Willdan Group Inc (WLDN) 2014 Q3 法說會逐字稿

Good day and welcome to the Willdan Group third quarter 2014 conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to [Nee Tetta]. Please go ahead, sir.

Thank you. Good afternoon, everyone, and thank you for joining us to discuss Willdan Group's financial results for the third quarter ended September 26, 2014. With us today from management are Chief Executive Officer, Thomas Brisbin, and Chief Financial Officer, Stacy McLaughlin. 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 risk 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 and Annual Report for the year ended December 27, 2013, filed on March 25, 2014. 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 Stacy McLaughlin. Stacy?

Thanks, Nee. I would like to add my welcome my to those joining us on today's call. In addition to GAAP financial results, we are providing non-GAAP financial measures that we believe enhance investors' ability to analyze our business trends and performance. Our non-GAAP measures include revenue net of subcontractor costs. We believe this allows for improved measure of the revenue derived from work performed by our employees.

We also provide adjusted EBITDA, which removes the impact of certain nonrecurring income and expense items from our operating results. GAAP reconciliations for both of these non-GAAP measures are included at the end of the earnings release we issued today. I am pleased to share our financial results with you today.

Let me begin with an overview of our financial results for the third quarter. Total contract revenue increased 33.2% to $28.2 million from $21.2 million for the third quarter of 2013. By segment, revenue from energy efficiency services grew 58.4% to $13.6 million. Engineering Services contract revenue increased 22.3% to $11.1 million, and revenue from public finance services was $2.8 million and homeland security services was $714,000.

Revenue, net of subcontractor costs, increased 28% to $22.2 million compared with the third quarter of 2013. Direct costs at $16.5 million for the third quarter of 2014 compared with $12 million for the third quarter of 2013. The majority of the increase was a result of greater demand for services performed by Willdan Energy Solutions, which generally utilizes a higher percentage of sub consultants than Willdan's other subsidiaries.

Gross margin was 41.6% for the third quarter of 2014. General and administrative expenses for the third quarter were $9.1 million, a 9.1% increase from the prior-year period. G&A expenses, as a percentage of total contract revenue, improved more than 7 percentage points to 32.2% from 39.3% for the third quarter of 2013. Net income for the quarter was $4.2 million or $0.53 per diluted share.

Consistent with the prior quarter, our estimated annual effective tax rate was reduced due to our use of federal and state that operating loss carryforwards and the related release of the valuation allowance against the NOL carryforwards. In addition, each reporting period we analyzed our deferred tax assets in order to determine whether it is more likely than not that we will be able to recognize the benefit of these assets in the future. During the third quarter of 2014, we concluded that we would be able to recognize a tax benefit for these assets.

Accordingly, we released the valuation allowance against our deferred tax assets, recognizing an additional income tax benefit of $1.7 million in the current quarter. Excluding the reversal of the deferred tax asset valuation allowance, net income was $2.7 million or $0.34 per diluted share. This compares with net income of $842,000 or $0.11 per diluted share for the third quarter of 2013.

Turning to financial results for the first nine months of 2014, total contract revenue increased to $77.8 million, up 23.5% from the first nine months of 2013. Higher revenue was due primarily to an $11.1 million or 41.9% increase in contract revenue for energy efficiency services to $37.6 million. Energy efficiency revenue accounted for 48.3% of total contract revenue for the first nine months of 2014 compared with 42% for the first nine months of 2013.

Engineering services revenue increased 13.6% to $29.5 million and represented 37.9% of total revenue compared with 41.2% of revenue in the prior year. Revenue from public finance services was $8 million and homeland security was $2.7 million. Revenue net of subcontractor costs for the first nine months grew 21% to $61.8 million compared with the first nine months of 2013.

Direct costs of contract revenue were $46 million, up from $35.4 million a year ago primarily due to the increases in services performed by Willdan Energy Solutions. Gross margin for the first nine months of 2014 was 41%. This is in our target range of 40% to 45%.

Adjusted EBITDA increased to $6.3 million from $2.6 million for the first nine months of 2013. Adjusted EBITDA margin was 8.1%. Total general and administrative expenses for the first nine months of 2014 increased by less than $0.5 million to $26 million.

