Edgar Filing: Willdan Group, Inc.

wldn_Current_folio_10Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2017

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

For the transition period from to

Commission file number 001-33076

WILLDAN GROUP, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware		14-195112
(State or Other Jurisdiction of Incorporation or Organization)		(IRS Employer Identification No.)

2401 East Katella Avenue, Suite 300 Anaheim, California		92806
(Address of Principal Executive Offices)		(Zip Code)

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

Not Applicable

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

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

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

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

Large accelerated filer ☐		Accelerated filer ☒

Non-accelerated filer ☐		Smaller reporting company ☐
(Do not check if a smaller reporting company)		Emerging growth company ☐

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

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

As of August 3, 2017, there were 8,663,671 shares of common stock, $0.01 par value per share, of Willdan Group, Inc. issued and outstanding.

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WILLDAN GROUP, INC.

FORM 10-Q QUARTERLY REPORT

TABLE OF CONTENTS


		Page

PART I. FINANCIAL INFORMATION		4

Item 1. Financial Statements (unaudited)		4

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		23

Item 3. Quantitative and Qualitative Disclosures About Market Risk		38

Item 4. Controls and Procedures		38

PART II. OTHER INFORMATION		39

Item 1. Legal Proceedings		39

Item 1A. Risk Factors		39

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		42

Item 3. Defaults upon Senior Securities		42

Item 4. Mine Safety Disclosures		42

Item 5. Other Information		42

Item 6. Exhibits		43

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

In addition to current and historical information, this report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to our future operations, prospects, potential products, services, developments and business strategies. These statements can, in some cases, be identified by the use of words like “may,” “will,” “should,” “could,” “would,” “intend,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” or “continue” or the negative of such terms or other comparable terminology. This report includes, among others, forward-looking statements regarding our:

Ability to achieve energy savings goals on our contracts;

Expectations about future customers;

Expectations regarding the industries and geographies that we primarily serve, including the impact of economic conditions in those industries and geographies;

Ability to successfully integrate our recent acquisitions, including our recent acquisition of Integral Analytics, Inc.;

Expectations about our service offerings;

Expectations about our ability to cross-sell additional services to existing clients;

Expectations about our intended geographical expansion;

Expectations about our ability to attract and retain executive officers and key employees;

Expectations about the impact of legislation on our business and that of our customers;

Evaluation of the materiality of our current legal proceedings; and

Expectations about positive cash flow generation and existing cash and cash equivalents being sufficient to meet normal operating requirements.

These statements involve certain known and unknown risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in our forward-looking statements. Such risks and uncertainties include, among others, those listed in this report. The forward-looking statements in this report, as well as subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf, are hereby expressly qualified in their entirety by the cautionary statements in this report, including the risk factors in our Annual Report on Form 10-K for the year ended December 30, 2016. We do not intend, and undertake no obligation, to update any of our forward-looking statements after the date of this report to reflect actual results or future events or circumstances.

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

WILLDAN GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)


	June 30,		December 30,
	2017		2016
Assets
Current assets:
Cash and cash equivalents	$	26,323,000	$	22,668,000
Accounts receivable, net of allowance for doubtful accounts of $594,000 and $785,000 at June 30, 2017 and December 30, 2016, respectively		28,141,000		30,285,000
Costs and estimated earnings in excess of billings on uncompleted contracts		29,738,000		18,988,000
Other receivables		1,550,000		699,000
Prepaid expenses and other current assets		3,146,000		2,601,000
Total current assets		88,898,000		75,241,000
Equipment and leasehold improvements, net		5,293,000		4,511,000
Goodwill		21,947,000		21,947,000
Other intangible assets, net		4,846,000		5,941,000
Other assets		678,000		707,000
Total assets	$	121,662,000	$	108,347,000
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	22,567,000	$	17,395,000
Accrued liabilities		22,296,000		19,049,000
Contingent consideration payable		1,525,000		1,925,000
Billings in excess of costs and estimated earnings on uncompleted contracts		7,098,000		8,377,000
Notes payable		2,244,000		3,972,000
Capital lease obligations		301,000		334,000
Total current liabilities		56,031,000		51,052,000
Contingent consideration payable		1,709,000		2,537,000
Notes payable		1,500,000		2,074,000
Capital lease obligations, less current portion		168,000		210,000
Deferred lease obligations		681,000		714,000
Deferred income taxes, net		2,587,000		1,842,000
Total liabilities		62,676,000		58,429,000

