Our company
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 customers.
Our broad portfolio of services operates in 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 provide our customers with reliable, comprehensive, innovative and proven solutions.
Our Energy segment provides specialized, innovative, comprehensive energy solutions to businesses, utilities, state agencies, municipalities, and non-profit organizations in theU.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, civil design, 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 provide financial advisory services for municipal securities but do not provide underwriting services.
Impact of Covid-19 on our business
The coronavirus ("Covid-19") pandemic and efforts to limit its spread negatively
impacted our operations during fiscal year 2020 and continued to impact us,
albeit to a lesser extent, during fiscal year 2021. In California and New York ,
the states in which we have historically derived a majority of our revenue,
mandatory shutdown orders were issued in March 2020 . In New York , phased
re-openings began in June 2020 , and all of our New York utility programs have
restarted. In California , phased re-openings began in May 2020 , followed by
periods of curtailments as a result of resurgences of Covid-19 cases, and
subsequent re-openings. As a result, the most significant pandemic related
impacts to our business occurred in California to our direct install business.
During the last week of June 2021 , our largest program for the Los Angeles
Department of Water and Power ("LADWP") resumed, which was our last remaining
program that was still suspended due to Covid-19. As of March 9, 2022 , none of
our contracts have been cancelled due to Covid-19.
In the Energy segment, we experienced a negative impact on our direct install
programs that serve small businesses as a result of restrictions put in place by
governmental authorities that required temporary shutdowns of all
"non-essential" businesses which resulted in a significant portion of our direct
install work on these programs being suspended for varying periods of time
during fiscal year 2020 and continuing in California through our first half of
fiscal 2021. During non-Covid-19 impacted years, such as fiscal year 2019, we
derived approximately 40% of our gross revenue from our direct install programs
that serve small businesses and 60% from our other programs. Our other programs
are either services that have been determined to be "essential" by government
authorities, can be performed remotely or outside of any Covid-related
restrictions, or have continued to progress during the pandemic.
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In the Engineering and Consulting segment, our revenues were less affected by Covid-19 than revenues in the Energy segment. Services in this segment have generally been deemed “essential” by the government and have continued to operate while adhering to social distancing measures.
We have continuously monitored our liquidity position during the Covid-19 pandemic in order to be flexible during these uncertain times and to position ourselves to resume our growth trajectory as work restrictions are lifted. As part of this effort, we amended our credit facility inApril 2021 for increased covenant flexibility as a result of forecasted increased working capital requirements related to$781 million in new California Investor Owned Utility contracts signed inDecember 2020 .
Valuation of assets and liabilities and other estimates used in the preparation of financial statements
As ofDecember 31, 2021 , we did not have any impairment with respect to goodwill or long-lived assets, including intangible assets. Because the full extent of the impact of the Covid-19 outbreak and efforts to slow its spread are unknown at this time, they could, under certain circumstances, cause impairment and result in a non-cash impairment charge being recorded in future periods. Changes to the estimated future profitability of the business may require that we establish an additional valuation allowance against all or some portion of our net deferred tax assets.
Impact on customers and subcontractors and other risks
We primarily work for utilities, municipalities and other public agencies. Some of these customers could experience significant budget shortfalls for the current year and beyond as a result of the measures taken to mitigate the Covid-19 pandemic and/or revenue shortfalls as a result of reduced economic activity. Although none of our material contracts with governmental or public agencies were materially modified during our fiscal years 2020 or 2021, these potential budget deficits could result in delayed funding for existing contracts with us, postponements of new contracts or price concessions. Further, most of our clients are not committed to purchase any minimum amount of services, as our agreements with them are based on a "purchase order" or "master service agreement" model. As a result, they may discontinue utilizing some or all of our services with little or no notice. In addition, we rely on subcontractors and material suppliers to complete a substantial portion of our work, especially in our Energy segment. If our significant subcontractors and material suppliers suffer significant economic harm and must limit or cease operations or file for bankruptcy as a result of the current economic slowdown, our subcontractors and material suppliers may not be able to fulfill their contractual obligations satisfactorily and we may not have the ability to select our subcontractors and material suppliers of choice for new contracts. If our subcontractors and material suppliers are not able to fulfill their contractual obligations, it could result in a significant increase in costs for us to complete the projects or cause significant delays to the realization of revenues under those projects. The ultimate impact of Covid-19 on our financial condition and results of operations will depend on all of the factors noted above, including other factors that we may not be able to forecast at this time. See the risk factor "The Covid-19 pandemic and health and safety measures intended to slow its spread have adversely affected, and may continue to adversely affect, our business, results of operations and financial condition." under Part I. Item 1A. "Risk Factors" included in this Annual Report on Form 10-K. While Covid-19 has had, and we expect it to continue to have, an adverse effect on our business, financial condition and results of operations, we are unable to predict the extent or duration of these impacts at this time.
