wldn_Current_Folio_10Q

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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 April 3, 2020

 

OR

 

 

 

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

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.01 per share

WLDN

The Nasdaq Stock Market LLC

(Nasdaq Global Market)

 

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 every Interactive Data File required to be submitted 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 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.

 

 

 

 

Large accelerated filer ☐

 

Accelerated filer ☒

 

 

 

Non-accelerated filer ☐

 

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 May 6, 2020, there were 11,649,968 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 

 

3

 

 

 

Item 1. Financial Statements (unaudited) 

 

3

 

 

 

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

 

38

 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk 

 

48

 

 

 

Item 4. Controls and Procedures 

 

50

 

 

 

PART II. OTHER INFORMATION 

 

50

 

 

 

Item 1. Legal Proceedings 

 

50

 

 

 

Item 1A. Risk Factors 

 

52

 

 

 

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

 

54

 

 

 

Item 3. Defaults upon Senior Securities 

 

54

 

 

 

Item 4. Mine Safety Disclosures 

 

54

 

 

 

Item 5. Other Information 

 

55

 

 

 

Item 6. Exhibits 

 

56

 

 

 

 

 

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CAUTIONARY STATEMENT REGARDING FORWARD‑LOOKING INFORMATION

This Quarterly Report on Form 10-Q (this “10-Q”) contains statements that constitute forward-looking statements as that term is defined by the Private Securities Litigation Reform Act of 1995, as amended. These statements concern our business, operations and financial performance and condition as well as our plans, objectives and expectations for our business operations and financial performance and condition, which are subject to risks and uncertainties. All statements other than statements of historical fact included in this 10-Q are forward-looking statements. These statements may include words such as “aim,” “anticipate,” “assume,” “believe,” “can have,” “could,” “due,” “estimate,” “expect,” “goal,” “intend,” “likely,” “may,” “objective,” “plan,” “potential,” “positioned,” “predict,” “should,” “target,” “will,” “would” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events or trends. For example, all statements we make relating to our plans and objectives for future operations, growth or initiatives and strategies are forward-looking statements.

These forward-looking statements are based on current expectations, estimates, forecasts and projections about our business and the industry in which we operate and our management’s beliefs and assumptions. We derive many of our forward-looking statements from our own operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that predicting the impact of known factors is very difficult, and we cannot anticipate all factors that could affect our actual results.

All of our forward-looking statements are subject to risks and uncertainties that may cause our actual results to differ materially from our expectations. Important factors that could cause actual results to differ materially from our expectations include, but are not limited to:

·

the extent to which the coronavirus (“Covid-19”) pandemic and measures taken to contain its spread ultimately impact our business, results of operation and financial condition, including the speed with which our various direct install programs for small businesses are able to resume normal operations following government mandated shutdowns;

·

our ability to adequately complete projects in a timely manner;

·

our ability to compete successfully in the highly competitive energy efficiency services market, which represented 84% of our consolidated revenue in fiscal year 2019;

·

our reliance on work from our top ten clients, which accounted for 51% of our consolidated contract revenue for fiscal year 2019;

·

changes in state, local and regional economies and government budgets;

·

our ability to win new contracts, to renew existing contracts and to compete effectively for contracts awarded through bidding processes;

·

our ability to successfully integrate our acquisitions and execute on our growth strategy;

·

our ability to make principal and interest payments on our outstanding debt as they come due and to comply with the financial covenants contained in our debt agreements; and

·

our ability to obtain financing and to refinance our outstanding debt as it matures.

The factors noted above and risks included in our other SEC filings may be increased or intensified as a result of the COVID-19 pandemic, including if there is a resurgence of the COVID-19 virus after the initial outbreak subsides.  The extent to which the COVID-19 pandemic ultimately impacts our business, results of operations and financial condition will depend on future developments, which are highly uncertain and cannot be predicted.  See the risk factor in Part II, Item 1A. “Risk Factors” in this Quarterly Report on Form 10-Q, “The COVID-19 pandemic and health and

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safety measures intended to reduce its spread have adversely affected, and may continue to adversely affect, our business, results of operations and financial condition.” The above is not a complete list of factors or events that could cause actual results to differ from our expectations, and we cannot predict all of them. All written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements disclosed elsewhere in this Quarterly Report on Form 10-Q, and under Part I, Item 1A. “Risk Factors”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in our Annual Report on Form 10-K for the fiscal year ended December 27, 2019, as such disclosures may be amended, supplemented or superseded from time to time by other reports we file with the Securities and Exchange Commission, including subsequent Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and public communications. You should evaluate all forward-looking statements made in this Quarterly Report on Form 10-Q and otherwise in the context of these risks and uncertainties.

Potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on any forward-looking statements we make. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are not guarantees of future performance or developments and involve known and unknown risks, uncertainties and other factors that are in many cases beyond our control. Except as required by law, we undertake no obligation to update or revise any forward-looking statements publicly, whether as a result of new information, future developments or otherwise.

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PART I.  FINANCIAL INFORMATION

Item 1. Financial Statements

WILLDAN GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

(Unaudited)

 

 

 

 

 

 

 

 

 

    

April 3,

    

December 27,

 

 

 

2020

 

2019

 

Assets

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

12,304

 

$

5,452

 

Accounts receivable, net of allowance for doubtful accounts of $1,455 and $1,147 at April 3, 2020 and December 27, 2019, respectively

 

 

61,589

 

 

57,504

 

Contract assets

 

 

61,753

 

 

101,418

 

Other receivables

 

 

5,099

 

 

4,845

 

Prepaid expenses and other current assets

 

 

5,589

 

 

6,254

 

Total current assets

 

 

146,334

 

 

175,473

 

Equipment and leasehold improvements, net

 

 

13,137

 

 

12,051

 

Goodwill

 

 

130,003

 

 

127,647

 

Right-of-use assets

 

 

22,612

 

 

22,297

 

Other intangible assets, net

 

 

73,580

 

 

76,837

 

Other assets

 

 

15,689

 

 

16,296

 

Deferred income taxes, net

 

