0000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2016
OR
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☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 001-33076
WILLDAN GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)
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Delaware |
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14-195112 |
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(State or other Jurisdiction of |
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(IRS Employer Identification No.) |
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2401 East Katella Avenue, Suite 300 |
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92806 |
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(Address of principal executive offices) |
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(Zip code) |
Registrant’s Telephone Number, Including Area Code: (800) 424-9144
Not Applicable
(Former name, former address and former fiscal year, if changed since last report).
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Accelerated filer ☒ |
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Non-accelerated filer ☐ |
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Smaller reporting company ☐ |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of November 2, 2016, there were 8,325,365 shares of common stock, $0.01 par value per share, of Willdan Group, Inc. issued and outstanding.
WILLDAN GROUP, INC.
FORM 10-Q QUARTERLY REPORT
2
WILLDAN GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
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September 30, |
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January 1, |
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2016 |
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2016 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
18,587,000 |
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$ |
16,487,000 |
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Accounts receivable, net of allowance for doubtful accounts of $705,000 and $760,000 at September 30, 2016 and January 1, 2016, respectively |
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26,549,000 |
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17,929,000 |
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Costs and estimated earnings in excess of billings on uncompleted contracts |
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22,887,000 |
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13,840,000 |
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Other receivables |
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2,699,000 |
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177,000 |
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Prepaid expenses and other current assets |
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2,417,000 |
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2,082,000 |
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Total current assets |
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73,139,000 |
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50,515,000 |
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Equipment and leasehold improvements, net |
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4,424,000 |
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3,684,000 |
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Goodwill |
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22,264,000 |
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16,097,000 |
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Other intangible assets, net |
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6,489,000 |
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1,545,000 |
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Other assets |
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482,000 |
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504,000 |
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Total assets |
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$ |
106,798,000 |
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$ |
72,345,000 |
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Liabilities and Stockholders’ Equity |
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Current liabilities: |
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Accounts payable |
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$ |
18,949,000 |
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$ |
5,561,000 |
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Accrued liabilities |
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15,886,000 |
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10,334,000 |
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Contingent consideration payable |
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1,925,000 |
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1,420,000 |
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Billings in excess of costs and estimated earnings on uncompleted contracts |
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8,687,000 |
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6,218,000 |
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Notes payable |
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5,210,000 |
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4,039,000 |
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Capital lease obligations |
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289,000 |
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444,000 |
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Total current liabilities |
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50,946,000 |
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28,016,000 |
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Contingent consideration payable |
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2,376,000 |
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4,305,000 |
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Notes payable |
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1,400,000 |
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1,085,000 |
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Capital lease obligations, less current portion |
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179,000 |
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255,000 |
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Deferred lease obligations |
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728,000 |
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737,000 |
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Deferred income taxes, net |
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3,490,000 |
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331,000 |
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Total liabilities |
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59,119,000 |
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34,729,000 |
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Commitments and contingencies |
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Stockholders’ equity: |
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Preferred stock, $0.01 par value, 10,000,000 shares authorized, no shares issued and outstanding |
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— |
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— |
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Common stock, $0.01 par value, 40,000,000 shares authorized; 8,323,000 and 7,904,000 shares issued and outstanding at September 30, 2016 and January 1, 2016, respectively |
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83,000 |
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79,000 |
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Additional paid-in capital |
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41,706,000 |
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38,377,000 |
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Retained earnings (accumulated deficit) |
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5,890,000 |
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(840,000) |
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Total stockholders’ equity |
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47,679,000 |
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37,616,000 |
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Total liabilities and stockholders’ equity |
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$ |
106,798,000 |
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$ |
72,345,000 |
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See accompanying notes to the unaudited condensed consolidated financial statements.
3
WILLDAN GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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October 2, |
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September 30, |
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October 2, |
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2016 |
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2015 |
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2016 |
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2015 |
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Contract revenue |
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$ |
58,660,000 |
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$ |
33,511,000 |
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$ |
151,516,000 |
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$ |
103,581,000 |
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Direct costs of contract revenue (exclusive of depreciation and amortization shown separately below): |
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Salaries and wages |
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10,421,000 |
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7,745,000 |
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28,753,000 |
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23,940,000 |
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Subcontractor services and other direct costs |
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32,134,000 |
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13,206,000 |
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75,161,000 |
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39,712,000 |
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Total direct costs of contract revenue |
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42,555,000 |
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20,951,000 |
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103,914,000 |
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63,652,000 |
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General and administrative expenses: |
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Salaries and wages, payroll taxes and employee benefits |
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7,825,000 |
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6,070,000 |
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23,035,000 |
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18,993,000 |
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Facilities and facility related |
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1,039,000 |
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1,207,000 |
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2,978,000 |
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3,203,000 |
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Stock-based compensation |
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268,000 |
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190,000 |
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732,000 |
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468,000 |
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Depreciation and amortization |
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742,000 |
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349,000 |
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2,308,000 |
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1,276,000 |
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Other |
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3,178,000 |
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3,103,000 |
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9,694,000 |
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8,915,000 |
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Total general and administrative expenses |
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13,052,000 |
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10,919,000 |
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38,747,000 |
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32,855,000 |
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Income from operations |
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3,053,000 |
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1,641,000 |
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8,855,000 |
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7,074,000 |
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Other (expense) income: |
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Interest income |
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— |
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1,000 |
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— |
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1,000 |
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Interest expense |
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(43,000) |
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(234,000) |
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(137,000) |
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(342,000) |
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Other, net |
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— |
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— |
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2,000 |
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18,000 |
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Total other expense, net |
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(43,000) |
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(233,000) |
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(135,000) |
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(323,000) |
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Income before income taxes |
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3,010,000 |
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1,408,000 |
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8,720,000 |
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6,751,000 |
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Income tax expense |
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548,000 |
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626,000 |
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1,990,000 |
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2,872,000 |
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Net income |
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$ |
2,462,000 |
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$ |
782,000 |
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$ |
6,730,000 |
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$ |
3,879,000 |
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Earnings per share: |
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Basic |
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$ |
0.30 |
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$ |
0.10 |
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$ |
0.82 |
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$ |
0.50 |
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Diluted |
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$ |
0.28 |
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$ |
0.10 |
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$ |
0.79 |
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$ |
0.48 |
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Weighted-average shares outstanding: |
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Basic |
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8,308,000 |
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7,862,000 |
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8,181,000 |
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7,817,000 |
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Diluted |
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8,720,000 |
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8,102,000 |
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8,516,000 |
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8,087,000 |
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See accompanying notes to the unaudited condensed consolidated financial statements.
