NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(in thousands, except share data)
Note 1 – Organization and Nature of Business Operations
Business
NV5 Global, Inc. and its subsidiaries (collectively, the “Company” or “NV5 Global”) is a provider of technology, conformity assessment, and consulting solutions to public and private sector clients in the infrastructure, utility services, construction, real estate, environmental, and geospatial markets, operating nationwide and abroad. The Company’s clients include the U.S. Federal, state and local governments, and the private sector. NV5 Global provides a wide range of services, including, but not limited to:
| | | | | | | | | | | |
| ● | Utility services | ● | MEP & technology design |
| ● | LNG services | ● | Commissioning |
| ● | Engineering | ● | Building program management |
| ● | Civil program management | ● | Environmental health & safety |
| ● | Surveying | ● | Real estate transaction services |
| ● | Testing, inspection & consulting (TIC) | ● | Energy efficiency & clean energy services |
| ● | Code compliance consulting | ● | 3D geospatial data modeling |
| ● | Forensic services | ● | Environmental & natural resources |
| ● | Litigation support | ● | Robotic survey solutions |
| ● | Ecological studies | ● | Geospatial data applications & software |
Fiscal Year
The Company operates on a "52/53 week" fiscal year ending on the Saturday closest to the calendar quarter end.
Impact of COVID-19 on Our Business
The COVID-19 pandemic has significantly impacted global stock markets and economies. The Company is closely monitoring the impact of the outbreak of COVID-19 on all aspects of its business. The extent to which the Company's operations may be impacted by the COVID-19 pandemic will depend largely on future developments, which are highly uncertain and cannot be accurately predicted.
Note 2 – Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The consolidated financial statements of the Company are presented in U.S. dollars in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for reporting of interim financial information. Pursuant to such rules and regulations, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. The consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
In the opinion of management, the accompanying unaudited interim consolidated financial statements of the Company contain all adjustments necessary to present fairly the financial position and results of operations of the Company as of the dates and for the periods presented. Accordingly, these statements should be read in conjunction with the consolidated financial statements and notes contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Form 10-K”). The results of operations and cash flows for the interim periods presented are not necessarily indicative of the results to be expected for any future interim period or for the full 2023 fiscal year.
NV5 Global, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(in thousands, except share data)
Performance Obligations
To determine the proper revenue recognition method, the Company evaluates whether two or more contracts should be combined and accounted for as one single contract and whether the combined or single contract should be accounted for as more than one performance obligation. The majority of the Company's contracts have a single performance obligation as the promise to transfer the individual goods or services that is not separately identifiable from other promises in the contracts and therefore, is not distinct.
The Company’s performance obligations are satisfied as work progresses or at a point in time. Revenue on the Company's cost-reimbursable contracts is recognized over time using direct costs incurred or direct costs incurred to date as compared to the estimated total direct costs for performance obligations because it depicts the transfer of control to the customer. Contract costs include labor, sub-consultant services, and other direct costs.
Gross revenue from services transferred to customers at a point in time is recognized when the customer obtains control of the asset, which is generally upon delivery and acceptance by the customer of the reports and/or analysis performed.
As of April 1, 2023, the Company had $805,397 of remaining performance obligations, of which $656,268 is expected to be recognized over the next 12 months and the majority of the balance over the next 24 months. Contracts for which work authorizations have been received are included in performance obligations. Performance obligations include only those amounts that have been funded and authorized and does not reflect the full amounts the Company may receive over the term of such contracts. In the case of non-government contracts and project awards, performance obligations include future revenue at contract or customary rates, excluding contract renewals or extensions that are at the discretion of the client. For contracts with a not-to-exceed maximum amount, the Company includes revenue from such contracts in performance obligations to the extent of the remaining estimated amount.
Contract Balances
The timing of revenue recognition, billings and cash collections results in billed receivables, unbilled receivables (contract assets), and billings in excess of costs and estimated earnings on uncompleted contracts (contract liabilities) on the Consolidated Balance Sheet. The liability “Billings in excess of costs and estimated earnings on uncompleted contracts” represents billings in excess of revenues recognized on these contracts as of the reporting date. This liability is generally classified as current. During the three months ended April 1, 2023 the Company performed services and recognized $18,430 of revenue related to its contract liabilities that existed as of December 31, 2022.
Goodwill and Intangible Assets
Goodwill is the excess of consideration paid for an acquired entity over the amounts assigned to assets acquired, including other identifiable intangible assets and liabilities assumed in a business combination. To determine the amount of goodwill resulting from a business combination, the Company performs an assessment to determine the acquisition date fair value of the acquired company’s tangible and identifiable intangible assets and liabilities.
