Willdan Group Inc (WLDN) 2015 Q4 法說會逐字稿

Good day and welcome to the Willdan Group, Inc. fourth-quarter 2015 conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Moira Conlon. Please go ahead, ma'am.

Thank you. Good afternoon, everyone, and thank you for joining us to discuss Willdan Group's financial results for the fourth quarter ended January 1, 2016. With us today from management are Chief Executive Officer Thomas Brisbin; Chief Financial Officer Stacey McLaughlin; and Mike Bieber, Senior Vice President of Corporate Development. 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. 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.

In addition to GAAP financial results, Willdan also provides 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 and adjusted EBITDA. We believe revenue, net of subcontractor costs allows for an improved measure of the revenue derived from the work performed by our employees. Adjusted EBITDA is a supplemental measure of operating performance 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.

With that I would now like to turn the call over to our Chief Financial Officer, Stacy McLaughlin. Stacy, please go ahead.

Thanks, Moira. I'd like to add my welcome to those joining us on today's call. I'll start with an overview of our income statement, then our balance sheet and, finally, our outlook for 2016.

Total contract revenue for the fourth quarter of 2015 increased 4.3% to $31.5 million from $30.2 million for the fourth quarter of 2014. The two firms we acquired in January 2015, Abacus and 360 Energy, contributed $4.5 million in contract revenue for the fourth quarter of 2015. By segment, including both organic and acquisitive revenue, energy efficiency services increased 3.6% to $15.9 million. Engineering services contract revenue increased 7.4% to $12.1 million, revenue from public finance services increased 9.4% to $2.9 million and homeland security services revenue decreased 33.6% to $673,000 in the quarter.

Revenue, net of subcontractor costs was $24.4 million compared with $25.4 million for the year ago quarter. Direct costs of contract revenue were $18.4 million for the fourth quarter of 2015, compared with $17.9 million in the same period last year. The increase was primarily the result of incremental direct cost of revenue of $2.5 million, attributable to our acquisitions of Abacus and 360 Energy. Excluding the impact of the acquisitions, direct costs were lower by approximately $2 million as we had a decrease in direct costs in the energy efficiency services segment, resulting from the organic decline we saw in the segment this quarter. This decline was partially offset by higher direct costs driven by the organic growth in the engineering services segment.

Gross margin was 41.5% in the fourth quarter of 2015, which was relatively unchanged from 41% we saw in the same period last year. On a sequential quarter basis, our gross margin improved from the 37.5% that we had in the third quarter of 2015 which was primarily attributable to a lower percentage of our revenue being derived from our recent acquisitions which use more subcontractors.

General and administrative expenses for the fourth quarter were $12.6 million, compared to $10 million for the prior year period. The increase in G&A was primarily related to higher audit fees associated with becoming an accelerated filer in 2015. In addition, we had approximately $100,000 of legal costs in the fourth quarter of 2015, related to the acquisition of Genesys Engineering. As a percentage of total contract revenue, our G&A expenses were 40% compared with 33% in the fourth quarter of 2014. The increase in this ratio was primarily attributable to the higher audit fees as well as the weakness in energy efficiency revenues.

Operating income was $456,000 for the fourth quarter of 2015, compared with $2.4 million generated in the fourth quarter of 2014. Adjusted EBITDA was $1.8 million for the fourth quarter of 2015, compared with $2.6 million for the fourth quarter of 2014.

Adjusted EBITDA margin was 5.7%, a decrease from 8.4% in the same period in the prior year. The lower adjusted EBITDA margin is primarily due to weak performance in the three utility programs within the energy efficiency segment we discussed last quarter. Tom will discuss this later on the call today.

Income tax expense was $210,000 in the fourth quarter of 2015 compared with $366,000 in the same period last year. The effective tax rate in the fourth quarter of 2015 was 35.6%, compared with 15.2% in the same period last year.

The difference in the effective tax rate is primarily due to recognition of an income tax benefit for net operating loss carryforwards that were fully utilized in 2014 and no longer available to offset taxable income this year. Net income for the fourth quarter of 2015 was $380,000 or $0.05 per diluted share compared to net income of $2 million or $0.26 per diluted share for the fourth quarter of 2014.

