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Item 5. Market for Registrant’s Common Equity

2021-03-17 compared with 2020-03-06 · 9 added, 529 removed, 16 unchanged (97% of the section changed)

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information for Common Stock

Since November 21, 2006, the common stock of Willdan Group, Inc.

has been listed and traded on the Nasdaq Global Market under the symbol “WLDN”.

As of March 15, 2021, there were 146 stockholders of record of our common stock.

This number does not include persons who hold our common stock in nominee or “street name”

accounts through brokers or banks.

We did not declare or pay cash dividends on our common stock in fiscal years 2019 and 2018.

This number does not include persons who hold our common stock in nominee or “street name” accounts through brokers or banks.

We did not declare or pay cash dividends on our common stock in fiscal years 2020 or 2019.

We currently expect to retain all available funds and future earnings, if any, for use in the operation and growth of our business and do not anticipate paying any cash dividends in the foreseeable future.

4 unchanged sentences

The customized peer group consists of:

Ameresco, Inc., Charah Solutions, Inc., Cypress Environmental Partners, L.P., Exponent, Inc., Hill International, Inc., Limbach Holdings, Inc., NV5 Global, Inc., RCM Technologies, Inc., and Resources Connection, Inc.

The old peer group consisted of:

Ecology & Environment, Inc., Iteris, Inc., NV5 Global, Inc., ICF International, Inc.

1 unchanged sentence

The peer group investment is weighted by market capitalization as of January 1, 2016 and is adjusted monthly.

An investment of $100, with reinvestment of all dividends, is assumed to have been made in our common stock, in the peer group and in the Nasdaq Composite on January 2, 2015, and the relative performance of each is tracked through and including December

An investment of $100, with reinvestment of all dividends, is assumed to have been made in our common stock, in the peer group and in the Nasdaq Composite on January 1, 2016, and the relative performance of each is tracked through and

including January 1, 2021.

The stock price performance shown in the graph is not necessarily indicative of future stock price performance.

Recent Sales of Unregistered Securities

On November 12, 2019, in connection with our acquisition of E3, Inc., we issued 162,088 shares of our common stock to the stockholders of E3, Inc.

(the “E3, Inc.

Stock Issuance”), as partial consideration for our acquisition of E3, Inc.

The issuance of our common stock in the E3, Inc.

Stock Issuance was not registered under the Securities Act.

Such shares were issued in a private placement exempt from the registration requirements of the Securities Act, in reliance on the exemptions set forth in Section 4(a)(2) of the Securities Act and Rule 506 under Regulation D for issuances to less than 35 non-accredited investors.

Issuer Repurchases of Equity Securities

During the three months ended December 27, 2019, we repurchased an aggregate of 582 shares of our common stock at an average price of $30.30 per share from employees to satisfy tax withholding obligations incurred in connection with the vesting of restricted stock .

During the three months ended January 1, 2021, we repurchased an aggregate of 2,505 shares of our common stock at an average price of $26.93 per share from employees to satisfy tax withholding obligations incurred in connection with the vesting of restricted stock.

SELECTED FINANCIAL DATA

The financial data set forth below should be read in conjunction with our corresponding consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this annual report.

(in thousands except per share amounts)

Consolidated Statement of Operations Data:

Contract revenue

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

Salaries and wages

Subcontractor services and other direct costs

Total direct costs of contract revenue

General and administrative expenses:

Salaries and wages, payroll taxes, employee benefits

Facilities and facility related

Stock-based compensation

Depreciation and amortization

Total general and administrative expenses

Income from operations

Other (expense) income:

Interest expense

Total other expense, net

Income before income tax expense

Income tax (benefit) expense

Earnings per common share:

Weighted average common shares outstanding:

Other Operating Data (unaudited):

Adjusted EBITDA (1)

Employee headcount at period end (2)

Fiscal Year Ended

Consolidated Balance Sheet Data:

Cash and cash equivalents

Working capital

Total indebtedness (3)

Total stockholders’

Adjusted EBITDA, a non-GAAP measure, is a supplemental measure used by our management to measure our operating performance.

We define Adjusted EBITDA as net income plus interest expense, income tax expense

(benefit), stock-based compensation, interest accretion, depreciation and amortization, transaction costs, and less gain on sale of equipment.

Adjusted EBITDA is not a measure of net income determined in accordance with U.S.

generally accepted accounting principles (“GAAP”).

We believe Adjusted EBITDA is useful because it allows our management to evaluate our operating performance and compare the results of our operations from period to period and against our peers without regard to our financing methods, capital structure and non-operating expenses.

We use Adjusted EBITDA to evaluate our performance for, among other things, budgeting, forecasting and incentive compensation purposes.

Adjusted EBITDA has limitations as an analytical tool and should not be considered as an alternative to, or more meaningful than, net income as determined in accordance with GAAP.

Certain items excluded from Adjusted EBITDA are significant components in understanding and assessing a company’s financial performance, such as a company’s costs of capital, as well as the historical costs of depreciable assets.

Our definition of Adjusted EBITDA may also differ from those of many companies reporting similarly named measures .

The following is a reconciliation of net income to Adjusted EBITDA:

(in thousands)

Interest expense

Income tax expense (benefit)

Stock-based compensation

Interest accretion (a)

Depreciation and amortization

Transaction costs (b)

Gain on sale of equipment

Adjusted EBITDA

Interest accretion represents the imputed interest on the earn-out payments to be paid by us in connection with the acquisitions of Abacus and substantially all of the assets of 360 Energy in January 2015, the acquisition of Integral Analytics, Inc.

in July 2017, the acquisition of Newcomb Anderson McCormick, Inc.

(“NAM”) in April 2018, and the acquisition of Energy and Environmental Economics, Inc.

(“E3, Inc.”) in October 2019.

Interest accretion is included in other expenses.

Transaction costs for fiscal year 2019 represented costs associated with our acquisitions of The Weidt Group, Onsite Energy, and E3, Inc.

and related financings.

Includes full-time and part-time employees.

Total indebtedness includes notes payable outstanding under our Term Loan Facility and notes payable that we issued to the sellers of Abacus and the sellers of substantially all of the assets of 360 Energy in connection with our acquisitions of each in January 2015.