Health and security
In response to the Covid-19 pandemic, we have taken and will continue to take
precautionary measures intended to help minimize the risk of Covid-19 to our
employees, including requiring the majority of our employees to work remotely,
suspending non-essential travel and restricting in-person work-related meetings.
We expect to continue to implement these measures until it has determined that
the Covid-19 pandemic is adequately contained for purposes of our business, and
may take further actions as government authorities require or recommend or as it
determines to be in the best interests of our employees, customers, business
partners and third-party service providers.
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Recent Developments
On March 8, 2022 , we amended our credit facility to provide for increased
liquidity and covenant flexibility as a result of forecasted increased working
capital requirements related to additional organic growth, including the
resumption of the LADWP small business program. The amendment also revises the
pricing structure of borrowings under our Credit Agreement from utilizing as a
reference rate the London Inter-Bank Offered Rate ("LIBOR") to utilizing the
Secured Overnight Financing Rate ("SOFR"). For additional information, see Part
II, Item 8, Note 15, "Subsequent Events" of the Notes to Consolidated Financial
Statements included in the Annual Report on Form 10-K.
Operating results
Summary comparison of 2021, 2020 and 2019
The following table presents, for the periods indicated, certain information taken from our consolidated statements of comprehensive income(1):
Fiscal Year
2021 2020 2019
(in thousands, except percentages)
Contract revenue $ 353,755 100.0 % $ 390,980 100.0 % $ 443,099 100.0 %
Direct costs of contract
revenue:
Salaries and wages 65,648 18.6 65,149 16.7 64,485 14.6
Subcontractor services and
other direct costs 152,233 43.0 196,438 50.2 243,641 55.0
Total direct costs of
contract revenue 217,881 61.6 261,587 66.9 308,126 69.5
Gross profit 135,874 38.4 129,393 33.1 134,973 30.5
General and administrative
expenses:
Salaries and wages, payroll
taxes and employee benefits 73,812 20.9 71,229 18.2 66,303 15.0
Facilities and facilities
related 9,896 2.8 10,481 2.7 8,568 1.9
Stock-based compensation 16,563 4.7 16,113 4.1 12,112 2.7
Depreciation and
amortization 17,146 4.8 18,743 4.8 15,027 3.4
Other 27,148 7.7 29,054 7.4 23,600 5.3
Total general and
administrative expenses 144,565 40.9 145,620 37.2 125,610 28.3
Income (loss) from
operations (8,691) (2.5) (16,227) (4.2) 9,363 2.1
Other income (expense):
Interest expense (3,869) (1.1) (5,068) (1.3) (4,900) (1.1)
Other, net 156 0.0 1,626 0.4 193 0.0
Total other income
(expense) (3,713) (1.0) (3,442) (0.9) (4,707) (1.1)
Income (Loss) before income
tax expense (12,404) (3.5) (19,669) (5.0) 4,656 1.1
Income tax expense
(benefit) (3,987) (1.1) (5,173) (1.3) (185) (0.0)
Net income (loss) $ (8,417) (2.4) $ (14,496) (3.7) $ 4,841 1.1
(1) Percentages are expressed as a percentage of contract revenue and may not
total due to rounding.
