wldn_Current_folio_10Q

Table of Contents

scenario

 

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 September 28, 2018

 

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

 

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 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 November 1, 2018, there were 10,935,424 shares of common stock, $0.01 par value per share, of Willdan Group, Inc. issued and outstanding.

 

 

 

 


 

Table of Contents

WILLDAN GROUP, INC.

FORM 10-Q QUARTERLY REPORT

 

TABLE OF CONTENTS

 

 

 

 

 

 

Page

 

 

 

PART I. FINANCIAL INFORMATION 

 

5

 

 

 

Item 1. Financial Statements (unaudited) 

 

5

 

 

 

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

 

29

 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk 

 

48

 

 

 

Item 4. Controls and Procedures 

 

49

 

 

 

PART II. OTHER INFORMATION 

 

50

 

 

 

Item 1. Legal Proceedings 

 

50

 

 

 

Item 1A. Risk Factors 

 

50

 

 

 

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 

 

54

 

 

 

Item 6. Exhibits 

 

55

 

2


 

Table of Contents

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 managements 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:

 

 

 

 

 

 

 

our ability to complete our pending acquisition of Lime Energy (as defined herein) and, if completed, to obtain the anticipated benefits therefrom,

 

 

our ability to satisfy the conditions precedent to borrowing under the Delayed Draw Term Loan Facility (as defined herein) and, if we borrow under the Delayed Draw Term Loan Facility, our ability to make principal and interest payments as they come due and comply with applicable financial maintenance covenants,

 

 

 

our ability to adequately complete projects in a timely manner,

 

 

 

our ability to compete successfully in the highly competitive energy market, 

 

 

 

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

 

 

 

our ability to win new contracts, to renew existing contracts (including with our two primary customers and, if the acquisition of Lime Energy is completed, the two primary customers of Lime Energy) and to compete effectively for contracts awarded through bidding processes, and

 

 

 

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

 

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 and risk factors disclosed in this 10-Q and under Risk Factors, Managements Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in our Annual Report on Form 10-K for the year ended December 29, 2017 and in our Current Report on Form 8-K filed with the Securities and Exchange Commission on October 3, 2018, 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 and 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 10-Q and otherwise in the context of these risks and uncertainties.

3


 

Table of Contents

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.

 

 

4


 

Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

WILLDAN GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

September 28,

 

December 29,

 

 

 

2018

 

2017

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

16,681,000

 

$

14,424,000

 

Accounts receivable, net of allowance for doubtful accounts of $296,000 and $369,000 at September 28, 2018 and December 29, 2017, respectively

 

 

19,725,000

 

 

38,441,000

 

Contract assets

 

 

43,752,000

 

 

24,732,000

 

Other receivables

 

 

315,000

 

 

1,833,000

 

Prepaid expenses and other current assets

 

 

3,549,000

 

 

3,760,000

 

Total current assets

 

 

84,022,000

 

 

83,190,000

 

Equipment and leasehold improvements, net

 

 

5,042,000

 

 

5,306,000

 

Goodwill

 

 

40,187,000

 

 

38,184,000

 

Other intangible assets, net

 

 

10,454,000

 

 

10,666,000

 

Other assets

 

 

904,000

 

 

826,000

 

Total assets

 

$

140,609,000

 

$

138,172,000

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

18,979,000

 

$

20,826,000

 

Accrued liabilities

 

 

21,804,000

 

 

23,293,000

 

Contingent consideration payable

 

 

4,020,000

 

 

4,246,000

 

Contract liabilities

 

 

5,001,000

 

 

7,321,000

 

Notes payable

 

 

 —

 

 

383,000

 

Capital lease obligations

 

 

216,000

 

 

289,000

 

Total current liabilities

 

 

50,020,000

 

 

56,358,000

 

Contingent consideration payable

 

 

1,949,000

 

 

5,062,000

 

Notes payable

 

 

 —

 

 

2,500,000

 

Capital lease obligations, less current portion

 

 

193,000

 

 

160,000

 

Deferred lease obligations

 

 

599,000

 

 

614,000

 

Deferred income taxes, net

 

 

1,582,000

 

 

2,463,000

 

Other noncurrent liabilities

 

 

468,000

 

 

363,000

 

Total liabilities

 

 

54,811,000

 

 

67,520,000

 

 

