NV5 Global Inc (NVEE) 2014 Q2 法說會逐字稿

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  • Operator

  • Greetings, and welcome to the NV5 Holdings second-quarter 2014 financial results conference call.

  • (Operator Instructions).

  • I would now like to turn the conference over to Mr. Glenn Garmont, Director of The Piacente Group.

  • Thank you, Mr. Garmont, you may now begin.

  • Glenn Garmont - Director

  • Thank you, operator.

  • Before we proceed I would like to remind everyone that this call contains forward-looking statements within the meaning of the Safe Harbor Provisions of the US Private Securities Litigation Reform Act of 1995 including, among others, statements with respect to our strategy of completing key acquisitions, our ability to generate organic growth and drive performance optimization, expanding our backlog, our ability to increase utilization and increasing our guidance relating to gross revenues and earnings per share.

  • The Company cautions that these statements are qualified by important factors that could cause actual results to differ materially from those reflected by the forward-looking statements contained herein.

  • Such factors include, but are not limited to, changes in demand from the local and state governments and private clients that we serve; general economic conditions nationally and globally and their effect on the market for our services; competitive pressures and trends in our industry and our ability to successfully compete with our competitors; changes in laws, regulations, or policies; our ability to successfully execute our mergers and acquisition strategy, including the integration of new companies into the Company's business; backlog cancellations and adjustments; and the risk factors set forth in the Company's most recent SEC filings.

  • All forward-looking statements are based on available information on the date hereof and the Company assumes no obligation to update such statements.

  • I would like to remind everyone that this call will be available for replay through August 20, 2014, starting at 8 PM Eastern time tonight.

  • A webcast replay will also be available via the link provided in today's press release as well as available on the Company's these websites www.nv5.com.

  • Any redistribution, retransmission, or rebroadcast of this call in any way without the express written consent of NV5 Holdings Incorporated is strictly prohibited.

  • We will begin the call with commentary from Dickerson Wright, Chairman and CEO of NV5 before turning the call over to Michael Rama, Chief Financial Officer for the review of the financial results and outlook.

  • We will then open the call for your questions.

  • Dickerson, please go ahead.

  • Dickerson Wright - Chairman and CEO

  • Thank you, Glenn, and good afternoon, everyone.

  • As you saw at the close of the market today, we issued a press release announcing our financial results for the second quarter, which ended June 30, 2014.

  • We reported another strong quarter for growth in revenues and growth in net income of 70% and 43%, respectively.

  • We continued to advance our strategy during the quarter as evidenced by the revenue and income growth.

  • We also completed a key acquisition and added significantly to our backlog.

  • Our results again demonstrated the success of our model which blends strong organic growth in our five core verticals with continuous process improvement that we apply to operations and to our acquisitions.

  • There are three areas that I would like to highlight in my prepared remarks today.

  • First, organic growth.

  • Our combined organic growth is 13%.

  • The overall organic growth includes our acquisition.

  • This growth is supported by expanding backlog which increased 26% to $76.1 million since the end of 2013.

  • Cross-selling opportunities between the companies is also a driver of our organic growth.

  • Next I would like to talk about performance excellence.

  • We have developed a process for incorporating performance improvement to acquisitions to approve an acquisition integration plan.

  • Through process improvement, our performance has resulted in a 43% increase in overall profitability and a 33% increase in profitability of our acquisitions.

  • Last, I would like to speak about acquisitions which is our third driver of our strategy to reach our goal of $300 million of revenue by 2016.

  • At any given time, we are evaluating 10 different potential deals at least.

  • As we have said before, we do not complete deals unless there is a fit with our culture of growth and increasing shareholder value.

  • This has been evident by the double-digit organic growth and double-digit bottom line profit improvement of the acquisitions that we have completed to date.

  • On the topic of mergers and acquisitions, during the quarter we acquired Owner's Representative Services, Inc.

  • or ORSI, a program management firm specializing in large-scale development of healthcare facilities.

  • The acquisition strengthens our program management vertical, but it also increases our Company's presence in the Midwest and Rocky Mountains region.