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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:
2021
Engineering and
Energy Consulting Total
(in thousands, except percentage)
Contract Type
Time-and-materials $ 34,004 $ 52,209 $ 86,213
Unit-based 180,311 10,688 190,999
Fixed price 72,069 4,474 76,543
Total $ 286,384 $ 67,371 $ 353,755
Client Type
Commercial $ 24,541 $ 5,323 $ 29,864
Government 65,249 61,899 127,148
Utilities 196,594 149 196,743
Total $ 286,384 $ 67,371 $ 353,755
Geography (1)
Domestic $ 286,384 $ 67,371 $ 353,755
2020
Engineering and
Energy Consulting Total
(in thousands, except percentage)
Contract Type
Time-and-materials $ 47,912 $ 53,840 $ 101,752
Unit-based 170,991 9,195 180,186
Fixed price 105,275 3,767 109,042
Total $ 324,178 $ 66,802 $ 390,980
Client Type
Commercial $ 36,212 $ 5,155 $ 41,367
Government 93,821 61,412 155,233
Utilities 194,145 235 194,380
Total (1) $ 324,178 $ 66,802 $ 390,980
Geography (1)
Domestic $ 324,178 $ 66,802 $ 390,980
2019
Engineering and
Energy Consulting Total
(in thousands, except percentage)
Contract Type
Time-and-materials $ 18,625 $ 54,560 $ 73,185
Unit-based 272,978 14,391 287,369
Fixed price 79,112 3,433 82,545
Total $ 370,715 $ 72,384 $ 443,099
Client Type
Commercial $ 39,311 $ 4,895 $ 44,206
Government 57,020 67,049 124,069
Utilities 274,384 440 274,824
Total $ 370,715 $ 72,384 $ 443,099
Geography (1)
Domestic $ 370,715 $ 72,384 $ 443,099
(1) Revenue from our Canadian operations were not material for fiscal years 2021,
2020, and 2019.
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Fiscal 2021 vs. Fiscal 2020
Contract revenue. Consolidated contract revenue decreased$37.2 million , or 9.5%, in fiscal year 2021 compared to fiscal year 2020, primarily due to decreased contract revenues from our construction management activities in our Energy segment and the impact of having one fewer week in fiscal year 2021 as compared to fiscal year 2020, partially offset by increased planning and advisory contract revenues including software licensing. Contract revenue related to Energy segment construction management projects decreased as a result of the completion of a number of Energy segment projects and delays in the start-up of construction of new Energy segment projects. Contract revenue in our Energy segment decreased$37.8 million , or 11.7%, in fiscal year 2021 compared to fiscal year 2020, primarily as a result of decreased contract revenues from construction management activities as described above and the impact of having one fewer week in fiscal year 2021 as compared to fiscal year 2020, partially offset by increased planning and advisory contract revenues including software licensing.
Contract revenue from our Engineering and Consulting segment was relatively flat in fiscal 2021 compared to fiscal 2020.
Direct costs of contract revenue. Direct costs of consolidated contract revenue decreased$43.7 million , or 16.7%, in fiscal year 2021 compared to fiscal year 2020, primarily as a result of decreased construction management activities in our Energy segment and the impact of having one fewer week in fiscal year 2021 as compared to fiscal year 2020. Direct cost of contract revenue in our Energy segment decreased$41.0 million , or 18.2%, in fiscal year 2021 compared to fiscal year 2020, primarily as a result of the reasons described above. Direct costs of contract revenue for the Engineering and Consulting segment decreased$2.7 million , or 7.4%, for the fiscal year 2021 compared to fiscal year 2020, primarily due to a reduction in scope of work from one of our customers combined with the impact of having one fewer week in fiscal year 2021 as compared to fiscal year 2020.