4
WILLDAN GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(Unaudited)
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Additional |
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Common Stock |
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Paid-in |
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Retained Earnings |
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Shares |
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Amount |
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Capital |
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(Accumulated Deficit) |
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Total |
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Balance at January 1, 2016 |
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7,904,000 |
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$ |
79,000 |
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$ |
38,377,000 |
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$ |
(840,000) |
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$ |
37,616,000 |
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Shares of common stock issued in connection with employee stock purchase plan |
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23,000 |
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— |
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209,000 |
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— |
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209,000 |
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Shares of common stock issued in connection with incentive stock plan |
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140,000 |
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2,000 |
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162,000 |
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— |
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164,000 |
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Stock issued to acquire business |
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256,000 |
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2,000 |
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2,226,000 |
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— |
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2,228,000 |
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Stock-based compensation expense |
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— |
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— |
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732,000 |
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— |
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732,000 |
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Net income |
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— |
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— |
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— |
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6,730,000 |
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6,730,000 |
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Balance at September 30, 2016 |
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8,323,000 |
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$ |
83,000 |
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$ |
41,706,000 |
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$ |
5,890,000 |
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$ |
47,679,000 |
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See accompanying notes to the unaudited condensed consolidated financial statements
5
WILLDAN GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Nine Months Ended |
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September 30, |
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October 2, |
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2016 |
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2015 |
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Cash flows from operating activities: |
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Net income |
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$ |
6,730,000 |
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$ |
3,879,000 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
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2,314,000 |
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1,276,000 |
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Deferred income taxes |
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2,556,000 |
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2,480,000 |
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Loss on sale/disposal of equipment |
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3,000 |
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8,000 |
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Provision for doubtful accounts |
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92,000 |
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431,000 |
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Stock-based compensation |
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732,000 |
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468,000 |
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Accretion and fair value adjustments of contingent consideration |
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(139,000) |
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182,000 |
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Changes in operating assets and liabilities, net of effects from business acquisitions: |
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Accounts receivable |
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5,148,000 |
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(1,321,000) |
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Costs and estimated earnings in excess of billings on uncompleted contracts |
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(7,956,000) |
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(5,645,000) |
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Other receivables |
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(1,918,000) |
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63,000 |
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Prepaid expenses and other current assets |
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(335,000) |
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583,000 |
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Other assets |
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56,000 |
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75,000 |
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Accounts payable |
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1,760,000 |
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2,697,000 |
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Accrued liabilities |
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5,246,000 |
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(1,857,000) |
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Billings in excess of costs and estimated earnings on uncompleted contracts |
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2,469,000 |
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2,290,000 |
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Deferred lease obligations |
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(9,000) |
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114,000 |
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Net cash provided by operating activities |
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16,749,000 |
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5,723,000 |
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Cash flows from investing activities: |
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Purchase of equipment and leasehold improvements |
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(1,386,000) |
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(1,678,000) |
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Cash paid for acquisitions, net of cash acquired |
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(8,857,000) |
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(8,168,000) |
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Net cash used in investing activities |
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(10,243,000) |
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(9,846,000) |
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Cash flows from financing activities: |
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Payments on contingent consideration |
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(1,285,000) |
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— |
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Payments on notes payable |
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(3,083,000) |
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(1,628,000) |
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Proceeds from notes payable |
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— |
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2,000,000 |
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Principal payments on capital lease obligations |
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(411,000) |
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(218,000) |
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Proceeds from stock option exercise |
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164,000 |
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369,000 |
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Proceeds from sales of common stock under employee stock purchase plan |
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209,000 |
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78,000 |
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Net cash (used in) provided by financing activities |
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(4,406,000) |
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601,000 |
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Net increase (decrease) in cash and cash equivalents |
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2,100,000 |
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(3,522,000) |
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Cash and cash equivalents at beginning of period |
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16,487,000 |
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18,173,000 |
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Cash and cash equivalents at end of period |
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$ |
18,587,000 |
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$ |
14,651,000 |
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Supplemental disclosures of cash flow information: |
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Cash paid during the period for: |
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Interest |
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$ |
137,000 |
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$ |
156,000 |
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Income taxes |
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2,046,000 |
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|
951,000 |
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Supplemental disclosures of noncash investing and financing activities: |
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Issuance of notes payable related to business acquisitions |
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$ |
4,569,000 |
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4,250,000 |
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Issuance of common stock related to business acquisitions |
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2,228,000 |
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1,485,000 |
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Contingent consideration related to business acquisitions |
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|
— |
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6,110,000 |
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Other receivable for working capital adjustment |
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604,000 |
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|
— |
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Equipment acquired under capital leases |
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186,000 |
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|
139,000 |
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See accompanying notes to the unaudited condensed consolidated financial statements.
6
WILLDAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)
1.BASIS OF PRESENTATION, ORGANIZATION AND OPERATIONS OF THE COMPANY
Basis of Presentation
The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission and reflect all adjustments, which consist of only normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the consolidated results for the interim periods presented. The Company operates and reports its quarterly financial results based on the 13-week period ending on the Friday closest to March 31, June 30 and September 30 and the 13 or 14-week period ending on the Friday closest to December 31, as applicable, with consideration of business days. Results for the interim periods are not necessarily indicative of results for the full year. Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The condensed consolidated financial statements should be read in conjunction with Willdan Group, Inc.’s 2015 Annual Report on Form 10-K filed on March 15, 2016.
Nature of Business
Willdan Group, Inc. and subsidiaries (“Willdan Group” or the “Company”) is a provider of professional technical and consulting services, including comprehensive energy efficiency solutions, for utilities, private industry, and public agencies at all levels of government, primarily in California and New York. The Company also has operations in Arizona, Colorado, Florida, Illinois, Kansas, Oregon, Texas, Utah, Washington and Washington, D.C. The Company enables its clients to provide a wide range of specialized services without having to incur and maintain the overhead necessary to develop staffing in-house. The Company provides a broad range of complementary services including energy efficiency, engineering and planning, economic and financial consulting, and national preparedness and interoperability. The Company’s clients primarily consist of public and governmental agencies, including cities, counties, public utilities, redevelopment agencies, water districts, school districts and universities, state agencies, federal agencies, a variety of other special districts and agencies, private utilities and industry and tribal governments.
Principles of Consolidation
The consolidated financial statements include the accounts of Willdan Group, Inc. and its wholly-owned subsidiaries, Willdan Energy Solutions, Willdan Engineering, Public Agency Resources, Willdan Financial Services and Willdan Homeland Solutions and their respective subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
7
Accounting for Contracts
The Company enters into contracts with its clients that contain various types of pricing provisions, including fixed price, time-and-materials, unit-based and service related provisions. The following table reflects the Company’s four reportable segments and the types of contracts that each most commonly enters into for revenue generating activities.
|
|
Types of Contract |
|
Segment |
(Revenue Recognition Method) |
|
Energy Efficiency Services |
Unit-based and time-and-materials (percentage-of-completion method) |
|
Engineering Services |
Time-and-materials, unit-based and fixed price (percentage-of-completion method) |
|
Public Finance Services |
Service related contracts (proportional performance method) |
|
Homeland Security Services |
Service related contracts (proportional performance method) |
Revenue on fixed price contracts is recognized on the percentage-of-completion method based generally on the ratio of direct costs (primarily exclusive of depreciation and amortization costs) incurred to date to estimated total direct costs at completion. Revenue on time-and-materials and unit-based contracts is recognized as the work is performed in accordance with the specific terms of the contract. The Company recognizes revenues for time-and-material contracts based upon the actual hours incurred during a reporting period at contractually agreed upon rates per hour and also includes in revenue all reimbursable costs incurred during a reporting period for which the Company has risk or on which the fee was based at the time of bid or negotiation. Certain of the Company’s time-and-material contracts are subject to maximum contract values and, accordingly, revenue under these contracts is generally recognized under the percentage-of-completion method, consistent with fixed priced contracts. Revenue on contracts that are not subject to maximum contract values is recognized based on the actual number of hours the Company spends on the projects plus any actual out-of-pocket costs of materials and other direct incidental expenditures that the Company incurs on the projects. In addition, revenue from overhead percentage recoveries and earned fees are included in revenue. Revenue is recognized as the related costs are incurred. For unit-based contracts, the Company recognizes the contract price of units of a basic production product as revenue when the production product is delivered during a period. Revenue for amounts that have been billed but not earned is deferred and such deferred revenue is referred to as billings in excess of costs and estimated earnings on uncompleted contracts in the accompanying condensed consolidated balance sheets.