  • ORSI represents our first foray into the healthcare facility space.

  • And we are excited to apply our program management expertise to this rapidly growing segment of the market.

  • Our ongoing business is solid and we are confident that we will meet our stated projections for the year.

  • In other developments our stock was added to the Russell Microcap Index, an important achievement for the Company as we seek to broaden our exposure to the investment community.

  • The addition to this index reflects our continuous effort to deliver value to our shareholders.

  • Before I turn the call over to Michael to review the Q2 results, I would like to call your attention to the S3 shelf registration that we filed after the closing of the financial market today.

  • As we have communicated on previous calls, our pipeline of acquisition opportunities remains full.

  • And we continue to seek larger opportunities.

  • We believe this shelf registration is a prudent move to ensure that we have the necessary financial flexibility to execute on the M&A aspect of our growth plan.

  • This shelf, in conjunction with our operating cash and existing unused credit facilities, positions the Company to be very opportunistic.

  • I would like now to turn the call over to our Chief Financial officer, Michael Rama, for an overview of the financial and 2004 outlook.

  • Michael.

  • Michael Rama - CFO

  • Thanks, Dickerson, and good afternoon, everyone.

  • As you saw at the close of the market today, we issued a press release announcing our financial results for the second quarter and six months ended June 30, 2014.

  • I will first provide a review of the Company's second-quarter results before turning to the six months ended 2014 results and, finally, our 2014 outlook.

  • Total gross revenues in the second quarter of 2014 were $29.2 million.

  • an increase of 70% compared with gross revenues of $17.1 million in the second quarter of 2013.

  • The increase was due to organic growth from our existing platform as well as the contribution from acquisitions made in 2013 and during the first six months of 2014.

  • Gross profit in the second quarter of 2014 increased 39% to $11.9 million compared to $8.6 million in the second quarter of 2013.

  • We note that our reported gross profit margin in any given reporting period can fluctuate, based on a number of factors, including utilization levels of professional staff as well as subconsulting costs.

  • Total operating expenses were $10.2 million in the second quarter of 2014 compared with $7.5 million in the same period last year.

  • The increase in operating expenses was due to integration costs from businesses acquired subsequent to June 30, 2013.

  • As a percentage of gross revenues.

  • operating expenses were 34.9% for the three months ended June 30, 2014, compared to 43.5% for the three months ended June 30, 2013.

  • This decrease was the result of the increase in utilization compared to the same period last year and internal focus on performance optimization and the scalability of our operations as we integrate new acquisitions.

  • Net income in the second quarter of 2014 was $1.1 million, an increase of 43% compared to a net income of $737,000 in the second quarter of 2013.

  • Second-quarter 2014 fully diluted earnings per share was $0.19 versus $0.18 in the second quarter of 2013.

  • Our second-quarter 2014 earnings per share reflects the weighted average shares outstanding of approximately 5.6 million shares for the three months ended June 30, 2014, compared to the weighted average shares outstanding of approximately $4 million for the three months ended June 30, 2013.

  • The earnings per share for the second quarter of 2014 includes a higher income tax rate of 36.6% compared to an effective income tax rate of 30.7% in the second quarter of 2013.

  • Turning now to our six months ended 2014 results, we reported gross revenues of $48.2 million in 2014, an increase of 47% over $32.7 million for the same period in 2013.

  • Our gross profit was $21.3 million, an increase of 26% for the same period in 2013.

  • Total operating expenses were $18.4 million for the six months ended June 30, 2014, compared with $50 million for the same period in 2013.

  • As a percentage of gross revenues operating expenses were 38.1% for the six months ended June 30, 2014, compared to 45.8% for the six months ended June 30, 2013.

  • Finally, net income for the six months ended June 30, 2014, was $1.8 million, an increase of 36% compared to net income of $1.3 million during the same period in 2013.

  • Six months ended 2014 fully diluted earnings per share was $0.32 versus $0.40 in the same period of 2013.