 

 

 

 

 

 

 

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; 8,921,000 and 8,799,000 shares issued and outstanding at September 28, 2018 and December 29, 2017, respectively

 

 

89,000

 

 

88,000

 

Additional paid-in capital

 

 

56,739,000

 

 

50,976,000

 

Retained earnings

 

 

28,970,000

 

 

19,588,000

 

Total stockholders’ equity

 

 

85,798,000

 

 

70,652,000

 

Total liabilities and stockholders’ equity

 

$

140,609,000

 

$

138,172,000

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

5


 

Table of Contents

WILLDAN GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 28,

 

September 29,

 

September 28,

 

September 29,

 

 

    

2018

    

2017

    

2018

    

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contract revenue

 

$

71,386,000

 

$

69,007,000

 

$

185,814,000

 

$

209,191,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and wages

 

 

11,233,000

 

 

11,425,000

 

 

33,358,000

 

 

33,594,000

 

Subcontractor services and other direct costs

 

 

36,840,000

 

 

37,310,000

 

 

86,453,000

 

 

118,881,000

 

Total direct costs of contract revenue

 

 

48,073,000

 

 

48,735,000

 

 

119,811,000

 

 

152,475,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and wages, payroll taxes and employee benefits

 

 

11,125,000

 

 

8,691,000

 

 

31,875,000

 

 

26,092,000

 

Facilities and facility related

 

 

1,492,000

 

 

1,235,000

 

 

4,087,000

 

 

3,478,000

 

Stock-based compensation

 

 

1,705,000

 

 

896,000

 

 

4,431,000

 

 

1,992,000

 

Depreciation and amortization

 

 

1,117,000

 

 

1,053,000

 

 

3,292,000

 

 

2,896,000

 

Other

 

 

2,961,000

 

 

4,214,000

 

 

11,226,000

 

 

11,548,000

 

Total general and administrative expenses

 

 

18,400,000

 

 

16,089,000

 

 

54,911,000

 

 

46,006,000

 

Income from operations

 

 

4,913,000

 

 

4,183,000

 

 

11,092,000

 

 

10,710,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(22,000)

 

 

(23,000)

 

 

(75,000)

 

 

(88,000)

 

Other, net

 

 

17,000

 

 

18,000

 

 

36,000

 

 

56,000

 

Total other expense, net

 

 

(5,000)

 

 

(5,000)

 

 

(39,000)

 

 

(32,000)

 

Income before income taxes

 

 

4,908,000

 

 

4,178,000

 

 

11,053,000

 

 

10,678,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

 

1,597,000

 

 

1,292,000

 

 

2,224,000

 

 

1,839,000

 

Net income

 

$

3,311,000

 

$

2,886,000

 

$

8,829,000

 

$

8,839,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.37

 

$

0.33

 

$

1.00

 

$

1.03

 

Diluted

 

$

0.35

 

$

0.31

 

$

0.95

 

$

0.97

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

8,844,000

 

 

8,730,000

 

 

8,798,000

 

 

8,580,000

 

Diluted

 

 

9,343,000

 

 

9,248,000

 

 

9,283,000

 

 

9,138,000

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

6


 

Table of Contents

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 29, 2017

 

8,799,000

 

$

88,000

 

$

50,976,000

 

$

19,588,000

 

$

70,652,000

 

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

 

65,000

 

 

 —

 

 

1,299,000

 

 

 —

 

 

1,299,000

 

Shares of common stock issued in connection with incentive stock plan

 

51,000

 

 

1,000

 

 

475,000

 

 

 —

 

 

476,000

 

Unregistered sales of equity securities and use of proceeds

 

(15,000)

 

 

 —

 

 

(442,000)

 

 

 —

 

 

(442,000)

 

Restricted Stock Awards

 

21,000

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Stock-based compensation expense

 

 —

 

 

 —

 

 

4,431,000

 

 

 —

 

 

4,431,000

 

Net income

 

 —

 

 

 —

 

 

 —

 

 

8,829,000

 

 

8,829,000

 

Cumulative effect from adoption of ASC 606

 

 —

 

 

 —

 

 

 —

 

 

553,000

 

 

553,000

 

Balance at September 28, 2018

 

8,921,000

 

$

89,000

 

$

56,739,000

 

$

28,970,000

 