Goodwill is required to be evaluated for impairment on an annual basis or whenever events or changes in circumstances indicate the asset may be impaired. An entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. These qualitative factors include macroeconomic and industry conditions, cost factors, overall financial performance, and other relevant entity-specific events. If the entity determines that this threshold is met, then the Company applies a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit's carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The Company determines fair value through multiple valuation techniques, and weights the results accordingly. Subjective and complex judgments are required in assessing whether an event of impairment of goodwill has occurred, including assumptions and estimates used to determine the fair value of its reporting units. The Company has elected to perform its annual goodwill impairment review as of August 1 of each year. The Company conducts its annual impairment tests on the goodwill using the quantitative method of evaluating goodwill.
NV5 Global, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(in thousands, except share data)
As of August 1, 2022, the Company conducted its annual impairment tests using the quantitative method of evaluating goodwill. Based on the quantitative analyses the Company determined the fair value of each of the reporting units exceeded its carrying value. Therefore, the goodwill was not impaired and the Company did not recognize an impairment charge relating to goodwill as of August 1, 2022. Furthermore, there were no indicators, events or changes in circumstances that would indicate goodwill was impaired during the period from August 2, 2022 through April 1, 2023.
Identifiable intangible assets primarily include customer backlog, customer relationships, trade names, non-compete agreements, and developed technology. Amortizable intangible assets are amortized on a straight-line basis over their estimated useful lives and reviewed for impairment whenever events or changes in circumstances indicate that the assets may be impaired. If an indicator of impairment exists, the Company compares the estimated future cash flows of the asset, on an undiscounted basis, to the carrying value of the asset. If the undiscounted cash flows exceed the carrying value, no impairment is indicated. If the undiscounted cash flows do not exceed the carrying value, then impairment, if any, is measured as the difference between fair value and carrying value, with fair value typically based on a discounted cash flow model. There were no indicators, events or changes in circumstances that would indicate intangible assets were impaired during the three months ended April 1, 2023. See Note 8, Goodwill and Intangible Assets, for further information on goodwill and identified intangibles.
There have been no material changes in the Company's significant accounting policies described in the audited financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2022.
Note 3 – Recent Accounting Pronouncements
None
Note 4 – Earnings per Share
Basic earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding during the period, excluding unvested restricted shares. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. The effect of potentially dilutive securities is not considered during periods of loss or if the effect is anti-dilutive.
The weighted average number of shares outstanding in calculating basic earnings per share for the three months ended April 1, 2023 and April 2, 2022 exclude 705,953 and 743,496 non-vested restricted shares, respectively. During the three months ended April 1, 2023 and April 2, 2022, there were 34,633 and 31,439 weighted average securities, respectively, which are not included in the calculation of diluted weighted average shares outstanding because their impact is anti-dilutive or their performance conditions have not been met.
The following table represents a reconciliation of the net income and weighted average shares outstanding for the calculation of basic and diluted earnings per share:
| | | | | | | | | | | | | | | |
| Three Months Ended | | |
| April 1, 2023 | | April 2, 2022 | | | | |
| Numerator: | | | | | | | |
| Net income – basic and diluted | $ | 5,947 | | | $ | 8,642 | | | | | |
| | | | | | | |
| Denominator: | | | | | | | |
| Basic weighted average shares outstanding | 14,883,487 | | | 14,693,323 | | | | | |
| Effect of dilutive non-vested restricted shares and units | 478,261 | | | 505,534 | | | | | |
| Effect of issuable shares related to acquisitions | 21,689 | | | 17,248 | | | | | |
| Diluted weighted average shares outstanding | 15,383,437 | | | 15,216,105 | | | | | |
NV5 Global, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(in thousands, except share data)
Note 5 – Business Acquisitions
2023 Acquisitions
On February 22, 2023 (the "Closing Date"), the Company acquired all of the outstanding equity interests in Continental Mapping Acquisition Corp. and Continental Mapping Holdings, LLC and its subsidiaries, including Axim Geospatial, LLC (collectively "Axim"), a provider of comprehensive geospatial services and solutions addressing critical mission requirements for customers across the defense and intelligence and state and local government sectors. The aggregate purchase price of the acquisition was $141,010, including $120,106 in cash, a $7,404 promissory note, and $13,500 of the Company's common stock. The purchase price and other related costs associated with the transaction were financed through the Company's amended and restated credit agreement (the "Second A&R Credit Agreement") with Bank of America, N.A. and other lenders party thereto. See Note 10, Notes Payable and Other Obligations, for further detail on the Second A&R Credit Agreement. In order to determine the fair values of tangible and intangible assets acquired and liabilities assumed, the Company engaged an independent third-party valuation specialist to assist in the determination of fair values. The final determination of the fair value of assets and liabilities will be completed within the one-year measurement period as required by ASC 805. The acquisition will necessitate the use of this measurement period to adequately analyze and assess the factors used in establishing the asset and liability fair values as of the relevant acquisition date, including intangible assets, accounts receivable, certain fixed assets, and the fair value of other assets and liabilities acquired.