  • Our year-to-date 2014 earnings per share reflects the weighted average shares outstanding of approximately 5.5 million shares for the six months ended June 30, 2014, compared to the weighted average shares outstanding of approximately $3.2 million for the six months ended June 30, 2013.

  • The earnings per share for the six months ended 2014 includes a higher income tax rate of 36.6% compared to an effective tax -- income tax rate of 28.2% for the six months ended June 30, 2013.

  • At June 30, 2014, we reported backlog of approximately $76.1 million compared to approximately $60.2 million at December 31, 2013.

  • Our backlog is an estimate of revenues to be recognized over a rolling 12-month period.

  • Now moving on to our outlook for 2014.

  • We are raising our 2014 guidance for gross revenues and earnings per share.

  • Our revised guidance for the full year 2014 gross revenues, including the impact of acquisitions closed during the first half of 2014, ranges between $100 million and $107 million, representing an increase of approximately 47% to 57% from 2013 gross revenues of $68.2 million.

  • In addition, we revised our guidance for earnings per share and expect that full-year 2014 diluted earnings per share will range between $0.82 and $0.92 per share.

  • We note that this guidance includes contributions from acquisitions closed during the first six months of 2014 as of their closing dates.

  • However this guidance does not include any anticipated acquisitions for the remainder of 2014.

  • This completes our prepared remarks.

  • At this point we would like to open the call for your questions.

  • Operator

  • (Operator Instructions).

  • Jeff Martin, ROTH Capital Partners.

  • Will Prior - Analyst

  • This is [Will Prior] on for Jeff Martin.

  • Thanks for taking my questions.

  • The first one I have got is that you made seven acquisitions since going public.

  • Can you walk us through the performance of those and how you feel they are affecting your ability to growth the business organically?

  • And second is I was wondering if you were seen any cross-selling opportunities as a result of the M&A strategy.

  • Dickerson Wright - Chairman and CEO

  • Thanks, Will.

  • This is Dick Wright.

  • I will address those questions.

  • We are very happy with the acquisitions we have done to date.

  • I think if you look at that organic growth that they individually are tracking very nicely between 13% and 15%.

  • And as you have seen in our stated remarks that we have increased the profitability of these acquisitions.

  • I think the real direct answer to growth is that these acquisitions not only position us in a geographical area that perhaps we haven't been, but it really strengthens the platform for our organic growth, in entering new markets and new service lines.

  • We still are driving along those five verticals and each of these acquisitions will have -- has had a strategic impact on those.

  • As for cross-selling, we have identified an individual that will be heading up all of the cross-selling, because we realize as we grow the real driving support, underlying support, for this organic growth is our ability to Internet and interwork between our offices.

  • So we have a person that has been assigned there in the second quarter and going forward to drive organic growth, knowing having all of our key people, knowing what our other offices do so there is first an internal process for learning what our -- each of the offices do for organic growth and knowing what service lines we can offer.

  • And I can tell you right now in our new acquisitions with AQC, we are entering new markets in California that they weren't before.

  • We are entering markets through our environmental firms.

  • AK has introduced us to surveying markets in Colorado for our infrastructure group.

  • So we are really pleased with that.

  • But cross-selling is something that you just -- all senior management has to stay focused on and we felt we needed to identify a very senior person to do that.

  • So I appreciate that question, Will.

  • Will Prior - Analyst

  • Definitely, thanks.

  • And the industry does remain highly fragmented, so can you give us your take on the current state of the M&A outlook with the industry today?

  • And how does that compare with the past, given your history in the industry?

  • Dickerson Wright - Chairman and CEO

  • Well, as I said in our stated remarks, we have at least 10 deals very forward in our thinking.

  • 10 deals in our acquisition pipeline.

  • Of those deals, six of those deals usually are we would sign an NDA and two or three were in due diligence.

  • Deals fall in, deals fall out, but what we are seeing is larger opportunities as we get known in the market more for the acquisitions.

  • So our acquisitions now are tending to be targeted towards bigger acquisitions.