Commitments and contingencies

Stockholders’ equity:
Preferred stock, $0.01 par value, 10,000,000 shares authorized, no shares issued and outstanding		—		—
Common stock, $0.01 par value, 40,000,000 shares authorized; 8,628,000 and 8,348,000 shares issued and outstanding at June 30, 2017 and December 30, 2016, respectively		86,000		83,000
Additional paid-in capital		45,488,000		42,376,000
Retained earnings		13,412,000		7,459,000
Total stockholders’ equity		58,986,000		49,918,000
Total liabilities and stockholders’ equity	$	121,662,000	$	108,347,000

See accompanying notes to the unaudited condensed consolidated financial statements.

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WILLDAN GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	Three Months Ended				Six Months Ended
	June 30,		July 1,		June 30,		July 1,
	2017		2016		2017		2016

Contract revenue	$	71,833,000	$	58,941,000	$	140,184,000	$	92,856,000

Direct costs of contract revenue (exclusive of depreciation and amortization shown separately below):
Salaries and wages		11,368,000		9,798,000		22,169,000		18,332,000
Subcontractor services and other direct costs		41,676,000		31,294,000		81,571,000		43,027,000
Total direct costs of contract revenue		53,044,000		41,092,000		103,740,000		61,359,000

General and administrative expenses:
Salaries and wages, payroll taxes and employee benefits		8,086,000		8,449,000		17,401,000		15,210,000
Facilities and facility related		1,119,000		829,000		2,243,000		1,939,000
Stock-based compensation		620,000		257,000		1,096,000		464,000
Depreciation and amortization		934,000		956,000		1,843,000		1,566,000
Other		3,467,000		3,394,000		7,334,000		6,516,000
Total general and administrative expenses		14,226,000		13,885,000		29,917,000		25,695,000
Income from operations		4,563,000		3,964,000		6,527,000		5,802,000

Other income (expense):
Interest expense		(32,000)		(44,000)		(65,000)		(94,000)
Other, net		1,000		1,000		38,000		2,000
Total other expense, net		(31,000)		(43,000)		(27,000)		(92,000)
Income before income taxes		4,532,000		3,921,000		6,500,000		5,710,000

Income tax expense		1,220,000		731,000		547,000		1,442,000
Net income	$	3,312,000	$	3,190,000	$	5,953,000	$	4,268,000

Earnings per share:
Basic	$	0.38	$	0.39	$	0.70	$	0.53
Diluted	$	0.36	$	0.37	$	0.66	$	0.51

Weighted-average shares outstanding:
Basic		8,603,000		8,207,000		8,505,000		8,102,000
Diluted		9,082,000		8,530,000		9,078,000		8,395,000

See accompanying notes to the unaudited condensed consolidated financial statements.

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WILLDAN GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(Unaudited)



				Additional
	Common Stock			Paid-in
	Shares	Amount		Capital		Retained Earnings		Total
Balance at December 30, 2016	8,348,000	$	83,000	$	42,376,000	$	7,459,000	$	49,918,000
Shares of common stock issued in connection with employee stock purchase plan	38,000		1,000		343,000		—		344,000
Shares of common stock issued in connection with incentive stock plan	242,000		2,000		1,673,000		—		1,675,000
Stock-based compensation expense	—		—		1,096,000		—		1,096,000
Net income	—		—		—		5,953,000		5,953,000
Balance at June 30, 2017	8,628,000	$	86,000	$	45,488,000	$	13,412,000	$	58,986,000

