Willdan Group, Inc. - 10-Q Summary
Business Context and Reporting Period
Company: Willdan Group, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: July 2, 2010
Business Overview: Willdan provides outsourced engineering, financial, and homeland security services to public agencies and utilities, primarily in California, New York, and Arizona. The company operates through three segments: Engineering Services, Public Finance Services, and Homeland Security Services.
Key Financial Metrics
| Metric | Three Months Ended July 2, 2010 |
Six Months Ended July 2, 2010 |
Six Months Ended July 3, 2009 |
|---|---|---|---|
| Contract Revenue | $20,367,000 | $37,318,000 | $32,669,000 |
| Net Income (Loss) | $1,258,000 | $1,650,000 | $(1,352,000) |
| Operating Income (Loss) | $1,265,000 | $1,650,000 | $(2,138,000) |
| EPS (Basic & Diluted) | $0.17 | $0.23 | $(0.19) |
| Cash and Equivalents | $6,753,000 | $6,753,000 | $8,703,000 |
| Operating Cash Flow | N/A | $(1,737,000) | $1,280,000 |
| Debt (Line of Credit) | $1,000,000 | $1,000,000 | N/A |
Liquidity: As of July 2, 2010, the company held $6.8 million in cash and cash equivalents. It maintains a $5.0 million revolving line of credit with Wells Fargo, with $1.0 million outstanding. The company met its tangible net worth covenant of $18.0 million, reporting a tangible net worth of approximately $19.0 million.
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenue increased 31.6% ($4.9 million) for the three months and 14.1% ($4.6 million) for the six months compared to the prior year periods.
- Profitability Turnaround: The company returned to profitability, reporting net income of $1.3 million for the quarter and $1.7 million for the six months, reversing net losses of $0.9 million and $1.4 million, respectively, in the prior year periods.
- Segment Performance:
- Engineering Services: Revenue increased significantly, driven by strong demand for energy efficiency and renewable energy services from the Willdan Energy Solutions subsidiary. This offset declines in traditional building and safety services due to the housing market slowdown.
- Public Finance Services: Revenue declined 9.7% (quarter) and 11.5% (six months) due to reduced activity in financial consulting amidst macroeconomic downturns.
- Homeland Security Services: Revenue increased 75.0% (quarter) and 62.5% (six months) due to expanded service offerings in public safety and management consulting.
- Expense Management: General and administrative expenses decreased 12.6% for the quarter and 13.1% for the six months, primarily due to reduced employee-related costs (increased chargeability of labor) and lower amortization of intangible assets.
- Cash Flow: Operating cash flow turned negative ($1.7 million used) for the six months ended July 2, 2010, compared to positive cash flow ($1.3 million provided) in the prior year. This was primarily due to increases in accounts receivable and costs in excess of billings.
Guidance, Outlook, and Risks
Outlook: Management notes that while general economic conditions are improving, the housing market has not recovered. The company continues to focus on reducing discretionary expenditures and evaluating workforce needs in underperforming areas. Strong performance in energy and homeland security segments is expected to continue offsetting declines in traditional engineering and public finance services.
Risks and Contingencies:
- Legal Proceedings: The company is defending against two significant lawsuits:
- County of San Diego v. Willdan: Allegations of errors in road reconstruction design, with damages alleged in excess of $5.0 million. No liability recorded.
- French v. Willdan Engineering: Suit regarding payment for plan review services where developer fees were not collected. No liability recorded.
- Goodwill: The company recorded an additional $2.0 million in goodwill related to the Willdan Energy Solutions acquisition earn-out. Total goodwill is $12.4 million. Management believes the fair value of the reporting unit exceeds its carrying value by approximately 25%.
- Credit Facility: The $5.0 million line of credit matures on January 1, 2011. There is no assurance it will be renewed. Violation of covenants (e.g., tangible net worth) could result in immediate repayment of outstanding loans.
Investor Verification Checklist
- Verify the sustainability of revenue growth in the Energy Solutions segment versus the continued decline in Public Finance Services.
- Monitor the resolution of the County of San Diego and French v. Willdan lawsuits and potential impact on reserves.
- Assess the company's ability to renew its $5.0 million line of credit upon maturity in January 2011.
- Review the trend in operating cash flow, specifically the increase in accounts receivable and unbilled costs, to ensure liquidity remains sufficient.
- Confirm the company's compliance with the tangible net worth covenant ($18.0 million) in future quarters.