  • And you will notice that in our S3 filing, we did the filing so that we will have the adequate capital if necessary for bigger acquisitions.

  • And it is really important to understand in the -- in that S3 filing it was done to strengthen our opportunities in acquisitions.

  • It is not to pay down any debt.

  • We are cash flowing very nicely.

  • In fact we cash flow about just under $2 million a quarter.

  • It is not for any operating issues, it is not to take down any debt and not like some of our competitors that have done secondary offerings.

  • Ours is just using this as a vehicle to -- a financial vehicle to expand on the growing opportunities that we are seeing.

  • And we have some -- we can't give you too much forward thinking, but we can tell you that we are excited about what is out there.

  • And we are also excited that the valuation seem to stay steady.

  • And we pay trailing earnings and we get the benefit of forward earnings and we don't price synergies in the deal.

  • So, long-winded answer to that question.

  • Very excited about opportunities and we are pleased that we now -- should we need it, should we need to go to that shelf we have it available ready to bring in -- bring in an opportunity to -- capital to grow these.

  • So, we are excited about what is in front of us.

  • Will Prior - Analyst

  • All right.

  • Thanks for the clarity there.

  • Moving on to some specific questions about business segments.

  • Do you -- can you give us an update on the [CQA] and infrastructure groups?

  • What is happening there?

  • Dickerson Wright - Chairman and CEO

  • Okay.

  • Well, let's -- many of you have heard this before that I said our overall strategy is with our infrastructure platform is to be that feeder of the other verticals and to allow cross-selling and to enter the market at a very high level.

  • With our infrastructure group we entered the market in design.

  • We entered the market very early on and win capital funding processes and we enter in as a professional that can feed those other markets.

  • So we have -- we hired a key professional at the end of last year and beginning of the first quarter to drive what is going on in infrastructure.

  • Tremendous profit improvements.

  • You'll see that.

  • We are seeing a much higher profit now in the infrastructure group.

  • But it is really introducing us to other verticals.

  • So we are happy what's going there.

  • We are starting to see that organic growth go from that larger platform.

  • As far as CQA, CQA remains very strong continuing to grow organically.

  • Growing about 15%.

  • Bottom line is the highest in the group and we are very, very happy in the claims area and construction defects and we are looking at acquisition opportunities that will really, really grow that space.

  • So that is kind of the state of the union on those two verticals.

  • Will Prior - Analyst

  • Great, thanks.

  • And then, Mike, a couple of quick modeling questions.

  • What -- how much revenue in the quarter came from acquisitions that were not included in the business during the second quarter of 2013?

  • If you can break that out.

  • Michael Rama - CFO

  • Hi, Will, nice to meet you.

  • $9.4 million came from acquisitions during the quarter.

  • However we also generated another $3.6 million from organic growth from -- compared to the quarter last year.

  • So that represented about 15% organic growth for the quarter.

  • Will Prior - Analyst

  • Okay, thanks.

  • And did you have a share count, a dollar amount of any acquisition-related expenses incurred during the quarter?

  • Michael Rama - CFO

  • During the quarter we generated $197,000 of acquisition-related expenditures.

  • Will Prior - Analyst

  • Okay.

  • And then the quarter share count?

  • Michael Rama - CFO

  • And this quarter share count is 5,504,236.

  • Will Prior - Analyst

  • All right.

  • Thanks, guys.

  • Operator

  • Gregg Hillman, First Wilshire Securities Management.

  • Gregg Hillman - Analyst

  • Could you talk about on the human resource side --

  • Dickerson Wright - Chairman and CEO

  • Sure.

  • What would you like me to talk about?

  • Gregg Hillman - Analyst

  • In particular just for the -- some of the companies that you are training do they have -- that you are acquiring -- do they have in-house training capabilities?

  • Dickerson Wright - Chairman and CEO

  • Well --

  • Gregg Hillman - Analyst

  • Do they have in-house training capability?

  • Like in other words, if that vertical really takes off are you going to have adequate capacity to meet the demand?