The Company has completed three other acquisitions during 2023. The aggregate purchase price for the three acquisitions was $3,315, including $2,900 in cash, $90 of the Company's common stock, and a potential earn-out of up to $340 payable in cash, which has been recorded at an estimated fair value of $325. A probability-weighted approach was used to determine the fair value of the earn-out, which is a generally accepted valuation technique that embodies all significant assumption types. The final determination of the fair value of assets and liabilities will be completed within the one-year measurement period as required by ASC 805. The 2023 acquisitions will necessitate the use of this measurement period to adequately analyze and assess the factors used in establishing the asset and liability fair values as of the relevant acquisition date, including intangible assets and accounts receivable.
2022 Acquisitions
The Company completed five acquisitions during 2022. The aggregate purchase price of all five acquisitions was $14,220, including $5,882 of cash, $1,606 of promissory notes, $433 of the Company's common stock, and potential earn-outs of up to $15,850 payable in cash and stock, which was recorded at an estimated fair value of $6,299. An option-based model was used to determine the fair value of the earn-outs, which is a generally accepted valuation technique that embodies all significant assumption types. In order to determine the fair values of tangible and intangible assets acquired and liabilities assumed, the Company engaged an independent third-party valuation specialist to assist in the determination of fair values. The final determination of the fair value of assets and liabilities will be completed within the one-year measurement period as required by ASC 805. The 2022 acquisitions will necessitate the use of this measurement period to adequately analyze and assess the factors used in establishing the asset and liability fair values as of the acquisition date, including intangible assets, accounts receivable, and certain fixed assets. Purchase price allocation adjustments recorded during 2023 were immaterial.
NV5 Global, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(in thousands, except share data)
The following table summarizes the fair values of the assets acquired and liabilities assumed as of the acquisition date for the acquisitions closed during the three months ended April 1, 2023 and the fiscal year ended December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| 2023 | | 2022 |
| Axim | | Other | | Total | | Total |
| Cash | $ | 5,419 | | | $ | — | | | $ | 5,419 | | | $ | — | |
| Billed and unbilled receivables, net | 13,907 | | | 561 | | | 14,468 | | | 1,794 | |
| Right-of-use assets | 1,622 | | | 189 | | | 1,811 | | | 632 | |
| Property and equipment | 2,870 | | | — | | | 2,870 | | | 1,510 | |
| Prepaid expenses | 4,748 | | | 21 | | | 4,769 | | | — | |
| Other assets | 155 | | | — | | | 155 | | | — | |
| Intangible assets: | | | | | | | |
| Customer relationships | 53,995 | | | 859 | | | 54,854 | | | 3,606 | |
| Trade name | 2,266 | | | 33 | | | 2,299 | | | 268 | |
| Customer backlog | 4,101 | | | 186 | | | 4,287 | | | 459 | |
| | | | | | | |
| Non-compete | 580 | | | 93 | | | 673 | | | 298 | |
| Total Assets | $ | 89,663 | | | $ | 1,942 | | | $ | 91,605 | | | $ | 8,567 | |
| Liabilities | (13,805) | | | (188) | | | (13,993) | | | (5,623) | |
| Deferred tax liabilities | (15,563) | | | — | | | (15,563) | | | — | |
| Net assets acquired | $ | 60,295 | | | $ | 1,754 | | | $ | 62,049 | | | $ | 2,944 | |
| | | | | | | |
| Consideration paid (Cash, Notes and/or stock) | $ | 141,010 | | | $ | 2,990 | | | $ | 144,000 | | | $ | 7,921 | |
| Contingent earn-out liability (Cash and stock) | — | | | 325 | | | 325 | | | 6,299 | |
| Total Consideration | $ | 141,010 | | | $ | 3,315 | | | $ | 144,325 | | | $ | 14,220 | |
| Excess consideration over the amounts assigned to the net assets acquired (Goodwill) | $ | 80,715 | | | $ | 1,561 | | | $ | 82,276 | | | $ | 11,276 | |
Goodwill was recorded based on the amount by which the purchase price exceeded the fair value of the net assets acquired and the amount is attributable to the reputation of the business acquired, the workforce in place and the synergies to be achieved from these acquisitions. See Note 8, Goodwill and Intangible Assets, for further information on fair value adjustments to goodwill and identified intangibles.
