Willdan Group Inc (WLDN) 2008 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Willdan Group fourth quarter 2008 investor conference call. During today's presentation all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. (Operator Instructions). This conference is being recorded today Tuesday, March 31st, 2009.

I would now like to turn the conference over to Ni Tata. Please go ahead.

Good afternoon, everyone Thank you for joining us to discuss Willdan Group's financial results for the fourth quarter and full fiscal year ended January 2, 2009. With us today from management are Chief Executive officer, Thomas Brisbin, and Chief Financial Officer Kimberly Gant. Management will review prepared remarks and we will then open up the call to your questions.

Statements made in the course of today's conference call which are not purely historical are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The forward-looking statements involve certain risks and uncertainties. And it is important to note that the Company's future results could differ materially from those in any such forward-looking statements. Factors that could cause actual results to differ materially and other risk factors are listed from time to time in the Company's SEC reports including, but not limited to, the Form 10-K annual report for the year-ended January 2nd, 2009 to be filed on April 2nd 2009. The Company cautions investors not to place undue reliance on the forward-looking statements made during the course of this conference call. Willdan Group, Inc. disclaims any obligation and does not undertake to update or revise any forward-looking statements made today.

With that, I will now turn the call over to Chief Financial Officer, Kimberly Gant. Kimberly?

Thank you. I'd like to provide you with a brief overview of our financial results for our fourth quarter and year-ended January 2, 2009. Tom will then walk you through how the current state of the economy impacted Willdan in 2008, steps we took to position Willdan for 2009 and beyond, and the progress we've made in diversifying our service platform. We will then conclude the call with questions and answers.

In 2008, generated revenue of $19 million in the fourth quarter which led to a total of $73.2 million for the year in line with previously issued guidance. We posted a diluted loss per share of $0.17 in the fourth quarter, $0.22 for the year. We generated positive cash flow from operations of $0.4 million in the fourth quarter, and $3.5 million for the year. And on a trailing three month basis, our day sales outstanding was 106 days, flat from our third quarter and up five days from the last year.

Our fourth quarter's revenue was up $0.3 million, or 1.6% to $19 million from $18.7 million in the same period last year, and as compared to $18.7 million in the third quarter, as well. On a segment basis, our Engineering Services segment contributed $14.9 million, or 79% of our fourth quarter revenue, of which $4.2 million was related to our acquisition of Intergy Corporation, now known as Willdan Energy Solutions. Our Public Finance Services segment contributed $3.4 million or 18% of our fourth quarter revenue. And our Homeland Security Services segment contributed $0.6 million or 3% of our fourth quarter revenue.

Our loss from operations for the fourth quarter was $2 million compared to income from operations of $0.3 million in the same period last year. Included in this loss from operations was lease abandonment expense of $742,000 related to exiting or reducing space in six of our engineering offices. We also elected not to renew our leases in four additional engineering offices. In addition to this expense, we incurred a goodwill impairment charge of $148,000 related to a historical acquisition in our Homeland Security Services segment. For the fourth quarter, we posted a net loss of $1.2 million or $0.17 per basic and diluted share as compared to net income of $0.3 million or $0.04 per basic and diluted share in our fourth quarter of 2007.

From a balance sheet perspective, at January 2nd, 2009, we had cash and cash equivalents of $8.1 million. This balance compares to $8.1 million at the end of our third quarter and $16.8 million last year. During 2008 we paid $10.2 million net of cash acquired in the purchase of Willdan Energy Solutions. We had no outstanding borrowings on our $5 million revolving line of credit at January 2nd, 2009 and our stockholders equity was $34.3 million.

Because our net loss for the year exceeded $1 million we were in violation of a financial covenant in our credit agreement as amended in December of 2008. On March 30, 2009, we further amended our credit agreement to waive the covenant violation, reduce or eliminate certain financial covenants while providing additional collateral to secure the underlying credit agreement. Details on this amendment can be found in our Form 10-K to be filed April 2, 2009. Further financial and business related details can be found in our Form 8-K filed today and our Form 10-K to be filed on April 2nd.

I'd like to now turn it over to Tom.

Thanks a lot, Kim. Good afternoon, everyone, and thanks for joining us today. 2008 was a challenging year for Willdan as we continued to be impacted by the weakness in the residential real estate market and reductions in state and local budgets. Over the course of the year we took the necessary steps to preserve cash and maximize profitability to position Willdan to weather the storm. As Kim said, we continued to generate positive cash flow from operations and ended the fourth quarter with $8.1 million in cash.

Importantly, we also made a lot of progress in diversifying our business model, away from our traditional business. I'll discuss that in a moment.

During the fourth quarter, declines in the residential housing market continued to impact our traditional engineering business. As you know, much of our work in this area was from building and safety plan checks and construction inspections for developments. Like most companies with exposure to the residential real estate sector, our business was hit hard last year. In fact, we were hit harder than many others due to our concentration in once high growth areas such as California, especially Southern California, Arizona and Las Vegas. Our view of the outlook for this business is pretty much in line with a recently published UCLA economic forecast which calls for continued declines in residential permits in California until 2010.