$  

85,798,000 

 

 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements

7


 

Table of Contents

WILLDAN GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 28,

 

September 29,

 

 

    

2018

    

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

 

$

8,829,000

 

$

8,839,000

 

Adjustments to reconcile net income to net cash used in operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

3,391,000

 

 

2,976,000

 

Deferred income taxes, net

 

 

(1,460,000)

 

 

1,784,000

 

(Gain) loss on sale/disposal of equipment

 

 

(17,000)

 

 

26,000

 

Provision for (recovery of) doubtful accounts

 

 

317,000

 

 

(98,000)

 

Stock-based compensation

 

 

4,431,000

 

 

1,992,000

 

Accretion and fair value adjustments of contingent consideration

 

 

(713,000)

 

 

779,000

 

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

 

 

 

 

 

 

 

Accounts receivable

 

 

19,492,000

 

 

(5,061,000)

 

Contract assets

 

 

(18,252,000)

 

 

(8,200,000)

 

Other receivables

 

 

1,518,000

 

 

(1,071,000)

 

Prepaid expenses and other current assets

 

 

78,000

 

 

(167,000)

 

Other assets

 

 

(78,000)

 

 

44,000

 

Accounts payable

 

 

(1,960,000)

 

 

5,408,000

 

Accrued liabilities

 

 

(1,672,000)

 

 

(3,340,000)

 

Contract liabilities

 

 

(2,320,000)

 

 

(1,812,000)

 

Deferred lease obligations

 

 

(15,000)

 

 

(64,000)

 

Net cash provided by operating activities

 

 

11,569,000

 

 

2,035,000

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchase of equipment and leasehold improvements

 

 

(720,000)

 

 

(1,826,000)

 

Proceeds from sale of equipment

 

 

41,000

 

 

 —

 

Cash paid for acquisitions, net of cash acquired

 

 

(2,994,000)

 

 

(14,603,000)

 

Net cash used in investing activities

 

 

(3,673,000)

 

 

(16,429,000)

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Payments on contingent consideration

 

 

(3,768,000)

 

 

(1,659,000)

 

Payments on notes payable

 

 

(383,000)

 

 

(3,270,000)

 

Repayments under line of credit

 

 

(2,500,000)

 

 

 —

 

Principal payments on capital lease obligations

 

 

(321,000)

 

 

(323,000)

 

Proceeds from stock option exercise

 

 

476,000

 

 

1,751,000

 

Proceeds from sales of common stock under employee stock purchase plan

 

 

1,299,000

 

 

830,000

 

Unregistered sales of equity securities and use of proceeds

 

 

(442,000)

 

 

 —

 

Net cash used in financing activities

 

 

(5,639,000)

 

 

(2,671,000)

 

Net increase (decrease) in cash and cash equivalents

 

 

2,257,000

 

 

(17,065,000)

 

Cash and cash equivalents at beginning of period

 

 

14,424,000

 

 

22,668,000

 

Cash and cash equivalents at end of period

 

$

16,681,000

 

$

5,603,000

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

Interest

 

$

75,000

 

$

88,000

 

Income taxes

 

 

2,061,000

 

 

2,142,000

 

Supplemental disclosures of noncash investing and financing activities:

 

 

 

 

 

 

 

Issuance of common stock related to business acquisitions

 

 

 —

 

 

3,099,000

 

Contingent consideration related to business acquisitions

 

 

943,000

 

 

5,400,000

 

Other payable for working capital adjustment

 

 

698,000

 

 

1,881,000

 

Equipment acquired under capital leases

 

 

281,000

 

 

263,000

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

8


 

Table of Contents

WILLDAN GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

September 28, 2018
(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 (“SEC”) 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 the Company’s Annual Report on Form 10-K for the year ended December 29, 2017.

 

Nature of Business

 

Willdan Group, Inc. and subsidiaries (the “Company”) is a provider of professional technical and consulting services to utilities, private industry, and public agencies at all levels of government. The Company enables its clients to realize cost and energy savings by providing a wide range of specialized services without having to incur and maintain the overhead necessary to develop staffing in-house. Such services include energy and sustainability, engineering, construction management and planning, economic and financial consulting and national preparedness and interoperability. The Company operates its business through a nationwide network of offices spread across 19 states and the District of Columbia.  Its 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.  The Company’s business with public and private utilities is concentrated primarily in California and New York and its business with public agencies is concentrated in California, New York and Arizona.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of Willdan Group, Inc. and its wholly-owned subsidiaries, Willdan Energy Solutions (“WES”), Willdan Engineering, Willdan Infrastructure, 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.

