General and administrative expenses: Salaries and wages, payroll taxes and employee benefits 18,712 22.2 15,331 18.3 3,381 22.1 Facilities and facilities related 2,379 2.8 2,642 3.2 (263) (10.0) Stock-based compensation 5,933 7.1 4,230 5.1 1,703 40.3 Depreciation and amortization 4,224 5.0 5,466 6.5 (1,242) (22.7) Other 6,710 8.0 5,716 6.8 994 17.4
Total general and administrative expenses 37,958 45.1 33,385 40.0
4,573 13.7
Income (loss) from operations (7,072) (8.4) (3,841) (4.6) (3,231) 84.12 Other income (expense): Interest expense (1,099) (1.3) (1,257) (1.5) 158 (12.6) Other, net (93) (0.1) 23 0.0 (116) (504.4)
Total other income (expense) (1,192) (1.4) (1,234) (1.5) 42 (3.4)
Income (Loss) before income tax expense (8,264) (9.8) (5,075) (6.1) (3,189) 62.8 Income tax expense (benefit)
(3,663) (4.4) (90) (0.1) (3,573) 3,970.0
Net income (loss) $ (4,601) (5.5) $ (4,985) (6.0) $ 384 (7.7)
(1) Percentages are expressed as a percentage of contract revenue and may not
total due to rounding.
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Six Months Ended
July 2, July 3,
2021 2020 $ Change % Change
(in thousands, except percentages)
Contract revenue $ 163,240 100.0 % $ 189,575 100.0 % $ (26,335) (13.9)
Direct costs of contract revenue:
Salaries and wages 32,186 19.7 32,565 17.2 (379) (1.2)
Subcontractor services and other
direct costs 68,036 41.7 96,775 51.0 (28,739) (29.7)
Total direct costs of contract
revenue 100,222 61.4 129,340 68.2 (29,118) (22.5)
Gross profit 63,018 38.6 60,235 31.8 2,783 4.6
General and administrative
expenses:
Salaries and wages, payroll taxes
and employee benefits 38,156 23.4 35,743 18.9 2,413 6.8
Facilities and facilities related 5,022 3.1 5,336 2.8 (314) (5.9)
Stock-based compensation 10,139 6.2 8,825 4.7 1,314 14.9
Depreciation and amortization 8,411 5.2 9,985 5.3 (1,574) (15.8)
Other 12,551 7.7 12,456 6.6 95 0.8
Total general and administrative
expenses 74,279 45.5 72,345 38.2 1,934 2.7
Income (loss) from operations (11,261) (6.9) (12,110) (6.4) 849 (7.0) Other income (expense): Interest expense (2,163) (1.3) (2,770) (1.5) 607 (21.9) Other, net (64) (0.0) 46 0.0 (110) (239.1)
Total other income (expense) (2,227) (1.4) (2,724) (1.4) 497 (18.2) Income (Loss) before income tax expense (13,488) (8.3) (14,834) (7.8) 1,346 (9.1) Income tax expense (benefit) (5,121) (3.1) (1,695) (0.9) (3,426) 202.1 Net income (loss)$ (8,367) (5.1)$ (13,139) (6.9)$ 4,772 (36.3) (1) Percentages are expressed as a percentage of contract revenue and may not total due to rounding. 39 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 2, 2021 Engineering and Energy Consulting Total (in thousands) Contract Type Time-and-materials$ 9,056 $ 13,863$ 22,918 Unit-based 41,604 2,722 44,326 Fixed price 15,786 1,123 16,909 Total (1)$ 66,446 $ 17,708$ 84,154 Client Type Commercial$ 7,016 $ 1,372$ 8,388 Government 13,675 16,281 29,956 Utilities (2) 45,756 55 45,810 Total (1)$ 66,446 $ 17,708$ 84,154 Geography (3) Domestic$ 66,446 $ 17,708$ 84,154 Six months ended July 2, 2021 Engineering and Energy Consulting Total (in thousands) Contract Type Time-and-materials$ 15,956 $ 27,284$ 43,240 Unit-based 81,218 5,167 86,385 Fixed price 31,279 2,336 33,615 Total (1)$ 128,453 $ 34,787$ 163,240 Client Type Commercial$ 12,944 $ 2,469$ 15,413 Government 27,229 32,210 59,439 Utilities (2) 88,280 108 88,388 Total (1)$ 128,453 $ 34,787$ 163,240 Geography (3) Domestic$ 128,453 $ 34,787$ 163,240
(1) Amounts may not add to the totals 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 2, 2021 .