We had $95.0 million outstanding under our Term A Loan, $30.0 million outstanding under our Delayed Draw Term Loan Facility, and $5.0 million outstanding under our Revolving Credit Facility as of December 27, 2019.

Total indebtedness does not include the earn-out payments owed in connection with our acquisitions of Abacus, Economists.com, LLC (“Economists LLC”), Integral Analytics, NAM, substantially all of the assets of 360 Energy, and E3, Inc.

For more information on our indebtedness, see Part II, Item 8, Debt , of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

We are 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, we help 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, we design and deliver trusted, comprehensive, innovative, and proven solutions to improve efficiency, resiliency, and sustainability in energy and infrastructure to our clients .

Our broad portfolio of services operates within two reporting segments:

(1) Energy and (2) Engineering and Consulting.

The interfaces and synergies between these segments are important elements of our strategy to design and deliver trusted, comprehensive, innovative, and proven solutions for our customers.

Our Energy segment provides specialized, innovative, comprehensive energy solutions to businesses, utilities, state agencies, municipalities, and non‑profit organizations in the U.S.

Our experienced engineers, consultants, and staff help our clients realize cost and energy savings by tailoring efficient and cost‑effective solutions to assist in optimizing energy spend.

Our energy efficiency services include comprehensive audit and surveys, program design, master planning, demand reduction, grid optimization, benchmarking analyses, design engineering, construction management, performance contracting, installation, alternative financing, measurement and verification services, and advances in software and data analytics.

Our Engineering and Consulting segment provides civil engineering‑related construction management, building and safety, city engineering, city planning, geotechnical, material testing and other engineering consulting services to our clients.

Our engineering services include rail, port, water, mining and other civil engineering projects.

We also provide economic and financial consulting to public agencies along with national preparedness and interoperability services, communications, and technology solutions.

Lastly, we supplement the engineering services that we offer our clients by offering expertise and support for the various financing techniques public agencies utilize to finance their operations and infrastructure.

We also support the mandated reporting and other requirements associated with these financings.

We do not provide underwriting or financial advisory services for municipal securities.

Key Developments

On March 8, 2019, we acquired substantially all of the assets of the energy practice division of The Weidt Group Inc.

(“The Weidt Group”).

The Weidt Group works with utilities to make available to the utilities’

customers accessible strategies for building lifelong energy performance through analysis, benchmarking, verification and software development.

We believe the acquisition will expand our presence in the upper Midwest of the U.S.

and better position us to help utilities make their grids more resilient.

The aggregate purchase price for The Weidt Group was $22.1 million, inclusive of working capital adjustments, consisting of $8.1 million funded from cash on hand and $14.0 million funded from our credit facilities.

On July 2, 2019, we acquired substantially all of the assets and liabilities of Onsite Energy Corporation (“Onsite Energy”).

Onsite Energy is an energy efficiency services and project implementation firm that specializes in energy upgrades and commissioning for industrial facilities.

We believe the acquisition will expand our presence in the California-based industrial energy management services.

The aggregate purchase price for Onsite Energy was a maximum of $26.4 million, subject to certain holdback and working capital adjustments, consisting of $8.4 million funded from cash on hand and $18.0 million funded from our credit facilities.

On October 28, 2019, we acquired all of the capital stock of Energy and Environmental Economics, Inc.

(“E3, Inc.”).

is an energy consulting firm that helps utilities, regulators, policy makers, developers, and investors make strategic decisions as they implement new public policies, respond to technological advances, and address customers’

shifting expectations in clean energy.

We believe the acquisition will expand our portfolio of services in the energy consulting marketplace.

The aggregate purchase price for E3, Inc.

is a maximum of $44.0 million, subject to certain

holdbacks and capital adjustments, consisting of $27.0 million paid in cash using funds from our credit facilities, $5.0 million resulting from the issuance of 162,088 shares of the Company’s common stock, and (iii) up to $12.0 million to be paid in cash if E3, Inc.

exceeds certain financial targets during the three years after the closing of the acquisition of E3, Inc.

In connection with our acquisition of E3, Inc., we expanded our operations into Canada.

Revenue from our Canadian operations were not material for fiscal year 2019.

For additional information on our acquisitions, see Part II, Item 8, Note 13, Business Combinations , of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.

Results of Operations

Summary Comparison of 2019, 2018, and 2017

The following table sets forth, for the periods indicated, certain information derived from our consolidated statements of comprehensive income (1) :

(in thousands, except percentages)

Contract revenue (2)

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

Salaries and wages

Subcontractor services and other direct costs

Total direct costs of contract revenue

General and administrative expenses:

Salaries and wages, payroll taxes and employee benefits

Facilities and facility related

Stock-based compensation

Depreciation and amortization

Total general and administrative expenses

Income from operations

Other income (expense):

Interest expense, net

Total other expense, net

Income before income taxes

Income tax (benefit) expense

Percentages are expressed as a percentage of contract revenue and may not total due to rounding.

Revenue for 2019 and 2018 is presented in accordance with Accounting Standards Codification (“ASC”) 606.

Revenue for 2017 is presented in accordance with ASC 605.

For information related to our transition from ASC 605 to ASC 606, see Part II, Item 8, Note 1, Organization and Basis of Presentation , of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.

The following tables provides information about disaggregated revenue of the Company’s two segments Energy and Engineering and Consulting by contract type, client type and geographical region (1)(2)(3) :

Engineering and

(in thousands, except percentages)

Contract Type

Time-and-materials

Engineering and

(in thousands, except percentages)

Contract Type

Time-and-materials

Revenue for 2019 and 2018 is presented in accordance with Accounting Standards Codification (“ASC”) 606.

We adopted ASC 606 utilizing a modified retrospective approach in accordance with ASU 2016-10.

As such, fiscal year 2017 comparative information is not presented.

Revenue from our Canadian operations were not material for fiscal year 2019.

For fiscal year 2018 and 2017, we did not have any foreign revenues.

Fiscal Year 2019 Compared to Fiscal Year 2018

Contract revenue.