While the performance of our traditional business in 2008 was clearly a disappointment, we did make some real progress in diversifying our business over the past year. In 2008 our engineering business accounted for 68% of our revenue, down from 82% in 2007. We achieved this diversification primarily by expanding our services into environmental and energy through our acquisition of Intergy, which we now call Willdan Energy Solutions, as well as strong performance in our financial services business. In addition, through our focus on expanding our traditional engineering services to include larger, longer term projects, we now have a number of key assignments in transportation, construction management and water and waste water treatment.

Looking ahead to 2009 and beyond, we will focus on further diversifying our business and continuing to pursue larger, longer term contracts. We do not expect the stimulus packages to have much of an impact on our business. In the fourth quarter, we continued to take significant measures to bring our cost structure in line with our near term revenue opportunity. Over the last two quarters we have reduced staff and exited markets. We were not generating sufficient work to merit continued operation. As we continue to navigate these difficult economic times, we'll keep a close eye on profitability and expenses and make month to month corrections as needed.

Our sales and marketing organization continues to turn out industry-leading proposals. There is no shortage of RFPs to respond to; however, competition has become fierce and over the past quarter, we've seen a marked increase in pricing pressure. Despite all this, we continue to win some key assignments in each one of our business units and I'd like to review those now.

I'll begin with our engineering group. Since we last spoke, we won a contract to provide development or review services for the $250 million terminal expansion project at John Wayne Airport. We were also awarded a program with Environmentally Sensitive Land Ordinance in Oro Valley, Arizona to improve community sustainability and emphasize the town's role in furthering regional goals related to conservation, planning and development. We'll be working with the town of Oro Valley and the region in support of improved sustainability for all new land development.

Turning to Willdan Financial Services. This group was retained by the city of Los Angeles to provide fee analysis services for the Department of Building and Safety. In addition, we expect that our Financial Services division will receive GSA approval shortly which will open a new opportunity for us at the federal level.

Willdan Energy Solutions had a number of new wins this quarter, and given the growing focus on increased energy efficiency and sustainability, we expect this business will become an increasingly important growth driver for us in the coming years. The cross-selling and collaboration efforts between Willdan Energy and our other business units are continuing to pay off. In the fourth quarter, Willdan Energy won a new contract from Encore Data Centers for work related to optimizing demand and driving energy savings at their data centers. Willdan Energy also expanded the scope of its projects for the metropolitan water district water savings program. The projects position Willdan Energy as a leader in running and implementing major programs to drive water use efficiency and capital improvement projects. Willdan Energy recently obtained their GSA approval and we're exciting about leveraging our experience to win new work in the federal sector.

Finally, while we were disappointed in the performance of our Homeland Security business in 2008, we believe that 2009 looks promising, and we had a number of wins during the fourth quarter, including a contract to provide the city of Santa Ana Anaheim with planning and training services.

I would like to close by saying that while 2008 was a challenging year, we're continuing to win new work, we've labored our position to weather the storm and to emerge from this recession as a stronger, more diversified company that is better positioned for the long-term. We're committed to managing the business carefully with an eye towards driving profitability and creating long term returns for our shareholders.

I would not like to open the call up for questions. Operator, please go ahead.

We will now begin the question-and-answer session. (Operator Instructions). Our first question is from the line of Al Kaschalk with Wedbush Morgan. Please go ahead.

Good afternoon, Tom and Kim. Just wanted to see if we could drill down a little bit on the current market on pricing and the competition, and maybe just, perhaps, reiterate or communicate the plan there in terms of going after work, given the high variable cost structure.

Okay, Al, I can give you four examples. Recently we lost by as much as 30% in the engineering portion and our financial services there were 22 bids. Our bid was 150 on a job, lowest bid was 50. We see as much as, I can't even calculate that, 1/3 of what we're bidding. So, what are we going to do about that going forward?

How do you, I mean I think part of it is just the balance or remaining discipline, but yet, seeing this work slide out from under you, how do you think through that scenario here in the shorter term?

You become like a construction company. You pay your people only when they work, you cut your benefits, and they don't have an office, you get rid of the overhead, and then you can get down and compete. I mean, I think, I wouldn't be telling that over the phone, it's no secret, that's what these guys are doing. In the construction industry, where there used to be three to five bids, there are now 60. The construction prices are off up to 50% of what they were a year ago.

Okay, so, balance that with the 2010 where residential permits are likely to continue to decline. Does that imply that we should see engineering segment in terms of revenue running at the current quarter rate, or is there still some completion of work that's not being replenished, if you will.

I'm starting to think we've hit our bottom. We started 29 months ago falling off. We're not counting on residential permits. I'll give you a statistic. Phoenix was running 700 permits a month. They're down to seven per month. Their in-house staff doesn't have enough work to do.