Net income for the first nine months of 2014 was $7.4 million or $0.96 per diluted share. Excluding the reversal of the deferred tax asset valuation allowance of $1.7 million I discussed earlier, net income would have been $5.7 million or $0.74 per diluted share for the nine-month period. Net income for the year to date period more than tripled the net income from the prior period of $1.9 million or $0.26 per diluted share.

Accounts receivable days outstanding for the first nine months of 2014 was 77.

Turning to our balance sheet, we reported cash and cash equivalents at September 26, 2014 of $13.4 million, up from $12.1 million at the end of the second quarter and up from $8.1 million at December 31, 2013. Our primary sources of liquidity are cash generated from operations and a revolving line of credit with BMO Harris Bank. At the end of the third quarter, we had not drawn against the revolving line of credit.

Also of note on our balance sheet was an increase in accrued liabilities during the year that included an accrual for employee bonuses. In our three-year financial outlook announced in June, we targeted annual year-over-year contract revenue growth of up to 15%. I'm pleased to report that, given our strong results for the first nine months of 2014, we are confident that we will exceed the 15% revenue growth target for 2014.

We are reaffirming our three-year financial targets of gross margin in the 40% to 45% range, adjusted EBITDA margin of 5% to 10%, and accounts receivable days outstanding of 70 to 75. Also, I am reaffirming our target for year-over-year annual contract revenue growth for 2015 and 2016 of up to 15%, including both organic growth and acquisitions.

I would now like to turn the call over to Tom Brisbin.

Thanks, Stacy. Good afternoon and welcome, everyone.

We had a strong third quarter. We reported revenue of $28.2 million and earnings of $4.2 million. These results were driven primarily by strong performance in our energy and engineering businesses.

As Stacy said, net income benefited from an NOL-related tax benefit, so adjusted net income is the best indication of our performance for the quarter. In addition, I think it is important for our investors to know that even as we grow revenue, we are running our operations more efficiently. Looking ahead, we expect to continue to grow and remain profitable.

Now I will provide an update on each of our business units. I will begin with engineering services, which accounted for 38% of our third quarter of revenue and grew 18% as we continued to benefit from increased demand for outsourcing services. Tax revenues have increased following the recession.

Many cities continue to re-staff critical positions through outsourcing. This is an efficient and cost-effective way to meet increased demand for services. Last quarter, we mentioned our plan to bring additional cities under contract.

I'm pleased to report that our engineering services group was recently retained by the City of Beaumont in Southern California, to provide engineering services. Also during the third quarter, our engineering group expanded its engagement with the County of Sacramento to provide technical services, including development plan review, permit support, and land surveying services we have provided for some time now. These are two great examples of how our engineering group is executing on our strategy to develop new clients and expand services.

Our engineering group also won four civil infrastructure projects with a Navy -- this is a tough one -- Navy heavy horizontal, civil, multiple award construction contractor. I have been working on that.

We will serve as the engineer and participate on the design team for these projects at the Naval San Nicholas Island airfield, the Marine Corps Air Station Yuma, the Naval Weapons Station Seal Beach, and the Marine Corps Recruitment Depot in San Diego.

Many of you ask me about our work on the California high-speed rail project. We are a team with Tudor Perini/Parsons and they are working on a proposal for the next two segments. And our services will be part of that proposal. We believe these contracts will be awarded early next year.

As I have said before, the high-speed rail project is more important to Willdan from the strategic perspective than as a revenue generator. We see our involvement in this project as a means to reestablish our presence in the Central Valley after closing nine offices along the Highway 99 corridor during the recession. This region has been important to Willdan in the past, and we look forward to regaining our foothold there. It is also important as we pursue large infrastructure projects.

Now, turning to energy efficiency, which was 48% of our third-quarter revenue. Most of our growth for the third quarter came from this segment, which has generated 58% year-over-year revenue growth.

On last quarter's call, we announced the expansion of our contract with ConEd of New York for its small business direct install program. This expands our service areas to include the entire ConEd service territory, which has a total contract value of $61.3 million.