See accompanying notes to the unaudited condensed consolidated financial statements

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WILLDAN GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Six Months Ended
	June 30,		July 1,
	2017		2016
Cash flows from operating activities:
Net income	$	5,953,000	$	4,268,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,870,000		1,566,000
Deferred income taxes, net		745,000		856,000
Loss on sale/disposal of equipment		—		3,000
(Recovery of) provision for doubtful accounts		(20,000)		61,000
Stock-based compensation		1,096,000		464,000
Accretion and fair value adjustments of contingent consideration		281,000		110,000
Changes in operating assets and liabilities, net of effects from business acquisitions:
Accounts receivable		2,164,000		2,157,000
Costs and estimated earnings in excess of billings on uncompleted contracts		(10,750,000)		(10,512,000)
Other receivables		(851,000)		64,000
Prepaid expenses and other current assets		(545,000)		(218,000)
Other assets		29,000		112,000
Accounts payable		5,172,000		(1,706,000)
Accrued liabilities		3,247,000		6,592,000
Billings in excess of costs and estimated earnings on uncompleted contracts		(1,279,000)		3,409,000
Deferred lease obligations		(33,000)		10,000
Net cash provided by operating activities		7,079,000		7,236,000
Cash flows from investing activities:
Purchase of equipment and leasehold improvements		(1,410,000)		(989,000)
Cash paid for acquisitions, net of cash acquired		—		(8,857,000)
Net cash used in investing activities		(1,410,000)		(9,846,000)
Cash flows from financing activities:
Payments on contingent consideration		(1,509,000)		(1,127,000)
Payments on notes payable		(2,302,000)		(2,099,000)
Principal payments on capital lease obligations		(222,000)		(345,000)
Proceeds from stock option exercise		1,675,000		49,000
Proceeds from sales of common stock under employee stock purchase plan		344,000		113,000
Net cash used in financing activities		(2,014,000)		(3,409,000)
Net increase (decrease) in cash and cash equivalents		3,655,000		(6,019,000)
Cash and cash equivalents at beginning of period		22,668,000		16,487,000
Cash and cash equivalents at end of period	$	26,323,000	$	10,468,000
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	65,000	$	94,000
Income taxes		1,628,000		1,134,000
Supplemental disclosures of noncash investing and financing activities:
Issuance of notes payable related to business acquisitions	$	—	$	4,569,000
Issuance of common stock related to business acquisitions		—		2,230,000
Other receivable for working capital adjustment		—		884,000
Equipment acquired under capital leases		147,000		73,000

See accompanying notes to the unaudited condensed consolidated financial statements.

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WILLDAN GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2017
(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 2016 Annual Report on Form 10-K filed on March 10, 2017.

Nature of Business

Willdan Group, Inc. and subsidiaries (the “Company”) is a provider of professional technical and consulting services, including comprehensive energy efficiency services, for utilities, private industry, and public agencies at all levels of government, primarily in California and New York. The Company also has operations in Arizona, Colorado, Florida, Illinois, Kansas, New Jersey, Ohio, Oregon, Texas, Utah, Washington and Washington, D.C. The Company enables its clients to provide a variety 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.

As of June 30, 2017, the Company had one variable interest entity (“VIE”) — Genesys Engineering, P.C. (“Genesys”). Pursuant to New York law, the Company does not own capital stock of Genesys and does not have control over the professional decision making of Genesys’ engineering services. The Company, however, has entered into an administrative services agreement with Genesys pursuant to which Willdan Energy Solutions (“WES”), the Company’s wholly-owned subsidiary, will provide Genesys with ongoing administrative, operational and other non-professional support services. The Company manages Genesys and has the power to direct the activities that most significantly impact Genesys’s performance, in addition to being obligated to absorb expected losses or receive benefits from Genesys. Accordingly, the Company is the primary beneficiary of Genesys and consolidates Genesys as a VIE. As a result of the administrative services agreement and due to the fact the Company absorbs all expected losess and receives all benefits from Genesys, there is no noncontrolling interest related to the consolidation of Genesys. For more information regarding Genesys, see Note 2 “Business Combinations.”