 

The Company accounts for variable interest entities in accordance with Accounting Standards Codification (“ASC”) 810, Consolidation. Under ASC 810, a variable interest entity (“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 entitys 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 entitys 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 entitys 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

9


 

Table of Contents

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.

 

As of September 28, 2018, the Company had one 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 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’ performance, in addition to being obligated to absorb expected losses from Genesys. Accordingly, the Company is the primary beneficiary of Genesys and consolidates Genesys as a VIE.

 

Management also concluded there is no noncontrolling interest related to the consolidation of Genesys because management determined that (i) the shareholder of Genesys does not have more than a nominal amount of equity investment at risk, (ii) WES absorbs the expected losses of Genesys through its deferral of Genesys’ service fees owed to WES, and the Company has, since entering into the administrative services agreement, had to continuously defer the service fees for Genesys, and (iii) the Company believes Genesys will continue to have a shortfall on payment of its service fees for the foreseeable future, leaving no expected residual returns for the shareholder.

 

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 Companys 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. The Company’s two segments are Energy and Engineering and Consulting.  The Company’s principal segment, Energy, consists of the business of its subsidiary, WES, which offers energy and sustainability consulting services to utilities public agencies and private industry. The Company’s Engineering and Consulting segment includes the operation of the Company’s remaining subsidiaries, Willdan Engineering, Willdan Infrastructure, Public Agency Resources, Willdan Financial Services and Willdan Homeland Solutions. Willdan Engineering provides civil engineering-related construction management, building and safety, city engineering, city planning, geotechnical, material testing and other engineering consulting services to its clients. Willdan Infrastructure, which was launched in fiscal year 2013, provides engineering services to larger rail, port, water, mining and other civil engineering projects. Public Agency Resources primarily provides staffing to Willdan Engineering. Willdan Financial Services provides economic and financial consulting to public agencies. Willdan Homeland Solutions provides national preparedness and interoperability services and communications and technology solutions. See Note 10 “Segment Information” for revised and restated segment information for the current and prior period.

 

Contract Assets and Liabilities

 

Amounts classified as “Costs and estimated earnings in excess of billings on uncompleted contracts” and “Billings in excess of costs and estimated earnings on uncompleted contracts” on the consolidated balance sheets of the Company’s Annual Report on Form 10-K for the year ended December 29, 2017 have been reclassified as “Contract assets” and “Contract liabilities”, respectively, on the condensed consolidated balance sheets and statements of cash flows.

 

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. Contract assets include unbilled amounts typically resulting from revenue under long-term contracts when the percentage-of-completion method of revenue recognition is utilized and revenue recognized exceeds the amount billed to the customer and right to payment is not unconditional. In addition, contract

10


 

Table of Contents

assets include retainage amounts withheld from billings to the Company’s clients pursuant to provisions in the contracts. Contract liabilities consist of advance payments and billings in excess of revenue recognized and deferred revenue.

 

The increase in contract assets was primarily attributable to the reclassification of retainage from accounts receivable to contract assets as of December 30, 2017 due to the adoption of Accounting Standards Update (“ASU”) 2014-09, offset by normal business operations for the nine months ended September 28, 2018. The decrease in contract liabilities was primarily related to normal business operations for the nine months ended September 28, 2018.

 

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 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

 

Service-related

Proportional performance

 

Revenue on the vast majority of the Company’s contracts will continue to be 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’s 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 amortized 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.

 

11


 

Table of Contents

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 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, contracts with multiple performance obligations 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

12


 

Table of Contents

schedule and the related changes in estimates of revenues and costs. Management must make assumptions and estimates 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 operations since no allocation of these costs is made to direct costs of contract revenue. No allocation of facilities costs is made to direct costs of contract revenue. Other companies may classify as direct costs of contract revenue some of the costs that the Company classifies as general and administrative costs. The Company expenses direct costs of contract revenue when incurred.

 

Included in revenue and costs are all reimbursable costs for which the Company has the risk or on which the fee was based at the time of bid or negotiation. No revenue or cost is recorded for costs in which the Company acts solely in the capacity of an agent and has no risks associated with such costs.