Adjustments to contract cost estimates are made in the periods in which the facts requiring such revisions become known. When the revised estimate, for contracts that are recognized under the percentage-of-completion method, indicates a loss, such loss is provided for currently in its entirety. Claims revenue is recognized only upon resolution of the claim. Change orders in dispute are evaluated as claims. Costs related to un-priced change orders are expensed when incurred and recognition of the related contract revenue is based on an evaluation of the probability of recovery of the costs. Estimated profit is recognized for un-priced change orders if realization of the expected price of the change order is probable.
The Company considers whether its contracts require combining for revenue recognition purposes. If certain criteria are met, revenues for related contracts may be recognized on a combined basis. With respect to the Company’s contracts, it is rare that such criteria are present. The Company may enter into certain contracts which include separate phases or elements. If each phase or element is negotiated separately based on the technical resources required and/or the supply and demand for the services being provided, the Company evaluates if the contracts should be segmented. If certain criteria are met, the contracts would be segmented which could result in revenues being assigned to the different elements or phases with different rates of profitability based on the relative value of each element or phase to the estimated total contract revenue.
8
Applying the percentage-of-completion method of recognizing revenue requires the Company to estimate the outcome of its long-term contracts. The Company forecasts such outcomes to the best of its knowledge and belief of current and expected conditions and its expected course of action. Differences between the Company's estimates and actual results often occur resulting in changes to reported revenue and earnings. Such changes could have a material effect on future consolidated financial statements. The Company did not have material revisions in estimates for contracts recognized using the percentage-of-completion method for any of the periods presented in the accompanying condensed consolidated financial statements.
Service-related contracts, including operations and maintenance services and a variety of technical assistance services, are accounted for over the period of performance, in proportion to the costs of performance. Award and incentive fees are recorded when they are fixed and determinable and consider customer contract terms.
Direct costs of contract revenue consist primarily of that portion of technical and nontechnical salaries and wages that has been incurred in connection with revenue producing projects. Direct costs of contract revenue also include production expenses, subcontractor services and other expenses that are incurred in connection with revenue producing projects.
Direct costs of contract revenue exclude that portion of technical and nontechnical salaries and wages related to marketing efforts, vacations, holidays and other time not spent directly generating revenue under existing contracts. Such costs are included in general and administrative expenses. Additionally, payroll taxes, bonuses and employee benefit costs for all Company personnel are included in general and administrative expenses in the accompanying consolidated statements of operations since no allocation of these costs is made to direct costs of contract revenue. No allocation of facilities costs is made to direct costs of contract revenue. Other companies may classify as direct costs of contract revenue some of the costs that the Company classifies as general and administrative costs. The Company expenses direct costs of contract revenue when incurred.
Included in revenue and costs are all reimbursable costs for which the Company has the risk or on which the fee was based at the time of bid or negotiation. No revenue or cost is recorded for costs in which the Company acts solely in the capacity of an agent and has no risks associated with such costs.
Accounts receivable are carried at original invoice amount less an estimate made for doubtful accounts based upon a review of all outstanding amounts on a quarterly basis. Management determines the allowance for doubtful accounts by identifying troubled accounts and by using historical experience applied to an aging of accounts. Credit risk is generally minimal with governmental entities, but disputes may arise related to these receivable amounts. Accounts receivables are written off when deemed uncollectible. Recoveries of accounts receivables previously written off are recorded when received.
Retainage is included in accounts receivable in the accompanying consolidated financial statements. Retainage represents the billed amount that is retained by the customer, in accordance with the terms of the contract, generally until performance is substantially complete. At September 30, 2016 and January 1, 2016, the Company had retained accounts receivable of approximately $5.1 million and $748,000, respectively.
Goodwill
Goodwill represents the excess of costs over the fair value of the assets acquired. Goodwill, which has an indefinite useful life, is not amortized, but instead tested for impairment at least annually or more frequently if events and circumstances indicate that the asset might be impaired.
The Company tests goodwill at least annually for possible impairment. The Company completes annual testing of goodwill as of the last day of the first month of its fourth fiscal quarter each year to evaluate possible impairment. In addition to the annual test, the Company regularly evaluates whether events and circumstances have occurred that may indicate a potential impairment of goodwill. As of September 30, 2016, the Company had $22.3 million of goodwill, which primarily relates to its Energy Efficiency Services reporting segment and the acquisition of the assets of Genesys, and the acquisitions of Abacus Resource Management Company (“Abacus”) and 360 Energy Engineers, LLC (“360
9
Energy”) and also relates to its Public Finance Services reporting segment and the acquisition of Economists.com, LLC (“Economists, LLC”).
The Company tests goodwill for impairment at the level of its reporting units, which are components of its operating segments. The process of testing goodwill for impairment involves an optional qualitative assessment on goodwill impairment of its reporting units to determine whether a quantitative assessment is necessary. If a quantitative assessment is warranted, the Company will then determine the fair value of the applicable reporting units. To estimate the fair value of its reporting units, the Company uses both an income approach based on management’s estimates of future cash flows and other market data and a market approach based upon multiples of EBITDA earned by similar public companies.
Once the fair value is determined, the Company then compares the fair value of the reporting unit to its carrying value, including goodwill. If the fair value of the reporting unit is determined to be less than the carrying value, the Company performs an additional assessment to determine the extent of the impairment based on the implied fair value of goodwill compared with the carrying amount of the goodwill. In the event that the current implied fair value of the goodwill is less than the carrying value, an impairment charge is recognized.
Inherent in such fair value determinations are significant judgments and estimates, including but not limited to assumptions about future revenue, profitability and cash flows, operational plans and interpretation of current economic indicators and market valuations. To the extent these assumptions are incorrect or economic conditions that would impact the future operations of the reporting units change, any goodwill may be deemed to be impaired, and an impairment charge could result in a material adverse effect on the financial position or results of operations.
Fair Value of Financial Instruments
The Company’s financial instruments consist primarily of cash, cash equivalents, accounts receivable, costs and estimated earnings in excess of billings on uncompleted contracts, other receivables, prepaid expenses and other current assets, accounts payable, accrued liabilities, contingent consideration and billings in excess of costs and estimated earnings on uncompleted contracts, and approximate their fair values because of the relatively short period of time between the origination of these instruments and their expected realization or payment. The carrying amounts of debt obligations and contingent consideration approximate their fair values since the terms are comparable to terms currently offered by local lending institutions for loans of similar terms to companies with comparable credit risk.