  • Can you gear up?(multiple speakers)

  • Dickerson Wright - Chairman and CEO

  • Let me -- thanks, Gregg.

  • I understand and it's a good question.

  • Let me approach it from two areas.

  • We believe and, as anyone has heard me speak, no, we believe in human resources as one of the key and most important drivers in supporting our growth.

  • We are in a people business.

  • People have to be with us, engaged, trained, because that is what we have.

  • That is what we have as a company.

  • That inventory, if you will, walks in and out of the door every night.

  • So they need to be engaged very well.

  • The first thing we do as part of our integration program is to bring our key leader, the senior executive of human resources, to understand completely what that company is, what needs they have and we have -- we have grown their human resources department, we have added people.

  • As we make the acquisitions, we have regional human resources persons that will most likely be from that company that supports what we are doing and that supports in training.

  • That supports what we're doing in our benefit program which becomes ours.

  • And I think the important thing to understand is culture.

  • And we have said that many times in our acquisitions.

  • One of those things in culture is that that person believes what we believe.

  • We believe in what is best moving that person forward.

  • Training that person.

  • Educating that person.

  • Not just in the technical fields that we are going in, but understanding that the culture of our Company.

  • So that is what we mean.

  • So when we sometimes say culture, we are really addressing the human resource aspect also.

  • Gregg Hillman - Analyst

  • Okay.

  • And through these principles of these companies that you are acquiring, are they willing to fly around the country and to do consulting work or are they just regional guys?

  • Dickerson Wright - Chairman and CEO

  • Well, it depends at the level of the person.

  • Some of the acquisitions that we are looking at right now have a national footprint.

  • So they have been flying around the country.

  • And they will continue to do that as we support them.

  • If you are looking at growing the opportunities from moving people around, we really feel that first it is our (inaudible) leaders is that they create -- you know we have a vertical organization so it is built on the concept that each of these verticals have to growth nationally.

  • As senior leaders and the larger acquisitions come in, they have been inclined to support those verticals in growing in national.

  • But I mean that is -- that's what's expected of our leaders and that's also what is expected in the larger acquisitions.

  • The smaller acquisitions, those tend to be a bolt-on or tuck-in to an existing platform that we have.

  • Gregg Hillman - Analyst

  • Okay.

  • And for the healthcare one, can you talk a little bit more about the healthcare, the addressable market that that company is in the healthcare and exactly what they do?

  • Do they just do quality control assurance but for healthcare projects or do they do something else that is unique in the industry?

  • Dickerson Wright - Chairman and CEO

  • Gregg, great, good question.

  • I wish -- I should've been a little clearer.

  • No, they don't do anything with quality assurance.

  • They are program managers and these people that are managing or see a licensed architect with very long relationships, embedded relationships.

  • The key accounts that they have they have work in Cleveland with the Cleveland Clinic, but in fact talk about moving around, they are down next week presenting with our forensics people with a relationship we have at Mount Sinai and other opportunities.

  • But the main work that they are doing is program management of the entire program.

  • And the University of Kansas and that Kansas healthcare Center is their key major project which is growing.

  • We did a lot of due diligence to make sure that that one would continue to grow.

  • But that is at a higher level.

  • That is the program management vertical.

  • That is not like testing concrete.

  • But as far as synergy, entering that client at a very high level at the architectural managing the program level, they tend to manage what goes on in the testing contracts and the inspection contracts.

  • But really, that is in-depth what they are doing.

  • And we are looking now to expand they are entering us into the healthcare space.

  • Good leadership there.

  • And we look for good opportunities now that we didn't have in program management and healthcare because of ORSI.

  • Gregg Hillman - Analyst

  • Okay.

  • So basically they work for typically large academic medical centers with sometimes large campuses like the Cleveland Clinic and they always have architectural needs and to expand things and do different things with their CapEx --?

  • Dickerson Wright - Chairman and CEO

  • Right, yes.

  • And it is both CapEx and OpEx.

  • So there's constant facility improvements and things.

  • So they tend to get embedded for longer periods of time with a client.