 

Accounts receivable are carried at original invoice amount less an estimate made for doubtful accounts based upon a review of all outstanding amounts on a quarterly basis. Management determines allowances for doubtful accounts

13


 

Table of Contents

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 September 28, 2018 and December 29, 2017, contract assets included retainage of approximately $6.9 million and $8.6 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, contract assets, other receivables, prepaid expenses and other current assets, accounts payable, accrued liabilities, contingent consideration and contract liabilities, 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 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.

 

Liquidity

 

As of September 28, 2018, the Company had $16.7 million of cash and cash equivalents. The Company’s primary source of liquidity is cash generated from operations. In addition, as of September 28, 2018, the Company also had a revolving line of credit with BMO Harris Bank, N.A. (“BMO”), which was scheduled to mature on January 20, 2020 (see Note 7 “Debt”), but which was refinanced on October 1, 2018 (see Note 12 “Subsequent Events”). The Company believes that its cash and cash equivalents on hand, cash generated by operating activities and funds available under its current line of credit (if needed and if available) will be sufficient to finance its operating activities for at least the next 12 months.

 

Adoption of New Accounting Standards

 

On December 30, 2017, the Company adopted ASC 606, using the modified retrospective method applied to those contracts which were not completed as of December 29, 2017. Prior to adopting ASC 606, it established an implementation team, which included senior managers from its finance and accounting group. The implementation team evaluated the impact of adopting ASC 606 on the Company’s contracts expected to be uncompleted as of December 30, 2017 (the date of adoption). The evaluation included reviewing the Company’s accounting policies and practices to identify differences that would result from applying the requirements of the new standard. The Company identified and made changes to its processes, systems and controls to support recognition and disclosure under the new standard. The

14


 

Table of Contents

implementation team worked closely with various professional consultants and attended several formal conferences and seminars to conclude on certain interpretative issues.

 

The Company recognizes engineering and consulting contract revenue over time using the percentage-of-completion method, based primarily on contract cost incurred to date compared to total estimated contract cost. Revenue on the vast majority of the Company’s contracts will continue to be recognized over time because of the continuous transfer of control to the customer. Revenue recognition for software licenses issued by the Energy segment is recognized at a point in time, 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 amortized over time.

 

Results for operating periods beginning after December 30, 2017 are presented under ASC 606, while comparative information has not been restated and continues to be reported in accordance with the accounting standards in effect for those periods.

 

The Company recognized the cumulative effect of initially applying ASC 606 as an adjustment to retained earnings in the balance sheet as of December 30, 2017 as follows:

 

 

 

 

 

 

 

 

 

 

Balance at

 

Adjustments

 

Balance at

 

 

December 29,

 

Due to

 

December 30,

 

 

2017

 

ASC 606

 

2017

Assets

 

 

 

 

 

 

Accounts receivable, net of allowance for doubtful accounts

$

38,441,000

$

(8,560,000)

$

29,881,000

Contract assets

$

24,732,000

$

9,328,000

$

34,060,000

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

Deferred income taxes, net

$

2,463,000

$

(215,000)

$

2,248,000

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

Retained earnings

$

19,588,000

$

553,000

$

20,141,000

 

15


 

Table of Contents

The impact of adoption on the Company’s condensed consolidated balance sheet and cash flows for the nine month period ended September 28, 2018 was as follows:

 

 

 

 

 

 

 

 

 

For the nine month period ended September 28, 2018

 

 

As

 

Balances Without

 

Effect of Change

 

 

Reported

 

Adoption of ASC 606

 

Higher/(Lower)

Assets

 

 

 

 

 

 

Accounts receivable, net of allowance for doubtful accounts

$

19,725,000

$

26,634,000

$

(6,909,000)

Contract assets

$

43,752,000

$

36,443,000

$

7,309,000

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

Deferred income taxes, net

$

1,582,000

$

1,731,000

$

(149,000)

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

Retained earnings

$

28,970,000

$

28,850,000

$

120,000

 

 

 

 

 

 

 

 

 

For the nine month period ended September 28, 2018

 

 

As

 

Balances Without

 

Effect of Change

 

 

Reported

 

Adoption of ASC 606

 

