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Item 7. Management’s Discussion and Analysis

2025-03-07 compared with 2024-03-08 · 60 added, 52 removed, 326 unchanged (26% of the section changed)

62 unchanged sentences

Contract revenue.

Consolidated contract revenue increased $55.7 million, or 10.9%, in fiscal year 2024 compared to fiscal year 2023, due to incremental revenues in both our Energy segment and in our Engineering and Consulting segment.

Contract revenue in our Energy segment increased $46.3 million, or 10.9%, in fiscal year 2024 compared to fiscal year 2023, primarily as a result of higher construction management revenues for government clients and increased demand for energy efficiency and electrification services under utility programs.

Contract revenue in our Engineering and Consulting segment increased $9.4 million, or 11.3%, in fiscal year 2024 compared to fiscal year 2023, primarily due to increased demand for services provided to our clients.

Direct costs of contract revenue.

Direct costs of consolidated contract revenue increased $32.7 million, or 9.9%, in fiscal year 2024 compared to fiscal year 2023, primarily as a result of the increase, and change of mix, in contract revenues as described above.

As a percentage of contract revenue, direct salaries and wages decreased to 16.5% in fiscal year 2024, from 17.6% in fiscal year 2023, while subcontractor services and other direct costs increased to 47.6% in fiscal year 2024, from 47.1% in fiscal year 2023.

Direct costs of contract revenue in our Energy segment increased $30.2 million, or 10.4%, in fiscal year 2024 compared to fiscal year 2023.

Direct costs of contract revenue in our Engineering and Consulting segment increased $2.5 million, or 6.4%, in fiscal year 2024 compared to fiscal year 2023.

Subcontractor services and other direct costs increased $29.1 million, or 12.1%, in fiscal year 2024 compared to fiscal year 2023, primarily due to the increase in construction management revenues, which utilize a higher percentage of material cost and installation subcontracting.

Salaries and wages increased by $3.6 million, or 4.0%, in fiscal year 2024 compared to fiscal year 2023, primarily as a result of the increases in contract revenue as described above.

Gross Profit .

Gross profit increased 12.8% to $202.8 million, or a 35.8% gross margin, for fiscal year 2024 compared to $179.8 million, or a 35.2% gross margin for fiscal year 2023.

The increase in gross margin was primarily driven by changes in the mix of revenues as described above.

General and administrative expenses.

General and administrative (“G&A”) expenses increased by $13.7 million, or 8.7%, in fiscal year 2024 compared to fiscal year 2023.

G&A expenses consisted of an increase of $7.4 million in the Energy segment combined with an increase of $4.2 million in the Engineering and Consulting segment, and an increase of $2.1 million in unallocated corporate expenses.

Within G&A expenses, the increase of $9.8 million in salaries and wages, payroll taxes and employee benefits, combined with the increase of $3.4 million in other general and administrative expenses, and the increase of $2.1 million in stock-based compensation was partially offset by a decrease of $1.7 million in depreciation and amortization.

The increase in salaries and wages, payroll taxes and employee benefits was primarily due to an increase in incentive compensation, consistent with the improvement in operating profit, and higher fringe benefit costs, combined with increases in employee headcount.

The increase in other general and administrative expenses was primarily due to increased professional service fees and computer-related expenses.

The increase in stock-based compensation expenses was primarily related to new stock grants to current employees and executives at a higher stock price.

The decrease in depreciation and amortization was primarily related to lower amortization of intangible assets from acquisitions prior to fiscal year 2024.

Income (loss) from operations .

Operating income increased 42.0% to $31.4 million for fiscal year 2024, compared to an operating income of $22.1 million for fiscal year 2023, as a result of the factors noted above.

Total other expense, net .

Total other expense, net, decreased $2.8 million, or 37.5%, in fiscal year 2024 compared to fiscal year 2023.