Turning to our balance sheet, we had cash and cash equivalents of $16.5 million at January 1, 2016, an increase of approximately $1.8 million from the end of the prior quarter. The increase was driven by positive free cash flow generated during the quarter. Our accounts receivable days outstanding was 74 days compared to 73 days at the end of the prior quarter.

As of January 1, 2016, we had no outstanding borrowings under our revolving line of credit and $1.1 million outstanding on our delayed draw term loan. All $7.5 million under the revolving line of credit is available for borrowing. And, as we indicated in the 8-K filed last week, we have signed an amendment to our credit facility that extends the maturity date by one year to March 24, 2017.

Now turning to our guidance for 2016, we expect full-year revenue in 2016 to range between $170 million and $185 million. We also expect full-year adjusted EBITDA to range between $15 million and $15.5 million. In addition, we expect our effective tax rate to be approximately 41% although we are currently exploring certain actions we could take to lower our effective tax rate over the next two years. As we move forward with these efforts we will provide an update on any expected change in our effective tax rate.

now like to turn the call over to Tom. Tom?

Thanks, Stacy, and good afternoon, everyone. As we indicated on our last conference call, we expect our fourth-quarter results to be in line with third quarter which is generally how things turned out. With regards to energy efficiency the overall performance of our energy efficiency business undermined our overall results, as it will take a couple of quarters to work through the issues that surfaced in the third quarter. The most significant issue we are facing in the energy efficiency business is adjusting to the baseline level of activity with our largest utility customer.

In the first half of 2015, Con Ed expanded our baseline contract to provide additional funding to address specific load pockets in Brooklyn and Queens where demand-side management was urgently needed. We staffed up to handle these contract modifications and expected the increased scope of activity to continue for an extended period.

However, the ramp up didn't continue into the third and fourth quarters of 2015. We fell back to the baseline level of activity with Con Ed which caused energy efficiencies revenue and profit to decline when compared to its first-half performance. We have the extension for 2016 at a value of approximately $33 million.

We are prepared to go beyond this baseline and expect to. The good news is that we continue to perform well for Con Ed and as a result, we are in discussions to expand our scope of activity in the second half of 2016 to include more programs targeting customer segments.

For example, more Brooklyn, Queens and larger projects -- 100 KW to 300 KW in our SBDI program. The type of programs that will include is larger retail stores, and warehouses and more real estate.

The second major drag on the energy efficiency business was a slow start-up of a new contract. This program required integrating systems and people. This was not our best effort.

As a result, we generated almost no revenue from this program in the third quarter and generated about $700,000 in revenue in the fourth quarter. We are now moving in the right direction but obviously not at the pace that we originally planned. The total value of this contract is $7.5 million over a one-year period. And now that we are starting to get more traction, we still expect to recognize the remainder of the revenue available in this contract during 2016.

We have corrected our third problem with hospitals in Southern California. Outside of these three problems, we continued to perform well across the board for our utility customers, and Puget Sound Energy is a good example. We were just awarded another two-year contract with a budget increase of 38% for small business direct install, refrigeration, and lodging programs.

As we have consistently seen in our energy efficiency business, if we deliver the targeted level of energy savings, the utilities will come back for more, increase the level of funding and say, we want you to expand what you are doing for us. We also have two additional wins with New York Power Authority. Both Genesys and Willdan were selected to provide energy efficiency services.

The two acquisitions we made in 2015, 360 Energy and Abacus, are performing well and they have record backlog coming into 2016. The acquisitions have helped us bid on Newark that we could not have won without them. We are awaiting the outcome of these significant pursuits.

The message here is Willdan is stronger and more diversified with 360 and Abacus.

Turning to an update on the New York Prize Micro-grid Competition, we are approaching the final phase of stage I and completing the feasibility studies for eight communities that we are working with. Approximately 10 of 83 communities will be selected for stage II of the contest later this year which will consist of engineering design and business planning.

We expect to go forward with at least one of the eight communities.