Higher/(Lower)

Cash flows from operating activities

 

 

 

 

 

 

Accounts receivable, net of allowance for doubtful accounts

$

19,492,000

$

12,583,000

$

6,909,000

Contract assets

 

(18,252,000)

 

(11,343,000)

 

(6,909,000)

Total cash flows used in operating activities

$

1,240,000

$

1,240,000

$

0

 

The impact of adoption on the Company’s opening balance sheet was primarily related to deferred revenues and unrecognized license renewals associated with software license agreements currently in force reclassified to retained earnings, net of the deferred income tax impact and reclassification of amounts between accounts receivable net of allowance for doubtful accounts and contract assets based on whether an unconditional right to consideration has been established or not.

 

The impact of adoption on the Company’s balance sheet at September 28, 2018 was primarily related to conforming the accounting treatment of most of the Company’s non-cancellable software license contracts, which were previously recorded over time based on prior acceptable accounting methods, and now recognize the full amount of such licenses upon acceptance of the software by the customer.

 

The impact of adoption on the Company’s statement of operations was not material for the nine month period ended September 28, 2018.

 

Recent Accounting Pronouncements

 

Revenue Recognition

 

Effective December 30, 2017, the Company adopted ASC 606 using the modified retrospective approach. See Note  1 “Basis of Presentation, Organization and Operations of the Company—Adoption of New Accounting Standards” above for a discussion of the Company’s adoption of ASC 606.  

 

Statement of Cash Flows

 

In August 2016, the Financial Accounting Standards Board (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

16


 

Table of Contents

after December 15, 2017. ASU 2016-15 provides for retrospective application for all periods presented. Effective December 30, 2017, the Company adopted ASU 2016-15 and the impact did not have a material effect on the Company’s condensed consolidated financial statements.

 

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 was permitted. The Company has developed a detailed plan to implement the new standard and, through a cross functional team, is assessing contractual arrangements that may qualify as leases under the new standard. Based on initial evaluations performed by the Company, the impact of the new standard will be an increase to right of use assets and lease liabilities on the Company’s consolidated balance sheet, primarily as a result of operating leases currently not recognized on the balance sheet. The Company expects to complete its evaluations of the impact of the new standard during the fourth quarter of 2018.

 

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

 

Acquisition of Newcomb Anderson McCormick

 

On April 30, 2018, the Company, through its wholly-owned subsidiary, WES, acquired all of the outstanding equity interests of Newcomb Anderson McCormick, Inc. (“NAM”). NAM is an energy engineering and consulting company with offices in San Francisco and Los Angeles that provides clients with mechanical engineering expertise and comprehensive energy efficiency programs and services. Pursuant to the terms of the Stock Purchase Agreement, dated April 30, 2018, by and among the Company, WES and NAM, WES will pay NAM shareholders a maximum purchase price of $4.0 million, subject to potential earn-out payments plus working capital adjustments, to be paid in cash. In connection with the Company’s New Credit Facilities (as defined herein), as of October 8, 2018, the earn-out payments to NAM shareholders became subject to certain subordination provisions in favor of BMO, as the Company’s senior secured lender, under the New Credit Facilities.  The Company expects to finalize the purchase price allocation with respect to this transaction by the end of the second quarter of 2019. NAM’s financial information is included within the Energy segment.

 

Acquisition of Integral Analytics

 

On July 28, 2017, the Company and the Company’s wholly-owned subsidiary, WES, acquired all of the outstanding shares of Integral Analytics, Inc. (“Integral Analytics”), a data analytics and software company, pursuant to the Stock Purchase Agreement, dated July 28, 2017 (the “Purchase Agreement”), by and among Willdan Group, Inc., WES, Integral Analytics, the stockholders of Integral Analytics (the “IA Stockholders”) and the Sellers’ Representative (as defined therein). The Company believes the addition of Integral Analytics’ capabilities will improve the ability to target locational energy savings and microgrids and can provide a clear technical advantage on energy programs. Integral Analytics’ financial information is included within the Energy segment.

