Willdan Group Inc (WLDN) 2012 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Willdan Group, Inc. first-quarter 2012 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, Thursday, May 10, 2012.

I would now like to turn the conference over to Nii Tetteh. Please go ahead, sir.

Thank you. Good afternoon, everyone, and thank you for joining us to discuss Willdan Group's financial results for the first quarter ended March 30, 2012. 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 the call up 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 December 30, 2011, filed on March 29, 2012.

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, Nii. I would like to provide you with a brief overview of our financial results for our first quarter ended March 30, 2012. Tom will then discuss recent and ongoing operational activity. We will then conclude the call with questions and answers.

In our first quarter of 2012, we generated revenue of $25.5 million. We posted a loss per share of $0.19, and on a trailing three-month basis our days sales outstanding was 133 days, up 17 days from our fourth quarter and 37 days from the same period last year.

Our first quarter's revenue was up by 12% or $2.7 million to $25.5 million, from $22.7 million in the same period last year. On a sequential basis, our revenue was down 15% or $4.5 million, from $30 million in our fourth quarter.

On a segment basis, our Engineering Services segment contributed $7.9 million or 31% of our first-quarter revenue, which now represents our traditional engineering services exclusive of our energy efficiency services. Our Energy Efficiency Services segment contributed $14.3 million or 56% of our first-quarter revenue. Our Public Finance Services segment contributed $2.3 million or 9% of our first-quarter revenue. And our Homeland Security Services segment contributed $1 million or 4% of our first-quarter revenue.

Our loss from operations for the first quarter was $2.3 million, as compared to $280,000 in the same period last year. Our first-quarter performance was significantly impacted by a slowdown in self-performed work in our Energy Efficiency business which Tom will address.

Our total salaries, wages and salary-related expenses were $12.4 million in our first quarter of 2012, up 3.4% from $11.9 million in our first quarter of 2011. As a percentage of revenue, this represented 48.6% in 2012, as compared to 52.5% for the same period last year.

Total G&A expense represented 41.6% of our revenue in both first quarter of 2012 and 2011. Non-salary related G&A expense was up 6.5% to $4.2 million in our first quarter of 2012, as compared to $3.9 million in our first quarter of 2011.

For the first quarter we posted a net loss of $1.4 million or $0.19 per basic and diluted share, as compared to $291,000 or $0.04 per basic and diluted share in our first quarter of 2011. From a balance sheet perspective at March 30, 2012, we had cash and cash equivalents of $5 million. This balance compares to $3 million at the end of our fourth quarter. And cash and cash equivalents of $7.2 million last year.

During our first quarter we realized growth in our unbilled accounts receivable at $3.3 million, which we anticipate will be converted into billed accounts receivable and cash in our second and third quarters.

We had outstanding borrowings of $3 million on our $5 million revolving line of credit at March 30, 2012. Due to two consecutive quarters of net loss, we were in violation of a debt covenant as discussed in our earnings release. We are actively working with the bank and believe we will be provided a waiver on this violation in advance of the filing of our 10-Q to occur on Monday, May 15.

Our working capital and our stockholders' equity were $11.8 million and $33 million, respectively. Further financial and business-related details can be found in our Form 8K filed earlier today. Again, our Form 10-Q will be filed on Monday, May 15. I will now turn it over to Tom.

Thanks, Kim. Overall, it was a disappointing quarter. First I would like to address our Energy Business since that is what accounted for most of the loss. Our Energy revenue declined primarily due to the ramp-down and renegotiation of one of our large energy contracts.

Looking forward we anticipate the scope of this contract will be less than it was for two reasons. First, the program is changing. The customer has decided to have multiple contractors instead of just one. We are currently negotiating for four of the six regions. The second reason is the energy efficiency goals for this particular utility have been reduced by their regulatory commission.

We are disappointed about the impact that this contract had on our first-quarter results and our outlook. We will be focused on rightsizing our expense structure to the go-forward requirement of our Energy business. That being said, from a strategic perspective this has been an important engagement for Willdan.

Our experience in managing the largest energy efficiency project in the country has led to other work. We are excited about this new work in Tennessee, Illinois, Texas, Washington, and California that will come online this year. So all told, we are pleased that we still have a sizable engagement with the New York utility, and we will continue to look for opportunities to leverage this experience.