Use of Estimates
The preparation of consolidated financial statements in conformity with generally accepted accounting principles in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Estimates also affect the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Liquidity
The Company had $18.6 million of cash and cash equivalents as of September 30, 2016. The Company’s primary source of liquidity is cash generated from operations. The Company also has a revolving line of credit with BMO Harris Bank, National Association (“BMO”), which matures on March 24, 2017 (see Note 7). The Company intends to refinance its revolving line of credit prior to its maturity next year. The Company believes that its cash and cash equivalents on hand, cash generated by operating activities and funds available under its line of credit (if needed and if available) will be sufficient to finance its operating activities for at least the next 12 months.
Reclassifications
Certain prior year amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported results of operations.
10
Recent Accounting Pronouncements
Statement of Cash Flows
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows: Clarification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), which eliminates the diversity in practice related to the classification of certain cash receipts and payments in the statement of cash flows, by adding or clarifying guidance on eight specific cash flow issues. ASU 2016-15 is effective for annual and interim reporting periods beginning after December 15, 2017 and early adoption is permitted. ASU 2016-15 provides for retrospective application for all periods presented. The Company does not believe the guidance will have a material impact on its consolidated financial statements.
Revenue Recognition
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which clarifies existing accounting literature relating to how and when revenue is recognized by an entity. ASU 2014-09 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets and supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance. ASU 2014-09 requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. In doing so, an entity will need to exercise a greater degree of judgment and make more estimates than under the current guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price, and allocating the transaction price to each separate performance obligation. ASU 2014-09 also supersedes some cost guidance included in Subtopic 605-35, Revenue Recognition-Construction-Type and Production-Type Contracts. In August 2015, the FASB issued Update 2015-14, which deferred the implementation of ASU 2014-09 for one year from the initial effective date. ASU 2014-09 is effective for public companies for interim and annual reporting periods beginning after December 15, 2017, and is to be applied either retrospectively or using the cumulative effect transition method, with early adoption not permitted. The Company has not yet selected a transition method, and is currently evaluating the impact the adoption of ASU 2014-09 will have on its consolidated financial statements and related disclosures.
Consolidations
In February 2015, the FASB issued Update 2015-02, which amends the consolidation requirements in Accounting Standards Codification 810 and changes the consolidation analysis required under GAAP. The standard became effective for the Company on January 2, 2016. The impact of the new standard on the Company’s consolidated financial statements was not material.
Leases
In February 2016, the FASB issued ASU No. 2016-02, “Leases” (Topic 842). The FASB issued this update to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The updated guidance is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption of the update is permitted. The Company is evaluating the impact of the adoption of this update on its consolidated financial statements and related disclosures.
Stock Compensation
On March 30, 2016, the FASB issued ASU No. 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,” which amends the current stock compensation guidance. The amendments simplify the accounting for the taxes related to stock based compensation, including adjustments to
11
how excess tax benefits and a company's payments for tax withholdings should be classified. The standard is effective for fiscal periods beginning after December 15, 2016, with early adoption permitted. The Company has elected to early adopt ASU 2016-09 on a prospective basis, which did not have a material impact for the quarter ended September 30, 2016.
Proposed Accounting Standards
A variety of proposed or otherwise potential accounting standards are currently being studied by standard-setting organizations and certain regulatory agencies. Because of the tentative and preliminary nature of such proposed standards, the Company has not yet determined the effect, if any, that the implementation of such proposed standards would have on its consolidated financial statements.
2.BUSINESS COMBINATIONS
On March 4, 2016, the Company and the Company’s wholly-owned subsidiary, Willdan Energy Solutions (“WES”) acquired substantially all of the assets of Genesys Engineering P.C. (“Genesys”) and assumed certain specified liabilities of Genesys (collectively, the “Purchase”) pursuant to an Asset Purchase and Merger Agreement, dated as of February 26, 2016 (the “Agreement”), by and among the Company, WES, WESGEN (as defined below), Genesys and Ronald W. Mineo (“Mineo”) and Robert J. Braun (“Braun” and, together with Mineo, the “Genesys Shareholders”). On March 5, 2016, pursuant to the terms of the Agreement, WESGEN, Inc., a non-affiliated corporation (“WESGEN”), merged (the “Merger” and, together with the Purchase, the “Acquisition”) with Genesys, with Genesys remaining as the surviving corporation. Genesys was acquired to strengthen our power engineering capability in the northeastern U.S., and also to increase client exposure and experience with universities.
Pursuant to the terms of the Agreement, WES or WESGEN, as applicable, paid the Genesys Shareholders an aggregate purchase price (the “Purchase Price”) of approximately $15.1 million, including post-closing working capital and tax adjustments. The Purchase Price consisted of (i) $6.0 million in cash, paid at closing, and $2.9 million paid in cash after closing for working capital and tax adjustments, (ii) a $0.6 million receivable payable to WES for working capital adjustments, (iii) 255,808 shares of Common Stock, par value $0.01 per share, of the Company (the “Common Stock”), with a fair value on the date of closing of $2.2 million, and (iv) $4.6 million in cash, payable in twenty-four (24) equal monthly installments beginning on March 26, 2016 (the “Installment Payments”). Until the third anniversary of the Closing Date (the “Closing Date”), the Genesys Shareholders are prohibited from transferring or disposing of any Common Stock received in connection with the Acquisition.
The Agreement contains customary representations and warranties regarding the Company, WES, WESGEN, Genesys and the Genesys Shareholders, indemnification provisions and other provisions customary for transactions of this nature. Pursuant to the terms of the Agreement, the Company and WES also provided guarantees to the Genesys Shareholders which guarantee certain of WESGEN’s and Genesys’ obligations under the Agreement, including the Installment Payments.
The Company used cash on hand to pay the $8.9 million due to the Genesys Shareholders.
Genesys continues to be a professional corporation organized under the laws of the State of New York, wholly-owned by one or more licensed engineers. Pursuant to New York law, the Company does not own capital stock of Genesys. The Company has entered into an agreement with the post-Closing Date owners of Genesys pursuant to which such owners will be prohibited from selling, transferring or encumbering their ownership interest in Genesys without the Company’s consent. Notwithstanding the Company’s rights regarding the transfer of Genesys’ stock, the Company does not have control over the professional decision making of Genesys. The Company has entered into an administrative services agreement with Genesys pursuant to which WES will provide Genesys with ongoing administrative, operational and other non-professional support services.