 

Pursuant to the terms of the Purchase Agreement, WES will pay the IA Stockholders a maximum purchase price of $30.0 million, consisting of (i) $15.0 million in cash paid at closing (subject to certain post-closing tangible net asset value adjustments), (ii) 90,611 shares of common stock, par value $0.01 per share, of Willdan Group, Inc. (“Common

17


 

Table of Contents

Stock”) issued at closing, equaling $3.0 million, calculated based on the volume-weighted average price of shares of Common Stock for the ten trading days immediately prior to, but not including, the closing date of the acquisition of Integral Analytics (the “Closing Date”) and (iii) up to $12.0 million in cash for a percentage of sales attributable to the business of Integral Analytics during the three years after the Closing Date, as more fully described below (such potential payments of up to $12.0 million, being referred to as “Earn-Out Payments” and $12.0 million in respect thereof, being referred to as the “Maximum Payout”). The Company used cash on hand for the $15.0 million cash payment paid at closing. As of September 30, 2018, we finalized the purchase price allocation (as detailed in the table below) with respect to this transaction.

 

The size of the Earn-Out Payments to be paid will be determined based on two factors. First, the IA Stockholders will receive 2% of gross contracted revenue for new work sold by the Company in close collaboration with Integral Analytics during the three years following the Closing Date (the “Earn-Out Period”). Second, the IA Stockholders will receive 20% of the gross contracted revenue specified in each executed and/or effective software licensing agreement, entered into by the Company or one of its affiliates that contains pricing either equal to or greater than standard pricing, of software offered for licensing by Integral Analytics during the Earn-Out Period. The amounts due to the IA Stockholders pursuant to these two factors will in no event, individually or in the aggregate, exceed the Maximum Payout. Earn-Out Payments will be made in quarterly installments for each year of the Earn-Out Period. For the purposes of both of these factors credit will be given to Integral Analytics for the gross contracted revenue in the quarter in which the contract/license is executed, regardless of when the receipt of payment thereunder is expected. The amount of gross contracted revenue for contracts with unfunded ceilings or of an indeterminate contractual value will be mutually agreed upon. Further, in the event of a change of control of WES during the Earn-Out Period, any then-unpaid amount of the Maximum Payout will be paid promptly to the IA Stockholders, even if such Earn-Out Payments have not been earned at that time. The Company has agreed to certain covenants regarding the operation of Integral Analytics during the Earn-Out Period, of which a violation by the Company could result in damages being paid to the IA Stockholders in respect of the Earn-Out. In addition, as of September 28, 2018, the Earn-Out Payments were subject to certain subordination provisions in favor of BMO, as the Company’s senior secured lender, under the Prior Credit Agreement (see Note 7 “Debt” below).  In connection with the Company’s New Credit Facilities, as of October 6, 2018, the Earn-Out Payments became subject to certain subordination provisions in favor of BMO, as the Company’s senior secured lender, under the New Credit Facilities.

 

WES has also established a bonus pool for the employees of Integral Analytics to be paid based on Integral Analytics’ performance against certain targets.

 

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 $15.9 million of goodwill resulting from the acquisition will be tax deductible. Consideration for the acquisition includes the following information:

 

 

 

 

 

 

    

Integral Analytics

Cash paid

 

$

15,000,000

Other payable for working capital adjustment

 

 

113,000

Issuance of common stock

 

 

3,100,000

Contingent consideration

 

 

5,600,000

Total consideration

 

$

23,813,000

 

18


 

Table of Contents

The following table summarizes the final purchase price allocation for the acquired assets recorded at their estimated fair value as of the acquisition date:

 

 

 

 

 

 

    

Integral Analytics

Current assets

 

$

626,000

Non-current assets

 

 

2,000

Cash

 

 

397,000

Property, plant and equipment

 

 

5,000

Liabilities

 

 

(946,000)

Customer relationships

 

 

1,200,000

Tradename

 

 

990,000

Developed technology

 

 

3,410,000

In-process technology

 

 

2,220,000

Goodwill

 

 

15,909,000

Net assets acquired

 

$

23,813,000

 

The following unaudited pro forma financial information for the three and nine months ended September 28, 2018 and September 29, 2017 assumes that acquisition of all the outstanding shares of Integral Analytics occurred on December 31, 2016 as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 28,

 

September 29,

 

September 28,

 

September 29,

In thousands (except per share data)

    

2018

    

2017

    

2018

    

2017

Pro forma revenue

 

$

71,386

 

$

69,331

 

$

185,814

 

$

211,461

 

 

 

 

 

 

 

 

 

 