Consolidated contract revenue increased $170.8 million, or 62.4%, in fiscal year 2019 compared to fiscal year 2018, primarily as a result of a full year of contract revenue related to our acquisition of Lime Energy Co.

(“Lime Energy”) in October 1, 2018, compared to a partial year of such revenues in the prior year, and

increases in contract revenue related to our acquisitions of E3, Inc., Onsite Energy, and the Weidt Group during fiscal year 2019.

This increase was partially offset by a decrease in contract revenue in the Engineering and Consulting segment due to normal fluctuations in the level of services provided.

Contract revenue in our Energy segment increased $173.9 million, or 88.0%, in fiscal year 2019 compared to fiscal year 2018.

Contract revenue in our Engineering and Consulting segment decreased $3.0 million, or 4.0%, in fiscal year 2019 compared to fiscal year 2018.

Contract revenue for the Energy segment increased as a result of the reasons mentioned above as Lime Energy, E3 Inc., Onsite Energy, and the Weidt Group are included in our Energy segment.

Contract revenue for the Engineering and Consulting segment decreased primarily as a result of lower subcontracted revenue during fiscal year 2019.

Direct costs of contract revenue.

Direct costs of consolidated contract revenue increased $128.8 million, or 71.4%, in fiscal year 2019 compared to fiscal year 2018, primarily as a result of a full year of direct costs of contract revenue related to Lime Energy, compared to a partial year of such costs in the prior year, and an increase in direct costs of contract revenues related to our acquisitions of E3, Inc., Onsite Energy, and the Weidt Group during fiscal year 2019.

Direct cost of contract revenue in our Energy segment increased $129.4 million, or 94.7%, to $266.0 million for fiscal year 2019 from $136.6 million for fiscal year 2018 as a result of the acquisitions in the Energy segment mentioned above which collectively contributed $132.3 million in direct costs of contract revenue in fiscal year 2019.

Direct costs of contract revenue for the Engineering and Consulting segment decreased $1.3 million, or 3.0%, to $41.4 million for fiscal year 2019 from $42.7 million for fiscal year 2018 in conjunction with the decrease in revenue in this segment.

Subcontractor services and other direct costs increased by $110.2 million and salaries and wages increased by $17.9 million compared to the prior year.

Within direct costs of contract revenue, salaries and wages decreased to 14.6% of contract revenue for fiscal year 2019 from 17.1% for fiscal year 2018.

Subcontractor services and other direct costs increased to 55.0% of contract revenue for fiscal year 2019 from 48.7% of contract revenue for fiscal year 2018.

Salaries and wages within direct costs of contract revenue decreased as a percentage of contract revenue and subcontractor services increased as a percentage of contract revenue, primarily as a result of increased mix of revenues derived from the Lime acquisition which contain a higher percentage of material costs and installation subcontracting and a lower percentage of labor costs compared to the previous year.

General and administrative expenses.

General and administrative (“G&A”) expenses increased by $45.4 million, or 56.6%, to $125.6 million for fiscal year 2019 from $80.2 million for fiscal year 2018.

The increase in G&A expenses consisted of an increase of $43.3 million in the Energy segment and an increase of $2.4 million in the unallocated corporate expenses, partially offset by a decrease of $3.0 million in the Engineering and Consulting segment.

The increase in G&A expenses in the Energy segment was primarily attributed of a full year of G&A expenses related to our acquisition of Lime Energy, compared to a partial year of such expenses in the prior year, and an increase in G&A expenses related to our acquisitions of E3, Inc., Onsite Energy, and The Weidt Group during fiscal year 2019, which collectively contributed $40.9 million in G&A expenses in fiscal year 2019.

The increase in our unallocated corporate expenses is primarily attributable to increased acquisition-related costs related to E3, Inc., Onsite Energy, and the Weidt Group.

The decrease in G&A expenses in the Engineering and Consulting segment was primarily attributed to lower contract revenues in that segment as described above.

Of the $42.7 million increase in G&A expenses, $18.3 million resulted from an increase in salaries and wages, payroll taxes and employee benefits, $5.9 million resulted from an increase in stock-based compensation, $9.0 million resulted from an increase in depreciation and amortization, $6.7 million resulted from an increase in other general and administrative expenses and $3.0 million resulted from an increase in facilities and facility related expenses.

The increase in salaries and wages, payroll taxes and employee benefits was primarily attributable to the addition of employees from the acquisitions of Lime Energy, The Weidt Group, Onsite Energy, and E3, Inc.

The increase in facilities and facility related expenses was primarily due to the addition of offices in connection with our fiscal year 2019 acquisitions.

The increase in stock-based compensation expenses was primarily related to an increase in stock grants to current employees and executives.

The increase in depreciation and amortization was primarily due to an increase in amortization of intangible assets derived from the acquisitions of Lime Energy, The Weidt Group, Onsite Energy, and

The increase in other general and administrative expenses was primarily due to acquisition costs related to the acquisition of the Weidt Group, Onsite Energy, and E3, Inc.

Income from operations.

Our operating income decreased by $0.8 million, or 6.3% as a result of the factors noted above.

As a percentage of contract revenue, operating income decreased to 2.7% in fiscal year 2019 compared to 4.7% in fiscal year 2018.

This decrease was primarily attributable to higher direct costs of contract revenue, as a percentage of revenue, partially offset by lower G&A expenses, as a percentage of contract revenue.

Total other expense, net.

Total other expense, net, increased to $4.7 million for fiscal year 2019 as compared $610,000 for fiscal year 2018.

This increase in total other expense, net is primarily the result of higher interest expense during fiscal year 2019 as a result of borrowings under our credit facilities related to our acquisitions of Lime Energy, the Weidt Group, Onsite Energy, and E3, Inc.

Income tax (benefit) expense.

We recorded an income tax benefit of $0.2 million for fiscal year 2019, as compared to $2.1 million expense for fiscal year 2018.

The effective tax rate for fiscal year 2019 was (4.0)%, as compared to 17.5% for fiscal year 2018.

The decrease in the year-over-year effective tax rate for fiscal year 2019 and the difference between the tax expense recorded and the expense that would be recorded by applying the federal statutory rate was primarily attributable to increased deductions for stock options, increased research and development credits, and the impact of the energy efficient commercial building deductions recognized in 2019.