We are performing well under this contract, having delivered a total of 28 million kilowatt hours in savings during the third quarter. This is a 75% increase over the 16 million kilowatt hours in savings we generated in the second quarter. We have already exceeded our 2014 annual goal of 41 million kilowatt hours in savings from the original contract. And this month, we expect to suppress surpass the additional 20 million kilowatt hours in savings stipulated under the expanded contract.

All this indicates that we are performing well on both our original contract and our contract mod. Our strong performance on the ConEd contract continues to lead to new energy efficiency opportunities.

For example, the New York City Energy Efficiency Corporation, or NYCEEC, which is an independent financial services nonprofit that supports the clean energy market, recently hired Willdan to identify at least $10 million in new loans for energy efficiency, renewable energy, and other clean energy projects. This is a joint project with Willdan Energy Efficiency and Financial Services, teaming up to work in how to fund renewable energy. This is a good example of energy funding in new markets for financial services.

Also in New York, we expanded support services under the New York State Energy Research and Development Authority, NYSERDA; technical review contracts for both management, staff augmentation, and engineering tactical review. Under the new contract, we increased the number of on-site personnel from one to four projects managers and we are now providing engineering tactical review services for all commercial building types. We have already been assigned six new technical review projects as part of our expanded relationship.

We were also selected by Southern California Edison to administer its new Healthcare Innovative Technology Energy Efficiency Program. This program is aimed at reducing energy usage by small to medium-sized hospitals, medical office buildings, specialty clinics, assisted living facilities, and rehabilitation centers. We currently administer a similar program with SCE for large hospitals and related facilities, hotels, resorts, and data centers.

This month we are beginning a new sustainable labs program with San Diego Gas and Electric to provide energy efficiency services to biotech and pharmaceutical laboratory customers. This is a notable win as medical labs represent a new vertical market for our energy efficiency services.

As a final note on energy efficiency, our customer Torrance Memorial Medical Center was awarded the Climate Registry 2014 Cool Planet award for healthcare, for demonstrating leadership in energy and carbon management. Our ability to win new contracts and expand services with current energy efficiency customers is an important part of our growth strategy.

I would like to note that growth in energy efficiency is not through -- directly related to oil prices. It is related to the increase in demand for electricity, which will continue to drive high electricity costs and energy conservation.

We now have significant technical expertise and direct experience working on a number of high profile projects, and we are building a strong track record of successful program implementation and outcomes. All of this positions us well to compete in this space, which is poised for long-term sustained growth.

Moving on to our homeland solutions business in the San Francisco Bay area, we recently held a full-scale exercise to test the ability of participants from six counties and 14 hospitals to respond to an explosive bioterrorist attack. Our homeland security group also completed work on the Amtrak security program conducted at 12 major train stations across the US.

Finally, in our financial services business, we recently hired three professionals from the Utility Advisors Network, who have more than 70 years of collective experience providing professional consulting services to numerous public utility systems in the southeastern region. This is a strategic move that strengthens our position in financial services consulting and expands our footprint in the Southeast.

We have enjoyed better performance this year and I would like to thank our entire team for their efforts. Given our results for the first nine months of 2014, I am confident that we will exceed our 15% revenue growth target for the year. That said, our business does have some seasonality, and historically our second and third quarter are stronger than our fourth and first quarters, which I have said pretty much each year since I have been on the call.

Our balance sheet remains strong and we continue to evaluate potential tuck-in acquisitions that strategically expand our geographic footprint, broaden our service offerings, and improve our competitive position. Before we take your questions, we have been invited to present at this year's KeyBanc Capital Markets Engineering and Construction Conference. The conference is being held December 8th and 9th in New York.

I would now like to open the call to questions.

(Operator Instructions) Al Kaschalk, Wedbush Securities.

Strong quarter there on the conversion. It was great, great to see. In terms of the outlook, Tom, I appreciate the color on energy efficiency, number of contracts there.

But, if I listen to your guidance of greater than 15% and the seasonality, could you help us square up the strength with what it implied, $20 million to $21 million in the fourth quarter on the revenue line? If I looked at year to date, which you have done, which you implied in the guidance, you are on track to do -- to hit your number, you would be on track to do $20 million, which clearly doesn't seem to be in the cards. It seems to be much better, if you can help us on the run rate of the business.