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Three months ended July 3, 2020
Engineering and
Energy Consulting Total
(in thousands)
Contract Type
Time-and-materials $ 12,125 $ 13,689 $ 25,814
Unit-based 28,900 1,993 30,893
Fixed price 25,683 1,159 26,842
Total (1) $ 66,708 $ 16,841 $ 83,549
Client Type
Commercial $ 8,889 $ 1,304 $ 10,193
Government 21,701 14,939 36,640
Utilities (2) 36,118 598 36,716
Total (1) $ 66,708 $ 16,841 $ 83,549
Geography (3)
Domestic $ 66,708 $ 16,841 $ 83,549
Six months ended July 3, 2020
Engineering and
Energy Consulting Total
(in thousands)
Contract Type
Time-and-materials $ 26,136 $ 27,781 $ 53,917
Unit-based 79,789 5,098 84,887
Fixed price 48,581 2,190 50,771
Total (1) $ 154,506 $ 35,069 $ 189,575
Client Type
Commercial $ 17,618 $ 2,678 $ 20,296
Government 43,428 31,734 75,162
Utilities (2) 93,460 657 94,117
Total (1) $ 154,506 $ 35,069 $ 189,575
Geography (3)
Domestic $ 154,506 $ 35,069 $ 189,575 (1) Amounts may not add to the totals 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
Three Months Ended
Contract revenue. Consolidated contract revenue was$84.2 million for the three months endedJuly 2, 2021 , or relatively flat as compared to the three months endedJuly 3, 2020 . Contract revenue in our Energy segment was relatively flat for the three months endedJuly 2, 2021 compared to the three months endedJuly 3, 2020 . Within our Energy segment, utility contract revenues increased$9.6 million , offset by decreases of$8.0 million governmental contract revenues combined with a decrease of$1.9 million in commercial contract revenues. Utility contract revenue increased as a result of increased contract revenues from our direct install programs for small businesses due to the lifting of business suspensions resulting from the Covid-19 pandemic and efforts to limit its spread that started inMarch 2020 , which had a full impact during the second quarter of fiscal year 2020 compared to having a partial impact on our second quarter of fiscal year 2021. Governmental and commercial contract revenues decreased as a result of the absence in the second quarter of fiscal year 2021 of the acceleration of projects, particularly those related to improvements in public schools that were accelerated to take advantage of empty facilities, that took place during the second quarter of fiscal year 2020 during the mandatory shutdown orders issued by local governments in response to the Covid-19 pandemic. 41 Table of Contents Contract revenue in our Engineering and Consulting segment increased$0.9 million , or 5.1%, in the three months endedJuly 2, 2021 compared to the three months endedJuly 3, 2020 . Contract revenue for the Engineering and Consulting segment increased primarily as a result of incremental government revenues of$1.4 million partially offset by$0.5 million of lower utility revenues. Contract revenue in our Engineering and Consulting segment has been less affected by Covid-19 than contract revenue in our Energy segment as the services provided in our Engineering and Consulting segment have generally been deemed "essential" by government authorities and have continued to operate while abiding social distancing measures. Direct costs of contract revenue. Direct costs of consolidated contract revenue were relatively flat for the three months endedJuly 2, 2021 compared to the three months endedJuly 3, 2020 . Direct costs of contract revenue in our Energy segment decreased$0.9 million , or 2.0%, in the three months endedJuly 2, 2021 compared to the three months endedJuly 3, 2020 . Direct costs of contract revenue for the Engineering and Consulting segment increased$0.2 million , or 1.9%, in the three months endedJuly 2, 2021 compared to the three months endedJuly 3, 2020 . Subcontractor services and other direct costs decreased by$3.5 million , and salaries and wages increased by$2.7 million for the three months endedJuly 2, 2021 compared to the three months endedJuly 3, 2020 . As a percentage of contract revenue, salaries and wages increased to 19.4% of contract revenue for the three months endedJuly 2, 2021 from 16.3% for the three months endedJuly 3, 2020 . Subcontractor