We continue to see more activity and funding for micro-grid implementation across the country. We recently submitted a proposal for a micro-grid project in California and we are closely monitoring the development of other state-sponsored micro-grid projects. It looks like Illinois, Massachusetts and Virginia might be the next states to provide funding for micro-grid development.

The increase in demand for micro-grids, central plants such as boilers and chillers, distributed generation were a primary driver for the acquisition of Genesys Engineering that we announced last week. Over the past few years, we have frequently partnered with Genesys as one of our team members and therefore have firsthand knowledge of their engineering expertise. We are very excited to add their knowledge and skill to the Willdan team. They are leaders in the development of small to midsized central plants, primarily used by hospitals, universities, and multifamily housing.

Genesys also fulfilled another goal of our M&A program which was to expand our East Coast engineering presence. In this region, Genesys was our top target. So, we are doubly pleased that they were interested in becoming a part of Willdan.

They have demonstrated the ability to consistently grow their business. We believe the combination of the technical skills will help us capitalize on the continued evolution towards distributed generation and micro-grids.

With regards to engineering, our legacy business, revenue was up 7.4% over last year. Engineering had a very strong year, with revenue up 12.8% and profit up 17.5%. Engineering continues to recover with more activity throughout California. We won new contracts in the Bay Area and in the Central Valley as well as a building and safety contract with the city of Phoenix, Arizona, a place where we used to be very strong.

Public finance services. In public finance services our revenues increased 9.4% over last year. We won $2 million in new contracts during the fourth quarter which brought us to $13.5 million in new contract wins during 2015. Residential and commercial real estate development trends continue to be positive which helps drive demand for new financing programs for infrastructure and municipal services.

We continue to see more business coming from Texas and Florida, which is providing incremental growth opportunities outside of the historical base business in California. We also expand regulatory changes concerning property SF clean energy PACE funding. This will open the opportunity to cross sell energy and financial services.

Let's turn to an outlook for 2016. I want to wrap up today by talking about 2016.

As Stacy mentioned, we are expecting total contract revenue in 2016 to range from $170 million to $185 million, which is an increase of $35 million to $50 million over 2015. Approximately $30 million of the growth will come from Genesys, and we anticipate another $5 million to $20 million of organic revenue growth. This translates to an implied organic growth rate of roughly 5% to 15%.

Now I want to walk through some data points that will help you understand our projections for 2016. All of our utility contracts have been extended through 2016, so we have good revenue visibility for the full year. As I mentioned earlier, we are in negotiations with Con Ed to add more programs to our baseline contract. The addition of these programs would probably put the total revenue from Con Ed about even with 2015 with a bigger contribution coming in the second half of the year.

As we indicated, the Puget Sound program is increasing in value this year. NYPA has notified us of additional wins. That's New York Power Authority. 360 Energy has a current backlog of over $16 million, which should lead to solid double-digit growth in their business. Engineering continues to execute well and produce growth in the mid to high single digits and public finance services ended 2015 with a backlog of $8.8 million, a 21% increase from where it was at the end of 2014.

So, this should translate into nice growth for this business in 2016.

Given these trends we are seeing in the business, we are confident that 2016 will be a strong year of profitable growth. We also continue to have an active M&A pipeline, and we anticipate completing additional accretive acquisitions. With the last three acquisitions, we have significantly enhanced our mechanical engineering capabilities and improved our geographic coverage. Our primary area of focus going forward will be targeting firms that can provide high-end electrical engineering capabilities.

As we indicated in an 8-K filing last week, we have made some amendments to our credit facility that provides us with the flexibility to continue implementing our M&A program. We believe we have strong growth opportunities, both organically and through our M&A program, and our primary use of capital continues to be focused on investing in initiatives that will drive revenue and earnings.

On a final note, I am confident that we will deliver a strong year in 2016. We continue to have a good position and an excellent reputation in markets that are seeing strong long-term growth. We are very optimistic about our opportunities to create significant value for our shareholders in the coming years.

With that, I would now like to turn the call back to the operator for questions.

(Operator Instructions) Al Kaschalk, Wedbush Securities.