 

11,448

 

 

9,312

 

Total assets

 

$

412,803

 

$

439,913

 

Liabilities and Stockholders’ Equity

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

43,938

 

$

34,000

 

Accrued liabilities

 

 

39,878

 

 

67,615

 

Contingent consideration payable

 

 

5,148

 

 

5,155

 

Contract liabilities

 

 

7,165

 

 

5,563

 

Notes payable

 

 

13,722

 

 

13,720

 

Finance lease obligations

 

 

421

 

 

375

 

Lease liability

 

 

5,717

 

 

5,550

 

Total current liabilities

 

 

115,989

 

 

131,978

 

Contingent consideration payable

 

 

3,798

 

 

4,891

 

Notes payable

 

 

112,268

 

 

116,631

 

Finance lease obligations, less current portion

 

 

242

 

 

191

 

Lease liability, less current portion

 

 

18,051

 

 

18,411

 

Other noncurrent liabilities

 

 

718

 

 

533

 

Total liabilities

 

 

251,066

 

 

272,635

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Preferred stock, $0.01 par value, 10,000 shares authorized, no shares issued and outstanding

 

 

 —

 

 

 —

 

Common stock, $0.01 par value, 40,000 shares authorized; 11,640 and 11,497 shares issued and outstanding at April 3, 2020 and December 27, 2019, respectively

 

 

116

 

 

115

 

Additional paid-in capital

 

 

135,608

 

 

132,547

 

Accumulated other comprehensive loss

 

 

(845)

 

 

(396)

 

Retained earnings

 

 

26,858

 

 

35,012

 

Total stockholders’ equity

 

 

161,737

 

 

167,278

 

Total liabilities and stockholders’ equity

 

$

412,803

 

$

439,913

 

 

See accompanying notes to Condensed Consolidated Financial Statements.

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WILLDAN GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands, except per share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

April 3,

 

March 29,

 

    

2020

    

2019

Contract revenue

 

$

106,026

 

$

91,793

 

 

 

 

 

 

 

Direct costs of contract revenue (inclusive of directly related depreciation and amortization):

 

 

 

 

 

 

Salaries and wages

 

 

18,915

 

 

14,910

Subcontractor services and other direct costs

 

 

56,420

 

 

50,948

Total direct costs of contract revenue

 

 

75,335

 

 

65,858

 

 

 

 

 

 

 

General and administrative expenses:

 

 

 

 

 

 

Salaries and wages, payroll taxes and employee benefits

 

 

20,412

 

 

15,744

Facilities and facility related

 

 

2,694

 

 

1,772

Stock-based compensation

 

 

4,595

 

 

1,817

Depreciation and amortization

 

 

4,519

 

 

2,654

Other

 

 

6,740

 

 

4,182

Total general and administrative expenses

 

 

38,960

 

 

26,169

Loss from operations

 

 

(8,269)

 

 

(234)

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

Interest expense, net

 

 

(1,513)

 

 

(1,121)

Other, net

 

 

23

 

 

11

Total other expense, net

 

 

(1,490)

 

 

(1,110)

Loss before income taxes

 

 

(9,759)

 

 

(1,344)

 

 

 

 

 

 

 

Income tax benefit

 

 

(1,605)

 

 

(927)

Net loss

 

 

(8,154)

 

 

(417)

 

 

 

 

 

 

 

Other comprehensive loss:

 

 

 

 

 

 

Unrealized loss on derivative contracts, net of tax

 

 

(449)

 

 

(219)

Comprehensive loss

 

$

(8,603)

 

$

(636)

 

 

 

 

 

 

 

Loss per share:

 

 

 

 

 

 

Basic

 

$

(0.71)

 

$

(0.04)

Diluted

 

$

(0.71)

 

$

(0.04)

 

 

 

 

 

 

 

Weighted-average shares outstanding:

 

 

 

 

 

 

Basic

 

 

11,510

 

 

10,974

Diluted

 

 

11,510

 

 

10,974

See accompanying notes to Condensed Consolidated Financial Statements.

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WILLDAN GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

other

 

 

 

 

 

 

 

 

Common Stock

 

Paid-in

 

Comprehensive

 

Retained

 

 

 

 

 

    

Shares

    

Amount

    

Capital

    

Loss

    

Earnings

    

Total

 

Balance at December 28, 2018

 

10,968

 

$

110

 

$

114,008

 

$

 —

 

$

30,171

 

$  

144,289

 

Shares of common stock issued in connection with employee stock purchase plan

 

28

 

 

 —

 

 

749

 

 

 —

 

 

 —

 

 

749

 

Shares of common stock issued in connection with incentive stock plan

 

21

 

 

 —

 

 

291

 

 

 —

 

 

 —

 

 

291

 

Shares used to pay taxes on stock grants

 

(66)

 

 

(1)

 

 

(2,515)

 

 

 —

 

 

 —

 

 

(2,516)

 

Issuance of restricted stock award and units

 

175

 

 

 2

 

 

(2)

 

 

 —

 

 

 —

 

 

 —

 

Stock-based compensation expense

 

 —

 

 

 —

 

 

1,817

 

 

 —

 

 

 —

 

 

1,817

 

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(417)

 

 

(417)

 

Net unrealized loss on derivative contracts

 

 —

 

 

 —

 

 

 —

 

 

(219)

 

 

 —

 

 

(219)

 

Balance at March 29, 2019

 

11,126

 

$

111

 

$

114,348

 

$

(219)

 

$

29,754

 

$  

143,994

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Other

 

 

 

 

 

 

 

Common Stock

 

Paid-in

 

Comprehensive

 

 

 

 

 

 

 

 

    

Shares

    

Amount

    

Capital

    

Loss

    

Retained Earnings

    

Total

 

Balance at December 27, 2019

 

11,497

 

$

115

 

$

132,547

 

$

(396)

 

$

35,012

 

$  

167,278

 

Shares of common stock issued in connection with employee stock purchase plan

 

40

 

 

 0

 

 

1,073

 

 

 —

 

 

 —

 

 