services and other direct costs decreased to 43.9% of contract revenue for the three months endedJuly 2, 2021 from 48.3% of contract revenue for the three months endedJuly 3, 2020 . As a percentage of contract revenue, changes in salaries and wages and subcontractor services and other direct costs were primarily as a result of changes in the mix of revenues to those which contain a higher percentage of labor costs and lower percentage of material costs and installation subcontracting. Gross Profit. Gross profit increased to$30.1 million , or 36.7% gross margin, for the three months endedJuly 2, 2021 compared to the three months endedJuly 3, 2020 . The increase in our gross margin was primary driven by changes in the mix of revenues to those which contain a higher percentage of labor costs and lower percentage of material costs and installation subcontracting. General and administrative expenses. General and administrative ("G&A") expenses increased by$4.6 million , or 13.7%, in the three months endedJuly 2, 2021 compared to the three months endedJuly 3, 2020 . The increase in G&A expenses consisted of an increase of$3.6 million in the Energy segment and$1.3 million in the Engineering and Consulting segment, partially offset by a decrease of$0.3 million in the unallocated corporate expenses. The increase in G&A expenses in the Energy segment and Engineering and Consulting segment was primarily attributed to having restored wage reductions and other actions taken during our second quarter of fiscal 2020 aimed at preserving liquidity as a result of the Covid-19 pandemic. Within G&A expenses, the increase of$3.4 million for salaries and wages, payroll taxes and employee benefits, combined with the increase of$1.7 million in stock-based compensation and$1.0 million in other general and administrative expenses, was partially offset by a decrease of$1.2 million in depreciation and amortization, combined with a decrease of$0.3 million in facilities and facility related expenses. The increase in salaries and wages, payroll taxes and employee benefits was primarily attributable to having restored, during our third quarter of fiscal year 2020, certain actions taken during the second quarter of our fiscal year 2020 aimed at preserving liquidity in the early stages of the Covid-19 pandemic, such as a temporary cash wage reduction for salaried employees, as well as instituting a reduction in workforce, primarily through unpaid furloughs. The increase in stock-based compensation expenses was primarily related to new stock grants to current employees and executives. The increase in other general and administrative expenses was primarily due to increased travel expenses as a result of the easing of travel restrictions put in place for Covid-19, combined with higher professional services. The decrease in depreciation and amortization was primarily related to lower amortization of intangible assets derived from prior acquisitions. The decrease in facilities and facilities related expenses was attributed to satisfied facility leases that were not renewed.
Income (loss) from operations. Our operating loss was
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ended
Total other expense, net. Total other expense, net, was relatively flat for the
three months ended
Income tax expense (benefit). We recorded an income tax benefit of$3.7 million for the three months endedJuly 2, 2021 compared to a tax benefit of$0.1 million for the three months endedJuly 3, 2020 . The increase in the income tax benefit is primarily attributable to our loss before income tax combined with an increase in various tax deductions and tax credits related to stock compensation and project-related incentives, and an additional tax benefit related to the net operating loss carryback provisions of the CARES Act. Net income (loss). Our net loss was$4.6 million for the three months endedJuly 2, 2021 , as compared to a net loss of$5.0 million for the three months endedJuly 3, 2020 . The improvement in net loss was primarily attributable to income tax benefits combined with the increase in higher margin revenues, partially offset by increases in G&A.