The consolidated financial statements of the Company include the results of operations from any business acquired from their respective dates of acquisition. The following table presents the results of operations of businesses acquired from their respective dates of acquisition for the three months ended April 1, 2023. The revenue and earnings of the fiscal 2022 acquisitions included in the Company's results since the acquisition dates are not material to the Company's consolidated financial statements and have not been presented.
| | | | | | | | | | |
| | Three Months Ended | | |
| | April 1, 2023 | | |
| Gross revenues | | $ | 7,474 | | | |
| Income before income taxes | | $ | 728 | | | |
General and administrative expenses for the three months ended April 1, 2023 and April 2, 2022 include acquisition-related costs pertaining to the Company's acquisition activities. Acquisition-related costs were not material to the Company's consolidated financial statements.
NV5 Global, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(in thousands, except share data)
The following table presents the unaudited, pro forma consolidated results of operations (in thousands, except per share amounts) for the three months ended April 1, 2023 and April 2, 2022 as if the fiscal 2023 and 2022 acquisitions had occurred at the beginning of fiscal year 2022. The pro forma information provided below is compiled from pre-acquisition financial information and includes pro forma adjustments for amortization expense, adjustments to certain expenses, and the income tax impact of these adjustments. The pro forma results are not necessarily indicative of (i) the results of operations that would have occurred had the operations of these acquisitions actually been acquired at the beginning of fiscal year 2022 or (ii) future results of operations:
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | |
| | April 1, 2023 | | April 2, 2022 | | | | |
| Gross revenues | | $ | 197,761 | | | $ | 210,372 | | | | | |
| Net income | | $ | 6,081 | | | $ | 9,277 | | | | | |
| Basic earnings per share | | $ | 0.41 | | | $ | 0.63 | | | | | |
| Diluted earnings per share | | $ | 0.40 | | | $ | 0.60 | | | | | |
Adjustments were made to the pro forma results to adjust amortization of intangible assets to reflect fair value of identified assets acquired, to record the effects of financing from the Company's Senior Credit Facility, to record the effects of promissory notes issued, and to record the income tax effect of these adjustments.
Note 6 – Billed and Unbilled Receivables
Billed and unbilled receivables consists of the following:
| | | | | | | | | | | |
| April 1, 2023 | | December 31, 2022 |
| Billed receivables | $ | 149,109 | | | $ | 149,082 | |
| Less: allowance for doubtful accounts | (3,310) | | | (3,445) | |
| Billed receivables, net | $ | 145,799 | | | $ | 145,637 | |
| | | |
| Unbilled receivables | $ | 113,620 | | | $ | 95,104 | |
| Less: allowance for doubtful accounts | (2,269) | | | (2,242) | |
| Unbilled receivables, net | $ | 111,351 | | | $ | 92,862 | |
Note 7 – Property and Equipment, net
Property and equipment, net, consists of the following:
| | | | | | | | | | | |
| April 1, 2023 | | December 31, 2022 |
| Office furniture and equipment | $ | 3,598 | | | $ | 3,421 | |
| Computer equipment | 29,314 | | | 25,816 | |
| Survey and field equipment | 56,951 | | | 49,985 | |
| Leasehold improvements | 6,968 | | | 6,546 | |
| Total | 96,831 | | | 85,768 | |
| Less: accumulated depreciation | (47,393) | | | (44,128) | |
| Property and equipment, net | $ | 49,438 | | | $ | 41,640 | |
Depreciation expense was $3,265 and $2,904 for the three months ended April 1, 2023 and April 2, 2022, respectively, of which $1,255 and $1,233 was included in other direct costs for each of the three months ended April 1, 2023 and April 2, 2022.
NV5 Global, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(in thousands, except share data)
Note 8 – Goodwill and Intangible Assets
Goodwill
The changes in the carrying value by reportable segment for the three months ended April 1, 2023 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended |
| December 31, 2022 | | 2023 Acquisitions | | Adjustments | | April 1, 2023 |
| INF | $ | 90,932 | | | $ | 722 | | | $ | — | | | $ | 91,654 | |
| BTS | 111,838 | | | 839 | | | 13 | | | 112,690 | |
| GEO | 198,187 | | | 80,715 | | | (10) | | | 278,892 | |
| Total | $ | 400,957 | | | $ | 82,276 | | | $ | 3 | | | $ | 483,236 | |
Goodwill of $1,146 from acquisitions completed during the three months ended April 1, 2023 is expected to be deductible for income tax purposes.