Just to clarify the energy efficiency, I think, Tom, your commentary suggested that, the first half of 2016, you would see some rolloff or some of that work that didn't materialize and then in the second half we should resume growth in that and I'm talking ex the acquisitions of course.

What I'm trying to say is in the -- our baseline will continue into 2016. So, where we were in the end of the third and fourth quarter, we'll continue. They are adding more Brooklyn-Queens work. We have more. They are adding what I referred to as 100 kilowatt to 300 kilowatt type businesses which is larger retail, warehouses and so forth. Those have already been under negotiation. We are anticipating them to start and ramp up maybe earlier than the second half. And it's all for Con Ed. So --.

But if you put all that together, and if I look at the $16 million or $15.9 million that you did in the fourth quarter, understanding that that's generally a little bit slower quarter than others, what's the --? What can you guys share in terms of what the first quarter and second quarter looks like in that segment particularly or that strategic business unit? Again, excluding the recently closed transaction. I'm trying to get at is -- is the so-called organic growth in there.

We think it will ramp up throughout the year. So, first quarter will be probably where we are in the fourth quarter, maybe a little better. And then, by the fourth quarter we are expecting to be doing much better. I think I even said beyond, potentially, the $33 million that the 2016 contract is for. They've added in larger businesses and they've added in more Brooklyn-Queens.

So, you can take our base and say it will ramp up through 2016 and should be better than 2015 overall.

Tom, if I may ask, the benefit to the revenue mix or to your operation to doing business as a result of larger customers, is that -- is there such a thing or is there not much in the way of operating leverage or billable time, etc.?

The only operating leverage you get with bigger customers, more customers, is probably on the material side. You won't see any leverage on the people side, so we are a professional services business. I mean that's the only -- we are either selling people or we are selling to some extent, I think -- I would just guess we are about probably 15 -- do we know how much materials there were --? Around $15 million? Maybe $15 million to $20 million in materials for 2015. So as that number grows, we have better buying power but that's about the only thing, Al.

Okay. Shifting gears. On the outlook, you talked about 5% to 15% organic growth. What would get you at the lower end of that range versus the upper end? And I realize winning a contract would do one versus the other but can you give us a little color into the broader range? Is there several contracts that would get you the $185 million? Is there one that would get you from $170 million to $185 million. Just a little bit of what you are hunting for in 2016.

If we go from $135 million and we say we are going to add, was it $5 million to $15 million? $5 million to $15 million.

If we perform and deliver all of that one utility for $7.5 million, that gives you $7.5 million that we didn't have in 2015. If we get up and going on the increased size of the 100 kilowatt to 300 kilowatt in our existing -- these are both existing contracts. The one we need to ramp up would give $7.5 million, $6.5 million. Con Ed, we are going to ramp up the 100, 300. And also the Brooklyn-Queens.

So, just those two alone would give you, you know, a solid in the middle $10 million. Maybe more. So with two existing programs, just delivering on them would get you to the midrange to the high range. We would have to have some type of unknown event at this time to take place not to grow. Because, as I said, the visibility into 2016 is very good. We have no programs rolling off. All we have to do is perform.

Then my final question, if I may, on the -- I was wondering perhaps, Stacy, if we could get the cash balance post the closing of Genesys. I think you ended it at [$16 million] in cash at the end of the year and been any -- is it the nature of what you used to close that transaction if there was a combination of debt or cash.

After the close of the Genesys acquisition, we had approximately $9 million left in cash and we only used cash for the close. We did not draw on the term loan or the revolver.

So, debt outstanding at that close also then would be zero?

We have $1.1 million outstanding on the delayed draw term.

All right. That's all I have, thank you.

Ryan Cassil, Seaport Global.

I guess, on my first question, just to clarify on the 5% to 15%, have you -- does that include if you increase the scope of your work with Con Edison, is that what gets you to that 15% organic growth range or would that be incremental in the way you are building the guidance?

I'm looking at Mike here. We are trying to decide how to answer that so it's clear. Do you have a clear answer, Mike?

Tom stated that Con Ed is approximately equal to that of last year. So the acquisitive growth will be likely driven by other programs, including the new programs we've already won and are ramping up, Ryan.