Six Months Ended
Contract revenue. Consolidated contract revenue decreased$26.3 million , or 13.9%, in the six months endedJuly 2, 2021 compared to the six months endedJuly 3, 2020 , primarily due to decreased contract revenues from our direct install programs for small businesses in our Energy segment and the impact of having one fewer week in our first fiscal quarter of fiscal year 2021 as compared to our first fiscal quarter of fiscal year 2020. Contract revenue in our Energy segment decreased$26.1 million , or 16.9%, in the six months endedJuly 2, 2021 compared to the six months endedJuly 3, 2020 . Contract revenue for the Energy segment primarily decreased as a result of decreased contract revenues from our direct install programs for small businesses combined with the impact of having one fewer week in our first fiscal quarter of fiscal year 2021 as compared to our first fiscal quarter of fiscal year 2020 and the absence in the second quarter of fiscal year 2021 of the acceleration of projects, particularly those related to improvements in public schools that were accelerated to take advantage of empty facilities, that took place during the second quarter of fiscal year 2020 during the mandatory shutdown orders issued by local governments in response to the Covid-19 pandemic. Contract revenues for our direct install programs for small businesses decreased as a result of the business suspensions resulting from the Covid-19 pandemic and efforts to limit its spread that started inMarch 2020 , which had a partial impact on the first half of fiscal year 2020 as compared to having a larger impact on our first half of fiscal year 2021. Through the first half of our fiscal year 2021, the most significant pandemic related impacts to the Company's business occurred inCalifornia to our direct install business which restarted throughout the first half of fiscal 2021. Contract revenue in our Engineering and Consulting segment was relatively flat for the six months endedJuly 2, 2021 compared to the six months endedJuly 3, 2020 . Direct costs of contract revenue. Direct costs of consolidated contract revenue decreased$29.1 million , or 22.5%, in the six months endedJuly 2, 2021 compared to the six months endedJuly 3, 2020 , primarily as a result of decreased contract revenues from our direct install programs for small businesses in our Energy segment, the impact of having one fewer week in our first fiscal quarter of fiscal year 2021 as compared to our first fiscal quarter of fiscal year 2020, and the reduction in pass-through construction management costs. Direct costs of contract revenue in our Energy segment decreased$27.9 million , or 25.3%, in the six months endedJuly 2, 2021 compared to the six months endedJuly 3, 2020 , primarily as a result of the decrease in our contract revenues related to direct install programs for small businesses as described above, and the impact of having one fewer week in our first fiscal quarter of fiscal year 2021 as compared to our first fiscal quarter of fiscal year 2020. Direct costs of contract revenue for the Engineering and Consulting segment decreased$1.3 million , or 6.6%, in the six months endedJuly 2, 2021 compared to the six months endedJuly 3, 2020 , primarily due to the impact of having one fewer week in our first fiscal quarter of fiscal year 2021 as compared to our first fiscal quarter of fiscal year 2020. 43 Table of Contents Subcontractor services and other direct costs decreased by$28.7 million and salaries and wages decreased by$0.4 million for the six months endedJuly 2, 2021 compared to the six months endedJuly 3, 2020 . As a percentage of contract revenue, salaries and wages increased to 19.7% of contract revenue for the six months endedJuly 2, 2021 from 17.2% for the six months endedJuly 3, 2020 . Subcontractor services and other direct costs decreased to 41.7% of contract revenue for the six months endedJuly 2, 2021 from 51.0% of contract revenue for the six months endedJuly 3, 2020 . Salaries and wages within direct costs of contract revenue increased as a percentage of contract revenue primarily as a result of the decrease in contract revenues from our direct install programs for small businesses which resulted in changes in the mix of revenues to those 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. Gross Profit. Gross profit increased to$63.0 million , or 38.6% gross margin, for the six months endedJuly 2, 2021 compared the six months endedJuly 3, 2020 . The increase in our gross margin was primary driven by changes in the mix of revenues to those which contain a higher percentage of labor costs and lower percentage of material costs and subcontracting. General and administrative expenses. G&A expenses increased by$1.9 million , or 2.7%, in the six months endedJuly 2, 2021 compared to the six months endedJuly 3, 2020 . The increase in G&A expenses consisted of an increase of$0.9 million in the Energy segment and an increase of$1.5 million in the Engineering and Consulting segment, partially offset by a decrease of$0.5 in the unallocated corporate expenses. The increase in G&A expenses in the Energy segment and Engineering and Consulting segment was primarily attributed to having restored wage reductions and other actions taken during our second quarter of fiscal 2020 aimed at preserving liquidity as a result of the Covid-19 pandemic, partially offset by the impact of having one fewer week in our first fiscal quarter of fiscal year 2021 as compared to our first fiscal quarter of fiscal year 2020. Within G&A expenses, the increase of$2.4 million for salaries and