  • But they do represent university healthcare centers and larger nationally known hospitals.

  • Gregg Hillman - Analyst

  • Okay, so that would be a good opportunity for synergies, for community centers and some other clients you have.

  • Okay.

  • And can they do other things other than health care or are they just healthcare?

  • Dickerson Wright - Chairman and CEO

  • No, they can do -- they specialize in healthcare, but our program management group, as you know, we are very well known in the hospitality and leisure section.

  • We mentioned our national contract with Ruth Chris and Ritz-Carlton.

  • So, this is just another key service line expansion in our program management group.

  • And those come in by the way at very high margins.

  • We just need to grow that figure.

  • That is one of our smaller verticals.

  • Gregg Hillman - Analyst

  • Okay, great.

  • Thanks.

  • Operator

  • [Josh Nichols], B. Riley.

  • Josh Nichols - Analyst

  • I know you guys are looking to do some bigger acquisitions and historically maybe $3 million to say like $30 million was the sweet spot.

  • Given the 10 deals that you are looking at right now, could you give me an idea what type of range we are looking at?

  • Dickerson Wright - Chairman and CEO

  • Well, I won't give any specificity of each deal on each side, but if you take the 10 -- okay the 10 aggregate we are looking at that total looks like somewhere between $98 million and $122 million.

  • Josh Nichols - Analyst

  • Okay.

  • And then what type of (multiple speakers)?

  • Dickerson Wright - Chairman and CEO

  • Something small, something larger.

  • Josh Nichols - Analyst

  • Right.

  • And then what type of multiples are you looking at?

  • What is the range for them, the deals?

  • Dickerson Wright - Chairman and CEO

  • What are we paying or what are we looking to pay?

  • Josh Nichols - Analyst

  • Well, I guess this -- meet somewhere in the middle on that, right?

  • Dickerson Wright - Chairman and CEO

  • We pay traveling earnings.

  • We pay a trailing on EBIT.

  • We usually don't like to put a multiple on EBITDA.

  • And that trailing has -- and we are very -- we have, depending on the strategy, we like to say we have a ceiling of six times.

  • And I think on all the deals that we have done so far we have been averaging under six.

  • They have been 4.5 up to six times trailing EBIT and even where our stock is, it looks like we are getting about a 50% arbitrage at on an after-tax valuation.

  • Josh Nichols - Analyst

  • Great.

  • And any big changes in the revenue mix as far as infrastructure still around a quarter of it, energy 30 to 35, as the two big segments or is that starting to move with the acquisition significantly as well?

  • Dickerson Wright - Chairman and CEO

  • Well, we are focusing on areas that have much higher than the industry standard in returns.

  • But the mix, when you say infrastructure energy, it's a little bit crowded because a lot of our key energy work is housed in the infrastructure group.

  • But we -- for example, though, the mix we did with -- we did a pipeline, the acquisition of AK.

  • We are very happy with it.

  • Mike, I guess I can say what the revenue is roughly.

  • We looked at that to be an energy and environmental.

  • It is a bit of a mix.

  • But that is energy.

  • That is energy trans -- transmission and delivery where we are looking also for energy-generating clients like the big utilities.

  • That acquisition, though, we anticipated that being a run rate of $24 million acquisition and we are really growing that and we are pleased to be part of it.

  • But it is running now at a run rate of about $36 million.

  • So if you take that piece and of that $36 million probably $30 million run rate of it is pure energy pipeline work.

  • And but if you took that mix with the infrastructure, that would compose of -- that would compose probably 50%, 55% or so of the business, maybe a little bit more than that.

  • Josh Nichols - Analyst

  • Okay.

  • And last question, looking -- and if you are still targeting the 12% to 15% EBITDA margins, I am wondering is that -- you probably -- probably somewhere around 10 right now.

  • Is that mix you think going to come from the acquisitions by going after some of the higher growth, higher margin areas or is it going to be a bit because of synergies or just how you see the Company getting there over the next couple of years?