The decrease in total other expense, net is primarily due to lower interest expense resulting from the reduced interest rate spread derived from lower debt leverage levels under our Credit Facilities, combined with increased income from interest as a result of our higher cash balances.

Income tax expense (benefit) .

We recorded an income tax expense of $4.1 million for fiscal year 2024, compared to a tax expense of $3.7 million for fiscal year 2023.

The tax expense is primarily attributable to the income before income tax combined with increases in discrete items related to stock compensation and additional energy efficiency building deductions.

Compared to prior year, the lower effective tax rate in fiscal year 2024 resulted from increased deductions for energy efficiency building deductions.

Net income (loss) .

Our net income was $22.6 million for fiscal year 2024, as compared to a net income of $10.9 million for fiscal year 2023.

The increase in net income was primarily attributable to the increase in income from operations combined with the decrease in total other expense and lower effective tax rate.

Fiscal Year 2023 Compared to Fiscal Year 2022

Contract revenue.

Consolidated contract revenue increased $81.0 million, or 18.9%, in fiscal year 2023 compared to fiscal year 2022, primarily due to incremental revenues in both our Energy segment and in our Engineering and Consulting segment.

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The increase in salaries and wages, payroll taxes and employee benefits was primarily due to an increase in incentive compensation, consistent with the improvement in operating profit, increased costs related to employee benefits, and increases in employee compensation as a result of additional employee headcount as well as employee compensation increases.

The decrease in stock-based compensation expenses was primarily related to previously awarded stock grants reaching the end of their corresponding vesting periods, partially offset by new equity awards being issued at lower stock prices.

The decrease in stock-based compensation expenses was primarily related to previously awarded stock grants reaching the

end of their corresponding vesting periods, partially offset by new equity awards being issued at lower stock prices.

The decrease in other general and administrative expenses was primarily due to contingent consideration expense related to prior acquisitions that occurred during fiscal year 2022 that did not recur in fiscal year 2023.

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Total other expense, net, increased $3.1 million, or 70.5%, in fiscal year 2023 compared to fiscal year 2022.

The increase in total other expense, net is primarily due to higher interest expense as a

result of the increase in market interest rates which directly affected our variable interest rates under our credit facilities, combined with a one-time charge of $0.5 million for unamortized debt issuance costs related to our prior credit facilities, partially offset by interest income related to bank deposits.

The increase in total other expense, net is primarily due to higher interest expense as a result of the increase in market interest rates which directly affected our variable interest rates under our Credit Facilities, combined with a one-time charge of $0.5 million for unamortized debt issuance costs related to our prior credit facilities, partially offset by interest income related to bank deposits.

Income tax expense (benefit) .

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The increase in net income was primarily attributable to the increase in revenue and gross profit, partially offset by higher interest expense and income tax expense.

Fiscal Year 2022 Compared to Fiscal Year 2021

Contract revenue.

Consolidated contract revenue increased $75.4 million, or 21.3%, in fiscal year 2022 compared to fiscal year 2021, primarily due to incremental revenues in our Energy segment generated from new governmental construction-management and design-build projects, combined with incremental revenues from the resumption of projects that had been suspended in fiscal year 2021 due to the Covid-19 pandemic, and increased governmental revenues in our Engineering and Consulting segment, partially offset by lower software licensing revenue.

Contract revenue in our Energy segment increased $71.1 million, or 24.8%, in fiscal year 2022 compared to fiscal year 2021, primarily as a result of incremental revenues from new governmental construction-management and design-build projects, combined with incremental revenues from the resumption of projects that had been suspended in fiscal year 2021 due to the Covid-19 pandemic, partially offset by lower software licensing revenue.

Contract revenue in our Engineering and Consulting segment increased $4.3 million, or 6.4%, in fiscal year 2022 compared to fiscal year 2021, primarily due to increased demand for services provided to our governmental clients.

Direct costs of contract revenue.