 

 

 

Pro forma income from operations

 

$

4,913

 

$

4,071

 

$

11,092

 

$

8,997

Pro forma net income

 

$

3,314

 

$

2,812

 

$

8,864

 

$

7,076

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.37

 

$

0.32

 

$

1.01

 

$

0.82

Diluted

 

$

0.35

 

$

0.30

 

$

0.95

 

$

0.77

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

8,844

 

 

8,730

 

 

8,798

 

 

8,598

Diluted

 

 

9,343

 

 

9,248

 

 

9,283

 

 

9,140

 

This pro forma supplemental information does not purport to be indicative of what the Company’s operating results would have been had this transaction occurred on December 31, 2016 and may not be indicative of future operating results.

 

During the three and nine months ended September 28, 2018, the acquisition of all of the outstanding shares of Integral Analytics contributed $2.5 million and $5.0 million in revenue and $1.0 million and $0.9 million income from operations, respectively. There were no acquisition related costs recorded during the three and nine month period ended September 28, 2018.

 

 

19


 

Table of Contents

3.GOODWILL AND OTHER INTANGIBLE ASSETS

 

As of September 28, 2018, the Company had $40.2 million of goodwill, which primarily relates to the Energy reporting segment and the acquisitions within this segment of NAM, Integral Analytics and Abacus Resource Management Company (“Abacus”) and substantially all of the assets of Genesys and 360 Energy Engineers, LLC (“360 Energy”). The remaining goodwill relates to the Engineering and Consulting reporting segment and the acquisition within this segment of Economists.com, LLC. The changes in the carrying value of goodwill by reporting unit for the nine months ended September 28, 2018 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 29,

 

Additions /

 

September 28,

 

Reporting Unit

    

2017

    

Adjustments

    

2018

 

Energy

 

$

37,435,000

 

$

2,003,000

 

$

39,438,000

 

Engineering and Consulting

 

 

749,000

 

 

 —

 

 

749,000

 

 

 

$

38,184,000

 

$

2,003,000

 

$

40,187,000

 

 

The gross amounts and accumulated amortization of the Company’s acquired identifiable intangible assets with finite useful lives as of September 28, 2018 included in other intangible assets, net in the accompanying condensed consolidated balance sheets, were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 28, 2018

 

December 29, 2017

 

 

 

 

 

 

 

Gross

 

Accumulated

 

Gross

 

Accumulated

 

Amortization

 

 

    

Amount

    

Amortization

    

Amount

    

Amortization

    

Period (yrs)

 

Backlog

 

$

1,784,000

 

$

1,305,000

 

$

1,398,000

 

$

989,000

 

 

 

5.0

 

Tradename

 

 

3,911,000

 

 

2,696,000

 

 

3,779,000

 

 

2,050,000

 

2.5

-

6.0

 

Non-compete agreements

 

 

1,420,000

 

 

966,000

 

 

1,331,000

 

 

745,000

 

 

 

4.0

 

Developed Technology

 

 

3,410,000

 

 

497,000

 

 

2,760,000

 

 

144,000

 

 

 

8.0

 

In-process Research & Technology

 

 

2,220,000

 

 

 —

 

 

1,650,000

 

 

 —

 

 

 

 —

 

Customer relationships

 

 

5,069,000

 

 

1,896,000

 

 

4,960,000

 

 

1,284,000

 

5.0

-

8.0

 

 

 

$

17,814,000

 

$

7,360,000

 

$

15,878,000

 

$

5,212,000

 

 

 

 

 

 

The Company’s amortization expense for acquired identifiable intangible assets with finite useful lives was $0.7 million and $2.1 million for the fiscal three and nine months ended September 28, 2018 as compared to $0.7 million and $1.8 million for the fiscal three and nine months ended September 29, 2017. Estimated amortization expense for acquired identifiable intangible assets for the remainder of fiscal year 2018 is $0.9 million and the succeeding years are as follows:

 

 

 

 

 

 

Fiscal year:

 

 

 

 

2019

    

$

2,348,000

    

2020

 

 

1,936,000

 

2021

 

 

1,244,000

 

2022

 

 

1,058,000

 

2023

 

 

981,000

 

Thereafter

 

 

1,991,000

 

 

 

$

9,558,000

 

 

 

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.

 

20


 

Table of Contents