Engineering also had a loss. This was not unexpected since the fourth and first quarters are traditionally slow quarters. We continued to pursue work in transportation, city engineering and outsourcing. We are not investing in 2012 above the 2011 levels.

Homeland Solutions had a loss, and we are making adjustments. We are waiting on outstanding proposals and will know by June if the direction will be growth or do we hunker down and execute the existing contracts.

Financial Services showed a profit and is currently leveraging our new offices outside of California to expand their geographic footprint and develop new growth areas in government consolidation studies and energy financing.

I am sure as stockholders, 2012 is not off to the start you had hoped for. We share that view and I'm sorry for it. Fundamentally, the business lines have work, a direction that has opportunity and the ability to make money. I believe adding energy to Willdan's portfolio allowed us to have an opportunity for growth and profitability.

Energy has grown from $8 million to $57 million very quickly. In that business and across our other business lines, we will make the adjustments we need to stay focused on building Willdan into a more consistently profitable company. We have overcome many serious obstacles in the past, and while I am not happy about our first-quarter's performance, I am confident that we have the right team, business lines and the resources to manage through our near-term challenges. Based on our current outlook, we do expect to be profitable for the year.

I will now take your questions.

(Operator Instructions) Linda Heil, Willdan.

I saw it in the paper on May 6 that a certain contract has been removed from the trading on the New York Stock Exchange, and it is one that I think Willdan is familiar with. What is your take on that, and how is it affecting us?

Linda, I don't know which contract you are talking about, or the article.

Do you want me to name it? I don't know if I should or not.

Yes.

Con Edison.

What was removed?

They were removed from the New York trading stock -- New York Stock Exchange.

Oh, Edison of New York was delisted, is what you're saying?

Yes. How is that going to affect us?

As of right now, we don't even know about it. It hasn't affected us. As I stated in the remarks earlier, we have won the recompete in terms of we bid on six regions. We had six regions and we won four of them. So it reduces the contract size a little bit, but we have been selected. Negotiations started Tuesday of this week. It is Consolidated Edison's to award the contract by June 1, which is about 2 to 3 weeks from now.

During that time our old contract had expired, and we have been working on an amendment. That amendment was for $9 million to carry us through June 1. So to my knowledge, Linda, will we have had no effect by them being delisted. It really does not affect their requirement to deliver energy efficiency to the utility commission, or has it affected anything from them going forward to award us a contract.

Okay. How are we going to combat all of these losses?

The losses, the dropoff in the revenue in the energy efficiency work that had started to occur at the end of last year and through the first quarter of this year, we expect that the startup of the new contract will help in New York. But we have also, as I said won work in -- I think I said it in my remarks -- Tennessee. We won work with the Tennessee Valley Authority, Illinois with Commonwealth Edison; on Data Centers, that is a subsidiary of Exelon; Texas with Entergy, State of Washington. And follow-on work with California has been extended for two more years without recompete.

So we see -- they haven't all started so, therefore, the revenue in this first quarter has been low. So the losses have been primarily due to the lack of revenue and the slow startup of some of the contracts, as well as the extension of the New York contract.

Are you planning on opening these offices one at a time with maybe a couple of months in between? Are you going to open them all at once? What is the cost to open these new offices?

There are no new offices being opened that weren't open last year.

Well, I was thinking of the Tennessee Valley and Texas and so forth.

Texas was there last year. Tennessee Valley is almost a virtual office; it's a program manager working out of his home.

Tennessee is a virtual office for the program manager to entertain clients at.

Okay, I think that is about it. That is all the questions I have. thank you.

Well, thanks for the question because that did help clarify a lot. So thanks.

Vincent Staunton, Wedbush.

So for the Con Edison, is it fair to say it is going to be reduced by approximately one-third going forward?

I cannot tell you the value of the new contract, but the contract we had was for $67 million. The new contract will be not one-third reduced.

Less than one-third?

Less than one-third in value, but if you account for the first one was for three years and the next one is for four years, it could approach about one-third in terms of the revenue run rate.

So revenue run rate per year could approach one-third?

Yes, that is why I brought up the other contracts that we are trying to backfill it with. And we think there will be a slow startup for the first half on these contracts, but once they get ramped up we will be back -- we will be back.