1,073

 

Shares of common stock issued in connection with incentive stock plan

 

19

 

 

 0

 

 

260

 

 

 —

 

 

 —

 

 

260

 

Shares used to pay taxes on stock grants

 

(92)

 

 

(1)

 

 

(2,866)

 

 

 —

 

 

 —

 

 

(2,867)

 

Issuance of restricted stock award and units

 

176

 

 

 2

 

 

(1)

 

 

 —

 

 

 —

 

 

 1

 

Stock-based compensation expense

 

 —

 

 

 —

 

 

4,595

 

 

 —

 

 

 —

 

 

4,595

 

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(8,154)

 

 

(8,154)

 

Net unrealized loss on derivative contracts

 

 —

 

 

 —

 

 

 —

 

 

(449)

 

 

 —

 

 

(449)

 

Balance at April 3, 2020

 

11,640

 

$

116

 

$

135,608

 

$

(845)

 

$

26,858

 

$  

161,737

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

.

 

 

 

 

See accompanying notes to Condensed Consolidated Financial Statements.

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WILLDAN GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

April 3,

 

March 29,

 

    

2020

    

2019

Cash flows from operating activities:

 

 

 

 

 

 

Net loss

 

$

(8,154)

 

$

(417)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

4,519

 

 

2,739

Deferred income taxes, net

 

 

(2,136)

 

 

69

(Gain) loss on sale/disposal of equipment

 

 

(16)

 

 

(25)

Provision for doubtful accounts

 

 

366

 

 

27

Stock-based compensation

 

 

4,595

 

 

1,817

Accretion and fair value adjustments of contingent consideration

 

 

334

 

 

111

Changes in operating assets and liabilities, net of effects from business acquisitions:

 

 

 

 

 

 

Accounts receivable

 

 

(4,451)

 

 

18,043

Contract assets

 

 

36,798

 

 

(5,765)

Other receivables

 

 

(253)

 

 

(696)

Prepaid expenses and other current assets

 

 

704

 

 

918

Other assets

 

 

607

 

 

(315)

Accounts payable

 

 

9,938

 

 

(127)

Accrued liabilities

 

 

(28,001)

 

 

(5,799)

Contract liabilities

 

 

1,602

 

 

(396)

Right-of-use assets

 

 

 3

 

 

303

Net cash provided by operating activities

 

 

16,455

 

 

10,487

Cash flows from investing activities:

 

 

 

 

 

 

Purchase of equipment and leasehold improvements

 

 

(2,156)

 

 

(1,929)

Proceeds from sale of equipment

 

 

17

 

 

35

Cash paid for acquisitions, net of cash acquired

 

 

 —

 

 

(21,800)

Net cash used in investing activities

 

 

(2,139)

 

 

(23,694)

Cash flows from financing activities:

 

 

 

 

 

 

Payments on contingent consideration

 

 

(1,434)

 

 

(1,205)

Payments on notes payable

 

 

(151)

 

 

(472)

Borrowings under term loan facility and line of credit

 

 

9,000

 

 

14,000

Repayments under term loan facility and line of credit

 

 

(13,250)

 

 

(1,750)

Principal payments on finance leases

 

 

(96)

 

 

(88)

Proceeds from stock option exercise

 

 

260

 

 

291

Proceeds from sales of common stock under employee stock purchase plan

 

 

1,073

 

 

749

Shares used to pay taxes on stock grants

 

 

(2,867)

 

 

(2,516)

Restricted Stock Award and Units

 

 

 1

 

 

 —

Net cash (used in) provided by financing activities

 

 

(7,464)

 

 

9,009

Net increase (decrease) in cash and cash equivalents

 

 

6,852

 

 

(4,198)

Cash and cash equivalents at beginning of period

 

 

5,452

 

 

15,259

Cash and cash equivalents at end of period

 

$

12,304

 

$

11,061

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

Interest

 

$

1,735

 

$

965

Income taxes

 

 

529

 

 

 —

Supplemental disclosures of noncash investing and financing activities:

 

 

 

 

 

 

Other working capital adjustment

 

 

 —

 

 

579

Equipment acquired under finance leases

 

 

193

 

 

261

See accompanying notes to Condensed Consolidated Financial Statements.

 

 

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WILLDAN GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. ORGANIZATION AND OPERATIONS OF THE COMPANY

Willdan Group, Inc. (“Willdan” or the “Company”) is a provider of professional, technical and consulting services to utilities, private industry, and public agencies at all levels of government. As resources and infrastructures undergo continuous change, the Company helps organizations and their communities evolve and thrive by providing a wide range of technical services for energy solutions and government infrastructure. Through engineering, program management, policy advisory, and software and data management, the Company designs and delivers trusted, comprehensive, innovative, and proven solutions to improve efficiency, resiliency, and sustainability in energy and infrastructure.

The Company’s broad portfolio of services operates within two financial reporting segments: (1) Energy and (2) Engineering and Consulting. The interfaces and synergies between these segments are important elements of the Company’s strategy to design and deliver trusted, comprehensive, innovative, and proven solutions for its customers

The accounting policies followed by the Company are set forth in Part II, Item 8, Note 1, Organization and Operations of the Company, of the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10‑K for the fiscal year ended December 27, 2019. In the opinion of management, all adjustments necessary to fairly state the Condensed Consolidated Financial Statements have been made. All such adjustments are of a normal, recurring nature. Certain information and footnote disclosures normally included in the Consolidated Financial Statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These Condensed Consolidated Financial Statements and related notes thereto should be read in conjunction with the Consolidated Financial Statements and the notes thereto included in the Company’s Annual Report on Form 10‑K for the fiscal year ended December 27, 2019. The results of operations for interim periods are not necessarily indicative of results to be expected for the full year.

Fiscal Years

The Company operates and reports its annual financial results based on 52 or 53-week periods ending on the Friday closest to December 31. 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. Fiscal years 2019, 2018 and 2017 contained 52 weeks. All references to years in the notes to consolidated financial statements represent fiscal years.

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP 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.