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

Segment Information

Willdan Group, Inc. is a holding company with six wholly owned subsidiaries. The Company presents segment information externally consistent with the manner in which the Company’s chief operating decision maker reviews information to assess performance and allocate resources. Willdan Group, Inc. performs administrative functions on behalf of its subsidiaries, such as treasury, legal, accounting, information systems, human resources and certain business development activities, and earns revenue that is only incidental to the activities of the enterprise. As a result, Willdan Group, Inc. does not meet the definition of an operating segment. Three of the six Willdan Group, Inc. subsidiaries are aggregated into one reportable segment as they have similar economic characteristics including the nature of services, the methods used to provide services and the type of customers. The remaining three subsidiaries each comprise separate reporting segments.

Contract Accounting

The Company enters into contracts with its clients that contain various types of pricing provisions, including fixed price, time-and-materials, unit-based and service related provisions. The 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	Time-and-materials, unit-based and fixed price (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. Many of the Company’s fixed price contracts involve a high degree of subcontracted fixed price effort and are relatively short in duration, thereby lowering the risks of not properly estimating the percent complete. Revenue on time-and-materials and unit-based contracts is recognized as the work is performed in accordance with the specific rates and terms of the contract. The Company recognizes revenues for time-and-materials contracts based upon the actual hours incurred during a reporting period at contractually agreed upon rates per hour and also includes in revenue all reimbursable costs incurred during a reporting period 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-materials 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 price contracts. Revenue on contracts that are not subject to maximum

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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.

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.

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

Retainage 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 June 30, 2017 and December 30, 2016, the Company had retained accounts receivable of approximately $8.7 million and $5.2 million, respectively.

Goodwill

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

Fair Value of Financial Instruments

The Company’s financial instruments consist primarily of cash, cash equivalents, accounts receivable, 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

As of June 30, 2017, the Company had $26.3 million of cash and cash equivalents. The Company’s primary source of liquidity is cash generated from operations. The Company also has a revolving line of credit with BMO Harris Bank, N.A. (“BMO”), which matures on January 20, 2020 (see Note 7). The Company believes that its cash and cash equivalents on hand, cash generated by operating activities and funds available under its line of credit (if needed and if available) will be sufficient to finance its operating activities for at least the next 12 months.

The Company completed the acquisition of all of the outstanding shares of Integral Analytics, Inc. (“Integral Analytics”) on July 28, 2017. In connection with that acquisition, the Company paid $15.0 million in cash to the sellers of Integral Analytics upon the closing of the acquisition. For further discussion of the acquisition of Integral Analytics, see “Note 12.—Subsequent Events” below.

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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, 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 FASB issued ASU 2014-09, Revenue from Contracts with Customers, 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 defers 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. In December 2016, the FASB issued ASU 2016-20, Revenue from Contracts with Customers (Topic 606), which further clarifies the current revenue recognition guidance. This update is intended to increase stakeholders’ awareness of the proposals and to expedite improvements to ASU 2014-09. The Company is continuing to evaluate the impact that the new standard will have on the contract portfolio. The Company’s approach will include a detailed review of contracts and comparing historical accounting policies and practices to the new standard. Because the standard may impact the Company’s business processes, systems and controls, the Company will also develop a comprehensive change management plan to guide the implementation if, and as needed. The Company is currently evaluating the impact the adoption of ASU 2016-20 will have on the Company’s consolidated financial statements and related disclosures. The Company will adopt the requirements of the new standard effective December 30, 2017, and due to the acquisition of all of the outstanding shares of Integral Analytics on July 28, 2017, the Company is continuing to assess the transition method to be selected.

Stock Compensation

In March 2016, the FASB issued ASU 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 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 elected to early adopt ASU 2016-09 on a prospective basis in 2016.