Intangible Assets
Intangible assets, net, as of April 1, 2023 and December 31, 2022 consist of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| April 1, 2023 | | December 31, 2022 |
| Gross
Carrying
Amount | | Accumulated Amortization | | Net
Amount | | Gross
Carrying
Amount | | Accumulated Amortization | | Net
Amount |
| Finite-lived intangible assets: | | | | | | | | | | | |
Customer relationships(1) | $ | 277,847 | | | $ | (93,267) | | | $ | 184,580 | | | $ | 222,998 | | | $ | (87,054) | | | $ | 135,944 | |
Trade name(2) | 19,182 | | | (16,339) | | | 2,843 | | | 16,883 | | | (15,933) | | | 950 | |
Customer backlog(3) | 33,704 | | | (28,212) | | | 5,492 | | | 29,419 | | | (27,333) | | | 2,086 | |
Non-compete(4) | 14,800 | | | (11,654) | | | 3,146 | | | 14,110 | | | (11,298) | | | 2,812 | |
Developed technology(5) | 32,944 | | | (15,488) | | | 17,456 | | | 32,944 | | | (14,305) | | | 18,639 | |
| Total finite-lived intangible assets | $ | 378,477 | | | $ | (164,960) | | | $ | 213,517 | | | $ | 316,354 | | | $ | (155,923) | | | $ | 160,431 | |
(1) Amortized on a straight-line basis over estimated lives (1 to 12 years)
(2) Amortized on a straight-line basis over their estimated lives (1 to 2 years)
(3) Amortized on a straight-line basis over their estimated lives (1 to 10 years)
(4) Amortized on a straight-line basis over their contractual lives (1 to 5 years)
(5) Amortized on a straight-line basis over their estimated lives (5 to 7 years)
The identifiable intangible assets acquired during the three months ended April 1, 2023 consist of customer relationships, trade name, customer backlog, and non-compete with weighted average lives of 9.9 years, 2.0 years, 1.0 year, and 3.6 years, respectively. Amortization expense was $9,037 and $8,263 during the three months ended April 1, 2023 and April 2, 2022, respectively.
NV5 Global, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(in thousands, except share data)
Note 9 – Accrued Liabilities
Accrued liabilities consist of the following:
| | | | | | | | | | | |
| April 1, 2023 | | December 31, 2022 |
| Current portion of lease liability | $ | 13,693 | | | $ | 13,081 | |
| Accrued vacation | 13,779 | | | 12,467 | |
| Payroll and related taxes | 14,882 | | | 6,616 | |
| Benefits | 5,685 | | | 5,160 | |
| Accrued operating expenses | 5,494 | | | 4,540 | |
| Other | 2,540 | | | 2,449 | |
| Total | $ | 56,073 | | | $ | 44,313 | |
Note 10 – Notes Payable and Other Obligations
Notes payable and other obligations consists of the following:
| | | | | | | | | | | |
| April 1, 2023 | | December 31, 2022 |
| Senior credit facility | $ | 143,750 | | | $ | 33,750 | |
| Uncollateralized promissory notes | 22,165 | | | 18,492 | |
| Finance leases | 3,546 | | | 3,465 | |
| Other obligations | 935 | | | 1,814 | |
| Debt issuance costs, net of amortization | (2,480) | | | (2,672) | |
| Total notes payable and other obligations | 167,916 | | | 54,849 | |
| Current portion of notes payable and other obligations | 14,832 | | | 15,176 | |
| Notes payable and other obligations, less current portion | $ | 153,084 | | | $ | 39,673 | |
As of April 1, 2023 and December 31, 2022, the carrying amount of debt obligations approximates their fair values based on Level 2 inputs as the terms are comparable to terms currently offered by local lending institutions for arrangements with similar terms to industry peers with comparable credit characteristics.
Senior Credit Facility
On August 13, 2021 (the "Closing Date"), the Company amended and restated its Credit Agreement (the "Second A&R Credit Agreement"), originally dated December 7, 2016 and as amended to the Closing Date, with Bank of America, N.A. ("Bank of America"), as administrative agent, swingline lender and letter of credit issuer, the other lenders party thereto, and certain of the Company's subsidiaries as guarantors. Pursuant to the Second A&R Credit Agreement, the previously drawn term commitments of $150,000 and revolving commitments totaling $215,000 in the aggregate were converted into revolving commitments totaling $400,000 in the aggregate. These revolving commitments are available through August 13, 2026 (the "Maturity Date") and an aggregate amount of approximately $138,750 was drawn under the Second A&R Credit Amendment on the Closing Date to repay previously existing borrowings under the term and revolving facilities prior to such amendment and restatement. Borrowings under the Second A&R Credit Agreement are secured by a first priority lien on substantially all of the assets of the Company. The Second A&R Credit Agreement also includes an accordion feature permitting the Company to request an increase in the revolving facility under the Second A&R Credit Agreement by an additional amount of up to $200,000 in the aggregate. As of April 1, 2023 and December 31, 2022, the outstanding balance on the Second A&R Credit Agreement was $143,750 and $33,750, respectively.