wages, payroll taxes and employee benefits, combined with the increase of$1.3 million in stock-based compensation was partially offset by a decrease of$1.6 million in depreciation and amortization, combined with a decrease of$0.3 million in facilities and facility related expenses. The increase in salaries and wages, payroll taxes and employee benefits was primarily attributable to having restored, during our third quarter of fiscal year 2020, certain actions taken during the second quarter of our fiscal year 2020 aimed at preserving liquidity in the early stages of the Covid-19 pandemic, such as placing a temporary cash wage reduction for salaried employees, as well as instituting a reduction in workforce, primarily through unpaid furloughs. The increase in stock-based compensation expenses was primarily related to new stock grants to current employees and executives. The decrease in depreciation and amortization was primarily related to lower amortization of intangible assets derived from prior acquisitions. The decrease in facilities and facilities related expenses was attributed to satisfied facility leases that were not renewed. Income (loss) from operations. Our operating loss was$11.3 million for the six months endedJuly 2, 2021 as a result of the factors noted above. As a percentage of contract revenue, operating loss was 6.9% for the six months endedJuly 2, 2021 compared to an operating loss of 6.4% for the six months endedJuly 3, 2020 . The decrease in operating margin was primarily attributable to increases in G&A expenses, partially offset by an increase in profit margin. Total other expense, net. Total other expense, net, was$2.2 million for the six months endedJuly 2, 2021 compared to$2.7 million for the six months endedJuly 3, 2020 . The decrease in total other expense, net is primarily as a result of lower interest expense as a result of lower interest rate borrowings under our credit facilities combined with the impact of having one fewer week in our first fiscal quarter of fiscal year 2021 as compared to our first fiscal quarter of fiscal year 2020. Income tax expense (benefit). We recorded an income tax benefit of$5.1 million for the six months endedJuly 2, 2021 compared to a tax benefit of$1.7 million for the six months endedJuly 3, 2020 . The increase in the income tax benefit is primarily attributable to an increase in various tax deductions and tax credits related to stock compensation and project-related incentives, and an additional tax benefit related to the net operating loss carryback provision of the CARES Act. 44 Table of Contents Net income (loss). Our net loss was$8.4 million for the six months endedJuly 2, 2021 , as compared to a net loss of$13.1 million for the six months endedJuly 3, 2020 . The improvement in our net loss was primarily driven by cost control and income tax benefits combined with the increase in higher margin revenues, partially offset by increases in G&A.
Liquidity and Capital Resources
The following table summarizes our statements of cash flows for the periods
indicated:
Six Months Ended
July 2, July 3,
2021 2020
(in thousands)
Net cash provided by (used in):
Operating activities $ (708) $ 29,231
Investing activities (3,057) (2,929)
Financing activities (15,226) (14,594)
Net increase (decrease) in cash and cash equivalents
We believe that our cash and cash equivalents, cash generated by operating activities, and available borrowings under our revolving credit facility and Delayed Draw Term Loan will be sufficient to finance our operating activities for at least the next 12 months. As a result of forecasted increased working capital requirements related to our$781 million in California Investor Owned Utility Contracts signed inDecember 2020 , we amended our credit agreement to, among other things, ensure an adequate margin for certain covenant compliance obligations. As ofJuly 2, 2021 , we had$9.4 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 2, 2021 , we had a$100 million Term A Loan with$80.0 million outstanding, a$50.0 million Revolving Credit Facility with no borrowed amounts outstanding and$4.1 million in letters of credit issued. We also have a$50.0 million Delayed Draw Term Loan with$20.0 million available for draw subject to the satisfaction of certain covenants and$25.5 million outstanding scheduled to mature onJune 26, 2024 . As ofJuly 2, 2021 , borrowings under our Credit Facilities bore interest at 2.75% 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 17, 2021 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 used in operating activities were$0.7 million for the six months endedJuly 2, 2021 , as compared to cash flows provided by operating activities of$29.2 million for the six months endedJuly 3, 2020 . 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. Cash flows used by operating activities for the six months endedJuly 2, 2021 resulted primarily due to the changing mix of revenues as described earlier and start-up costs associated with certain new contract awards. 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 from Investing Activities
Cash flows used in investing activities were$3.1 million for the six months endedJuly 2, 2021 , as compared to cash flows used in investing activities of$2.9 million for the six months endedJuly 3, 2020 . Cash flows used in investing activities for the six months endedJuly 2, 2021 were primarily due to cash
paid
for the development of
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software, the purchase of equipment and leasehold improvements. 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.