Business Combinations

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805), which specifies the definition of a business that affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The Company does not believe the guidance will have a material impact on its consolidated financial statements and related disclosures.

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Leases

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The FASB issued this update to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The updated guidance is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption of the update is permitted. The Company is evaluating the impact of the adoption of this update on its consolidated financial statements and related disclosures.

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, WES, acquired substantially all of the assets of 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 Willdan Group, Inc., 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 the Company’s 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) 255,808 shares of common stock, par value $0.01 per share, of Willdan Group, Inc. (the “Common Stock”), with a fair value on the date of closing of $2.2 million, (iii) $4.6 million in cash, payable in twenty-four (24) equal monthly installments beginning on March 26, 2016 (the “Installment Payments”), and (iv) offset by a $0.6 million receivable paid to WES for working capital adjustments. 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 at closing.

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’ engineering services. The Company has entered into an administrative services agreement with Genesys pursuant to which WES will provide Genesys with ongoing

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administrative, operational and other non-professional support services. As a result of the administrative services agreement, all economic risks and rewards associated with Genesys’ assets, liabilities and results of operations are owned and flow through solely to the Company.

The acquisition was accounted for as a business combination in accordance with ASC 805. Under ASC 805, the Company recorded the acquired assets and assumed liabilities at their estimated fair value with the excess allocated to goodwill. Goodwill represents the value the Company expects to achieve through the operational synergies and the expansion into new markets. The Company estimates that the entire $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 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

During the three and six months ended June 30, 2017, the acquisition of substantially all of the assets of Genesys contributed $16.1 million and $38.1 million in revenue and $0.6 million and $1.4 million of income from operations. There were no acquisition costs related to Genesys recorded during the three and six months ended June 30, 2017.

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3.GOODWILL AND OTHER INTANGIBLE ASSETS

As of June 30, 2017, the Company had $21.9 million of goodwill, which primarily relates to the Energy Efficiency Services reporting segment and the acquisition of substantially all of the assets of Genesys and 360 Energy Engineers, LLC (“360 Energy”) and the acquisition of Abacus Resource Management Company (“Abacus”) and also relates to the Public Finance Services reporting segment and the acquisition of Economists.com LLC. There were no changes in the carrying value of goodwill by reporting unit for the six months ended June 30, 2017 as the following table indicates:


	December 30,						June 30,
	2016		Additions		Adjustments		2017
Reporting Unit:
Energy Efficiency Services	$	21,198,000	$	—	$	—	$	21,198,000
Financial Services		749,000		—		—		749,000
	$	21,947,000	$	—	$	—	$	21,947,000

The gross amounts and accumulated amortization of the Company’s acquired identifiable intangible assets with finite useful lives as of June 30, 2017 included in other intangible assets, net in the accompanying condensed consolidated balance sheets, were as follows:


	June 30, 2017				December 30, 2016
	Gross		Accumulated		Gross		Accumulated		Amortization
	Amount		Amortization		Amount		Amortization		Period (yrs)
Backlog	$	1,398,000	$	814,000	$	1,398,000	$	639,000			5.0
Tradename		2,739,000		1,595,000		2,739,000		1,142,000	2.5	-	3.5
Non-compete agreements		1,331,000		604,000		1,331,000		463,000			4.0
Customer relationships		3,260,000		869,000		3,260,000		543,000			5.0
	$	8,728,000	$	3,882,000	$	8,728,000	$	2,787,000

The Company’s amortization expense for acquired identifiable intangible assets with finite useful lives was $0.5 million and $1.1 million for the fiscal three and six months ended June 30, 2017 as compared to $0.6 million and $1.0 million for the fiscal three and six months ended July 1, 2016. Estimated amortization expense for acquired identifiable intangible assets for the remainder of fiscal 2017 is $1.0 million and the succeeding years are as follows:


Fiscal year:
2018	$	1,951,000
2019		1,087,000
2020		674,000
2021		109,000
	$	3,821,000