Wages and salaries remained relatively stable in fiscal 2021 compared to fiscal 2020. Outsourced services and other direct costs decreased
As a percentage of contract revenue, salaries and wages increased to 18.6% of contract revenue for fiscal year 2021 from 16.7% for fiscal year 2020 and subcontractor services and other direct costs decreased to 43.0% of contract revenue for fiscal year 2021 from 50.2% of contract revenue for the fiscal year 2020, for the reasons noted above. Gross Profit. Gross profit increased 5.0% to$135.9 million , or 38.4% gross margin, for fiscal 2021 compared to$129.4 million , or a 33.1% gross margin for fiscal 2020. The increase in our gross margin was primarily driven by changes in the mix of revenues resulting from the reduction in construction management services which have a relatively lower gross margin profile due to their relatively higher content of pass-through subcontractor and materials costs. General and administrative expenses. General and administrative ("G&A") expenses decreased by$1.1 million , or 0.7%, in the fiscal year 2021 compared to the fiscal year 2020. The decrease in G&A expenses consisted of a decrease of$2.6 million in the Energy segment combined with a decrease of$1.7 million in the unallocated corporate expenses, partially offset by an increase of$3.3 million in the Engineering and Consulting segment. The decrease in G&A expenses in the Energy segment and unallocated corporate expenses was primarily attributed to lower amortization of intangibles combined with lower other general and administrative expenses, partially offset by higher wage and related benefit costs. The increase in G&A expenses in the Engineering and Consulting segment was primarily attributed to higher wage and related benefit costs. The increase in wage and related benefit costs was primarily attributed to having restored wage reductions taken during our second quarter of fiscal 2020 aimed at preserving liquidity as a result of the Covid-19 pandemic. 40
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Within G&A expenses, the increase of$2.6 million for salaries and wages, payroll taxes and employee benefits, combined with the increase of$0.5 million in stock-based compensation was offset by the decrease of$0.6 million in facilities and facility related expenses, combined with the decrease of$1.6 million in depreciation and amortization and the decrease of$1.9 million in other general and administrative expenses. The increase in salaries and wages, payroll taxes and employee benefits was primarily attributable to having restored, during our third quarter of fiscal year 2020, certain actions taken during the second quarter of our fiscal year 2020 aimed at preserving liquidity in the early stages of the Covid-19 pandemic, such as a temporary cash wage reduction for salaried employees, as well as instituting a reduction in workforce, primarily through unpaid furloughs. The increase in stock-based compensation expenses was primarily related to new stock grants to current employees and executives. The decrease in facilities and facilities related expenses was attributed to satisfied facility leases that were not renewed. The decrease in depreciation and amortization was primarily related to lower amortization of intangible assets derived from prior acquisitions. The decrease in other general and administrative expenses was primarily related to decreased earn-out expenses, partially offset by increases in professional services combined with increases in computer-related expenses. Income (loss) from operations. Operating loss was$8.7 million for fiscal 2021, compared to a loss of$16.2 million for fiscal 2020, as a result of the factors noted above. As a percentage of contract revenue, the operating loss was 2.5% for fiscal 2021 compared to an operating loss of 4.2% for fiscal 2020. The increase in operating margin was attributable to increased gross profit combined with lower G&A expenses. Total other expense, net. Total other expense, net, was$3.7 million for fiscal 2021 compared to$3.4 million for fiscal 2020. The increase in total other expense, net is primarily due to lower interest income partially offset by lower interest expense as a result of lower borrowings under our credit facilities and the impact of having one fewer week in fiscal year 2021 as compared to fiscal year 2020. Income tax expense (benefit). We recorded an income tax benefit of$4.0 million for fiscal year 2021 compared to a tax benefit of$5.2 million for fiscal year 2020. The decrease in the income tax benefit is primarily attributable to the increase in valuation allowance recorded against certain state-specific deferred tax assets combined with a reduction in energy efficiency deductions, partially offset by additional tax benefits related to the net operating loss carryback provision of the CARES Act. Net income (loss). Our net loss was$8.4 million for fiscal 2021, as compared to a net loss of$14.5 million for fiscal 2020. The reduction in our net loss was primarily driven by increased gross profit margins combined with lower operating expenses.