As a result of the above factors, our net income was $4.8 million for fiscal year 2019, as compared to net income of $10.0 million for fiscal year 2018.

Fiscal Year 2018 Compared to Fiscal Year 2017

Contract revenue.

Our contract revenue was $272.3 million for fiscal year 2018, with $196.8 million attributable to the Energy segment and $75.4 million attributable to the Engineering and Consulting segment.

Consolidated contract revenue decreased $1.1 million, or 0.4%, to $272.3 million for fiscal year 2018 from $273.4 million for fiscal year 2017.

This was primarily the result of a decrease in contract revenue for our Energy segment of $2.8 million, or 1.4%, to $196.8 million for fiscal year 2018 from $199.6 million for fiscal year 2017 and an increase in contract revenue for our Engineering and Consulting segment of $1.7 million, or 2.3%, to $75.4 million for fiscal year 2018 from $73.7 million for fiscal year 2017.

Contract revenue for the Energy segment decreased primarily due to the substantial completion of certain large construction management projects with high pass-through subcontractor costs during fiscal year 2018, offset by the addition of incremental contract revenue of $24.4 million as a result of our acquisition of Lime Energy.

Contract revenue for the Engineering and Consulting segment increased primarily due to the increased subcontractor revenues under certain of our existing capital improvement projects and continued growth across the country in the Property Assessed Clean Energy Program (PACE) that Willdan Financial Services manages, along with an increased demand for consulting services in Texas and Arizona.

Direct costs of contract revenue.

Direct costs of contract revenue decreased by $17.4 million, or 8.8%, compared to the prior year, to $179.3 million for fiscal year 2018, with $136.6 million attributable to the Energy segment and $42.7 million attributable to the Engineering and Consulting segment.

Direct costs of contract revenue for our Energy segment decreased by $18.2 million, or 11.7%, compared to the prior year, primarily due to the completion of certain large construction management projects during fiscal year 2018 that resulted in the decrease of related pass-through expenses, offset by $18.8 million that was attributable to the incremental costs as a result of our acquisition of Lime Energy.

Direct costs of contract revenue increased for our Engineering and Consulting segment by $0.8 million, or 1.9%, in conjunction with the increase in revenue in that segment.

Subcontractor services and other direct costs decreased by $19.2 million and salaries and wages increased by $1.8 million compared to the prior year.

Within direct costs of contract revenue, salaries and wages increased to 17.1% of contract revenue for fiscal year 2018 as compared to 16.4% for fiscal year 2017.

Subcontractor services and other direct costs decreased to 48.7% of contract revenue for fiscal year 2018 from 55.6% of contract revenue for fiscal year 2017.

Subcontractor services decreased primarily as a result of a reduction in pass-through subcontractor expenses as a result of the completion of certain Energy construction management projects, partially offset by increased use of

subcontractor services under certain of our existing Engineering and Consulting engineering capital improvement projects.

General and administrative expenses.

General and administrative expenses increased by $17.2 million, or 27.3%, to $80.2 million for fiscal year 2018 from $63.0 million for fiscal year 2017.

This reflected increases of $8.4 million in general and administrative expenses of the Energy segment, $2.4 million in general and administrative expenses of the Engineering and Consulting segment and $6.4 million in general and administrative expenses of the unallocated corporate expenses.

General and administrative expenses increased by $5.9 million primarily as a result of incremental expenses associated with the acquisition of Lime Energy and NAM, as well as the growth of contract revenues in Engineering and Consulting segment.

General and administrative expenses as a percentage of contract revenue were 29.5% for fiscal year 2018 as compared to 23.0% for fiscal year 2017.

Our general and administrative expenses increased as a percentage of contract revenue, compared to the prior year, primarily due to increases in salaries and wages, employee taxes and employee benefits from the addition of employees from the acquisitions of Lime Energy and NAM, the implementation of a performance based restricted stock unit award program that increased stock compensation under our unallocated corporate expenses.

Of the $17.2 million increase in general and administrative expenses, approximately $8.7 million resulted from an increase in salaries and wages, payroll taxes and employee benefits, $3.5 million resulted from an increase in stock-based compensation, $2.1 million resulted from an increase in depreciation and amortization, $1.9 million resulted from an increase in other general and administrative expenses and $1.0 million resulted from an increase in facilities and facility related expenses.

The increase in salaries and wages, payroll taxes and employee benefits was primarily due to the addition of employees from the acquisitions of Lime Energy and NAM.

The increase in stock-based compensation expenses was primarily due to the implementation of a performance based restricted stock unit award program and issuing grants to current employees and the Board of Directors.

The increase in depreciation and amortization was primarily due to an increase in amortization of intangible assets from the acquisitions of Lime Energy and NAM.

The increase in other general and administrative expenses was primarily due to acquisition costs related to the acquisition of Lime Energy.

The increase in facilities and facility related expenses was primarily due to the addition of NAM offices in San Francisco and Los Angeles, upgrades to data services lines in current offices and overall increase in base rent.

Income from operations.

As a result of the above factors, our operating income decreased by $0.9 million or 6.8% to $12.8 million for fiscal year 2018 as compared to $13.7 million for fiscal year 2017.

The decrease was primarily due to the increase in general and administrative expenses.

Income from operations, as a percentage of contract revenue, was 4.7% for fiscal year 2018 and 5.0% for fiscal year 2017.

The decrease in operating margin was primarily due to an increase in total general and administrative expenses, partially offset by an increase in contract revenues, net of subcontracting and other direct costs.

Total other expense, net.

Total other expense, net, increased to $610,000 for fiscal year 2018 as compared $13,000 for fiscal year 2017.

This increase in total other expense, net is primarily the result of higher interest expense during fiscal year 2018, due to borrowing of $70.0 million under our prior delayed draw term loan facility for the acquisition of Lime Energy.

Income tax expense.

We recorded an income tax expense of $2.1 million for fiscal year 2018, as compared to $1.6 million for fiscal year 2017.

The effective tax rate for fiscal year 2018 was 17.5%, as compared to 11.4% for fiscal year 2017.