Management’s Plans in Response to Covid-19

On January 30, 2020, the spread of a novel strain of coronavirus (“Covid-19”) was declared a Public Health Emergency of International Concern by the World Health Organization (“WHO”). On March 11, 2020, WHO characterized the Covid-19 outbreak as a pandemic. The Covid-19 pandemic has resulted in governmental authorities around the world implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter-in-place or total lock-down orders and business limitations and shutdowns (subject to exceptions for certain essential operations and businesses). The Covid-19 outbreak and restrictions intended to slow the spread of Covid-19 have caused economic and social disruption on an unprecedented scale. It is unclear how long these restrictions will remain in place and they may remain in place in some form for an extended period of time. Given the

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

uncertainties associated with the duration of the pandemic, the Company cannot reasonably estimate the ultimate impacts of Covid-19 and efforts to limit its spread on its business, financial condition, results of operations or cash flows for the foreseeable future or whether the Company’s assumptions used to estimate its future liquidity requirements will be correct

 

Health and Safety

 

In response to the Covid-19 pandemic, the Company has taken and will continue to take temporary precautionary measures intended to help minimize the risk of Covid-19 to its employees, including requiring the majority of its employees to work remotely, suspending non-essential travel and restricting in-person work-related meetings. The Company expects to continue to implement these measures until it has determined that the Covid-19 pandemic is adequately contained for purposes of its business, and may take further actions as government authorities require or recommend or as it determines to be in the best interests of its employees, customers, business partners and third-party service providers.

Financial Position and Results of Operations

The Covid-19 pandemic and efforts to limit its spread negatively impacted the Company’s operations during the three months ended April 3, 2020. In California and New York, the states in which it has historically derived a majority of its revenue, mandatory shutdown orders were issued in March. As such, Covid-19 had only a partial impact on the Company’s operations during its first fiscal quarter of 2020 and it expects the impact to be more significant in its second quarter.

 

In the Energy segment, the Company has experienced and expects to continue to experience a negative impact on its direct install programs that serve small businesses as a result of restrictions put in place by governmental authorities that have required temporary shutdowns of all “non-essential” businesses. In fiscal 2019, the Company derived approximately 40% of its gross Energy segment revenue from its direct install programs that serve small businesses, and a significant portion of its direct install work on these programs is currently suspended and will remain suspended until Covid-19-related restrictions are lifted. The Company’s other energy programs, which generated approximately 60% of its gross Energy segment revenue in fiscal 2019, are either direct install work for small businesses that have been determined to be “essential” by government authorities or has continued to progress during the pandemic. In addition, some of the Company’s programs in the Energy segment, including certain programs in New York, are considered “essential” under applicable governmental regulations are being accelerated because of their importance to help fight this pandemic

 

In the Engineering and Consulting segment, the Company’s revenues have been minimally affected. The services in this segment have generally been deemed “essential” by the government and have continued to operate while abiding social distancing measures.

 

As of May 8, 2020, though some of the Company work has been suspended, none of its contracts have been cancelled.

 

In response to the Covid-19 pandemic and efforts to prevent its spread, the Company began taking a number of steps during the first quarter of fiscal 2020 aimed at preserving liquidity and positioning itself to resume its growth trajectory after work restrictions are lifted. These steps include:

 

·

Executing a reduction in workforce, primarily through an unpaid furlough, impacting approximately 300 members of staff. The largest reductions were a result of government-mandated work restrictions impacting the Company’s direct install programs in California and New York;

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

·

A temporary freeze on all non-critical spending for travel, capital expenditures, and other discretionary expenses;

 

·

A temporary cash wage reduction for salaried employees, ranging from 0% for lower salary bands up to 75% for senior management;

 

·

Suspension of cash fees for the Company’s Board of Directors, until such time as the Board of Directors determines;

 

·

Implementing a temporary hiring freeze; and

 

·

Amending the Company’s credit facility for increased flexibility.

 

The Company believes that its financial position will allow it to withstand the current economic environment. In the first quarter of fiscal year 2020, the Company enhanced liquidity by minimizing working capital and improving cash collections and, in May 2020, the Company amended its credit facilities to amend certain covenants to increase its financial flexibility. Combined with availability under its credit facilities, the Company believes its enhanced liquidity position provides a cushion against any unforeseen liquidity disruptions. The Company anticipates borrowing additional amounts under its existing credit facility during the second half of fiscal year 2020.

 

Asset and liability valuation and other estimates used in preparation of financial statements

 

As of April 3, 2020, the Company did not have any impairment with respect to goodwill or long-lived assets, including intangible assets. Because the full extent of the impact of the Covid-19 outbreak and efforts to slow its spread are unknown at this time, they could, under certain circumstances, cause impairment and result in a non-cash impairment charge being recorded in future periods.

Changes to the estimated future profitability of the business may require that the Company establish an additional valuation allowance against all or some portion of its net deferred tax assets.

Impact on Clients and Subcontractors and Other Risks

The Company primarily works for utilities, municipalities and other public agencies. The Company expects many governmental and other public agencies will have significant budget shortfalls for 2020 and potentially beyond as a result of the economic slowdown from the measures taken to mitigate the Covid-19 pandemic. These potential budget deficits could result in delayed funding for existing contracts with the Company, postponements of new contracts or price concessions.  Further, most of the Company’s clients are not committed to purchase any minimum amount of services, as the Company agreements with them are based on a “purchase order” model. As a result, they may discontinue utilizing some or all of the Company’s services with little or no notice. 

 In addition, the Company relies on subcontractors to complete a substantial portion of our work, especially in its Energy segment. If the Company’s preferred subcontractors suffer significant economic harm and must limit or cease operations or file for bankruptcy as a result of the current economic slowdown, the Company’s subcontractors may not be able to fulfill their contractual obligations satisfactorily and the Company may not have the ability to select its subcontractors of choice for new contracts. If the Company’s subcontractors are not able to fulfill their contractual obligations, it could result in a significant increase in costs for the Company to complete the projects.  The ultimate impact of Covid-19 on the Company’s financial condition and results of operations will depend on all of the factors noted above, including other factors that the Company may not be able to forecast at this time. See the risk factor “The Covid-19 pandemic and health and safety measures intended to slow its spread have adversely affected, and may continue to adversely affect, our business, results of operations and financial condition.”  under Part II. Item 1A. of this

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

Quarterly Report on Form 10-Q. While the Company expects the impacts of Covid-19 to have an adverse effect on its business, financial condition and results of operations, it is unable to predict the extent of these impacts at this time. 