Fiscal 2020 vs. Fiscal 2019
Contract revenue. Consolidated contract revenue decreased$52.1 million , or 11.8%, in fiscal year 2020 compared to fiscal year 2019, primarily due to decreased contract revenues from our direct install programs for small businesses in our Energy segment, partially offset by$31.2 million of incremental contract revenue generated from government projects and$22.0 million of incremental contract revenue from the acquisitions ofEnergy and Environmental Economics, Inc. ("E3, Inc. ") andOnsite Energy Corporation ("Onsite Energy") onOctober 28, 2019 , andJuly 2, 2019 , respectively. Contract revenues for our direct install programs for small businesses decreased as a result of the business suspensions resulting from the Covid-19 pandemic and efforts to limit its spread that started inMarch 2020 , which we estimate to have reduced our contract revenue by approximately 20% from our planned pre-pandemic levels. Contract revenue in our Energy segment decreased$46.5 million , or 12.6%, in fiscal year 2020 compared to fiscal year 2019. Contract revenue for the Energy segment primarily decreased as a result of reduced contract revenues from our direct install programs for small businesses as a result of the effects of Covid-19 noted above, partially offset by$36.8 million of incremental contract revenue generated from government projects and$22.0 million of incremental contract revenue from the acquisitions ofE3, Inc. andOnsite Energy . 41
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Contract revenue in our Engineering and Consulting segment decreased$5.6 million , or 7.7%, in fiscal year 2020 compared to fiscal year 2019. Contract revenue for the Engineering and Consulting segment decreased primarily due to decreased subcontractor revenues combined with a$2 million reduction of scope of work related to one of our customers implemented during the second quarter of 2020. Contract revenue in our Engineering and Consulting segment has been less affected by Covid-19 than contract revenue in our Energy segment as the services in the Engineering and Consulting segment have generally been deemed "essential" by the government and continue to operate while abiding social distancing measures. Direct costs of contract revenue. Direct costs of consolidated contract revenue decreased$46.5 million , or 15.1%, in fiscal year 2020 compared to fiscal year 2019. Direct costs of consolidated contract revenue decreased as a result of decreased contract revenues from our direct install programs for small businesses in our Energy segment, partially offset by$31.2 million of incremental contract revenue generated from government projects combined with an additional$7.9 million of incremental direct costs of contract revenue related to our acquisitions ofE3, Inc. andOnsite Energy . Direct cost of contract revenue in our Energy segment decreased$41.3 million , or 15.5%, in the fiscal year 2020 compared to the fiscal year 2019, primarily as a result of the decrease in our contract revenues related to direct install programs for small businesses as described above, which generally use a higher percentage of materials and subcontractor services than other projects in our Energy segment, partially offset by$36.8 million of incremental contract revenues related to government projects combined with an incremental$7.9 million in direct costs of contract revenue contributed from the acquisitions ofE3, Inc. andOnsite Energy in the Energy segment. Direct costs of contract revenue for the Engineering and Consulting segment decreased$5.2 million , or 12.6%, for the fiscal year 2020 compared to fiscal year 2019, primarily due to the reduction of revenues described above. Subcontractor services and other direct costs decreased$47.2 million and salaries and wages increased by$0.7 million for the fiscal year 2020 compared to the fiscal year 2019. As a percentage of contract revenue, salaries and wages increased to 16.7% of contract revenue for the fiscal year 2020 from 14.6% for the fiscal year 2019 and subcontractor services and other direct costs decreased to 50.2% of contract revenue for the fiscal year 2020 from 55.0% of contract revenue for the fiscal year 2019. Salaries and wages within direct costs of contract revenue increased as a percentage of contract revenue primarily as a result of our acquisition ofE3, Inc. andOnsite Energy which contain a higher percentage of labor costs and lower percentage of material costs and installation subcontracting. Subcontractor services and other direct costs decreased as a percentage of contract revenue primarily as a result of the decrease in contract revenues from our direct install programs for small businesses, as described above. General and administrative expenses. General and administrative ("G&A") expenses increased by$20.0 million , or 15.9%, in the fiscal year 2020 compared to the fiscal year 2019. The increase in G&A expenses consisted of an increase of$12.2 million in the Energy segment and an increase of$8.5 million in the unallocated corporate expenses, partially offset by a decrease of$0.7 million in the Engineering and Consulting segment. The increase in G&A expenses in the Energy segment was primarily attributed to incremental expenses of$13.0 million from the addition ofE3, Inc. andOnsite Energy , combined with increases in stock-based compensation, intangible asset amortization, and other corporate general and administrative expenses, partially