4.EARNINGS PER SHARE (EPS)

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

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


	Three months ended				Six months ended
	June 30,		July 1,		June 30,		July 1,
	2017		2016		2017		2016
Net income	$	3,312,000	$	3,190,000	$	5,953,000	$	4,268,000
Weighted-average common shares outstanding		8,603,000		8,207,000		8,505,000		8,102,000
Effect of dilutive stock options and restricted stock awards		479,000		323,000		573,000		293,000
Weighted-average common shares outstanding-diluted		9,082,000		8,530,000		9,078,000		8,395,000
Earnings per share:
Basic	$	0.38	$	0.39	$	0.70	$	0.53
Diluted	$	0.36	$	0.37	$	0.66	$	0.51

For the three and six months ended June 30, 2017, 195,000 and 60,000 options were excluded from the calculation of dilutive potential common shares, as compared to 360,000 and 331,000 options for the three and six months ended July 1, 2016. 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 2017 and 2016 periods. Accordingly, the inclusion of these options would have been anti-dilutive.

5.EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET

Equipment and leasehold improvements consist of the following:


	June 30,		December 30,
	2017		2016
Furniture and fixtures	$	2,939,000	$	2,353,000
Computer hardware and software		7,954,000		7,686,000
Leasehold improvements		1,116,000		1,094,000
Equipment under capital leases		1,103,000		1,076,000
Automobiles, trucks, and field equipment		1,873,000		1,446,000
		14,985,000		13,655,000
Accumulated depreciation and amortization		(9,692,000)		(9,144,000)
Equipment and leasehold improvements, net	$	5,293,000	$	4,511,000

6.ACCRUED LIABILITIES

Accrued liabilities consist of the following:


	June 30,		December 30,
	2017		2016
Accrued bonuses	$	1,251,000	$	2,090,000
Accrued interest		2,000		1,000
Paid leave bank		2,390,000		2,129,000
Compensation and payroll taxes		1,700,000		2,006,000
Accrued legal		154,000		177,000
Accrued workers’ compensation insurance		173,000		81,000
Accrued rent		175,000		166,000
Employee withholdings		1,676,000		1,337,000
Client deposits		203,000		139,000
Accrued subcontractor costs		13,196,000		8,100,000
Other		1,376,000		2,823,000
Total accrued liabilities	$	22,296,000	$	19,049,000

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7.DEBT

Total debt obligations consist of the following:


	June 30,		December 30,
	2017		2016
Outstanding borrowings on revolving credit facility	$	1,500,000	$	—
Outstanding borrowings on delayed draw term loan		—		1,500,000
Notes payable for 360 Energy, bearing interest at 4%, payable in monthly principal and interest installments of $88,752 through December 2017.		514,000		1,031,000
Notes payable for Abacus, bearing interest at 4%, payable in monthly principal and interest installments of $54,281 through January 2017.		—		54,000
Notes payable for insurance, bearing interest at 2.98%, payable in monthly principal and interest installments of $67,620 through October 2017.		200,000		599,000
Deferred purchase price for the acquisition of substantially all of the assets of Genesys, bearing interest at 0.650%, payable in monthly principal and interest installments of $191,667 through March 2018.		1,530,000		2,862,000
Total debt obligations		3,744,000		6,046,000
Less current portion		2,244,000		3,972,000
Debt obligations, less current portion	$	1,500,000	$	2,074,000

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

Borrowings under the Credit Agreement bear interest at a rate equal to either, at the Company’s option, (i) the highest of the prime rate, the Federal Funds Rate plus 0.5% or one-month LIBOR plus 1% (the “Base Rate”) or (ii) LIBOR, in each case plus an applicable margin ranging from 0.25% to 1.00% with respect to Base Rate borrowings and

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1.25% to 2.00% with respect to LIBOR borrowings. The applicable margin will be based upon the consolidated leverage ratio of the Company. The Company will also be required to pay a commitment fee for the unused portion of the revolving line of credit, which will range from 0.20% to 0.35% per annum, and fees on any letters of credit drawn under the facility, which will range from 0.94% to 1.50%, in each case, depending on the Company’s consolidated leverage ratio.