I think we are 77 year to date?

DSS?

No, revenue.

Yes.

Yes, 78 million, actually.

So why don't you take 25 million a quarter and the fourth quarter, even though we are ramping up New York, which is why I give you the kilowatt hours, the ramp up of that mod. So take four even quarters and you come out at 25 million. You might do a little bit better.

Okay.

We don't know yet. But, the thing that hits us in the fourth quarter on the seasonality -- Thanksgiving, Christmas, New Year's -- and on selling energy efficiency in Manhattan, it does get hit. There is a few other holidays in there along the way.

Right.

We have ramped up very quickly, but we do have holidays in the fourth quarter.

Sure. Okay.

So divide by three and add a fourth. That is little bit better than $20 million, I think, right?

I don't have my slide ruler with me, so.

Come on. 77 million divided by three, 25 million on top of 77 million. I don't know; somewhere around there.

Okay. Fair enough. On the energy efficiency side, the increase in ConEd, so that is -- is that something now that you fully have in terms of a run rate, your visibility on what the scope of that is? Or is that there are additional opportunities coming on? Because I think we had talked about some direct install and then maybe some that you would need to be doing with subcontractors so -- or third parties. Can you help us just understand where we are at in terms of that particular contract?

On ConEd?

Yes.

ConEd is -- we are ramped up, pretty close. We have met the mod goal already -- or will meet it. So we are pretty much ramped up and that will be our run rate through -- I think it is around July, August next year.

And then, what happens in July or August of next year? You look for an extension or you look for the next funding? What is --

I might be off there. It is a year past 2015 or is it 2016?

18 months.

18 months from now? Yes. So it is a little bit longer than that, end of next year. Then we look for contract extensions, mods, or re-competes.

Do you have any update or commentary as a result of the recent elections, whether that will help or enhance the business going forward?

I see no effect.

Okay.

I also put a thing in there on oil because the price of oil has gone down. No effect, in my opinion. I mean, the state PUCs, public service commissions around the country are still going to try to reduce the amount of electricity used independent of the price of it.

So is that -- okay. We can talk about that off-line. The compensation, it looks like there was some additional cost or accruals in the quarter or am I misreading that? There was a bonus.

(multiple speakers) Yes. You are reading it correctly.

Could you tell me how much that was?

No.

No, because you don't have it, or no because you don't disclose it.

We don't disclose it. I am telling you that we are accruing bonuses for people who have had haven't raises or anything for seven years through the recession, and for a whole new group of people that are performing this type of work, and so I am letting you know.

Right.

That is what we are doing (multiple speakers)

Okay. Finally, Stacy, with the reversal of the evaluation allowance, what should we think about in terms of an effective tax rate going forward?

For the current year, we will use almost the remainder of our NOLs. So for next year, our effective rate will probably be about 40%.

Wyatt Carr, Monarch Bay Securities.

Congratulations on a great quarter; just a couple of quick questions. Were there any additions to the ConEd contract during the quarter?

No.

Okay.

Are you asking did we get any other modifications or amendments or any of that?

Right, any new additions, besides the ones you have already announced?

No. No.

Okay. And then, if energy efficiency services, on a sequential basis, your revenues were down just slightly, but your income in that segment was up sharply. Can you explain that?

What are you looking at, Wyatt? I got Stacy going through papers here.

I am looking at the segment information. I am looking at for the three months ended June 27, you did $13,699,000 in contract revenue for energy efficiency. And your net income on that segment was $1,473,000. And, in this quarter, it was just slightly below that at $13.558 million and your net income was $1.983 million, which is a pretty nice increase.

Stacy knows where you are now. She is looking at it and she is following along.

So, as you heard in the call, Wyatt, we talked about the release of the valuation allowance.

Right.

So that will have an impact on the net income because our -- we didn't have a tax expense in the current quarter. It was a tax benefit.

Right.

So I would say it is a combination of the tax benefit, which is going the other way than an expense, and that group working on decreasing costs -- overhead type costs.