Cash Flows from Financing Activities
Cash flows used in financing activities were$15.2 million for the six months endedJuly 2, 2021 , as compared to cash flows used in financing activities of$14.6 million for the six months endedJuly 3, 2020 . Cash flows used in financing activities for the six months endedJuly 2, 2021 were primarily attributable to payments of$6.6 million for contingent consideration related to prior acquisitions, repayments of$6.5 million under our term loan facility and revolving line of credit, payments of taxes on stock grants of$3.1 million , payments on notes payable of$1.5 million , partially offset by$1.4 million in proceeds from sales of common stock under our employee stock purchase plan and$1.4 million in proceeds from stock option exercise. 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, and payments of$1.4 million for contingent consideration related to prior acquisitions, partially offset by$24.0 million of borrowings under our revolving line of credit.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet financing arrangements or liabilities. In addition, our policy is not to enter into futures or forward contracts. Finally, we do not have any majority-owned subsidiaries or any interests in, or relationships with, any special-purpose entities that are not included in the consolidated financial statements. We have, however, an administrative services agreement with Genesys in which we provide Genesys with ongoing administrative, operational and other non-professional support services. We manage Genesys and have the power to direct the activities that most significantly impact Genesys' performance, in addition to being obligated to absorb expected losses from Genesys. Accordingly, we are the primary beneficiary of Genesys and consolidate Genesys as a variable interest entity.
Short and Long-term Liquidity
Contractual Obligations
The following table sets forth our known contractual obligations as ofJuly 2, 2021 : Less than More than Contractual Obligations Total 1 Year 1 - 3
Years 3 - 5 Years 5 Years
( in thousands)
Long term debt (1)$ 105,250 $ 13,455 $ 91,795 $ - $ - Interest payments on debt outstanding (2) 7,773 3,396 4,377 - - Operating leases 18,670 5,557 7,787 4,006 1,320 Finance leases 845 349 431 65 -
Total contractual cash obligations
(1) Long-term debt includes
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 Credit Facilities are estimated using
floating rates in effect as of July 2, 2021 .
We are obligated to pay earn-out payments in connection with our 2019 and 2017
acquisitions of Energy and Environmental Economics, Inc. ("E3, Inc. ") and
Integral Analytics, respectively. 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 2, 2021 , we had
contingent consideration payable of $9.5 million related to these acquisitions.
For the six months ended
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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 endedJanuary 1, 2021 , 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 ofJuly 2, 2021 , we had$50.0 million in borrowing capacity under the Revolving Credit Facility and an additional$20.0 million under the Delayed Draw Term Loan. As ofJuly 2, 2021 , the Company's composite interest rate, exclusive of the effects of upfront fees, undrawn fees and issuance cost amortization, was 2.75% and$4.1 million in letters of credit were issued.
Insurance Premiums
We have also financed, from time to time, insurance premiums by entering into unsecured notes payable with insurance companies.
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.
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 2, 2021 , 26% of our contracts are time-and-materials contracts and 53% of our contracts are unit-based contracts, compared to 31% for time-and-materials contracts and approximately 37% for unit-based contracts as ofJuly 3, 2020 . 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.
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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. 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. 48
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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 endedJanuary 1, 2021 . Please refer to Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year endedJanuary 1, 2021 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.
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