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WILLDAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

2. RECENT ACCOUNTING PRONOUNCEMENTS

Accounting Pronouncements Recently Adopted

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 requires entities to report “expected” credit losses on financial instruments and other commitments to extend credit rather than the current “incurred loss” model. These expected credit losses for financial assets held at the reporting date are to be based on historical experience, current conditions, and reasonable and supportable forecasts. ASU 2016-13 will also require enhanced disclosures relating to significant estimates and judgments used in estimating credit losses, as well as the credit quality. The Company adopted this standard effective December 28, 2019. The adoption of this standard did not have a material impact on the Company’s Condensed Consolidated Financial Statements

Accounting Pronouncements Recently Issued

In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” (“ASU 2019-12”). ASU 2019-12 amends the accounting for income taxes by, among other things, removing: (i) The exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or a gain from other items (for example, discontinued operations or other comprehensive income); (ii) The exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment; (iii) The exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary; and (iv) The exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, which for the Company is the first quarter of fiscal 2021. The Company is currently evaluating the impact this update will have on its Condensed Consolidated Financial Statements.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

3. REVENUES

The Company enters into contracts with its clients that contain various types of pricing provisions, including fixed price, time-and-materials, and unit-based provisions. The Company recognizes revenues in accordance with ASU 2014-09, Revenue from Contracts with Customer, codified as ASC Topic 606 and the related amendments (collectively “ASC 606”). As such, the Company identifies a contract with a customer, identifies the performance obligations in the contract, determines the transaction price, allocates the transaction price to each performance obligation in the contract and recognizes revenues when (or as) the Company satisfies a performance obligation.

The following table reflects the Company’s two reportable segments and the types of contracts that each most commonly enters into for revenue generating activities.

 

 

 

Segment

Contract Type

Revenue Recognition Method

 

Time-and-materials

Time-and-materials

Energy

Unit-based

Unit-based

 

Software license

Unit-based

 

Fixed price

Percentage-of-completion

 

Time-and-materials

Time-and-materials

Engineering and Consulting

Unit-based

Unit-based

 

Fixed price

Percentage-of-completion

 

Revenue on the vast majority of the Company’s contracts is recognized over time because of the continuous transfer of control to the customer. Revenue on fixed price contracts is recognized on the percentage-of-completion method based generally on the ratio of direct costs incurred-to-date to estimated total direct costs at completion. The Company uses the percentage-of-completion method to better match the level of work performed at a certain point in time in relation to the effort that will be required to complete a project. In addition, the percentage-of-completion method is a common method of revenue recognition in the Company’s industry.

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. Certain of the Company’s time-and-materials contracts are subject to maximum contract values and, accordingly, when revenue is expected to exceed the maximum contract value, these contracts are generally recognized under the percentage-of-completion method, consistent with fixed price contracts. 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 recognition for software licenses issued by the Energy segment is generally recognized at a point in time, utilizing the unit-based revenue recognition method, upon acceptance of the software by the customer and in recognition of the fulfillment of the performance obligation. Certain additional performance obligations beyond the base software license may be separated from the gross license fee and recognized on a straight-line basis over time. Revenue for amounts that have been billed but not earned is deferred, and such deferred revenue is referred to as contract liabilities in the accompanying condensed consolidated balance sheets. 

To determine the proper revenue recognition method for contracts, the Company evaluates whether two or more contracts should be combined and accounted for as one single contract and whether the combined contract should be accounted for as one performance obligation. With respect to the Company’s contracts, it is rare that multiple contracts should be combined into a single performance obligation. This evaluation requires significant judgment and the decision to combine a group of contracts or separate a single contract into multiple performance obligations could change the amount of revenue and profit recorded in a given period. Contracts are considered to have a single performance

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

obligation if the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts, which is mainly because the Company provides a significant service of integrating a complex set of tasks and components into a single project or capability.

The Company may enter into contracts that 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. Segmented contracts may comprise up to approximately 2.0% to 3.0% of the Company’s consolidated contract revenue.

Contracts that cover multiple phases or elements of the project or service lifecycle (development, construction and maintenance and support) may be considered to have multiple performance obligations even when they are part of a single contract. For contracts with multiple performance obligations, the Company allocates the transaction price to each performance obligation using the best estimate of the standalone selling price of each distinct good or service in the contract. For the periods presented, the value of the separate performance obligations under contracts with multiple performance obligations (generally measurement and verification tasks under certain energy performance contracts) were not material. In cases where the Company does not provide the distinct good or service on a standalone basis, the primary method used to estimate standalone selling price is the expected cost plus a margin approach, under which the Company forecasts the Company’s expected costs of satisfying a performance obligation and then adds an appropriate margin for the distinct good or service.

The Company provides quality of workmanship warranties to customers that are included in the sale and are not priced or sold separately or do not provide customers with a service in addition to assurance of compliance with agreed-upon specifications and industry standards. The Company does not consider these types of warranties to be separate performance obligations.

In some cases, the Company has a master service or blanket agreement with a customer under which each task order releases the Company to perform specific portions of the overall scope in the service contract. Each task order is typically accounted for as a separate contract because the task order establishes the enforceable rights and obligations, and payment terms.

Under ASC 606, variable consideration should be considered when determining the transaction price and estimates should be made for the variable consideration component of the transaction price, as well as assessing whether an estimate of variable consideration is constrained. For certain of the Company’s contracts, variable consideration can arise from modifications to the scope of services resulting from unapproved change orders or customer claims. Variable consideration is included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. The Company estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on assessments of legal enforceability, the Company’s performance, and all information (historical, current and forecasted) that is reasonably available to the Company.