Direct costs of consolidated contract revenue increased $67.7 million, or 31.1%, in fiscal year 2022 compared to fiscal year 2021, primarily due to increases in our contract revenues in our Energy segment as described above as well as the ramping up of new projects for which we saw higher project startup costs relative to the revenue recognized.

Direct costs of contract revenue in our Energy segment increased $67.3 million, or 36.5%, in fiscal year 2022 compared to fiscal year 2021, primarily as a result of the reasons described above.

Direct costs of contract revenue for the Engineering and Consulting segment increased $0.4 million, or 1.2%, for the fiscal year 2022 compared to fiscal year 2021.

Subcontractor services and other direct costs increased by $50.4 million, or 33.1%, and salaries and wages increased by $17.3 million, or 26.4%, in fiscal year 2022 compared to fiscal year 2021, primarily due to the increases in contract revenues as described above combined with changes in the mix of those contract revenues to those which contain a higher percentage of material costs and installation subcontracting and lower percentage of labor costs, as well as the ramping up of new projects for which we saw higher project startup costs relative to the revenue recognized.

Gross Profit .

Gross profit increased 5.7% to $143.6 million, or a 33.5% gross margin, for fiscal year 2022 compared to $135.9 million, or a 38.4% gross margin for fiscal year 2021.

The decrease in gross margin percentage was primarily driven by changes in the mix of revenues as described above, combined with a reduction in software licensing revenues and the ramping up of new projects for which we saw higher project startup costs relative to the revenue recognized.

General and administrative expenses.

General and administrative (“G&A”) expenses increased by $6.1 million, or 4.2%, in fiscal year 2022 compared to fiscal year 2021.

The increase in G&A expenses consisted of an increase of $9.2 million in the Energy segment combined with an increase of $2.3 million in the Engineering and Consulting

segment, partially offset by a decrease of $5.4 million in unallocated corporate expenses.

The increase in G&A expenses was primarily attributed to higher salaries and wages, payroll taxes and employee benefits, increased contingent consideration expense related to prior acquisitions, and higher computer-related expenses, partially offset by lower stock-based compensation expenses.

Within G&A expenses, the increase of $8.0 million in salaries and wages, payroll taxes and employee benefits combined with the increase of $6.5 million in other general and administrative expenses was partially offset by a decrease of $8.2 million in stock-based compensation and a decrease of $0.6 million in facilities and facility related expenses.

The increase in salaries and wages, payroll taxes and employee benefits was primarily due to increases in personnel.

The increase in other general and administrative expenses was primarily due to increased contingent consideration expense related to prior acquisitions, higher computer-related expenses and higher professional service fees.

The decrease in stock-based compensation expenses was primarily related to previously awarded stock grants reaching the end of their corresponding vesting periods.

The decrease in facilities and facility related expenses was due to satisfied facility leases that were not renewed.

Depreciation and amortization was relatively flat for the fiscal year 2022 compared to fiscal year 2021.

Income (loss) from operations .

Operating loss was $7.1 million for fiscal year 2022, compared to an operating loss of $8.7 million for fiscal year 2021, as a result of the factors noted above.

As a percentage of contract revenue, the operating loss improved to 1.6% for fiscal year 2022 from an operating loss of 2.5% for fiscal year 2021.

Total other expense, net .

Total other expense, net, was $4.4 million for fiscal year 2022 compared to $3.7 million for fiscal year 2021.

The increase in total other expense, net is primarily due to higher interest expense as a result of higher variable interest rates under our credit facilities, partially offset by income from indemnification agreements.

Income tax expense (benefit) .

We recorded an income tax benefit of $3.0 million for fiscal year 2022 compared to a tax benefit of $4.0 million for fiscal year 2021.

The decrease in the income tax benefit is primarily attributable to the lower loss before income tax expense, the non-recurrence tax benefits provided by the Coronavirus Aid, Relief, and Economic Security Act of 2020 (“CARES Act”), and various tax deductions and tax credits.

Net income (loss) .