offset by our cost-saving measures instituted, as described earlier, in response to Covid-19. Of the$20.0 million increase in G&A expenses,$4.9 million resulted from an increase in salaries and wages, payroll taxes and employee benefits,$4.0 million resulted from an increase in stock-based compensation,$3.7 million resulted from an increase in depreciation and amortization,$1.9 million resulted from an increase in facilities and facility related expenses, and$5.4 million resulted from an increase in other general and administrative expenses. The increase in other general and administrative expenses was primarily due to an increase of$6.5 million in the liability for contingent consideration, partially offset by lower traveling expenses as a result of the measures put in place for Covid-19, combined with lower acquisition costs and lower professional services. The increase in salaries and wages, payroll taxes and employee benefits was primarily attributable to the addition of employees from the acquisition ofE3, Inc. andOnsite Energy , partially offset by our actions related to placing a temporary cash wage reduction for salaried employees, as well as instituting a reduction in workforce, primarily through unpaid furloughs, aimed at preserving liquidity as a result of the Covid-19 pandemic. During the second half of the three months endedJuly 3, 2020 , furloughed employees 42 Table of Contents began to return to work as government authorities began loosening restrictions through phased re-openings and, by the end of the third fiscal quarter, the majority of furloughed employees had returned to work. In addition, as the initial impact of Covid-19 was ascertained and operations were adjusted accordingly, salaries were reinstituted inJune 2020 with the exception of corporate staff, whose salaries were reinstituted at the end ofJuly 2020 . The increase in facilities and facility related expenses was primarily due to the addition of offices in connection with the acquisition ofE3, Inc. , andOnsite Energy . The increase in stock-based compensation expenses was primarily related to new 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 acquisition ofE3, Inc. , andOnsite Energy . Income (loss) from operations. Our operating loss was$16.2 million for fiscal year 2020, compared to operating income of$9.4 million for fiscal year 2019, as a result of the factors noted above. As a percentage of contract revenue, operating loss was 4.2% for the fiscal year 2020 compared to an operating income of 2.1% for the fiscal year 2019. The decrease in operating margin was primarily attributable to decreases in contract revenue as a result of Covid-19 combined with increases in stock-based compensation and intangible asset amortization from the acquisition ofE3, Inc. andOnsite Energy , partially offset by increases in governmental contract revenue. Total other expense, net. Total other expense, net was$3.4 million for fiscal year 2020 compared to$4.7 million for fiscal year 2019. The decrease in total other expense, net was primarily the result of the recognition of$0.6 million in income from an indemnification agreement and higher interest income. Interest expense was relatively flat year over year. Income tax expense (benefit). We recorded an income tax benefit of$5.2 million for the fiscal year 2020 compared to a tax benefit of$0.2 million for the fiscal year 2019. The effective tax rate for fiscal year 2020 was (26.3)% as compared to (4.0)% for fiscal year 2019. The increase in the year-over-year effective tax rate for fiscal year 2020 is primarily attributable to our loss before income tax, reduced energy efficient commercial building deductions and increased nondeductible compensation recognized in 2020.
Net profit (loss). Due to the above factors, our net loss was
Cash and capital resources
Fiscal Year
2021 2020 2019
(in thousands)
Net Cash Provided by (used in):
Operating activities $ 9,803 $ 47,025 $ 11,621
Investing activities (8,454) (5,059) (78,348)
Financing activities (18,533)
(19,013) 56,920 Net increase (decrease) in cash and cash equivalents
Sources of Cash We believe that our cash and cash equivalents on hand, cash generated by operating activities and available borrowings under our revolving credit facility and Delayed Draw Term Loan will be sufficient to finance our operating activities for at least the next 12 months. As a result of forecasted increased working capital requirements related to the$781 million in California Investor Owned Utility Contracts and other organic growth, we amended our credit agreement to, among other things, ensure an adequate margin for certain covenant compliance obligations. As ofDecember 31, 2021 , we had$11.2 million of cash and cash equivalents. In addition, as ofDecember 31, 2021 , we had a$100 million Term A Loan with$75.0 million outstanding, a$50.0 million Revolving Credit Facility with no borrowed amounts outstanding and$4.1 million in letters of credit issued. We also had a$50.0 million Delayed Draw Term Loan with$20.0 million available for draw subject to the satisfaction of certain covenants and$24.0 million outstanding. Each of our Term A Loan, Revolving Credit Facility, and Delayed Draw Term Loan mature onJune 26, 2024 . Our primary 43
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The source of liquidity for the next 12 months and beyond is cash generated from operations and borrowings under our revolving credit facility.