Okay.

With the revenue that we are going to lose in New York; is that clear?

So you believe new contracts will make up for the revenue loss.

Not immediately, and it not make it for that year, because we don't know the ramp-up rate. But we have one more than what we're going to lose in New York.

Okay. That is good news. In terms of the cost reduction, do you have any type of cost reductions planned?

Kim, do you want to address that? We can talk about layoffs, we can talk about cost reducing.

We have right-sized certain operations to their current backlog that they have, and we are primarily a service-oriented company. We are not looking at shutting down any geographies at this stage. If we do not -- if we are not able to execute on some of the pipeline that we have, then we will look at reducing headcount in some instances. But we don't have any restructuring on the table at this stage.

Okay. Thanks, guys.

Tom Spiro, Spiro Capital.

Tom Spiro, Spiro Capital. Good afternoon.

Hello.

I got on a few minutes late, so I'm sorry if the questions have been already addressed. But focusing first on your dealings with the bank, where do they stand today? In particular, how much have you borrowed from them as we speak today? How much cash do you have as we speak today, and when do you think you'll resolve your situation with the bank?

I had a conversation with the bank earlier today, and we have come to an agreement where we will have documentation as of the filing of the 10-Q on a waiver of the covenant that we did violate. We are -- where we were at at the end of the quarter is not significantly different than where we are at today.

As I understood it, at the end of the quarter you are pretty darn close to being unable to borrow anymore, so you have the cash on the balance sheet. You are saying you have the same level of cash approximately today?

We have cash in investments and we have cash on hand, and we have not fully exhausted our capacity.

Right, but you have cash -- I know you have some, but do you have enough to sustain the business while you are working through with the banks?

Yes.

You do? Do you expect the outcome of your dealings with the banks to be a credit line that is unchanged; the same amount, the same terms, the same rates, or do you think it will change?

We are still working through that.

Okay. On a separate matter, I believe in an earlier call or two, Tom, you mentioned that one of the initiatives for this year was to switch into, I think you said it was self-installation in the energy efficiency area. Rather than using outside vendors, we were going to do it ourselves.

Yes.

I think the term was self-installation or something like that. Is that still your plan?

Yes.

To do that, I would imagine if I understand it, you are going to turn a variable cost into a fixed cost, if I am thinking about this properly.

Let me think about that. A variable cost to a fixed cost.

You are going to be hiring workers who will be, I guess, on our payroll?

Yes.

Well, that is a fixed cost where I come from.

Okay.

And you are doing that in the face, if I understand it, of revenues that are at least in New York going to be declining pretty meaningfully. And I'm trying to put those two pieces of information together to understand why it is a good idea.

All right, let me help you. Let's say on New York we do $20 million that you see as revenue. Of that $20 million, probably more than half or around half is passed through to electrical subcontractors. So we are paying them and we are not doing any of the work.

Now, Consolidated Edison will pay them a fixed amount of money for let's say, make it real simple, electrical contractor comes in and changes the fixture above your head; it is a florescent light, and that contractor gets $90 per fixture. Of that $90, that's total pass-through to our contract which we don't even get a markup on.

If we self-perform it, then we get the margin on the labor and we get the margin on the equipment that's being installed. And it's what Consolidated Edison pays those subcontractors for doing the work. So one reason that we are self-performing is to start to pick up margin on labor and equipment rather than passing it through.

Sure, and that makes all the sense in the world when your revenues are strong. Now when your revenues are weak, it works just the opposite way. So I guess can you give me some sense of whether you are staffing for a reduced level of revenues? That is to say, the rate of revenues that you expect you'll have under the new arrangements, it will still be a financially advantageous thing to have done.

The rate of revenue will be -- you mean --.

Your Con Ed revenues are going down.

Yes.

Well, you are hiring people at the same time your Con Ed revenues are going down. That kind of strikes me as peculiar.

The work -- the revenue is going down, okay, but the work we are actually doing by hiring our own contractors or people who do contract work, our self-performed revenue will go up; how is that? Instead of passing it through other people, we will do it ourselves.

Sure. No, I can understand that and I don't mean to beat a horse to death, but you will have the costs of an employee, whatever it is, the wait is, the benefits, the office space, what have you. That is a cost the Company will have to bear whether revenues are robust or not robust.