Our net loss was relatively flat for fiscal year 2022, compared to fiscal year 2021, as a result of the factors described above.

Liquidity and Capital Resources

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We believe that our cash and cash equivalents, 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.

As described in Part II, Item 8, Note 5, “ Debt Obligations ,” of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K , on September 29, 2023, we and certain of our subsidiaries entered into the Credit Agreement with a syndicate of financial institutions as lenders and BMO, as administrative agent.

December 29, 2023, we had a fully drawn $100 million term loan with $98.1 million outstanding (the “Term Loan”), and a $50.0 million Revolving Credit Facility with no borrowed amounts and $4.1 million in letters of credit issued, each scheduled to mature on September 29, 2026.

As of December 27, 2024, we had a fully drawn $100 million term loan with $90.0 million outstanding (the “Term Loan”, and collectively with the Revolving Credit Facility, the “Credit Facilities”), and a $50.0 million Revolving Credit Facility with no borrowed amounts and $1.6 million in letters of credit issued, each scheduled to mature on September 29, 2026.

In addition, as of December 27, 2024, we had $74.2 million of unrestricted cash and cash equivalents.

As of December 29, 2023, we were in compliance with the covenants contained in the Credit Agreement and borrowings under our Credit Facilities, exclusive of the effects of upfront fees, undrawn fees and issuance cost amortization, bore interest at an annual rate of 8.5%.

As of December 27, 2024, we were in compliance with the covenants contained in the Credit Agreement.

As of December 27, 2024, unhedged b orrowings under our Credit Facilities, exclusive of the effects of upfront fees, undrawn fees and issuance cost amortization, bore interest at an annual rate of 6.4%.

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.

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Cash flows 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 current operating assets and liabilities.

Cash flows provided by operating activities for fiscal year 2024 resulted primarily from the increase in earnings, and lower working capital requirements resulting from more robust billing and payment terms and the timing of collections at the end of the fiscal year.

Cash flows provided by operating activities for fiscal year 2023 resulted primarily from the increase in earnings, combined with lower working capital requirements .

Cash flows provided by operating activities for fiscal year 2022 were unfavorably impacted by higher working capital requirements required to support the increase in contract revenues.

Cash flows provided by operating activities for fiscal year 2021 resulted primarily from the changing mix of revenues, partially offset by increased demand for working capital related to the resumption of our utility programs that were suspended in 2020 and start-up costs associated with certain new contract awards.

Cash Flows from Investing Activities

Cash flows used in investing activities were $15.7 million, $11.5 million, and $9.5 million for fiscal years 2024, 2023, and 2022, respectively.

Cash flows used in investing activities for fiscal years 2023, 2022, and 2021 were primarily due to cash paid for the development of software and the purchase of computers and other equipment.

Cash flows used in investing activities for fiscal year 2024 were primarily due to cash paid for an acquisition, combined with cash paid for the development of proprietary software and the purchase of computers and equipment.

Cash flows used in investing activities for fiscal years 2023, and 2022 were primarily due to cash paid for the development of proprietary software and the purchase of computers and other equipment.

Cash Flows from Financing Activities

Cash flows used in financing activities were $23.8 million for fiscal year 2023 compared to cash flows provided by financing activities of $8.4 million for fiscal year 2022 and cash flows used in financing activities of $18.5 million in fiscal year 2021.

Cash flows used in financing activities were $5.6 million and $23.8 million for fiscal years 2024 and 2023, respectively, compared to cash flows provided by financing activities of $8.4 million for fiscal year 2022.

Cash flows used in financing activities for fiscal year 2024 were primarily attributable to the repayments of $8.1 million under our Term Loan, $1.4 million principal payments on finance leases, and $1.4 million cash used to pay withholding taxes on stock grants, partially offset by $2.8 million of proceeds from sales of common stock under employee stock purchase plan and $2.8 million in proceeds from stock option exercises.