The acquisition was accounted for as business combinations in accordance with ASC 805. Under ASC 805, the Company recorded the acquired assets and assumed liabilities at their estimated fair value with the excess allocated to goodwill. Goodwill represents the value the Company expects to achieve through the operational synergies and the
12
expansion of the Company into new markets. The Company estimates that the entire $6.2 million of goodwill resulting from the acquisition will be tax deductible. Consideration for the acquisition includes the following:
|
|
|
Genesys |
|
|
|
|
Cash paid, net of cash acquired |
|
$ |
8,857,000 |
|
|
|
Other receivable for working capital adjustment |
|
|
(604,000) |
|
|
|
Issuance of common stock |
|
|
2,228,000 |
|
|
|
Deferred purchase price, payable in 24 monthly installments |
|
|
4,569,000 |
|
|
|
Total consideration |
|
$ |
15,050,000 |
|
|
The following table summarizes the preliminary amounts for the acquired assets recorded at their estimated fair value as of the acquisition date:
|
|
|
Genesys |
|
|
|
|
Current assets |
|
$ |
14,952,000 |
|
|
|
Non-current assets |
|
|
36,000 |
|
|
|
Cash |
|
|
101,000 |
|
|
|
Property, plant and equipment |
|
|
117,000 |
|
|
|
Liabilities |
|
|
(12,643,000) |
|
|
|
Customer relationships |
|
|
3,260,000 |
|
|
|
Backlog |
|
|
1,050,000 |
|
|
|
Tradename |
|
|
1,690,000 |
|
|
|
Non-compete agreements |
|
|
320,000 |
|
|
|
Goodwill |
|
|
6,167,000 |
|
|
|
Net assets acquired |
|
$ |
15,050,000 |
|
|
As of September 30, 2016, the Company obtained further information on the valuation of the assets acquired and liabilities assumed related to the Genesys acquisition and, in accordance with the authoritative guidance for business combinations, recorded purchase price adjustments as of the acquisition date to increase the fair values of intangible assets by $3.3 million and decrease other receivables by $0.3 million. These adjustments to the provisional purchase price allocations decreased goodwill by $3.0 million. As of September 30, 2016, the Company has not completed its final estimate of fair value of the assets acquired and liabilities assumed due to the timing of the transaction and incomplete information necessary to finalize such estimates of fair value. Therefore, the Company has preliminarily estimated the fair values of the assets acquired and the liabilities assumed.
The following unaudited pro forma financial information for the three and nine months ended September 30, 2016 and October 2, 2015 assumes the acquisition of the assets of Genesys occurred on January 2, 2015 as follows:
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
|
September 30, |
|
October 2, |
|
September 30, |
|
October 2, |
|
||||
|
In thousands (except per share data) |
|
2016 |
|
2015 |
|
2016 |
|
2015 |
|
||||
|
Pro forma revenue |
|
$ |
58,660 |
|
$ |
41,220 |
|
$ |
160,328 |
|
$ |
124,289 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma income from operations |
|
|
3,053 |
|
|
1,734 |
|
|
9,676 |
|
|
7,014 |
|
|
Pro forma net income |
|
$ |
2,462 |
|
$ |
963 |
|
$ |
7,254 |
|
$ |
4,020 |
|
This pro forma supplemental information does not purport to be indicative of what the company’s operating results would have been had these transactions occurred on January 2, 2015 and may not be indicative of future operating results.
13
During the three and nine months ended September 30, 2016, the acquisition of the assets of Genesys contributed $16.2 million and $35.6 million in revenue and $0.2 million and $0.6 million of income from operations, respectively.
Acquisition related costs of $165,000 were expensed as incurred in general and administrative expenses, of which $56,000 was recorded by the Company during the nine month period ended September 30, 2016. There were no acquisition costs recorded during the three month period ended September 30, 2016.
On January 15, 2015, the Company and its wholly-owned subsidiary, Willdan Energy Solutions (“WES”) completed two separate acquisitions. The Company and WES acquired all of the outstanding shares of Abacus, an Oregon-based energy engineering company. In addition, the Company and WES separately acquired substantially all of the assets of 360 Energy, a Kansas-based energy and engineering energy management consulting company. Cash payments based on the achievement of certain financial targets were included in the purchase price for each of the acquisitions. The Company has amended its Asset Purchase Agreement with 360 Energy to extend the term of the three-year performance goal for an additional year to the end of the Company’s 2018 fiscal year to allow 360 Energy to expand into additional geographical territories. As a result of this amendment, the Company has increased contingent consideration by $0.3 million. Additionally, the Company has evaluated the total contingent consideration and has determined that certain financial targets will not be met and, as a result, $0.4 million, net has been reversed out of short term contingent consideration.
3.GOODWILL AND OTHER INTANGIBLE ASSETS
As of September 30, 2016, the Company had $22.3 million of goodwill, which primarily relates to the Energy Efficiency Services reporting segment and the acquisition of the assets of Genesys and the acquisitions of Abacus and 360 Energy and also relates to the Public Finance Services reporting segment and the acquisition of Economists LLC. The changes in the carrying value of goodwill by reporting unit for the nine months ended September 30, 2016 were as follows:
|
|
|
January 1, |
|
|
|
September 30, |
|
|||
|
|
|
2016 |
|
Additions |
|
2016 |
|
|||
|
Reporting Unit: |
|
|
|
|
|
|
|
|
|
|
|
Energy Efficiency Services |
|
$ |
15,348,000 |
|
$ |
6,167,000 |
|
$ |
21,515,000 |
|
|
Financial Services |
|
|
749,000 |
|
|
— |
|
|
749,000 |
|
|
|
|
$ |
16,097,000 |
|
$ |
6,167,000 |
|
$ |
22,264,000 |
|
The gross amounts and accumulated amortization of the Company’s acquired identifiable intangible assets with finite useful lives as of September 30, 2016 included in other intangible assets, net in the accompanying condensed consolidated balance sheets, were as follows:
|
|
|
September 30, 2016 |
|
January 1, 2016 |
|
|
|
|
|
||||||||
|
|
|
Gross |
|
Accumulated |
|
Gross |
|
Accumulated |
|
Amortization |
|
||||||
|
|
|
Amount |
|
Amortization |
|
Amount |
|
Amortization |
|
Period (yrs) |
|
||||||
|
Backlog |
|
$ |
1,398,000 |
|
$ |
551,000 |
|
$ |
348,000 |
|
$ |
340,000 |
|
|
|
5.0 |
|
|
Tradename |
|
|
2,739,000 |
|
|
916,000 |
|
|
1,049,000 |
|
|
329,000 |
|
2.5 |
- |
3.5 |
|
|
Non-compete agreements |
|
|
1,331,000 |
|
|
392,000 |
|
|
1,011,000 |
|
|
194,000 |
|
|
|
4.0 |
|
|
Customer relationships |
|
|
3,260,000 |
|
|
380,000 |
|
|
— |
|
|
— |
|
|
|
5.0 |
|
|
|
|
$ |
8,728,000 |
|
$ |
2,239,000 |
|
$ |
2,408,000 |
|
$ |
863,000 |
|
|
|
|
|
The Company’s amortization expense for acquired identifiable intangible assets with finite useful lives was $0.4 million and $1.4 million for the fiscal three and nine months ended September 30, 2016, respectively as compared to
14
$0.2 million and $0.7 million for the fiscal three and nine months ended October 2, 2015. Estimated amortization expense for acquired identifiable intangible assets for the remainder of fiscal 2016 is $0.5 million and the succeeding years are as follows:
|
Fiscal year: |
|
|
|
|
|
2017 |
|
$ |
2,121,000 |
|
|
2018 |
|
|
1,951,000 |
|
|
2019 |
|
|
1,087,000 |
|
|
2020 |
|
|
674,000 |
|
|
2021 |
|
|
109,000 |
|
|
|
|
$ |
5,942,000 |
|
As of September 30, 2016, the Company obtained further information on the valuation of the assets acquired and liabilities assumed related to the Genesys acquisition and in accordance with the authoritative guidance for business combinations, recorded purchase price adjustments as of the acquisition date to increase the fair values of intangible assets by $3.3 million and decrease other receivables by $0.3 million. These adjustments to the provisional purchase price allocations decreased goodwill by $3.0 million. As of September 30, 2016, the Company has not completed its final estimate of fair value of the assets acquired and liabilities assumed due to the timing of the transaction and incomplete information necessary to finalize such estimates of fair value. Therefore, the Company has preliminarily estimated the fair values of the assets acquired and the liabilities assumed.