Well, what difference is that if we are doing self-perform work or we win a contract doing something else and we hire more people to do it? It is kind of all of the same. That is the business we are in.

Well, you don't want your costs to outweigh your revenues; I guess that is all we are saying here. And if your costs are going to be fixed, you have to have confidence that your revenues are reliable. And are they?

For Con Ed, we are currently in negotiations. We just started negotiations this week. Yes, we are anticipating on self-performing this down the road. We have not staffed up in anticipation of this until we conclude negotiations with the client.

Is he saying that we're going to take on all of this cost before we have revenue?

Yes, that is what I am saying.

No, we are not going to take on anything until we have a dollar worth of work.

Oh, okay. Well, that is fine as long as you are going to staff in a way and an amount that is appropriate for your revenues, then okay. It is just you first mentioned this a quarter or two ago when you were anticipating, I think, stronger Con Ed revenues than it looks like you will earn. Okay, if your costs are going to be in line, well, that's fine; that's great.

Okay. It's just like any of our business, I mean we don't hire people until we have the work.

Okay, that is fine.

We are not spending money in advance.

Good. I guess lastly, I think in the last quarter or two, Tom, you mentioned that you felt the engineering business had stabilized and you were even looking forward to some growth in '12, 2012.

Yes.

Is that still your view?

Yes.

You feel the circumstances, the environment is stabilized, and you are expecting growth in that segment?

I don't think the environment is stabilized. I think the cities in California are no better and getting worse, but I think our ability -- I think where we are, I don't anticipate it going down any further. I think we have a stable set of work that we can count on, and we have opportunities out there that hopefully will give us growth.

Okay, okay. One other that just occurred to me was -- as long as I am on -- backlog information. I know in the past you have spoken about the importance of backlog to the Company, and I was curious, one, where backlog stands today; and two, what your plans are to disclose backlog on a quarterly basis?

I will like Kim answer that one.

In our business mix, it is not formulaic to quantify backlog. We have -- similar to the federal government we have what are called on-call contracts which are like ID IQ contracts with the federal government; whereas you have been shortlisted basically for work, but task orders have yet to be issued. So quantifying and disclosing backlog is not something that we have done historically, nor do we anticipate doing.

I thought on the last conference call, Tom, you said that the backlog was looking better than it had in a number of years. You were feeling much better about the Company because of that, and you thought that we needed to grow backlog even more than we had done. I certainly came away with the sense that, A, it is an important measure to the Company, and B, there is a way to track it.

There is a way of tracking it in the Energy portion, and backlog is stronger in Energy. It is very strong. There is not a very good way to track it in Engineering, because they're on-call contracts as Kim referred to, ID IQ. So to track it in one segment and not the other, we are not prepared to do that at this time. But yes, nothing has changed in terms of my opinion, if that is what you are looking for.

Okay. Many thanks.

And Mr. Spiro, there is one more part of that self-perform that I want you to understand on the Con Ed contract. Right now we are acting as a program manager for many of these energy efficiency contracts, and we hire electrical contractors to do the actual installs. What we are seeing and what we believe we will see is the utilities across the country are going to be hiring contractors that don't just sub it out to electrical contractors but self-perform.

A big part, in addition to just margin and making money on the actual pass-through, we need to be able to self-perform because many of the upcoming utilities are going to be requiring that. They don't want you to just manage electrical contractors. They want you to deliver it yourself.

That is fine and that makes a lot of sense. If we need to self-perform in order to be in a better position to win contracts, that is fine. That is obviously a very different argument from saying we are going to self-perform because self-perform is a way for us to make more money. And perhaps it will do both, but it is a very different argument.

It is a very different argument, but they are both driving us to self-perform.

That is fine. Given our financial circumstances, obviously, we need to make that money in the near term. We can't absorb any extended period of losses because we don't have the strength to do it.

Correct.

Thanks much.

Okay.

At this time there are no further questions in the queue. You may continue with any closing remarks.

I would just like to thank everybody for participating, and we will talk to you next quarter. Thanks a lot.

Ladies and gentlemen, this concludes the Willdan Group, Inc. first-quarter 2012 conference call. You may now disconnect. Thank you for using ACT Conferencing.