The increase in the year-over-year effective tax rate for fiscal year 2018 and the difference between the tax expense recorded and the expense that would be recorded by applying the federal statutory rate was primarily attributable to increased state taxes, decreased deductions for stock options and disqualifying dispositions and the impact of the Tax Act recognized in 2017, partially offset by energy efficient commercial building deductions recognized in 2018 and increased research and development credits.

The difference between the tax expense recorded and the expense that would be recorded by applying the federal statutory rate in fiscal year 2017 primarily relates to stock options and disqualifying dispositions and the impact of the Tax Act.

On December 22, 2017, the Tax Act was enacted into law, which, among other items, lowered the U.S.

corporate tax rate from 35% to 21%, effective January 1, 2018.

As a result of the Tax Act, we recorded a one-time decrease in deferred tax expense of $1.3 million for the fiscal quarter ended December 29, 2017 to account for the

remeasurement of our deferred tax assets and liabilities on the enactment date.

For further discussion of our income tax provision, see Part II, Item 8, Note 11, I ncome Taxes , of the notes to our consolidated financial statements included in this Annual report on Form 10-K.

Shortly after the Tax Act was enacted, the SEC issued guidance under SAB 118 to address the application of GAAP and directing taxpayers to consider the impact of the Tax Act as “provisional”

when a registrant does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete the accounting for the change in tax law.

In accordance with SAB 118, we recognized the provisional tax impacts.

As of December 28, 2018, our accounting for the Tax Act is complete.

An adjustment of $0.2 million additional deferred tax expense was recorded due to the corporate tax rate change impact on adjustments to temporary differences that were estimated at the time of the tax provision and finalized for the tax return.

As a result of the above factors, our net income was $10.0 million for fiscal year 2018, as compared to net income of $12.1 million for fiscal year 2017.

Liquidity and Capital Resources

(in thousands)

Net Cash Provided by (used in):

Operating activities

Investing activities

Financing activities

Net increase (decrease) in cash and cash equivalents

As of December 29, 2019, we had $5.5 million of cash and cash equivalents.

Our cash decreased by $9.8 million since December 28, 2018.

We generated cash flow from operations of $11.6 million during fiscal year 2019, partially offset by net cash used for acquisitions and capital expenditures.

Our primary source of liquidity is cash generated from operations.

In addition, as of December 27, 2019, we had a $100 million Term A Loan with $95.0 million outstanding, a $50.0 million Revolving Credit Facility with $5.0 million outstanding and $2.7 million in letters of credit issued, and a $50.0 million Delayed Draw Term Loan with $30.0 million outstanding, each scheduled to mature on June 26, 2024.

We believe that our cash and cash equivalents on hand, cash generated by operating activities and available borrowings under our revolving credit facility will be sufficient to finance our operating activities for at least the next 12 months.

Cash Flows from Operating Activities

Cash flows provided by operating activities were $11.6 million for fiscal year 2019, as compared to $7.6 million and $11.1 million for fiscal years 2018 and 2017, respectively.

Cash flow from operating activities primarily consists of net income, adjusted for non-cash charges, such as depreciation and amortization and stock-based compensation, plus or minus changes in operating assets and liabilities .

The net cash provided by changes in operating assets and liabilities in 2019 reflects changes as a result of our fiscal year 2019 acquisitions, combined with a decrease in accounts receivable and an increase in accrued liabilities, partially offset by an increase in contract assets.

Cash flows provided by operating activities for fiscal year 2018 resulted primarily from our net income, as adjusted for non-cash activity such as depreciation and amortization and stock-based compensation and collections of accounts receivable, partially offset by increases in contract assets combined with decreases in accrued liabilities and accounts payable.

Cash flows provided by operating activities for fiscal year 2017 resulted primarily from our net income and increases in accrued liabilities and accounts payable, partially offset by increases in accounts receivable.

Cash Flows used in Investing Activities

Cash flows used in investing activities were $78.3 million for fiscal year 2019, as compared to $126.4 million and $16.8 million for fiscal years 2018 and 2017, respectively.

Cash flows used in investing activities for fiscal year 2019 were primarily due to cash paid for the acquisitions of The Weidt Group, Onsite Energy, and E3, Inc.

Cash flows used in investing activities for fiscal year 2018 were primarily due to cash paid for the acquisition of Lime Energy.

Cash flows used in investing activities for fiscal year 2017 were primarily due to cash paid for the acquisition of Integral Analytics and the purchase of equipment and leasehold improvements.

Cash Flows from Financing Activities

Cash flows provided by financing activities were $56.9 million for fiscal year 2019, as compared to cash flows used in financing activities of $119.7 million for fiscal year 2018 and $2.5 million for fiscal year 2017.

Cash flows provided by financing activities for fiscal year 2019 were primarily attributable to borrowings under our credit facilities related to our acquisitions of The Weidt Group, Onsite Energy, and E3, Inc.

Cash flows provided by financing activities for fiscal year 2018 were primarily attributable to borrowings under our Delayed Draw Term Loan Facility and the net proceeds from our equity offering, each related to our acquisition of Lime Energy.

Cash flows used in financing activities for fiscal year 2017 were primarily attributable to payments on notes payable and payments on contingent consideration related to our previous acquisitions, which were partially offset by proceeds from stock option exercises and borrowings under our line of credit.

Off‑Balance Sheet Arrangements

Other than operating lease commitments, we do not have any off‑balance sheet financing arrangements or liabilities.

In addition, our policy is not to enter into futures or forward contracts.

Finally, we do not have any majority‑owned subsidiaries or any interests in, or relationships with, any special‑purpose entities that are not included in the consolidated financial statements.

We have, however, an administrative services agreement with Genesys in which we provide Genesys with ongoing administrative, operational and other non-professional support services.

We manage Genesys and have the power to direct the activities that most significantly impact Genesys’

performance, in addition to being obligated to absorb expected losses from Genesys.

Accordingly, we are the primary beneficiary of Genesys and consolidate Genesys as a variable interest entity.