4.EARNINGS PER SHARE (EPS)
Basic EPS is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding. Diluted EPS is computed by dividing net income by the weighted-average number of common shares outstanding and dilutive potential common shares for the period. Potential common shares include the weighted-average dilutive effects of outstanding stock options using the treasury stock method.
The following table sets forth the number of weighted-average shares used to compute basic and diluted EPS:
|
|
|
Three months ended |
|
Nine months ended |
|
||||||||
|
|
|
September 30, |
|
October 2, |
|
September 30, |
|
October 2, |
|
||||
|
|
|
2016 |
|
2015 |
|
2016 |
|
2015 |
|
||||
|
Net income |
|
$ |
2,462,000 |
|
$ |
782,000 |
|
$ |
6,730,000 |
|
$ |
3,879,000 |
|
|
Weighted-average common shares outstanding |
|
|
8,308,000 |
|
|
7,862,000 |
|
|
8,181,000 |
|
|
7,817,000 |
|
|
Effect of dilutive stock options and restricted stock awards |
|
|
412,000 |
|
|
240,000 |
|
|
335,000 |
|
|
270,000 |
|
|
Weighted-average common stock outstanding-diluted |
|
|
8,720,000 |
|
|
8,102,000 |
|
|
8,516,000 |
|
|
8,087,000 |
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.30 |
|
$ |
0.10 |
|
$ |
0.82 |
|
$ |
0.50 |
|
|
Diluted |
|
$ |
0.28 |
|
$ |
0.10 |
|
$ |
0.79 |
|
$ |
0.48 |
|
For the three and nine months ended September 30, 2016, 412,000 and 335,000 options were excluded from the calculation of dilutive potential common shares, respectively, as compared to 240,000 and 270,000 options for each of the same periods last year. These options were not included in the computation of dilutive potential common shares because the assumed proceeds per share exceeded the average market price per share for the 2016 and 2015 periods. Accordingly, the inclusion of these options would have been anti-dilutive.
15
5.EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consist of the following:
|
|
|
September 30, |
|
January 1, |
|
||
|
|
|
2016 |
|
2016 |
|
||
|
Furniture and fixtures |
|
$ |
2,322,000 |
|
$ |
2,270,000 |
|
|
Computer hardware and software |
|
|
7,543,000 |
|
|
6,496,000 |
|
|
Leasehold improvements |
|
|
1,094,000 |
|
|
1,072,000 |
|
|
Equipment under capital leases |
|
|
935,000 |
|
|
1,266,000 |
|
|
Automobiles, trucks, and field equipment |
|
|
1,400,000 |
|
|
984,000 |
|
|
|
|
|
13,294,000 |
|
|
12,088,000 |
|
|
Accumulated depreciation and amortization |
|
|
(8,870,000) |
|
|
(8,404,000) |
|
|
Equipment and leasehold improvements, net |
|
$ |
4,424,000 |
|
$ |
3,684,000 |
|
6.ACCRUED LIABILITIES
Accrued liabilities consist of the following:
|
|
|
September 30, |
|
January 1, |
|
||
|
|
|
2016 |
|
2016 |
|
||
|
Accrued bonuses |
|
$ |
1,643,000 |
|
$ |
922,000 |
|
|
Accrued interest |
|
|
1,000 |
|
|
4,000 |
|
|
Paid leave bank |
|
|
2,050,000 |
|
|
1,710,000 |
|
|
Compensation and payroll taxes |
|
|
1,168,000 |
|
|
1,494,000 |
|
|
Accrued legal |
|
|
185,000 |
|
|
523,000 |
|
|
Accrued workers’ compensation insurance |
|
|
146,000 |
|
|
268,000 |
|
|
Accrued rent |
|
|
170,000 |
|
|
169,000 |
|
|
Employee withholdings |
|
|
662,000 |
|
|
942,000 |
|
|
Client deposits |
|
|
223,000 |
|
|
106,000 |
|
|
Unvouchered accounts payable |
|
|
9,357,000 |
|
|
3,061,000 |
|
|
Other |
|
|
281,000 |
|
|
1,135,000 |
|
|
Total accrued liabilities |
|
$ |
15,886,000 |
|
$ |
10,334,000 |
|
16
7.DEBT
Total debt obligations consist of the following:
|
|
|
September 30, |
|
January 1, |
|
||
|
|
|
2016 |
|
2016 |
|
||
|
Outstanding borrowings on delayed draw term loan |
|
$ |
1,575,000 |
|
$ |
1,850,000 |
|
|
Notes payable for 360 Energy Engineers, LLC, 36 month term, bearing interest at 4%, payable in monthly principal and interest installments of $88,752 through December 2017. |
|
|
1,285,000 |
|
|
2,033,000 |
|
|
Notes payable for Abacus, 24 month term, bearing interest at 4%, payable in monthly principal and interest installments of $54,281 through January 2017. |
|
|
216,000 |
|
|
690,000 |
|
|
Notes payable for insurance, 11 month term, bearing interest at 2.773%, payable in monthly principal and interest installments of $55,868 through October 2016. |
|
|
102,000 |
|
|
551,000 |
|
|
Deferred purchase price for the acquisition of the assets of Genesys, bearing interest at 0.650%, payable in monthly principal and interest installments of $191,667 through March 2018. |
|
|
3,432,000 |
|
|
— |
|
|
Total debt obligations |
|
|
6,610,000 |
|
|
5,124,000 |
|
|
Less current portion |
|
|
5,210,000 |
|
|
4,039,000 |
|
|
Debt obligations, less current portion |
|
$ |
1,400,000 |
|
$ |
1,085,000 |
|
To finance the acquisitions of Abacus and 360 Energy on January 15, 2015, the Company borrowed $2.0 million under its delayed draw term loan facility pursuant to the BMO Credit Agreement described below. The term loan bears interest at the LIBOR rate plus an applicable margin ranging between 2.25% and 2.75%, set at the LIBOR rate plus 2.50% as of September 30, 2016, and matures on March 24, 2017. Interest on the term loan is payable quarterly, beginning April 13, 2015. Principal on the term loan is payable on the last day of each March, June, September and December in each year, with the amount of each such principal installment equal to: (i) $75,000 on the last day of December 2016 and (ii) all of the remaining outstanding principal amount on March 24, 2017. The term loan is governed by the terms of the BMO Credit Agreement.