So we're not counting on that at all, but we are counting on winning engineering service work, like road widening and that type of thing. That's where we're going when we say diversifying it. And they're larger contracts. These building on call permit things were great, but they were on call. These contracts we're winning now are anywhere from a couple hundred thousand to a couple million and they last over two or three years.

Is it fair to say that the, what many of us viewed as the residential permitting business, which was a, I don't know what the peak was in terms of percentage of revenue in a given quarter or on an annual basis.

47%.

Is it fair to think that that's going to be below 10% on a given period now?

Let me think about that a second, number-wise.

In round numbers. It's going to be substantially below 25% of a given quarter revenue number. So we should start to see these other projects, including Intergy's work, help provide some growth.

I think that's fair to say.

Okay. I don't want to focus on the negative, but in reality here, are we still going to pick up some charges in Q1 as you adjust your cost structure to the new reality? I know you've been very aggressive about it since last summer to make these changes. But is it fair to say we still have some pain to go through in terms of the numbers for the first Q1 and Q2 of 09?

As far as special charges go, like the ones I mentioned, goodwill impairment and lease abandonment for the first quarter--

Did you give the numbers for that?

Yes, I did.

Okay, just wanted to make sure.

Yes, I did. We're not anticipating anything for the first quarter. We're wrapping up our first quarter this week. But as Tom mentioned in his notes, we're looking at this on a month to month basis. If we need to make further downward adjustments, then we're going to do that to reduce our cost structure. But first quarter we don't anticipate any costs beyond what we would normally incur.

Okay, just one follow-up, and if I missed this, I apologize. On Homeland Security what was the drag or the negative given, the disappointment that you had in that business either in 2008 or in the fourth quarter? I'm sorry if I can't recall.

We didn't say, but what it was is we had work, but we had people charging to it that didn't need to be and it hurt the profitability.

Okay. Very good.

We eliminated that, and I probably shouldn't say this but we're looking pretty good in the first two, three months of this year.

Great, I'll hop back in queue.

Thank you, our next question is from the line of Jim Wiggins with Phronesis Partners. Please go ahead.

I don't want to put words in your mouth, but my recollection, broad brush, was that you felt that you would make a bit of money, if I recall, I think you felt that you'd make enough to offset the losses in the first bit of the year, in the fourth quarter. And I just was trying, I guess that was early November, I just wondered whether the world changed so much, or whether there were internal issues that led you to not be able to track how your results were developing.

Jim, you're going to have to refresh my mind. I knew November, December were looking pretty bad. I thought we might be close to breaking even. I didn't know at the time I talked to you last, but I don't think I had any faith in making enough money to cover the losses.

It wasn't a conversation with you and I, it was the conference call and I thought it was, there was a comment made to the effect that you wanted to break even or make money for the fourth quarter, I thought, in order to satisfy what were the then covenants in your line of credit.

We were concerned about it at the time. That's right, we did say we needed to make a dollar, something like that, so we didn't violate our covenants. We didn't make it.

Okay, so anything, I guess nothing else to say about it.

Jim, in December we did amend the credit agreement because we were in violation at the end of our third quarter, and we discussed that in the conference call. And if you look at the amendment in the revised covenants, we were anticipating having a loss for the year. We baked into the covenants that we didn't anticipate having a loss in excess of $1 million for the year.

However, as we were winding up the year, we did decide to take a hard line on some of these offices that weren't performing and had no backlog. So we did exit a number of areas. Basically we abandoned ten different areas, taking charges for six offices. That contributed to just over $700,000 in noncash charges for the quarter. And then additionally we had a goodwill impairment charge where the underlying cash flows for Homeland Security could not support the excess purchase price that we had on the books. That was another $148,000. If you look at the combination of those two, it's nearly $1 million as opposed to what we baked into our amendment three in December.

Got you. If I recall, I did look at the covenant a while ago, the revised one, my recollection was I believe you said (I'm probably going to get this wrong) that you would at least break even, I believe it was by the second quarter or by the third quarter of the current fiscal year. If you could please clarify what the actual thing is and then tell me if that is still a reasonable expectation in your view.

When we revised the covenants in December, we were looking at returning to profitability approximately mid-year and that was what was baked into the the covenants. We have since amended the agreement this week, as well, and because there's been volatility in some of the numbers, there's no longer an income test, there's a minimum net worth test. And again, you'll see that in the filing that'll be made on Thursday.

Okay, thank you.

Jim, I'd like to give kind of a commercial for Wells Fargo. They're doing a great job working with us.

Good. Thank you.

Thank you. There are no further questions. You may continue.

One moment, please. I would like to thank you all of you for participating in our call today and for your continued interest in Willdan. Please feel free to call us if you have any additional questions. Thanks again.

Ladies and gentlemen, this concludes the Willdan Group fourth quarter 2008 investor conference call. If you'd like to listen to a replay of today's conference, please dial 1-800-405-2236 or 303-590-3000. Followed by the access code of 11128779 and the pound sign. ACT would like to thank you for your participation. You may now disconnect.