Willdan Group Inc (WLDN) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Willdan Group Inc. second-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, August 9 of 2012. I would now like to turn the conference over to Nii Tetteh, Business Analyst. Please go ahead, sir.

Thank you. Good afternoon, everyone, and thank you for joining us to discuss Willdan Group's financial results for the second quarter ended June 29, 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 clearly 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 statement.

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 quarterly report on Form 10-Q for the quarter ended March 30, 2012, filed on May 14, 2012; and the quarterly report on Form 10-Q for the quarter ended June 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 the three months ended June 29, 2012. Tom will discuss the operational drivers of our financial results and prospects. We will then open the call up for questions and answers.

In our second quarter of fiscal 2012, we generated revenue of $23.5 million, down 8% from our first quarter. We posted a diluted loss per share of $2.33, of which $2.08 was related to our goodwill impairment charge of $15.2 million. Cash provided by operations was $1.7 million, and on a trailing three month basis, our days sales outstanding was 119 days, down 14 days from our first quarter, and up 29 days from the same period last year.

Our second quarter's revenue was $23.5 million, down $2.3 million or 9% from $25.8 million in the same period last year. On a sequential basis, our revenue was down $2 million or 7.8% reported in our first quarter of 2012.

On a segment basis, our Engineering Services segment contributed $8.3 million or 35% of our second-quarter revenue, which is comprised of our traditional engineering services. Our Energy Efficiency Services segment contributed $11.6 million or 49% of our second-quarter revenue. Our Public Finance Services segment contributed $2.6 million or 10% of our second-quarter revenue. And our Homeland Security Services segment contributed $1 million or 4% of our second-quarter revenue.

Our loss from operations for the second quarter was $19.6 million, which includes a goodwill impairment charge of $15.2 million. Excluding the impairment charge, our loss from operations could have been $4.4 million, as compared to income from operations of $1 million in the same period last year.

In the first half of fiscal 2012, we continued to see contract renewal delays in certain contracts. In anticipation of the renewals, we carried a higher proportion of indirect labor that otherwise would have been direct and revenue-producing.

We also saw a significant decline in our stock price, which impacts our overall market capitalization. Entering 2012, our market capitalization exceeded $28 million. In May, our market capitalization fell below $15 million. The decline in our earnings, delay of the significant contract renewals, overall market conditions of peer companies and the decline in our overall market capitalization triggered an interim goodwill impairment test during June.

The goodwill impairment test yielded that the carrying value of the energy reporting unit, including its $15.2 million goodwill, exceeded the implied fair value, and therefore, we took a goodwill impairment charge in June. Our overall market capitalization today is just over $9 million.

Reverting back to operations, included in our direct cost of sales was $11.1 million in pass-through costs as compared to $8.9 million for the same period last year. We experienced a higher proportion of direct installation of services as opposed to market outreach and energy efficiency audits in the first half of 2012. As mentioned in our press release, we did successfully renew certain New York contracts as well as one additional work in the Midwest, which will positively impact the balance of the year.

In the second quarter, we posted a net loss of $17 million or $2.33 per share, as compared to net income of $735,000 or $0.10 per share in the same period last year. Our tax provision continued to vary due to our net operating losses and certain valuation allowances.

From a balance sheet perspective, we had cash and cash equivalents of $5.5 million. This balance compares to $7.2 million in cash at July 1, 2011, and $5 million at the end of our first quarter. As was stated earlier, we generated positive cash flow from operations of $1.7 million in our second quarter of 2012.

At June 29, 2012, we had $3 million in outstanding borrowings on our $5 million revolving line of credit. Due to our consecutive losses, we are in violation of certain debt covenants. We are working with our bank, but the bank is not currently obligated to extend further loans and has the ability to accelerate current outstanding loans at its full discretion.

Our working capital and stockholders' equity at June 29, 2012 were $10 million and $16.1 million, respectively. For further information, please refer to our Form 8-K filed earlier today. We will file our Form 10-Q on Monday, August 13.

Thank you for your support, and I will now turn it over to Tom.

Thanks, Kim. During the first two quarters of 2012, our revenue declined substantially. The decline was primarily due to continued delays in contract renewals in our Energy Efficiency business that we discussed last quarter. These contracts have been and continue to undergo either recompetes or renewals as they approach the end of their terms.