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

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

The Credit Agreement includes customary negative covenants, including (i) restrictions on the incurrence of additional indebtedness by the Company or the Guarantors and the incurrence of additional liens on property, (ii) restrictions on permitted acquisitions, including that the total consideration payable for all permitted acquisitions (including potential future earn-out obligations) shall not exceed $20.0 million during the term of the Credit Agreement and the total consideration for any individual permitted acquisition shall not exceed $10.0 million without BMO’s consent, and (iii) limitations on asset sales, mergers and acquisitions. Further, the Credit Agreement limits the payment of future dividends and distributions and share repurchases by the Company; however, the Company is permitted to repurchase up to $8.0 million of shares of common stock under certain conditions, including that, at the time of any such repurchase, (a) the Company is able to meet the financial covenant requirements under the Credit Agreement after giving effect to the share repurchase, (b) the Company has at least $5.0 million of liquidity (unrestricted cash or undrawn availability under the revolving line of credit), and (c) no default exists or would arise under the Credit Agreement after giving effect to such repurchase. In addition, the Credit Agreement includes customary events of default. Upon the occurrence of an event of default, the interest rate will be increased by 2.0%, BMO has the option to make any loans then outstanding under the Credit Agreement immediately due and payable, and BMO is no longer obligated to extend further credit to the Company under the Credit Agreement.

To finance the acquisitions of Abacus and substantially all of the assets of 360 Energy on January 15, 2015, the Company borrowed $2.0 million under its delayed draw term loan facility pursuant to the Company’s Prior Credit Agreement. On January 20, 2017, the remaining $1.5 million of borrowings outstanding under the delayed draw term loan facility was converted into $1.5 million of borrowings under the revolving credit facility pursuant to the Credit Agreement.

As of June 30, 2017, the Company was in compliance with the financial covenants under the Credit Agreement.

Notes Payable. 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 were fully amortizing and payable in equal monthly installments between January 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, pursuant to which any indebtedness under the Abacus Notes is subordinated to any indebtedness under the Credit Agreement. From issuance through June 30, 2017, the Company had made principal payments of approximately $0.6 million on each of the Abacus Notes and, as of June 30, 2017, there were no outstanding balances for either of the Abacus Notes.

On January 15, 2015, in connection with the completion of the acquisition of substantially all of the assets 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

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documents of this nature. 360 Energy has entered into a Subordination Agreement, dated as of January 15, 2015, in favor of BMO, pursuant to which any indebtedness under the 360 Energy Note is subordinated to any indebtedness under the Credit Agreement. From issuance through June 30, 2017, the Company had made principal payments of approximately $2.5 million on the 360 Energy Note and, as of June 30, 2017, the outstanding balance was $0.5 million.

Deferred Purchase Price. The Asset Purchase and Merger Agreement for the acquisition of substantially all of the assets of Genesys dated March 4, 2016, included deferred payments to Messrs. Braun and Mineo in the amount of $2.3 million (“Deferred Payments”), each. The Deferred Payments 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. From issuance through June 30, 2017, the Company made payments of $3.1 million inclusive of interest and, as of June 30, 2017, the aggregate outstanding balance on the Deferred Payments to Messrs. Braun and Mineo was approximately $1.5 million.

Insurance Premiums. The Company has also financed, from time to time, insurance premiums by entering into unsecured notes payable with insurance companies. During the Company’s annual insurance renewals in the fourth quarter of its fiscal year ended December 30, 2016, the Company elected to finance its insurance premiums for the upcoming fiscal year. The unpaid balance of the financed premiums totaled $200,000 and $599,000 at June 30, 2017 and December 30, 2016, respectively.