On January 15, 2015, in connection with the completion of the acquisition of Abacus, WES issued promissory notes to Mark Kinzer (the “Kinzer Note”) and Steve Rubbert (the “Rubbert Note” and, together with the Kinzer Note, the “Abacus Notes”). The initial outstanding principal amounts of the Kinzer Note and the Rubbert Note were $0.6 million and $0.6 million, respectively. The Abacus Notes provide for a fixed interest rate of 4% per annum. The Abacus Notes are fully amortizing and payable in equal monthly installments between February 15, 2015 and their January 15, 2017 maturity date. The Abacus Notes contain events of default provisions customary for documents of this nature. Mr. Kinzer and Mr. Rubbert have entered into a Subordination Agreement, dated as of January 15, 2015, in favor of BMO Harris, pursuant to which any indebtedness under the Abacus Notes is subordinated to any indebtedness under the BMO Credit Agreement. Through September 30, 2016 the Company had made principal payments of approximately $0.5 million on each of the Abacus Notes and as of September 30, 2016, the outstanding balance was approximately $0.1 million on each of the Abacus Notes.
On January 15, 2015, in connection with the completion of the acquisition of 360 Energy, WES issued a promissory note to 360 Energy (the “360 Energy Note”). The initial outstanding principal amount of the 360 Energy Note was $3.0 million. The 360 Energy Note provides for a fixed interest rate of 4% per annum. The 360 Energy Note is fully amortizing and payable in equal monthly installments between January 31, 2015 and its December 31, 2017 maturity date. The 360 Energy Note contains events of default provisions customary for documents of this nature. 360 Energy has entered into a Subordination Agreement, dated as of January 15, 2015, in favor of BMO Harris, pursuant to which any indebtedness under the 360 Energy Note is subordinated to any indebtedness under the BMO Credit Agreement. Through September 30, 2016 the Company had made principal payments of approximately $1.7 million on the 360 Energy Note and the outstanding balance was $1.3 million as of September 30, 2016.
17
The Asset Purchase and Merger Agreement for the acquisition of the assets of Genesys dated March 4, 2016, included deferred payments to Robert J. Braun (“Braun”) and Ronald W. Mineo (“Mineo”) in the amount of $2.3 million (“Deferred Payments”), each. The Deferred Payments are to be paid in twenty-four (24) equal monthly installments in the amount of $95,834, inclusive of interest at the rate of 0.65% per annum. Payments commenced April 4, 2016 and conclude March 4, 2018. Through September 30, 2016 the Company made payments of $0.6 million inclusive of interest and as of September 30, 2016, the outstanding balances on the Deferred Payments to each of Messrs. Braun and Mineo was approximately $1.7 million.
BMO Credit Facility. The Company and its subsidiaries and Genesys, as guarantors, have entered into a credit agreement (as amended, the “BMO Credit Agreement”) with BMO Harris Bank, N.A., or BMO, that provides for a revolving line of credit of up to $7.5 million, subject to a borrowing base calculation, and a delayed draw term loan facility of up to $3.0 million. The $7.5 million revolving credit facility includes a $5.0 million standby letter of credit sub-facility. As of September 30, 2016, there were no outstanding borrowings under the revolving line of credit, approximately $1.0 million in letters of credit outstanding under the standby letter of credit sub-facility, approximately $1.6 million in loans outstanding under the delayed draw term loan facility and, after considering the BMO Credit Agreement’s borrowing base calculation and debt covenants (each as described below), $6.5 million under the revolving line of credit and $1.4 million under the delayed draw term loan facility were available for borrowing.
The term loan bears interest, at the Company’s option, at (a) the base rate plus an applicable margin ranging between 1.25% and 1.75%, or (b) the LIBOR rate plus an applicable margin ranging between 2.25% and 2.75%. Borrowings under the revolving line of credit bear interest, at the Company’s option, at (a) the base rate plus an applicable margin ranging between 0.75% and 1.25%, or (b) the LIBOR rate plus an applicable margin ranging between 1.75% and 2.25%. The applicable margin is determined based on the Company’s total leverage ratio. Interest on the term loan is payable quarterly, beginning April 13, 2015 and was 3.3% as of September 30, 2016. Principal on the term loan is payable on the last day of each March, June, September, and December in each year, with the amount of each such principal installment equal to: (i) $75,000 on the last day of December 2016, and (ii) all of the remaining outstanding principal amount on March 24, 2017. The Company is currently in the process of negotiating a refinancing of the credit facility under the BMO Credit Agreement; however, the Company may not be able to refinance such facility on terms favorable to it or at all. In the event the Company does not refinance the credit facility, the Company intends to repay any outstanding amounts with cash on hand. The term loan is governed by the terms of the BMO Credit Agreement.
All borrowings under the revolving line of credit are limited to a borrowing base equal to roughly 75% of the eligible accounts receivable plus 50% of the lower of cost or market value of the Company’s eligible inventory, each term as defined in the BMO Credit Agreement. Under the BMO Credit Agreement, as of September 30, 2016, no cash amounts are restricted. The revolving line of credit matures on March 24, 2017 and term loans can be requested at any time prior to February 22, 2017, which would mature March 24, 2017.
Borrowings under the term loan facility and the revolving line of credit are guaranteed by all of the Company’s subsidiaries and Genesys (the “Guarantors”) and secured by all of the Company’s and the Guarantors’ accounts receivable and other rights to payment, general intangibles, inventory and equipment. Pursuant to the BMO Credit Agreement, the Company also must pay a fee of up to 0.3% on unused commitments and customary fees on any letters of credit drawn under the facility.
The BMO Credit Agreement contains customary representations and affirmative covenants, including financial covenants that require the Company to maintain (i) a maximum total leverage ratio, measured as total funded debt (measured as the sum of all obligations for borrowed money, including subordinated debt, plus all capital lease obligations) plus capital leases plus financial letters of credit divided by a trailing twelve month EBITDA (as defined in the BMO Credit Agreement) measured on a rolling basis of not more than 2.0; (ii) a minimum fixed charge coverage ratio (measured as the sum of EBITDA plus rent expense less unfinanced capital expenditures divided by the sum of rent expense plus principal payments plus cash taxes plus cash interest plus restricted payments plus distributions) of not less than 1.25; and (iii) a minimum tangible net worth of at least the sum of (a) the Company’s tangible net worth as of December 31, 2015, plus (b) 50% of net income (only if positive) for each fiscal quarter ending after February 29, 2016, plus (c) the aggregate proceeds received by the Company from the issuance or sale of equity interests in the Company after February 29, 2016, minus (d) the aggregate dollar amount of stock repurchases after February 29, 2016, plus or
18
minus, as applicable, (e) 80% of any adjustments to tangible net worth of the Company arising as a result of certain acquisitions identified to BMO Harris.