The Company's Second A&R Credit Agreement provides for the replacement of LIBOR (London Interbank Offered Rate), which prior to April 1, 2023, was transitioned to SOFR (Secured Overnight Funding Rate), subject to the completion of the relevant existing interest period ("LIBOR Transition"). Borrowings under the Second A&R Credit Agreement bear interest at variable rates which are, at the Company's option, tied to a Eurocurrency rate equal to LIBOR or, from and after the LIBOR
NV5 Global, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(in thousands, except share data)
Transition, either Term SOFR or Daily Simple SOFR, plus in each case an applicable margin or a base rate denominated in U.S. dollars. Interest rates remain subject to change based on the Company's consolidated leverage ratio. As of April 1, 2023 the Company's interest rate was 5.8%.
The Second A&R Credit Agreement contains financial covenants that require NV5 Global to maintain a consolidated net leverage ratio (the ratio of the Company's pro forma consolidated net funded indebtedness to the Company's pro forma consolidated EBITDA for the most recently completed measurement period) of no greater than 4.00 to 1.00.
These financial covenants also require the Company to maintain a consolidated fixed charge coverage ratio of no less than 1.10 to 1.00 as of the end of any measurement period. As of April 1, 2023, the Company was in compliance with the financial covenants.
The Second A&R Credit Agreement contains covenants that may have the effect of limiting the Company's ability to, among other things, merge with or acquire other entities, enter into a transaction resulting in a Change in Control, create certain new liens, incur certain additional indebtedness, engage in certain transactions with affiliates, or engage in new lines of business or sell a substantial part of their assets. The Second A&R Credit Agreement also contains customary events of default, including (but not limited to) a default in the payment of principal or, following an applicable grace period, interest, breaches of the Company's covenants or warranties under the Second A&R Credit Agreement, payment default or acceleration of certain indebtedness, certain events of bankruptcy, insolvency or liquidation, certain judgments or uninsured losses, changes in control and certain liabilities related to ERISA based plans.
The Second A&R Credit Agreement limits the payment of cash dividends (together with certain other payments that would constitute a "Restricted Payment" within the meaning of the Second A&R Credit Agreement and generally including dividends, stock repurchases and certain other payments in respect to warrants, options, and other rights to acquire equity securities), unless the Consolidated Leverage Ratio would be less than 3.25 to 1.00 and available liquidity (defined as unrestricted, domestically held cash plus revolver availability) would be at least $30,000, in each case after giving effect to such payment.
Total debt issuance costs incurred and capitalized in connection with the issuance of the Second A&R Credit Agreement were $3,702. Total amortization of debt issuance costs was $194 and $185 during the three months ended April 1, 2023 and April 2, 2022, respectively.
Other Obligations
The Company has aggregate obligations related to acquisitions of $23,100 and $20,306 as of April 1, 2023 and December 31, 2022, respectively. As of April 1, 2023, the Company's weighted average interest rate on other outstanding obligations was 3.1%.
Note 11 – Contingent Consideration
The following table summarizes the changes in the carrying value of estimated contingent consideration:
| | | | | | | | | | | |
| April 1, 2023 | | December 31, 2022 |
| Contingent consideration, beginning of the year | $ | 15,335 | | | $ | 8,328 | |
| Additions for acquisitions | 325 | | | 6,299 | |
| Reduction of liability for payments made | (1,500) | | | (2,264) | |
| (Decrease) increase of liability related to re-measurement of fair value | (859) | | | 2,972 | |
| Total contingent consideration, end of the period | 13,301 | | | 15,335 | |
| Current portion of contingent consideration | 10,606 | | | 10,854 | |
| Contingent consideration, less current portion | $ | 2,695 | | | $ | 4,481 | |
NV5 Global, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(in thousands, except share data)
Note 12 – Commitments and Contingencies
Litigation, Claims and Assessments
The Company is subject to certain claims and lawsuits typically filed against the engineering, consulting and construction profession, alleging primarily professional errors or omissions. The Company carries professional liability insurance, subject to certain deductibles and policy limits, against such claims. However, in some actions, parties are seeking damages that exceed our insurance coverage or for which we are not insured. While management does not believe that the resolution of these claims will have a material adverse effect, individually or in aggregate, on its financial position, results of operations or cash flows, management acknowledges the uncertainty surrounding the ultimate resolution of these matters.