  • Dickerson Wright - Chairman and CEO

  • Thanks, Josh.

  • That was a good call on -- EBITDA is probably closer to 11%.

  • But it really comes from the model is comes from [scalability].

  • And it -- we -- it -- we have a cost to integrate the acquisitions, manage those acquisitions and have a very aggressive M&A strategy.

  • We have a full-time M&A person.

  • I spend probably half of my time with deals and getting deals done.

  • And we do this for a percentage of revenue.

  • And what you see is those results after that management fee, if you will.

  • As we continue to increase the volume as a percentage and, roughly, we are anticipating 8% management fee, we are expecting that to drop lower so that will go -- that will be part of the synergies that we have in scalability to the bottom line.

  • So we don't -- we think that 12% to 14% to 15% EBITDA is right in front of us.

  • Josh Nichols - Analyst

  • Great.

  • Thanks a lot.

  • I appreciate it.

  • Operator

  • Alex Silverman, Special Situations Fund.

  • Alex Silverman - Analyst

  • Good evening.

  • Can you -- thank you by the way for providing the net revenues.

  • It is a helpful way of looking at this.

  • What exactly are the direct costs that you strip out?

  • Dickerson Wright - Chairman and CEO

  • I am going to turn that over to Mike for --

  • Michael Rama - CFO

  • The direct cost would generally be reimbursables that our employees charge and we are able to bill back to the client.

  • Alex Silverman - Analyst

  • Okay so as a zero margin?

  • Michael Rama - CFO

  • Practically, yes.

  • Alex Silverman - Analyst

  • Okay.

  • And so how should we be thinking about gross margins and SG&A as a percent of net revenues going forward?

  • Dickerson Wright - Chairman and CEO

  • If you are looking at the gross margin, you will probably see a erosion in the gross margin recently and that is coming from the AK acquisition which -- that is, in the pipeline business, that is a high level technical staffing business.

  • Where that gross margin has -- is running in the mid-20% where historically the rest of our Company runs in the 60%.

  • So you'll see a difference and that has representing as we mentioned earlier, their revenue is growing.

  • I think it is interesting, though, to point out about gross margin that sometimes a bit -- it will show up in the aggregate total of gross margin, but the gross margin and AK although being lower is based on a bigger growth dollar, because we are putting much higher compensated or build for individuals.

  • So that gross in real dollars is more.

  • So the trend that -- and we are not, we think it's a great positioning and a great opportunity for synergy and lead to other work.

  • We are not trying to say that we are going be purely in that business.

  • But the erosion, really, in gross margin has come from AK and we are very happy with the success of AK.

  • Alex Silverman - Analyst

  • Okay.

  • But how -- well -- how should we model out as a percent?

  • I mean roughly, historically, you or your gross margin has been in the low 50s, high 40s as a percent of total revs.

  • Should we be thinking of it as a percent of net revs?

  • Dickerson Wright - Chairman and CEO

  • As a percentage of net revs, we are at about 58% on net revenues.

  • Alex Silverman - Analyst

  • Okay.

  • And how should we be thinking about SG&A?

  • Dickerson Wright - Chairman and CEO

  • How would you like to think about it?

  • What -- ? (multiple speakers) trying to follow the question.

  • Alex Silverman - Analyst

  • What should -- historically the thought was that the leverage would come on the SG&A line, right?

  • Grow revenue, keep SG&A tight and lever that to drop more to the bottom line.

  • Are there targets that you guys are using that you are willing to share with us?

  • Dickerson Wright - Chairman and CEO

  • No, well, let's say we agree with what you've said.

  • What happens as you are building a platform, the first thing and we are starting, as I started to say, that we are starting to see scalability in that overall -- I will call it overall management fee.

  • We are starting to see some scalability there.

  • But as you are building that platform and as we have done some of the -- and are in the -- I can't say but as we look at the larger acquisitions, the integration process is supported at the G&A level and we are spending some money in that G&A process to make sure that the due diligence is correctly done and in that if I am not incorrect, but we have the legal cost.