8.COMMITMENTS

Leases

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

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

Employee Benefit Plans

The Company has a qualified profit sharing plan pursuant to Code Section 401(a) and qualified cash or deferred arrangement pursuant to Code Section 401(k) covering substantially all employees. Employees may elect to contribute up to 50% of 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 member of the board of directors, and his spouse and for Linda Heil, the widow of the Company’s former chief executive officer, Dan Heil. These benefits relate to past services provided to the Company. Accordingly, there is no unamortized compensation cost for the benefits.

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

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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 each fiscal year, management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to utilize the existing deferred tax assets. For fiscal year 2016, the Company ultimately determined that it was more-likely-than-not that the entire California net operating loss will not be utilized prior to expiration. Significant pieces of objective evidence evaluated included the Company’s history of utilization of California net operating losses in prior years for each of its subsidiaries, as well as the Company’s forecasted amount of net operating loss utilization for certain members of the combined group. As a result, the Company recorded a valuation allowance in the amount of $72,000 at the end of fiscal year 2016 related to California net operating losses. There was no change to the valuation allowance during the six month period ended June 30, 2017.

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 June 30, 2017, the Company recorded a liability of $0.3 million for uncertain tax positions related to miscellaneous tax deductions taken in open tax years. Included in this amount are $0.1 million of tax benefits that, if recognized, would affect the effective tax rate. No interest and penalties have been recorded related to unrecognized tax benefits as of June 30, 2017.

Based on management’s estimates and determination of an effective tax rate for the year, the Company recorded an income tax expense of $1.2 million and $0.5 million for the three and six months ended June 30, 2017, as compared to an income tax expense of $0.7 million and $1.4 million for the three and six months ended July 1, 2016, respectively. The change from an income tax benefit of $0.7 million for the three months ended March 31, 2017 to an income tax expense of $1.2 million for the three months ended June 30, 2017 is primarily attributable to the income tax benefit related to stock option exercises and an adjustment to the estimate of the deferred tax asset related to stock options from fiscal year 2016, which were included as a reduction of 73.0% to the Company’s effective tax rate for the three months ended March 31, 2017. During the six months ended June 30, 2017, the difference between the tax benefit recorded and the expense that would be recorded by applying the federal statutory rate is primarily attributable to tax deductions related to stock option exercises which were significant in the six months ended June 30, 2017. In accordance with ASU 2016-09 (see Note 1 “—Basis of Presentation, Organization and Operations of the Company”), the income tax benefit related to stock option exercises has been included as a reduction of 26.0% to the Company’s effective tax rate for the six months ended June 30, 2017. The effective tax rate also varies from the federal statutory rate due to the impact of state income tax expense, an adjustment to the estimate of the deferred tax asset related to stock options from fiscal year 2016, and certain expenses that are non-deductible for tax purposes, including meals and entertainment, compensation expense related to incentive stock options, and employee gifts.

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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 WES, provides energy efficiency consulting services to utilities, state agencies, municipalities, private industry and non-profit organizations. The Engineering Services segment consists of Willdan Engineering 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 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 2016 Annual Report on Form 10-K filed on March 10, 2017. There were no intersegment sales in the three and six month periods ended June 30, 2017 and July 1, 2016. The Company’s chief operating decision maker evaluates the performance of each segment based upon income or loss from operations before income taxes. Certain segment asset information including expenditures for long-lived assets has not been presented as it is not reported to or reviewed by the chief operating decision maker. In addition, enterprise-wide service line contract revenue is not included as it is impracticable to report this information for each group of similar services.

Financial information with respect to the reportable segments as of and for the fiscal three and six months ended June 30, 2017 and as of and for the fiscal three and six months ended July 1, 2016 is as follows:


	Energy				Public		Homeland
	Efficiency		Engineering		Finance		Security		Unallocated				Consolidated
	Services		Services		Services		Services		Corporate		Intersegment		Total
Fiscal Three Months Ended June 30, 2017
Contract revenue	$	53,733,000	$	14,111,000	$	3,462,000	$	527,000	$	—	$	—