Short and Long-term Liquidity

Contractual Obligations

The following table sets forth our known as of December 27, 2019:

Contractual Obligations

( in thousands)

Long term debt (1)

Interest payments on debt outstanding (2)

Operating leases

Finance leases

Total contractual cash obligations

Long‑term debt includes $95.0 million outstanding on our Term A Loan, $5.0 million outstanding on our Revolving Credit Facility and $30.0 million outstanding on our Delayed Draw Term Loan as of December 27, 2019.

We have assumed no future borrowings or repayments (other than at maturity) for purposes of this table.

Borrowings under our Delayed Draw Term Loan bear interest at a variable rate.

Future interest payments on our Delayed Draw Term Loan Facility are estimated using floating rates in effect as of December 27, 2019.

We are obligated to pay earn-out payments in connection with our acquisitions of E3, Inc.

and Integral Analytics.

We are obligated to pay up to (i) $12.0 million in cash if E3, Inc.

exceeds certain financial targets during the

three years after the E3, Inc.

closing date, and (ii) $12.0 million in cash based on future work obtained from the business of Integral Analytics during the four years after the closing of the acquisition, payable in installments, if certain financial targets are met during the four years.

As of December 27, 2019, we had contingent consideration payable of $10.0 million related to these acquisitions.

For fiscal 2019, our statement of operations includes $1.0 million of accretion (excluding fair value adjustments) related to the contingent consideration.

Outstanding Indebtedness

See part II, Item 8, Note 5, “

Debt Obligations ”, of the Notes to consolidated financial statements included in this Annual Report on Form 10-K for information regarding our indebtedness, including information about new borrowings and repayments, principal repayment terms, interest rates, covenants, and other key terms of our outstanding indebtedness.

Insurance Premiums

We have also financed, from time to time, insurance premiums by entering into unsecured notes payable with insurance companies.

See part II, Item 8, Note 5, “

Debt Obligations ”, of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K for information regarding our financing arrangements related to our insurance premiums including principal repayment terms, interest rates, and other related key terms.

Interest Rate Swap

We have entered into an interest rate swap agreement to moderate our exposure to fluctuations in interest rates underlying our variable rate debt.

For more information, see Part II, Item 7A, “

Quantitative and Qualitative Disclosures About Market Risk ”, and Note 4, “

Derivatives ”, to the Notes of Consolidated Financial Statements included in this Annual Report on Form 10-K.

Impact of Inflation

Due to the average duration of our projects and our ability to negotiate prices as contracts end and new contracts begin, we believe our operations have not been, and, in the foreseeable future, are not expected to be, materially impacted by inflation.

Components of Revenue and Expense

Contract Revenue

We generally provide our services under contracts, purchase orders or retainer letters.

The agreements we enter into with our clients typically incorporate one of three principal types of pricing provisions:

time-and-materials, unit-based, and fixed price.

Revenue on our time-and-materials and unit-based contracts are recognized as the work is performed in accordance with specific terms of the contract.

As of December 27, 2019, approximately 17% of our contracts are time-and-materials contracts and approximately 65% of our contracts are unit-based contracts, compared to approximately 27% for time-and-materials contracts and approximately 47% for unit-based contracts as of December 28, 2018.

Such change was attributed to the acquisition of Lime Energy in 2018 which significantly increased the percentage of revenue derived from unit-based contracts.

Some of these contracts include maximum contract prices, but contract maximums are often adjusted to reflect the level of effort to achieve client objectives and thus the majority of these contracts are not expected to exceed the maximum.

Contract revenue on our fixed price contracts is determined on the percentage of completion method based generally on the ratio of direct costs incurred to date to estimated total direct costs at completion.

Many of our 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.

Adjustments to contract cost estimates are made in the periods in which the facts requiring such revisions become known.

When the revised estimate indicates a loss, such loss is recognized in the current period in its entirety.

Claims and change orders that have not been finalized are evaluated to determine whether or not a change has occurred in the enforceable rights and obligations of the original contract.

If these non-finalized changes qualify as a contract modification, a determination is made whether to account for the change in contract value as a modification to the existing contract, or a separate contract and revenue under the claims or change orders is recognized accordingly.

Costs related to un-priced change orders are expensed when incurred, and recognition of the related revenue is based on the assessment above of whether or not a contract modification has occurred.

Estimated profit for un‑priced change orders is recognized only if collection is probable.

Our contracts come up for renewal periodically and at the time of renewal may be subject to renegotiation, which could impact the profitability on that contract.

In addition, during the term of a contract, public agencies may request additional or revised services which may impact the economics of the transaction.

Most of our contracts permit our clients, with prior notice, to terminate the contracts at any time without cause.

While we have a large volume of contracts, the renewal, termination or modification of a contract, in particular contracts with Consolidated Edison, the City of Elk Grove, DASNY, and utility programs associated with Los Angeles Department of Water and Power and Duke Energy Corp., may have a material effect on our consolidated operations.

Some of our contracts include certain performance guarantees, such as a guaranteed energy saving quantity.

Such guarantees are generally measured upon completion of a project.

In the event that the measured performance level is less than the guaranteed level, any resulting financial penalty, including any additional work that may be required to fulfill the guarantee, is estimated and charged to direct expenses in the current period.

We have not experienced any significant costs under such guarantees.

Direct Costs of Contract Revenue

Direct costs of contract revenue consist primarily of that portion of salaries and wages that have been incurred in connection with revenue producing projects.

Direct costs of contract revenue also include material costs, subcontractor services, equipment and other expenses that are incurred in connection with revenue producing projects.

Direct costs of contract revenue exclude that portion of 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 of our personnel are included in general and administrative expenses since no allocation of these costs is made to direct costs of contract revenue.

Other companies may classify as direct costs of contract revenue some of the costs that we classify as general and administrative costs.

We expense direct costs of contract revenue when incurred.

General and Administrative Expenses

G&A expenses include the costs of the marketing and support staffs, other marketing expenses, management and administrative personnel costs, payroll taxes, bonuses and employee benefits for all of our employees and the portion of salaries and wages not allocated to direct costs of contract revenue for those employees who provide our services.

G&A expenses also include facility costs, depreciation and amortization, professional services, legal and accounting fees and administrative operating costs.