Due to the nature of the work required to be performed on many of the Company’s performance obligations, the estimation of total revenue and cost at completion is complex, subject to many variables and requires significant judgment. As a significant change in one or more of these estimates could affect the profitability of the Company’s contracts, the Company reviews and updates the Company’s contract-related estimates regularly through a company-wide disciplined project review process in which management reviews the progress and execution of the Company’s performance obligations and the estimate at completion (EAC). As part of this process, management reviews information including, but not limited to, any outstanding key contract matters, progress towards completion and the related program schedule and the related changes in estimates of revenues and costs. Management must make assumptions and estimates

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

regarding labor productivity and availability, the complexity of the work to be performed, the cost and availability of materials, the performance of subcontractors, and the availability and timing of funding from the customer, among other variables.

The Company recognizes adjustments in estimated profit on contracts under the cumulative catch-up method. Under this method, the impact of the adjustment on profit recorded to date is recognized in the period the adjustment is identified. Revenue and profit in future periods of contract performance is recognized using the adjusted estimate. If at any time the estimate of contract profitability indicates an anticipated loss on the contract, the Company recognizes the full amount of estimated loss in the period it is identified.

Contracts are often modified to account for changes in contract specifications and requirements. The Company considers contract modifications to exist when the modification either creates new rights or obligations or changes the existing enforceable rights or obligations. Most of the Company’s contract modifications are for goods or services that are not distinct from existing contracts due to the significant integration provided in the context of the contract and are accounted for as if they were part of the original contract. The effect of a contract modification that is not distinct from the existing contract on the transaction price and the Company’s measure of progress for the performance obligation to which it relates is recognized as an adjustment to revenue (either as an increase in or a reduction of revenue) on a cumulative catch-up basis.

For contract modifications that result in the promise to deliver goods or services that are distinct from the existing contract and the increase in price of the contract is for the same amount as the standalone selling price of the additional goods or services included in the modification, the Company accounts for such contract modifications as a separate contract.

The Company includes claims to vendors, subcontractors and others as a receivable and a reduction in recognized costs when enforceability of the claim is established by the contract and the amounts are reasonably estimable and probable of being recovered. The amounts are recorded up to the extent of the lesser of the amounts management expects to recover or to costs incurred.

Billing practices are governed by the contract terms of each project based upon costs incurred, achievement of milestones or pre-agreed schedules. Billings do not necessarily correlate with revenue recognized using the percentage-of-completion method of revenue recognition.

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 comprehensive income 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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WILLDAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

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 historical credit losses have been 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, included in contract assets, represents amounts withheld from billings to the Company’s clients pursuant to provisions in the contracts and may not be paid to the Company until specific tasks are completed or the project is completed and, in some instances, for even longer periods. At April 3, 2020 and December 27, 2019, contract assets included retainage of approximately $4.4 million and $5.4 million, respectively.

In addition to the above, the Company derives revenue from software licenses and professional services and maintenance fees. In accordance with ASC 606, the Company performs an assessment of each contract to identify the performance obligations, determine the overall transaction price for the contract, allocate the transaction price to the performance obligations, and recognize the revenue when the performance obligations are satisfied.

The Company utilizes the residual approach by which it estimates the standalone selling price by reference to the total transaction price less the sum of the observable standalone selling prices of other goods or services promised in the contract. The software license revenue is typically recognized at a point in time when control is transferred to the client, which is defined as the point in time when the client can use and benefit from the license. The software license is delivered before related services are provided and is functional without services, updates, or technical support. Related professional services include training and support services in which the standalone selling price is determined based on an input measure of hours incurred to total estimated hours and is recognized over time, usually which is the life of the contract. 

 

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WILLDAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

4. SUPPLEMENTAL FINANCIAL STATEMENT DATA

Accounts Receivable

From time to time, in connection with factoring agreements, the Company sells trade accounts receivable without recourse to third party purchasers in exchange for cash. During the three months ended April 3, 2020 and March 29, 2019, the Company did not sell any trade accounts receivable.

Equipment and Leasehold Improvements

 

 

 

 

 

 

 

 

 

April 3,

 

December 27,

 

    

2020

    

2019

 

 

(in thousands)

Furniture and fixtures

 

$

4,071

 

$

4,614

Computer hardware and software

 

 

15,318

 

 

14,789

Leasehold improvements

 

 

2,872

 

 

2,410

Equipment under finance leases

 

 

2,122

 

 

1,957

Automobiles, trucks, and field equipment

 

 

3,244

 

 

3,564

Subtotal

 

 

27,627

 

 

27,334

Accumulated depreciation and amortization

 

 

(14,490)

 

 

(15,283)

Equipment and leasehold improvements, net

 

$

13,137

 

$

12,051

Included in accumulated depreciation and amortization is $0.2 million and $0.5 million of amortization expense related to equipment held under finance leases in the fiscal three months ended April 3, 2020 and fiscal year 2019, respectively.

Accrued Liabilities

 

 

 

 

 

 

 

 

 

April 3,

 

December 27,

 

    

2020

    

2019

 

 

(in thousands)

Accrued subcontractor costs

 

$

25,943

 

$

45,366

Other

 

 

4,348

 

 

4,630

Employee withholdings

 

 

3,190

 

 

3,463

Compensation and payroll taxes

 

 

2,877

 

 

3,286

Paid leave bank

 

 

1,854

 

 

3,114

Accrued bonuses

 

 

1,666

 

 

7,756

Total accrued liabilities

 

$

39,878

 

$

67,615

Goodwill

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 27,

 

Additional

 

Additions /

 

April 3,

 

    

2019

    

Purchase Cost

    

Adjustments

    

2020

 

 

(in thousands)

Reporting Unit:

 

 

 

 

 

 

 

 

 

 

 

 

Energy

 

$

126,898

 

$

 —

 

$

2,356

 

$

129,254

Engineering and Consulting

 

 

749

 

 

 —

 

 

 —

 

 

749

 

 

$

127,647

 

$

 —

 

$

2,356

 

$

130,003

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

The Company tests for impairment, at a minimum, on an annual basis or earlier when certain events or changes in circumstances indicate that goodwill may more likely than not be impaired. The Company evaluated the current economic impact caused by the Covid-19 pandemic to assess a potential impairment of goodwill and noted that it does not believe it is more likely than not that goodwill was impaired as of April 3, 2020.