In New York, we have been successful with our re-compete, winning four of the six regions that we serviced previously. This contract is approximately $50 million over 3.5 years. We are also confident that the California contracts will be renewed at about $14 million per year. In addition, we have one new work in Illinois, Ohio, Tennessee, Texas and California. Taken together, these successful recompetes, renewals and new wins should provide a revenue stream that, when combined with our other businesses, will enable us to be profitable in the back half of 2012.

As you know, our energy business has contributed significantly to Willdan's growth and diversification over the past couple of years. We have grown this business sixfold, from $8 million to $57 million, due to contracts with utilities in New York and California. However, due to the recompete process over the past six months, we experienced an unanticipated slowdown in revenue.

In response to this slowdown, we have made some significant adjustments. First, we reduced our cost structure, including staff reductions. Second, in a process of recompeting for contracts and finding new ones, we have been negotiating the best possible payment terms for better cash flow management. And third, we have sustained our new business efforts with a focus on winning new work in new regions to diversify our energy contract base. Looking ahead, we are well-positioned in the energy market. We are confident that this is a very good business.

Now turning to our other businesses. Financial Services has remained steady both in revenue and profit. For some time now, we have talked about exporting our financial services expertise to other geographic markets. We are beginning to win work outside of California, and we can now see some upside for this business.

Homeland Solutions continues to be challenged by reduced government spending, which impacted our federal government contracts during the quarter. However, we did win new state contracts in New York, Virginia and California that should ramp up significantly in the third quarter.

The environment for Engineering Services remains highly competitive. This business is stable; however, we are not expecting any meaningful growth this year.

Looking ahead, we expect our energy business will continue to be our key growth driver and our businesses will remain relatively flat. We continue to win new work, and we have taken the steps we need to align our expenses with our current revenue forecasts.

Looking ahead, we will remain focused on managing cash flow and generating growth and profitability. I will now answer your questions.

(Operator Instructions) Al Kaschalk, Wedbush Securities.

Good afternoon, Tom and Kimberly. If I look at the color you provided or try to absorb the color you provided on the contracts, and specific to New York, which I think that is a major one, that part of the business or that component of the business is -- you don't see any recompetition or renewal bid process over the next couple years. And so now it is a spot of just executing -- again, just the four of the six that you recompeted and won.

Yes, that New York contract is now a two-year base with a 1.5-year option. So it is good for 3.5 years, with no recompete. Does that answer your question, Al?

Yes. And then -- what I'm trying to get at, though, is it sounds like you are going after work that you should be going after, and the competitive environment has just remained that competitive. So on these slew of contracts you listed out in various states, I think there were maybe one or two per state, those have similar structure? In other words, one to two years? Or can you talk a little bit about the new wins and what the duration of those contracts are for the near future.

I can talk a little bit. One, Tennessee was Tennessee Valley Authority. It's doing schools, energy efficiency for schools within the TVA. Another one was for two utilities -- there is two in Texas, two utilities in Texas.

Duration is generally on these things, when we win them, two to three years. Texas is two to three years. Ohio, which was a little bit different than energy efficiency for schools or traditional, but it's for data centers. We are running a very good data center program for NYSERDA. That's New York State. And we are also running data centers for California, energy efficiency and data centers. And that really gave us -- which was a highly competitive win in Ohio, which I think it is around $3 million, $3.5 million to get started.

But that is a very -- it is not so broad as the direct [consol] for the utilities. It is very specific, and you have to be highly qualified to win it. That was a big win for us in Ohio. I also mentioned California, we've won some work with the local governments rather than utilities.

So, Tom, on these contracts or the work, is it already funded? Are these things that have -- because of improvement that your client or customer is seeing that they are able now to move forward on these? What was the switch here that allowed you to make some relatively positive announcements here?

Well, we've won them and they are funded, yes. Some of them we have not signed a contract yet, but that is why I'm not giving you specific names, numbers or details. But we have won them, and they are funded. So question, Al -- what is the specific question?

Two of them. One, when does the majority of these get started, Q3 or Q4?

Hopefully by the end of Q3.

What does hopefully mean, Tom?

Hopefully means -- I told you hopefully we would start Consolidated Edison be started back -- I mean, it was operating the whole time under a modification, but it has only been in the last three or four weeks we've signed Consolidated Edison.