Okay. And then in the segment assets that were applied to those two -- to the engineering services and to energy efficiency services (multiple speakers)

Wyatt, I do the same thing, and I am reading it. So go ahead.

So my question is, does that represent a capital expense increase in those segments?

The segment net assets are just the assets for that. I think for energy efficiency it is -- the slight increase you will see from the prior periods would be in AR.

Okay.

But it is just -- it is derived to their AR and WIPP for the majority of it, and then there are some other items that are not as material, but they are not a capital intensive -- (multiple speakers)

It is not a capital expense.

Yes. It is not in PG&E or anything like that. It's cash, WIPP, and AR.

Right. Okay.

We did actually, for energy, we did add some vehicles, but nothing that is going to really change these numbers and filings.

Okay. And then the increase in DSOs, your target is 70 to 75 days. You are at 77 days. Was there one area that caused the increase?

Yes. There is one customer that we have a pretty sizable invoice is outstanding. We are in communication with that customer and we expect to receive payment by the end of the year. And that should help bring our DSO back down.

Okay. And then, just, Tom, can you update me on -- you talked about Sacramento. Was that aimed towards Elk Grove? And also, you brought on a city that you said was larger than even Elk Grove. Is that reflected in the numbers?

No. And Beaumont is not the city that is larger than Elk Grove. We're still working for -- winning small jobs at the city we hope will get bigger. But Beaumont was a new one that I had never talked before. And then, in Sacramento, that is the County of Sacramento, which we are trying to rebuild our Northern California presence.

Right.

Willdan, at one time, went from Southern California up the 111 all the way to Redding, the northern parts of California, during the recession all the way through Sacramento, those services were closed. I mean, we closed, like I said, nine offices. And Sacramento, the win that I was referring to in Sacramento was not Elk Grove, but the County of Sacramento, which, for us, is getting back to where we were.

Great. And you still haven't identified the larger city out there.

No.

Is it in northern or southern California?

It is in California.

(laughter) Okay. And then, Prop 39 funding, have you seen an increase there? I know you're doing some work. But has that work picked up?

We have won three jobs now versus one when I talk to you last time -- last quarter. They were not -- they are in the early planning stages phases, where they are planning contracts for schools, schools wondering what to do with Prop 39. So the program is starting up and we went from one to three. Hopefully, next quarter, we will go to six.

Okay. And then, lastly, on the acquisition front, could you give us a little update there? I mean, are you close to something? Or have you identified things that -- is there anything that is close?

We have identified things. And if all goes well, it will be close.

Okay. That's pretty much it. Congratulations.

The one question I had, lastly, sequentially your gross margin is up from about 39.6% to 41.6%. So you improved gross margins sequentially. Is that because of the revenue increase and leveraging?

Yes. (multiple speakers) Yes, sorry. We were having a little discussion here.

Anything else, Wyatt?

No. That's it. Thank you very much. Congratulations on a great quarter.

Al Kaschalk, Wedbush Securities.

Tom, on the M&A front, can you give us an update on whether things that were in the pipeline have fallen out? Or have things just stayed in and you are not able to cross the goal line on, arguably, valuation?

We have a pipeline. They're in the pipeline. It has nothing to do with valuation or goal line. Things take time.

Okay. But, are you able to comment on whether things have fallen out? In other words, you have got (multiple speakers).

They have not fallen out.

Okay. And then, just a follow-up on this gross margin question; can you be a little bit more specific than just yes, that it was due to higher revenue? Is it more mix of revenue, self-perform, better technical contracts, therefore improved economics than your base business?

Yes. It is up a lot.

Yes. I think besides just the increase in revenue, we have been able to do some of our -- use less subs, which we do better on as well, instead of making no margin on those, which has helped.

There are no further questions left in the queue. So Mr. Brisbin, I will turn the call back over to you for any closing remarks.

Sorry. We were having a discussion on gross margin. What's that?

Closing remarks.

Closing remarks. I would like to thank all of you for participating on our call today, and for your continued interest in Willdan. And thank you all and have a great day.

Ladies and gentlemen, this does conclude today's conference. We appreciate your participation.