Within G&A expenses, “Other”

includes expenses such as professional services, legal and accounting, computer costs, travel and entertainment, marketing costs and acquisition costs.

We expense general and administrative costs when incurred.

Critical Accounting Policies

This discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the U.S.

(“GAAP”).

To prepare these financial statements in conformity with GAAP, we must make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amount of revenue and expenses in the reporting period.

Our actual results may differ from these estimates.

We have provided a summary of our significant accounting policies in Part II, Item 8, Note 1, Organization and Operations of the Company , of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.

We describe below those accounting policies that require material subjective or complex judgments and that have the most significant impact on our financial condition and results of operations.

Our management evaluates these estimates on an ongoing basis, based upon information currently available and on various assumptions management believes are reasonable as of the date of this report.

Contract Assets and Liabilities

Billing practices are governed by the contract terms of each project based upon costs incurred, achievement of milestones or pre-agreed schedules.

Billings in any given fiscal period do not necessarily correlate with revenue recognized for that period.

Contract assets include unbilled amounts typically resulting from revenue under contracts where the percentage-of-completion method of revenue recognition is utilized and revenue recognized exceeds the amount billed to the customer and right to repayment is not unconditional.

Contract assets also include retainage amounts withheld from billings to our clients pursuant to provisions in our contracts and other revenues earned but not billed in the current period.

Contract liabilities consist of advance payments and billings in excess of revenue recognized and deferred revenue.

Contract Accounting

We enter into contracts with our clients that contain various types of pricing provisions, including fixed price, time-and-materials, and unit-based provisions.

We recognize 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, we identify a contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to each performance obligation in the contract and recognize revenue when (or as) we satisfy a performance obligation.

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

Contract Type

Revenue Recognition Method

Time-and-materials

Software license

Percentage-of-completion

Time-and-materials

Engineering and Consulting

Percentage-of-completion

Revenue on the vast majority of our 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.

We use the percentage-of-completion method to better match the level of work performed at a certain point in time in relation to our effort that will be required to complete a project.

In addition, the percentage-of-completion method is a common method of revenue recognition in our industry.

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.

We recognize 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 include in revenue all reimbursable costs incurred during a reporting period.

Certain of our 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, we recognize 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 utilizing the unit-based revenue recognition method 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 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, we evaluate 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 our 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 we provide a significant service of integrating a complex set of tasks and components into a single project or capability.

We 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, we evaluate 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 our consolidated contract revenue.

Contracts that cover multiple phases or elements of the project or service lifecycle (development, design, 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, we allocate 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 we do 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 we forecast our expected costs of satisfying a performance obligation and then adds an appropriate margin for the distinct good or service.

We provide 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.

We do not consider these types of warranties to be separate performance obligations.

In some cases, we have a master service or blanket agreement with a customer under which each task order releases us 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 our 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.

Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on assessments of legal enforceability, our performance, and all information (historical, current and forecasted) that is reasonably available to us.

Due to the nature of the work required to be performed on many of our 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 our contracts, we review and update our contract-related estimates regularly through a company-wide disciplined project review process in which management reviews the progress and execution of our 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 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.

We recognize 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, we recognize the total loss in the period it is identified.

Contracts are often modified to account for changes in contract specifications and requirements.

We consider contract modifications to exist when the modification either creates new rights or obligations or changes the existing enforceable rights or obligations.

Most of our 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 our 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, we account for such contract modifications as a separate contract.

We include 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.

Accounts receivable are carried at original invoice amount less an estimate made for doubtful accounts based upon our 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.

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.

In addition to the above, we derive revenue from software licenses and professional services and maintenance fees.

In accordance with ASC 606, we perform 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.

We utilize the residual approach by which we estimate 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.

For further information on the types of contracts under which we perform our services, see Part II, Item 8, Note 1, Organization and Operations of the Company, of the Notes to consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 27, 2019.

We test our goodwill at least annually for possible impairment.

We complete our annual testing of goodwill as of the last day of the first month of our fourth fiscal quarter each year to determine whether there is impairment.

In addition to our annual test, we regularly evaluate whether events and circumstances have occurred that may indicate a potential impairment of goodwill.

We did not recognize any goodwill impairment charges in fiscal years 2019, 2018, or 2017.

We had goodwill of approximately $127.6 million and $97.7 million, as of December 27, 2019 and December 28, 2018, respectively, which primarily relates to our acquisitions.

We test our goodwill for impairment at the level of our reporting units, which are components of our operating segments.

In January 2017, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) Update No.

2017‑04 (“ASU 2017‑04”), Intangibles—Goodwill and Other (Topic 350):

Testing Goodwill for Impairment .

This accounting guidance eliminates the requirement to compare the implied fair value of reporting unit goodwill with the carrying amount of that goodwill (commonly referred to as Step 2) from the goodwill impairment test .

The new standard does not change how a goodwill impairment is identified.

We will continue to perform our quantitative and qualitative goodwill impairment test by comparing the fair value of each reporting unit to its carrying amount, but if we are required to recognize a goodwill impairment charge, under the new standard the amount of the charge will be calculated by subtracting the reporting unit’s fair value from its carrying amount.

Under the prior standard, if we were required to recognize a goodwill impairment charge, Step 2 required us to calculate the implied value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination and the amount of the charge was calculated by subtracting the reporting unit’s implied fair value of goodwill from its actual goodwill balance.

To estimate the fair value of our reporting units, we use both an income approach based on management’s estimates of future cash flows and other market data and a market approach based upon multiples of earnings before interest, taxes, depreciation and amortization, or EBITDA, earned by similar public companies.

Once the fair value is determined, we then compare the fair value of the reporting unit to its carrying value, including goodwill.

If the fair value of the reporting unit is determined to be less than the carrying value, we perform an additional assessment to determine the extent of the impairment based on the implied fair value of goodwill compared with the carrying amount of the goodwill.

In the event that the current implied fair value of the goodwill is less than the carrying value, an impairment charge is recognized.

Inherent in such fair value determinations are significant judgments and estimates, including but not limited to assumptions about our future revenue, profitability and cash flows, our operational plans and our interpretation of current economic indicators and market valuations.