The BMO Credit Agreement also includes customary negative covenants, including (i) restrictions on the incurrence of additional indebtedness by the Company or the Guarantors other than indebtedness existing on the date of the BMO Credit Agreement, (ii) restrictions on the total consideration for all permitted acquisitions (including potential future earn-out obligations) shall not exceed $1.5 million during the term of the agreement and the total consideration for any individual permitted acquisition shall not exceed $750,000 without BMO’s consent, and (iii) limitations on asset sales, mergers and acquisitions. In addition, the credit agreement includes customary events of default. Upon the occurrence of an event of default, the interest rate may be increased by 2.0%, BMO has the option to make any loans then outstanding under the BMO Credit Agreement immediately due and payable, and BMO is no longer obligated to extend further credit to the Company under the BMO Credit Agreement. As of September 30, 2016, the Company was in compliance with the covenants under the BMO Credit Agreement.
Insurance Premiums. The Company has also financed, from time to time, insurance premiums by entering into unsecured notes payable with insurance companies. During the Company’s annual insurance renewals in the fourth quarter of its fiscal year ended January 1, 2016, the Company elected to finance its insurance premiums for the upcoming fiscal year.
8.COMMITMENTS
Leases
The Company is obligated under capital leases for certain furniture and office equipment that expire at various dates through the year 2019.
The Company also leases certain office facilities under non-cancelable operating leases that expire at various dates through the year 2023.
Employee Benefit Plans
The Company has a qualified profit sharing plan pursuant to Code Section 401(a) and qualified cash or deferred arrangement pursuant to Code Section 401(k) covering substantially all employees. Employees may elect to contribute up to 50% of compensation limited to the amount allowed by tax laws. Company contributions are made solely at the discretion of the Company’s board of directors.
The Company has a discretionary bonus plan for regional managers, division managers and others as determined by the Company president. Bonuses are awarded if certain financial goals are achieved. The financial goals are not stated in the plan; rather they are judgmentally determined each year. In addition, the board of directors may declare discretionary bonuses to key employees and all employees are eligible for bonuses for outstanding performance. The Company’s compensation committee of the board of directors determines the compensation of the president and chief executive officer.
Post Employment Health Benefits
In May 2006, the Company’s board of directors approved providing lifetime health insurance coverage for Win Westfall, the Company’s former chief executive officer and current chairman of the board of directors, and his spouse and for Linda Heil, the widow of the Company’s former chief executive officer, Dan Heil. These benefits relate to past services provided to the Company. Accordingly, there is no unamortized compensation cost for the benefits.
9.INCOME TAXES
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences of temporary differences between the financial reporting basis and tax basis
19
of the Company’s assets and liabilities, subject to a judgmental assessment of the recoverability of deferred tax assets. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets may not be realized. Significant judgment is applied when assessing the need for valuation allowances. Areas of estimation include the Company’s consideration of future taxable income and ongoing prudent and feasible tax planning strategies. Should a change in circumstances lead to a change in judgment about the utilization of deferred tax assets in future years, the Company would adjust the related valuation allowances in the period that the change in circumstances occurs, along with a corresponding increase or charge to income.
During fiscal year 2015, the Company assessed the available positive and negative evidence to estimate if sufficient future taxable income will be generated to utilize the existing deferred tax assets. The Company has ultimately determined that it is not more-likely-than-not that the entire California net operating loss will be utilized prior to expiration. Significant pieces of objective evidence evaluated included the Company’s history of utilization of California net operating losses in prior years for each of its subsidiaries, as well as its forecasted amount of net operating loss utilization for certain members of the combined group. Based on this evaluation, as of January 1, 2016, the Company recorded a valuation allowance in the amount of $73,000 related to California net operating losses. There was no change to the valuation allowance as of September 30, 2016.
For acquired business entities, if the Company identifies changes to acquired deferred tax asset valuation allowances or liabilities related to uncertain tax positions during the measurement period and they relate to new information obtained about facts and circumstances that existed as of the acquisition date, those changes are considered a measurement period adjustment and the Company records the offset to goodwill. The Company records all other changes to deferred tax asset valuation allowances and liabilities related to uncertain tax positions in current period income tax expense.
The Company recognizes the tax benefit from uncertain tax positions if it is more likely than not that the tax positions will be sustained on examination by the tax authorities, based on the technical merits of the position. The tax benefit is measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense. As of September 30, 2016, the Company has not recorded a liability for uncertain tax positions.
Based on management’s estimates and determination of an effective tax rate for the year, the Company recorded an income tax expense of $0.5 million and $2.0 million for the three and nine months ended September 30, 2016, respectively, as compared to $0.6 million and $2.9 million for the three and nine months ended October 2, 2015, respectively. During the nine months ended September 30, 2016, the Company determined that certain deductions related to energy efficient commercial building deductions were greater than what was estimated in the income tax provision for 2015. Accordingly, the Company has recorded a reduction of income tax expense of approximately $0.1 million and $0.6 million as a change in estimate for the three and nine month periods ended September 30, 2016, respectively. The difference between the tax expense recorded and the expense that would be recorded by applying the federal statutory rate primarily relates to energy efficient commercial building deductions, as well as certain expenses that are non-deductible for tax purposes, including meals and entertainment, lobbying and compensation expense related to incentive stock options.
10.SEGMENT INFORMATION
The Company has four reporting segments: Energy Efficiency Services, Engineering Services, Public Finance Services and Homeland Security Services. The Energy Efficiency Services segment, which consists of Willdan Energy Solutions, provides energy efficiency consulting services to utilities, state agencies, municipalities, private industry and non-profit organizations. The Engineering Services segment consists of Willdan Engineering, Willdan Infrastructure and Public Agency Resources. The Engineering Services segment offers a broad range of engineering and planning services to the Company’s public and private sector clients. The Public Finance Services segment, which consists of Willdan Financial Services, provides expertise and support for the various financing techniques employed by public agencies to
20
finance their operations and infrastructure along with the mandated reporting and other requirements associated with these financings. The Homeland Security Services segment, which consists of Willdan Homeland Solutions, provides national preparedness, homeland security consulting, public safety and emergency response services to cities, related municipal service agencies and other entities.
The accounting policies applied to determine the segment information are the same as those described in the summary of significant accounting policies included in the Company’s 2015 Annual Report on Form 10-K filed on March 15, 2016. There were no intersegment sales in the three and nine month periods ended September 30, 2016 or October 2, 2015. Management evaluates the performance of each segment based upon income or loss from operations before income taxes. Certain segment asset information including expenditures for long-lived assets has not been presented as it is not reported to or reviewed by the chief operating decision maker. In addition, enterprise-wide service line contract revenue is not included as it is impracticable to report this information for each group of similar services.
Financial information with respect to the reportable segments as of and for the fiscal three and nine months ended September 30, 2016 and as of and for the fiscal three and nine months ended October 2, 2015 is as follows:
|
|
|
Energy |
|
|
|
|
Public |
|
Homeland |
|
|
|
|
|
|
|
|
|
|
|||
|
|
Efficiency |
|
Engineering |
|
Finance |
|
Security |
|
Unallocated |
|
|
|
| |||||||||