Note 13 – Stock-Based Compensation
In October 2011, the Company's stockholders approved the 2011 Equity Incentive Plan, which was subsequently amended and restated in March 2013 (as amended, the “2011 Equity Plan”). The 2011 Equity Plan provides directors, executive officers, and other employees of the Company with additional incentives by allowing them to acquire ownership interest in the business and, as a result, encouraging them to contribute to the Company’s success. The Company may provide these incentives through the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares and units, and other cash-based or stock-based awards. As of April 1, 2023, 1,931,726 shares of common stock are authorized and reserved for issuance under the 2011 Equity Plan. This reserve automatically increases on each January 1 from 2014 through 2023, by an amount equal to the smaller of (i) 3.5% of the number of shares issued and outstanding on the immediately preceding December 31, or (ii) an amount determined by the Company's Board of Directors. The restricted shares of common stock granted generally provide for service-based vesting after two to four years following the grant date.
The 2011 Equity Incentive Plan expired pursuant to its terms in March 2023, accordingly no further grants were made following the date of such expiration. Prior to such expiration, the Company's Board adopted the 2023 Equity Incentive Plan (the "2023 Equity Plan") to replace the 2011 Equity Incentive Plan, subject to stockholder approval in June 2023, and authorized the issuance of 2,328,504 shares of the Company's common stock in connection with awards pursuant to the 2023 Equity Plan.
The following summarizes the activity of restricted stock awards during the three months ended April 1, 2023:
| | | | | | | | | | | |
| Number of Unvested Restricted Shares of Common Stock and Restricted Stock Units | | Weighted Average
Grant Date Fair
Value |
| December 31, 2022 | 713,793 | | $ | 81.25 | |
| Granted | 63,548 | | $ | 108.67 | |
| Vested | (13,562) | | $ | 71.44 | |
| Forfeited | — | | $ | — | |
| April 1, 2023 | 763,779 | | $ | 83.7 | |
Stock-based compensation expense relating to restricted stock awards during the three months ended April 1, 2023 and April 2, 2022 was $5,826 and $4,789, respectively. In connection with the Company's 401(k) Profit Sharing match, stock-based compensation expense during the three months ended April 1, 2023 includes $614 of expense related to the Company's liability-classified awards. The total estimated amount of the liability-classified awards for fiscal 2023 is approximately $5,747. Approximately $30,937 of deferred compensation, which is expected to be recognized over the remaining weighted average vesting period of 1.2 years, is unrecognized at April 1, 2023. The total fair value of restricted shares vested during the three months ended April 1, 2023 and April 2, 2022 was $1,685 and $1,376, respectively.
NV5 Global, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(in thousands, except share data)
Note 14 – Income Taxes
As of April 1, 2023 and December 31, 2022, the Company had net deferred income tax liabilities of $16,853 and $6,893, respectively. Deferred income tax liabilities primarily relate to intangible assets and accounting basis adjustments where we have a future obligation for tax purposes.
The Company's effective income tax rate was 19.7% and 25.8% during the three months ended April 1, 2023 and April 2, 2022, respectively. The difference between the effective income tax rate and the combined statutory federal and state income tax rate in both periods was primarily due to federal tax credits.
The Company evaluates tax positions for recognition using a more-likely-than-not recognition threshold, and those tax positions eligible for recognition are measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon the effective settlement with a taxing authority that has full knowledge of all relevant information. Fiscal years 2019 through 2022 are considered open tax years in the U.S. federal jurisdiction, state and foreign jurisdictions. Fiscal years 2012 - 2014 are considered open in the State of California. It is not expected that there will be a significant change in the unrecognized tax benefits within the next 12 months.
Note 15 – Reportable Segments
The Company reports segment information in accordance with ASC Topic No. 280 “Segment Reporting” (“Topic No. 280”). The Company's Chief Executive Officer, who is the chief operating decision maker ("CODM"), organized the Company into three operating and reportable segments: Infrastructure ("INF"), which includes the Company's engineering, civil program management, utility services, and construction quality assurance, testing and inspection practices; Building, Technology & Sciences ("BTS"), which includes the Company's environmental health sciences, clean energy consulting, buildings and program management, and MEP & technology design practices; and Geospatial Solutions ("GEO"), which includes the Company's geospatial solution practices.