  • We have got -- and for example we looked at some deals that we got closed and got very involved and saw the culture didn't fit and Mike explained to you that we spent about $200,000 in this quarter on -- and that was solely associated with that M&A work.

  • So, Alex, I agree.

  • It is going to go down.

  • It will go down as we get a larger more volume, but we still need to donate dedicate some funds to have that aggressive M&A approach.

  • So that is probably where you may see some movement in that.

  • And now in our second quarter our volume is when the months -- where our volume is really increasing, so maybe as a percentage you are going to see that SG&A go down in the coming quarters.

  • Alex Silverman - Analyst

  • Okay.

  • Very helpful.

  • Thank you.

  • Operator

  • (Operator Instructions).

  • Fred Milligan, Wunderlich Securities.

  • Fred Milligan - Analyst

  • Good evening.

  • Is it a requirement that all acquisitions are accretive?

  • Dickerson Wright - Chairman and CEO

  • That certainly tries to be our requirement.

  • Fred Milligan - Analyst

  • But it is a requirement?

  • Dickerson Wright - Chairman and CEO

  • Is it required by -- excuse me I am trying to --

  • Fred Milligan - Analyst

  • By your organization.

  • Dickerson Wright - Chairman and CEO

  • We don't want to go into any acquisition that is not accretive.

  • And although we haven't done there is sometimes that that accretive this does not happen the day of the acquisition, it could happen as we grow that company or they are entering us into a market that we know is going to make us very accretive.

  • But maybe immediately it isn't accretive.

  • How we manage though that, Fred, is that you may notice in some of our acquisitions now and that is and we have, right now, we have an $8 million unused line of credit.

  • We have cash and so we are not -- we weren't -- we are doing any offering, shelf offerings to finance the Company, but to look for opportunities.

  • Having said that, in the deals that you are starting to see with us, there will be we monitored the amount of stock we put into that deal.

  • We monitor the amount of stock of that deal so that hopefully and we've seen it every time so far, but I am knocking on my head and wood right now when I say that, but every deal we have done has been accretive.

  • Every deal we go into we look to be immediately accretive and that has been the case.

  • But it could be down the road that sometimes accretiveness does not come in the first month or the second month.

  • But the plan is for strategywise for it to be accretive going forward.

  • Fred Milligan - Analyst

  • Okay.

  • Second question.

  • The stock is very illiquid.

  • Any way of addressing that?

  • Dickerson Wright - Chairman and CEO

  • I address it every day.

  • No, I think, yes, it is.

  • We knew in our underwriting that we have had a -- we love our underwriters.

  • We are -- they are very supportive.

  • We love the institutions that are part of us and people thinks -- people seem to hold stock.

  • We need to look at ways and we look -- we think through acquisitions through deploying more stock through acquisitions, to meeting our goals and having the price per share increase we will get that liquidity.

  • So I think the plan is to grow the Company.

  • We are very focused on growing the Company.

  • At the timing right to use the following offering to maybe get more shares out there and apply them accretively to larger acquisitions.

  • We will start to get more stock trading hopefully.

  • Fred Milligan - Analyst

  • Thank you.

  • Operator

  • We have no further questions in queue at this time.

  • I would like to turn the floor back over to Mr. Wright for any closing remarks.

  • Dickerson Wright - Chairman and CEO

  • Thanks, Manny, and (technical difficulty) listening in and as you can see and, hopefully, from listening to Mike and myself, we are very excited about the growth of the Company and the opportunities in front of us.

  • We are really happy that our model is working as far as process improvement and organic growth.

  • But really for that opportunities we have in front of us with M&A.

  • We are preparing for it now and I can tell you this, we are going to stay focused.

  • We hope our presentation provided more insight on our progress, what we're doing and we feel very good about the outlook going forward, and we appreciate your interest and I look forward to speaking to everyone again next quarter.

  • Operator

  • Thank you.

  • Ladies and gentlemen, this does conclude tonight's teleconference.

  • You may disconnect your lines at this time and thank you for your participation.