As ofDecember 31, 2021 , borrowings under our Credit Facilities, exclusive of the effects of upfront fees, undrawn fees and issuance cost amortization, bore interest at 2.37%. 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.
Cash flow from operating activities
Cash flows provided by operating activities were$9.8 million ,$47.0 million , and$11.6 million for fiscal years 2021, 2020, and 2019, 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. 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 provided by operating activities for fiscal year 2020 resulted primarily as a result of improvements in cash collections, reductions in working capital requirements as a result of the reduction of revenues from the suspension of our small business energy programs, and incremental operating cash flow from our acquisitions ofE3, Inc. andOnsite Energy . Cash flows provided by operating activities for fiscal year 2019 resulted primarily 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 flow from investing activities
Cash flows used in investing activities were$8.5 million for fiscal year 2021, as compared to$5.0 million and$78.3 million for fiscal years 2020 and 2019, respectively. Cash flows used in investing activities for fiscal year 2021 were primarily due to cash paid for software development cost and the purchase of equipment. Cash flows used in investing activities for fiscal year 2020 were primarily due to cash paid for the purchase of equipment, the enhancement of internal operating software, and leasehold improvements. Cash flows used in investing activities for fiscal year 2019 were primarily due to cash paid for the acquisitions ofThe Weidt Group ,Onsite Energy , andE3, Inc.
Cash flow from financing activities
Cash flows used in financing activities were$18.5 million and$19.0 million for fiscal year 2021 and 2020, as compared to cash flows provided by financing activities of$56.9 million for fiscal 2019. Cash flows used in financing activities for fiscal year 2021 were primarily attributable to repayments of$13.0 million under our term loan facility and revolving line of credit, 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. Cash flows used in financing activities for fiscal year 2020 were primarily attributable to repayments of$42.0 million under our term loan facility and revolving line of credit, a payment of$2.9 million in employee payroll taxes related to the vesting of performance-based restricted stock units, and payments of$1.4 million for contingent consideration related to prior acquisitions, partially offset by$24.0 million of borrowings under our revolving line of credit. Cash flows provided by financing activities for fiscal year 2019 were primarily attributable to borrowings under our credit facilities related to our acquisitions ofThe Weidt Group ,Onsite Energy , andE3, Inc.
Off-balance sheet arrangements
Other than operating lease commitments, we do not have any off-balance sheet
financing arrangements or liabilities. In addition, our policy is not to enter
into futures or forward contracts. Finally, we do not have any majority-owned
subsidiaries or any interests in, or relationships with, any special-purpose
entities that are not included in the consolidated financial statements. We
have, however, an administrative services agreement with Genesys in which
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we provide Genesys with ongoing administrative, operational and other non-professional support services. We manage Genesys and have the power to direct the activities that most significantly impact Genesys' performance, in addition to being obligated to absorb expected losses from Genesys. Accordingly, we are the primary beneficiary of Genesys and consolidate Genesys as a variable interest entity.
Short-term and long-term uses of cash
General
Our principal uses of cash are to fund operating expenses and pay down outstanding debt. From time to time, we also use cash to help fund business acquisitions. Our cash and cash equivalents are impacted by the timing of when we pay expenses as reflected in the change in our outstanding accounts payable and accrued expenses. Contractual Obligations The following table sets forth our known contractual obligations as ofDecember 31, 2021 : Less than More than Contractual Obligations Total 1 Year 1 - 3
Years 3 – 5 Years 5 Years
( in
thousands)
Long term debt (1)(3)$ 100,574 $ 15,036 $ 85,538 $ - $ - Interest payments on debt outstanding (2)(3) 6,151 2,756 3,395 - - Operating leases 16,342 5,575 6,589 3,753 425 Finance leases 1,317 539 702 76 -
Total cash contractual obligations
(1) Long-term debt includes
amounts outstanding on our revolving credit facility, and
outstanding on our deferred draw term loan at
assumed no future borrowing or repayment (other than at maturity) for
purposes of this table.