The Company evaluates the performance of these reportable segments based on their respective operating income before the effect of amortization expense related to acquisitions and other unallocated corporate expenses. The following tables set forth summarized financial information concerning our reportable segments:
| | | | | | | | | | | | | | | |
| Three Months Ended | | |
| April 1, 2023 | | April 2, 2022 | | | | |
| Gross revenues | | | | | | | |
| INF | $ | 88,210 | | | $ | 99,963 | | | | | |
| BTS | 52,846 | | | 60,454 | | | | | |
| GEO | 43,261 | | | 29,737 | | | | | |
| Total gross revenues | $ | 184,317 | | | $ | 190,154 | | | | | |
| | | | | | | |
| Segment income before taxes | | | | | | | |
| INF | $ | 16,981 | | | $ | 16,250 | | | | | |
| BTS | 8,418 | | | 12,812 | | | | | |
| GEO | 7,021 | | | 5,104 | | | | | |
| Total Segment income before taxes | 32,420 | | | 34,166 | | | | | |
Corporate(1) | (25,016) | | | (22,526) | | | | | |
| Total income before taxes | $ | 7,404 | | | $ | 11,640 | | | | | |
(1) Includes amortization of intangibles of $9,037 and $8,263 for the three months ended April 1, 2023 and April 2, 2022, respectively.
NV5 Global, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(in thousands, except share data)
The Company disaggregates its gross revenues from contracts with customers by geographic location, customer-type and contract-type for each of our reportable segments. Disaggregated revenues include the elimination of inter-segment revenues which has been allocated to each segment. The Company believes this best depicts how the nature, amount, timing and uncertainty of its revenues and cash flows are affected by economic factors. Gross revenue, classified by the major geographic areas in which the Company's customers were located, were as follows:
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| Three Months Ended April 1, 2023 | | Three Months Ended April 2, 2022 |
| INF | | BTS | | GEO | | Total | | INF | | BTS | | GEO | | Total |
| United States | $ | 88,210 | | | $ | 44,386 | | | $ | 42,224 | | | $ | 174,820 | | | $ | 99,963 | | | $ | 52,917 | | | $ | 29,215 | | | $ | 182,095 | |
| Foreign | — | | | 8,460 | | | 1,037 | | | 9,497 | | | — | | | 7,537 | | | 522 | | | 8,059 | |
| Total gross revenues | $ | 88,210 | | | $ | 52,846 | | | $ | 43,261 | | | $ | 184,317 | | | $ | 99,963 | | | $ | 60,454 | | | $ | 29,737 | | | $ | 190,154 | |
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Gross revenue by customer were as follows:
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| Three Months Ended April 1, 2023 | | Three Months Ended April 2, 2022 |
| INF | | BTS | | GEO | | Total | | INF | | BTS | | GEO | | Total |
| | | | | | | | | | | | | | | |
| Public and quasi-public sector | $ | 69,730 | | | $ | 17,947 | | | $ | 35,768 | | | $ | 123,445 | | | $ | 79,206 | | | $ | 15,261 | | | $ | 22,989 | | | $ | 117,456 | |
| Private sector | 18,480 | | | 34,899 | | | 7,493 | | | 60,872 | | | 20,757 | | | 45,193 | | | 6,748 | | | 72,698 | |
| Total gross revenues | $ | 88,210 | | | $ | 52,846 | | | $ | 43,261 | | | $ | 184,317 | | | $ | 99,963 | | | $ | 60,454 | | | $ | 29,737 | | | $ | 190,154 | |
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Gross revenues by contract type were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended April 1, 2023 | | Three Months Ended April 2, 2022 |
| INF | | BTS | | GEO | | Total | | INF | | BTS | | GEO | | Total |
| | | | | | | | | | | | | | | |
| Cost-reimbursable contracts | $ | 83,857 | | | $ | 40,624 | | | $ | 43,227 | | | $ | 167,708 | | | $ | 95,725 | | | $ | 39,487 | | | $ | 29,644 | | | $ | 164,856 | |
| Fixed-unit price contracts | 4,353 | | | 12,222 | | | 34 | | | 16,609 | | | 4,238 | | | 20,967 | | | 93 | | | 25,298 | |
| Total gross revenues | $ | 88,210 | | | $ | 52,846 | | | $ | 43,261 | | | $ | 184,317 | | | $ | 99,963 | | | $ | 60,454 | | | $ | 29,737 | | | $ | 190,154 | |
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NV5 Global, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(in thousands, except share data)
Note 16 – Subsequent Events
On April 6, 2023 ("L3 Harris Closing Date"), the Company acquired the Visual Information Solutions commercial geospatial technology and software business ("VIS") from L3Harris. VIS is a provider of subscription-based software solutions for the analysis and management of software applications and Analytics as a Service (AaaS) solutions. The Company acquired VIS for a cash purchase price of approximately $70,000 net of cash acquired.