Intangible Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

April 3, 2020

 

December 27, 2019

 

 

 

 

 

 

 

 

Gross

 

Accumulated

 

Gross

 

Accumulated

 

Amortization

 

    

Amount

    

Amortization

    

Amount

    

Amortization

    

Period

 

 

(in thousands)

 

(in years)

Finite:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Backlog

 

$

7,134

 

$

4,198

 

$

7,134

 

$

3,763

 

1.0

Tradename

 

 

13,351

 

 

5,357

 

 

13,351

 

 

4,882

 

2.5

 

-

 

6.0

Non-compete agreements

 

 

2,320

 

 

1,452

 

 

2,320

 

 

1,384

 

4.0

 

-

 

5.0

Developed technology

 

 

14,620

 

 

3,883

 

 

14,620

 

 

3,227

 

8.0

Customer relationships

 

 

60,733

 

 

9,688

 

 

60,733

 

 

8,065

 

5.0

 

-

 

8.0

Total intangible assets

 

$

98,158

 

$

24,578

 

$

98,158

 

$

21,321

 

 

 

 

 

 

 

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WILLDAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

5. DERIVATIVE FINANCIAL INSTRUMENTS

The Company uses certain interest rate derivative contracts to hedge interest rate exposures on its variable rate debt. The Company’s hedging program is not designated for trading or speculative purposes.

The Company recognizes derivative instruments as either assets or liabilities on the accompanying consolidated balance sheets at fair value. The Company records changes in the fair value (i.e., gains or losses) of the derivatives that have been designated as cash flow hedges in its consolidated balance sheets as accumulated other comprehensive income (loss) and in its condensed consolidated statements of comprehensive (loss) income as a loss or gain on cash flow hedge valuation.

On January 31, 2019, the Company entered into an interest rate swap agreement that the Company designated as cash flow hedge to fix the variable interest rate on a portion of the Company’s Term A Loan (as defined below in Note 6. “Debt Obligations”). The interest rate swap agreement total notional amount of $35.0 million, has a fixed annual interest rate of 2.47% and expires on January 31, 2022. As of April 3, 2020, the effective portion of the Company’s interest rate swap agreement designated as a cash flow hedge before tax effects was $1.0 million, of which no amounts were reclassified from accumulated other comprehensive income to interest expense in the three months ended April 3, 2020. The Company expects to reclassify $0.6 million from accumulated other comprehensive loss to interest expense within the next twelve months.

The fair values of the Company’s outstanding derivatives designated as hedging instruments were as follows:

 

 

 

 

 

 

 

 

 

    

 

Fair Value of Derivative

 

    

 

Instruments as of

 

 

Balance Sheet Location

April 3, 2020

 

December 27, 2019

 

 

 

(in thousands)

Interest rate swap agreement

 

Accrued liabilities

$

(624)

 

$

(241)

Interest rate swap agreement

 

Other noncurrent (liabilities) assets

$

(490)

 

$

(306)

 

The impact of the effective portions of derivative instruments in cash flow hedging relationships and fair value relationships on other comprehensive income were $0.4 and $0.2 million of the fiscal three months ended April 3, 2020 and March 29, 2019, respectively.

The accumulated balances and reporting period activities and for the three months ended April 3, 2020 related to reclassifications out of accumulated other comprehensive loss are summarized as follows:

 

 

 

 

 

 

 

 

 

Gain (Loss) on

 

Accumulated Other

 

    

Derivative Instruments

    

Comprehensive Loss

 

 

(in thousands)

Balances at December 27, 2019

 

$

(396)

 

$

(396)

Other comprehensive loss before reclassifications

 

 

(568)

 

 

(568)

Amounts reclassified from accumulated other comprehensive income

 

 

 —

 

 

 —

Income tax benefit related to derivative instruments

 

 

119

 

 

119

Net current-period other comprehensive loss

 

 

(845)

 

 

(845)

Balances at April 3, 2020

 

$

(845)

 

$

(845)

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WILLDAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

 

6. DEBT OBLIGATIONS

Debt obligations, excluding obligations under finance leases (see Note 7, Leases, below), consisted of the following:

 

 

 

 

 

 

 

 

    

April 3,

    

December 27,

 

 

2020

 

2019

 

 

(in thousands)

Outstanding borrowings on Term A Loan

 

$

92,500

 

$

95,000

Outstanding borrowings on Revolving Credit Facility

 

 

4,000

 

 

5,000

Outstanding borrowings on Delayed Draw Term Loan

 

 

29,250

 

 

30,000

Other debt agreements

 

 

909

 

 

1,060

Total debt

 

 

126,659

 

 

131,060

Issuance costs and debt discounts

 

 

(669)

 

 

(709)

Subtotal

 

 

125,990

 

 

130,351

Less current portion of long-term debt

 

 

13,722

 

 

13,720

Long-term debt portion

 

$

112,268

 

$

116,631

 

Credit Facilities

On June 26, 2019, the Company and certain of its subsidiaries entered into an Amended and Restated Credit Agreement (as amended by the First Amendment, dated as of August 15, 2019, and the Second Amendment, dated as of November 6, 2019, the “Credit Agreement”) with a syndicate of financial institutions as lenders and BMO Harris Bank, N.A. (“BMO”), as administrative agent. The Credit Agreement provides for (i) a $100.0 million secured term loan (the “Term A Loan”), (ii) up to $50.0 million in delayed draw secured term loans (the “Delayed Draw Term Loan”), and (iii) a $50.0 million secured revolving credit facility (the “Revolving Credit Facility” and, collectively with the Term A Loan and the Delayed Draw Term Loan, the “Credit Facilities”), each maturing on June 26, 2024.  The Company’s obligations under the Credit Agreement are guaranteed by its present and future domestic subsidiaries, with limited exceptions.