To the extent these assumptions are incorrect or economic conditions that would impact the future operations of our reporting units change, any goodwill may be deemed to be impaired, and an impairment charge could have in a material impact on our financial position or results of operation.

Almost all of our goodwill is contained in our Energy segment, with the remainder in our Engineering and Consulting segment.

At our measurement date, the estimated fair value of our Energy segment exceeded its carrying value.

Any reduction in the estimated fair value of our Energy segment could result in an impairment charge of goodwill associated with this segment in future periods.

Accounting for Claims Against Us

We accrue an undiscounted liability related to claims against us for which the incurrence of a loss is probable and the amount can be reasonably estimated.

We disclose the amount accrued and an estimate of any reasonably possible loss in excess of the amount accrued, if such disclosure is necessary for our financial statements not to be misleading.

We do not accrue liabilities related to claims when the likelihood that a loss has been incurred is probable but the amount cannot be reasonably estimated, or when the liability is believed to be only reasonably possible or remote.

Losses related to recorded claims are included in general and administrative expenses.

Determining probability and estimating claim amounts is highly judgmental.

Initial accruals and any subsequent changes in our estimates could have a material effect on our consolidated financial statements.

Business Combinations

The acquisition method of accounting for business combinations requires us to use significant estimates and assumptions, including fair value estimates, as of the business combination date.

For reporting periods prior to the completion of our procedures to value assets and liabilities, the acquisition method requires us to refine those estimates as necessary during the measurement period (defined as the period, not to exceed one year, in which we may adjust the provisional amounts recognized for a business combination) based upon new information about facts that existed on the business combination date.

Under the acquisition method of accounting, we recognize separately from goodwill the identifiable assets acquired, the liabilities assumed, and any non-controlling interests in an acquiree, at the acquisition date fair value.

We measure goodwill as of the acquisition date as the excess of consideration transferred over the net of the acquisition date amounts of the identifiable assets acquired and liabilities assumed.

Costs that we incur to complete the business combination such as investment banking, legal and other professional fees are not considered part of consideration.

We charge these acquisition costs to other general and administrative expense as they are incurred.

Should the initial accounting for a business combination be incomplete by the end of a reporting period that falls within the measurement period, we report provisional amounts in our financial statements.

During the measurement period, we adjust the provisional amounts recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date and we record those adjustments to our financial statements.

We recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined, including the effect on earnings of changes in depreciation, amortization or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date.

As of December 27, 2019, we had not yet completed our final estimate of fair value of the assets acquired and liabilities assumed relating to the acquisitions of The Weidt Group, Onsite Energy, and E3, Inc.

due to the timing of the transactions and lack of complete information necessary to finalize such estimates of fair value.

Accordingly, we have preliminarily estimated the fair values of the assets acquired and the liabilities assumed and will finalize such fair value estimates within twelve months of the acquisition date.

For further discussion of our acquisitions, see Part II, Item 8,

Note 13, “

Business Combinations ”

of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.

Income taxes are accounted for under the asset and liability method.

Deferred tax assets and liabilities are recognized for the future tax consequences of temporary differences between the financial reporting basis and tax basis of our assets and liabilities, subject to a judgmental assessment of the recoverability of deferred tax assets.

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

A valuation allowance is recorded when it is more-likely-than-not that some of the deferred tax assets may not be realized.

Significant judgment is applied when assessing the need for valuation allowances.

Areas of estimation include our consideration of future taxable income and ongoing prudent and feasible tax planning strategies.

Should a change in circumstances lead to a change in judgment about the utilization of deferred tax assets in future years, we would adjust the related valuation allowances in the period that the change in circumstances occurs, along with a corresponding increase or charge to income.

On December 22, 2017, the Tax Act was enacted into law, which, among other items, lowered the U.S.

corporate tax rate from 35% to 21%, effective January 1, 2018.

As a result of the Tax Act, we recorded a one-time decrease in deferred tax expense of $1.3 million for the fiscal quarter ended December 29, 2017 to account for the remeasurement of our deferred tax assets and liabilities on the enactment date.

As of December 28, 2018, our accounting for the Tax Act was complete.

During each fiscal year, management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to utilize existing deferred tax assets.

For fiscal years 2019 and 2018, we ultimately determined that it was more-likely-than-not that the entire California net operating loss will not be utilized prior to expiration.

Significant pieces of objective evidence evaluated included our history of utilization of California net operating losses in prior years for each of our subsidiaries, as well as our forecasted amount of net operating loss utilization for certain members of the combined group.

As a result, at the end of fiscal years 2019 and 2018, we recorded a valuation allowance in the amount of $86,000, for each year, related to California net operating losses.

For acquired business entities, if we identify changes to acquired deferred tax asset valuation allowances or liabilities related to uncertain tax positions during the measurement period and they relate to new information obtained about facts and circumstances that existed as of the acquisition date, those changes are considered a measurement period adjustment and we record the offset to goodwill.

We record all other changes to deferred tax asset valuation allowances and liabilities related to uncertain tax positions in current period income tax expense.

We recognize the tax benefit from uncertain tax positions if it is more-likely-than-not that the tax positions will be sustained on examination by the tax authorities, based on the technical merits of the position.

The tax benefit is measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.

We recognize interest and penalties related to unrecognized tax benefits in income tax expense.

As of December 27, 2019, we recorded a liability of $142,000 for uncertain tax positions related to miscellaneous tax deductions taken in open tax years, all of which, if recognized, would affect our effective tax rate.

The decrease of $282,000 from fiscal year 2018 is primarily related to the expiration of uncertain tax positions.

Approximately $0.1 million of interest and penalties have been recorded related to unrecognized tax benefits as of December 27, 2019.

During the three months ended December 27, 2019, the Internal Revenue Service continued its audit of our tax return for the fiscal year ended December 30, 2016.

We have not determined the impact of this examination due to the audit process having not been completed.

Recent Accounting Standards

For a description of recently issued and adopted accounting pronouncements, including adoption dates and expected effects on our results of operations and financial condition, see Part II, Item 8, Note 2, “

Recent Accounting Pronouncements ”, of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 5. Market for Registrant’s Common Equity