So the Houston contract or the Texas contracts, TVA is signed and we are operating. Texas, we are operating on one. Ohio, I don't have a number for you as to when that will get going. But California, we've just won, with the municipalities that are working under Edison.

Okay. So where -- again, can you give us any color on the nature of these being funded? Is this just -- are these funds coming available because it is the end of the fiscal year or heading to an end of the fiscal year? What has happened here to just timing, the natural process. Just trying to see if there has been any acceleration or further pressure maybe on letting out new wins on contracts.

No, there is none of that. I mean, TVA, we've been working towards this end for over a year and a half. It is just that they hit when they hit, Al.

Right.

There is nothing in the market driving anything, other than the normal course of business for utilities. They are all a six-month to 12-month process when they are being competed, recompeted or renewed.

Okay. And then my final question is in terms of -- of course the goodwill charge, I understand what happened there. But in terms of the business and the costs you have taken out, are you -- when do you think we are done in that process? And sort of can then -- you guys can run your business prospectively as opposed to having to see if you need more costs or reductions or you are scaled right, et cetera.

We are scaled right going forward from here. The mistake made on my part was we didn't scale back far enough, fast enough on the reductions in both California and New York.

Now, in that scaling back, it is a tough call. Because when you have those initiatives going to win work in Texas and Illinois and Ohio and other places, you don't want to touch it when stuff is pending. That is where we kind of were. We are okay for now, going forward. We've scaled it back to the appropriate revenue streams going forward.

And your direct costs are in line specifically?

I'll let Kim answer that. You are getting into numbers.

One of the things, Al, as you recall, in our significant New York contract, we had a shift in -- going from time and materials type of situation to the actual installation of the sold measures. And so there is very little margin on that.

Now, what we are looking at doing as we shift back into some of the traditional markets, you will see a shift from -- we've got a lot of indirect -- if you look at the quarter, we have about 50-50 between indirect and direct costs. And that should shift to more of a -- that should convert more to direct, and then that would be revenue-generating on that.

So it is not status quo moving forward. We have cut costs out of this; decisive cuts were made in overhead in the month of June. So we will start seeing benefits from that in July and the August timeframe. But the labor costs were -- the unnecessary labor costs were made in the month of June.

I realize you don't share a specific number, but that gets that utilization, is that correct, in terms of direct, indirect costs?

Correct. We were suboptimized on utilization for the first and second quarter, primarily due to the shift in our large Energy Efficiency contracts in New York and even in California, focused on installing the measures by the end of the year.

Not to be cynical, but did literally these people just sit around, if they are not being built? Is that because you have on the contract or part of the contract, that is what happens? Again, I'm not trying to be --

That is a bit cynical, but recall, Al, we had -- we were anticipating the contract renewals originally in January. That did not happen. It was prolonged, and they basically extended our existing contract through the end of March. Then we had anticipated renewing the contract in the March timeframe, as well. That actually happened at the end of the second quarter. And so the new contract is expected for the third quarter going forward, and there is a different mix in the type of activities that will be performed under the new contract, rather than just the installation under the former contract.

Okay. Thank you for answering that. And then finally, it is probably the third time you said it, but did you say cash flow from operations in the quarter or in the first half of the year totaled $1.7 million?

It was $1.7 million in the quarter; just under $900,000 for the six months -- positive.

I guess one final, if I may. I'm sorry to the others. Profitability on the business in the second half of 2012, that means two quarters. Does that mean both are profitable? And if so, what measure of profitability are you asking us to look at?

Right now, we are looking at being modestly profitable in the back half of the year in both quarter three and quarter four.

Okay, thank you. What measure [was that] profitability -- sorry?

Less and 10%, more than 5% --

No, is that operating, is that income?

No, that would be income from operations, so pretax.

Great.

Pretax income as a percentage of gross revenue.

Thank you for answering my question.

You are welcome.

Thank you, and at this time I would like to turn the conference back to Mr. Brisbin for any closing remarks.

I would like to thank you all for listening, and we will keep working. Thank you very much.

Thank you. Ladies and gentlemen, this concludes the Willdan Group Inc. second-quarter 2012 conference call. If you would like to listen to a replay of today's call, please dial 303-590-3030 or 1-800-406-7325 and enter the access code of 455-6741, followed by the pound sign. We thank you for your participation. You may now disconnect.