Cash flows used in financing activities for fiscal year 2023 were primarily attributable to the disbursement of $10.7 million in restricted cash for utility rebate incentives, payments of $4.0 million for contingent consideration related to prior acquisitions, combined with repayments and borrowings of $112.9 million and $105.0 million, respectively, under our term loan facility and line of credit, which resulted primarily from refinancing our Prior Credit Facility.

Cash flows provided by financing activities for fiscal year 2022 were primarily attributable to borrowings of $20.0 million under our Delayed Draw Term Loan, $10.7 million in receipt of restricted cash, $3.0 million in proceeds from sales of common stock under our employee stock purchase plan, and $1.7 million proceeds from notes payable, partially offset by repayments of $13.0 million under our Term A Loan, combined with payments of $10.2 million for contingent consideration related to prior acquisitions, $1.9 million payments on notes payable, and $1.1 million principal payments on finance leases.

Cash flows used in financing activities for fiscal year 2021 were primarily attributable to principal repayments of $13.0 million under our Term A Loan and Revolving Credit Facility, increases of $6.6 million for contingent consideration related to prior acquisitions, payments of taxes on stock grants of $3.1 million, payments on notes payable of $1.9 million, partially offset by $2.7 million in proceeds from sales of common stock under our employee stock purchase plan and $1.9 million in proceeds from stock option exercise.

Under certain utility contracts, we periodically receive cash deposits to be held in trust for the payment of energy incentive rebates to be sent directly to the utility’s end-customer on behalf of the utility.

We act solely as the utility’s agent to distribute these funds to the end-customer and, accordingly, we classify these contractually restricted funds as restricted cash.

cash flows as financing cash inflows, “Receipt of restricted cash”, with the subsequent payments classified as financing cash outflows, “Payment of restricted cash”.

Because these funds are held in trust for pass through to the utility’s customers and have no impact on our working capital or operating cash flows, these cash receipts are presented in the consolidated statement of cash flows as financing cash inflows, “Receipt of restricted cash”, with the subsequent payments classified as financing cash outflows, “Payment of restricted cash”.

Off-Balance Sheet Arrangements

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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.

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.

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Future interest payments on our Credit Facility are estimated using floating rates in effect as of December 27, 2024.

As of December 29, 2023, we did not have any remaining contingent consideration payable related to any prior acquisitions.

In addition, as of December 29, 2023, we did not have any arrangements involving the potential incurrence of future contingent consideration .

We are obligated to pay earnout payments in connection with our acquisition of Enica Engineering, PLLC.

We are obligated to pay up to $6.0 million in cash if Enica exceeds certain financial targets during the two years after the Enica closing date of October 23, 2024 (the “Enica Closing Date”).

As of December 27, 2024, we had contingent consideration payable of $4.2 million related to the Enica acquisition.

For fiscal year 2024, our statement of operations includes $0.2 million of interest accretion (excluding fair value adjustments) related to the contingent consideration.

Outstanding Indebtedness

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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 29, 2023, 19% of our contracts are time-and-materials contracts, 42% are unit-based contracts, and 39% are fixed price contracts, compared to 20% for time-and-materials contracts, 45% for unit-based contracts, and 35% for fixed price contract s, as of December 30, 2022.

As of December 27, 2024, 18% of our contracts are time-and-materials contracts, 40% are unit-based contracts, and 42% are fixed price contracts, compared to 19% for time-and-materials contracts, 42% for unit-based contracts, and 39% for fixed price contracts, as of December 29, 2023.

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.

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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.

During fiscal year 2024, we acquired substantially all of the assets of Enica.

As of December 27, 2024, we had not yet completed our final estimate of fair value of the assets acquired relating to the acquisitions of Enica 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 will finalize such fair value estimates within twelve months of the Enica Closing Date.

During fiscal years 2023 and 2022, we did not have any material acquisitions.

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.

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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.

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.

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.

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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 7. Management’s Discussion and Analysis