(2) Borrowings under our deferred draw term loan bear interest at a variable rate.
Future interest payments on our deferred draw term loan facility are estimated
using the variable rates in effect at
(3) Long-term debt and interest payments on outstanding debt do not include
million drawn on
under the Fifth Amendment to the Amended and Restated Credit
OK. For more information, see Part II, Article 8, Note 15, “
events”, notes to the consolidated financial statements included in this
Annual Report on Form 10-K.
We are obligated to pay earn-out payments in connection with our 2019 and 2017 acquisitions ofE3, Inc. and Integral Analytics, respectively. We are obligated to pay up to (i)$12.0 million in cash ifE3, Inc. exceeds certain financial targets during the three years after theE3, 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 ofDecember 31, 2021 , we had contingent consideration payable of$11.0 million related to these acquisitions. For fiscal 2021, our statement of operations includes$2.3 million of accretion (excluding fair value adjustments) related to the contingent consideration. Outstanding Indebtedness
Subsequent toDecember 31, 2021 , we borrowed and repaid$5.0 million under our Revolving Credit Facility. OnMarch 8, 2022 , after giving effect to the Fifth Amendment, we had$50.0 million in borrowing capacity available under our credit facilities. See part II, Item 8, Note 5, "Debt Obligations", and Note 15, "Subsequent Events", 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 45 Table of Contents 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.
Interest rate swap
See Part II, Item 7A, "Quantitative and Qualitative Disclosures About Market Risk", and Note 4, "Derivative Financial Instruments", to the Notes of Consolidated Financial Statements included in this Annual Report on Form 10-K for information regarding our interest rate swap.
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 moderate inflation.
Components of income and expenses
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 ofDecember 31, 2021 , approximately 24% of our contracts are time-and-materials contracts and approximately 54% of our contracts are unit-based contracts, compared to approximately 26% for time-and-materials contracts and approximately 46% for unit-based contracts as ofJanuary 1, 2021 . 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, theCity of Elk Grove , DASNY, and utility programs associated withLos Angeles Department of Water and Power and Duke Energy Corp., may have a material effect on our consolidated operations. 46 Table of Contents 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 contract revenue costs
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 theU.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.
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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.
Segment Contract Type Revenue Recognition Method
Time-and-materials Time-and-materials
Energy Unit-based Unit-based
Software license Unit-based
Fixed price Percentage-of-completion
Time-and-materials Time-and-materials
Engineering and Consulting Unit-based Unit-based
Fixed price Percentage-of-completion
Revenue on the vast majority of 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.
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. 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 includes
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 for amounts
that have been billed but not earned is deferred, and such deferred revenue is
referred to as contract liabilities in the accompanying consolidated balance
sheets. We also 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 it
estimates the standalone selling price by reference to the total transaction
price less the sum of the observable standalone selling prices of other goods or
services promised in the contract. The software license revenue is typically
recognized at a point in time when control is transferred to the client, which
is defined as the point in time when the client can use and benefit from
the license. The software license is delivered before related services are
provided and is functional without services, updates, or technical support.
Related professional services include training and support services in which the
standalone selling price is determined based on an input measure of hours
incurred to total estimated hours and is recognized over time, usually which is
the life of the contract.
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
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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.
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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.
For more information on the types of contracts under which we provide our services, see Part II, Article 8, Note 1, Company Organization and Operations, Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K.
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 2021, 2020, or 2019. We test our goodwill for impairment at the level of our reporting units, which are components of our operating segments. InJanuary 2017 , theFinancial 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 50
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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.
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.
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During fiscal years 2021 and 2020, we did not make any acquisitions. In fiscal 2019, we completed three acquisitions; At
Income taxes
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 and includes the evaluation of historical income (loss) adjusted for the effects of non-recurring items and the impact of recent business combinations. Areas of estimation include our consideration of future taxable income which is driven by verifiable signed contracts 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. 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.
For further details on our income taxes, see Part II, Section 8, Note 11, “Income Taxes” of the Notes to the Consolidated Financial Statements included with this Annual Report on Form 10-K.
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.
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