The Credit Agreement requires the Company to comply with certain financial covenants, including requiring that the Company maintain a (i) total leverage ratio (the “Leverage Ratio”), defined as the ratio of total funded debt to Adjusted EBITDA (as defined in the Credit Agreement), of at least 3.50 to 1.00 through December 31, 2020, and 3.25 to 1.00 thereafter and (ii) fixed charge coverage ratio (“FCCR Ratio”), defined as the ratio of Adjusted EBITDA  less Unfinanced Capital Expenditures (as defined in the Credit Agreement) to Fixed Charges (as defined in the Credit Agreement), of not less than 1.20 to 1.00, in each case tested quarterly.

The Credit Agreement also contains other customary restrictive covenants including (i) restrictions on the incurrence of additional indebtedness and additional liens on property, (ii) restrictions on permitted acquisitions and other investments and (iii) limitations on asset sales, mergers and acquisitions. Further, the Credit Agreement limits the Company’s payment of future dividends and distributions and share repurchases by the Company. Subject to certain exceptions, borrowings under the Credit Agreement are also subject to mandatory prepayment from (a) any issuances of debt or equity securities, (b) any sale or disposition of assets, (c) insurance and condemnation proceeds (d) representation and warranty insurance proceeds related to insurance policies issued in connection with acquisitions and (e) excess cash flow. The Credit Agreement includes customary events of default.

As of April 3, 2020, the Company was in compliance with all covenants contained in the credit agreement.

Other Debt Agreements

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WILLDAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

Software Agreements

The Company finances, from time to time, software costs by entering into unsecured notes payable with software providers. During the fiscal year ended December 28, 2018, the Company elected to finance its IBM software costs of $0.2 million with a note payable bearing interest at an annual rate of 4.656%, payable in monthly principal and interest installments of $6,000 through November 2021. As of April 3, 2020, and December 27, 2019, the unpaid balance related to the IBM software agreement totaled $110,000 and $133,000, respectively.

Utility Customer Agreement

In connection with the acquisition of substantially all of the assets of Onsite Energy, the Company assumed a contract dispute settlement agreement between Onsite Energy and one of its utility customers dated December 20, 2018 (the “Utility Customer Agreement”) where Onsite Energy agreed to pay $1.7 million, bearing interest at an imputed annual rate of 4.332%, payable in quarterly principal and interest installments through June 2021. As of April 3, 2020 and December 27, 2019, the unpaid balance of the Utility Customer Agreement totaled $0.8 million and $0.9 million, respectively.

 

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WILLDAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

7. LEASES

The Company leases certain office facilities under long-term, non-cancellable operating leases that expire at various dates through the year 2027. In addition, the Company is obligated under finance leases for certain furniture and office equipment that expire at various dates through the year 2022.

From time to time, the Company enters into non-cancelable leases for some of our facility and equipment needs. These leases allow the Company to conserve cash by paying a monthly lease rental fee for the use of facilities and equipment rather than purchasing them. The Company’s leases have remaining terms ranging from one to eight years, some of which may include options to extend the leases for up to five years, and some of which may include options to terminate the leases within one year. Currently, all of the Company’s leases contain fixed payment terms. The Company may decide to cancel or terminate a lease before the end of its term, in which case we are typically liable to the lessor for the remaining lease payments under the term of the lease. Additionally, all of our month-to-month leases are cancelable by the Company or the lessor, at any time, and are not included in our right-of-use asset or lease liability. As of April 3, 2020, the Company had no leases with residual value guarantees. Typically, the Company has purchase options on the equipment underlying its long-term leases. The Company may exercise some of these purchase options when the need for equipment is on-going and the purchase option price is attractive. Nonperformance-related default covenants, cross-default provisions, subjective default provisions and material adverse change clauses contained in material lease agreements, if any, are also evaluated to determine whether those clauses affect lease classification in accordance with “ASC” Topic 842-10-25. Leases are accounted for as operating or financing leases, depending on the terms of the lease.

 

Financing Leases

 

The Company leases certain equipment under financing leases. The economic substance of the leases is a financing transaction for acquisition of equipment and leasehold improvements. Accordingly, the right-of-use assets for these leases are included in the balance sheets in equipment and leasehold improvements, net of accumulated depreciation, with a corresponding amount recorded in current portion of financing lease obligations or noncurrent portion of financing lease obligations, as appropriate. The financing lease assets are amortized over the life of the lease or, if shorter, the life of the leased asset, on a straight-line basis and included in depreciation expense. The interest associated with financing lease obligations is included in interest expense.

 

Right-of-use assets

Operating leases are included in right-of-use assets, and current portion of lease liability and noncurrent portion of lease liability, as appropriate. Right-of-use assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of the Company’s leases do not provide an implicit rate to calculate present value, the Company determines this rate by estimating the Company’s incremental borrowing rate at the lease commencement date. The right-of-use asset also includes any lease payments made and initial direct costs incurred at lease commencement and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

The following is a summary of the lease expense:

 

 

 

 

 

 

 

 

Three Months Ended

 

April 3,

 

March 29,

 

2020

    

2019

 

(in thousands)

Operating lease cost

$

1,742

 

$

1,089

Finance lease cost:

 

 

 

 

 

Amortization of assets

 

155

 

 

107

Interest on lease liabilities

 

9

 

 

 9

Total net lease cost

$

1,906

 

$

1,205

 

The following is a summary of lease information presented on the Company’s consolidated balance sheet:

 

 

 

 

 

 

 

 

 

 

 

April 3,

    

December 27,

 

 

 

2020

 

2019

 

 

 

(in thousands)

 

Operating leases:

 

 

 

 

 

 

 

Right-of-use assets

 

$

22,612

 

$

22,297

 

 

 

 

 

 

 

 

 

Lease liability

 

$

5,717

 

$

5,550

 

Lease liability, less current portion

 

 

18,051

 

 

18,411

 

Total lease liabilities

 

$

23,768