You said acquisitive growth. You meant organic.

Organic growth.

Ryan, did you catch that?

Yes, I think so. Okay. So, that would include some of -- expanding those on some of those new projects with Con Ed, then, to get to that 15% range.

There's a little expansion in Con Ed. There is delivering on the existing one in Southern California and there's a little bit of new programs in there to get to the high end.

Got you. And at the low end, are you still assuming you get the remainder of the new start-up project which I think it has 6 -- it sounds like just south of $7 million left on that contract or is that an assumption that you will get all of that in 2016?

I think we are being conservative and, this time, assuming that something goes wrong not -- that's -- we are giving the low end just in a conservative assumption something might go wrong. That's all that is. We gave ourselves a broader range to be -- the margin for error is more [of that].

Makes sense. In the micro-grid study, you guys sound confident you are going to win with at least one of those communities that they will move forward. What's giving you any confidence and then or what's giving you the increased confidence? And then, on some of those new states -- I think you said Illinois and Massachusetts and Virginia. Any sense on timing on those and whether one might move forward versus another?

No. It should be by the end of the year, 2016. We should have knowledge of wins or knowledge of responses or under negotiation if we get selected. But with regards to New York if we move one forward, one, it puts us on the map. I mean, it's -- what you are really looking at is, let's say a five-year plan of how distributed generation and micro-grids start to take over the overall transformation of the utilities.

So, for us, moving one forward is a big hurdle. It's a big thing for Willdan. Because I won't say no one but hardly anyone can point to having implemented complete micro-grid for municipality.

Great. Could you give us refresh us again of what that revenue opportunity could ultimately lead to on that one project and then what you think about that ability, you know, winning that project and how it could help you win additional projects after that?

It's not a revenue event. The next phase is like $1 million. And then the next phase after that I think it's going to be ceded by $5 million to $7 million from the state with a municipality, is probably looking at coming out with $30 million, $35 million, $40 million. So again the idea here, Ryan, is -- you win, you do it, you go to the next stage, you actually implement it and it puts you on the map in the country as someone who has actually done it.

And it's a direction and the team we have working on it, I think I've referred to before Illinois Institute of Technology campus is a complete micro-grid. There are potentially a few others that are partial but for a city to say, I've got solar, I've got wind, I've got battery storage, I've got gas-fired generators, I can island off the grid for a week or a month or during high demand times kick in my other things. There is not a real complete city out there that's there but it is the direction that seems to be evolving.

If you go into New York and listen to Mr. Kaufman, he outlines it quite well of how utility is going to look over the next five to 10 years. One important role distributed generation and micro-grids are going to play, energy efficiency also refers to, too, to reduce the amount of capital that utilities have to pay.

Great. Thanks. That's great color on the overall opportunity. The last one from me, you said you have $9 million of cash left post the close of the acquisition. Could you talk about what the cash needs are, what you feel the cash needs are at this point in terms of day-to-day operations and where you are comfortable in terms of that cash balance getting to?

Ryan, we are comfortable around the balance we have now. The $9 million we can run efficiently on, say, approximately $10 million.

Okay. That's the minimum. I was trying to get to the minimum cash balance you would feel comfortable with. If you think that we are kind of bumping up against it or there's some cushion there?

We are comfortable.

Okay, thanks, guys. Appreciate it and look forward to seeing you next week.

Yes, we will see you out there. I guess we are going for a tour of a micro-grid, aren't we?

Yes, yes. We are pretty excited for it so looking forward to it.

Ian Niemeyer, Morehouse Investment Group.

I guess, first, just initially following the story and it looks like an optimistic 2016, I guess my question was on the acquisition strategy and it would be, like, are you like looking at any specific kind of geographic expansion and with certain new acquisitions going forward? Or is it going to be in the same sort of geographies you guys are in now?

Mike is going to answer that one.

Ian, we have only slight electrical engineering capabilities right now. So it's not specifically geographic.

Hold on a second, Mike. Somebody needs to turn their speaker off. Ian? Ian, can you hear me? I'm assuming you can hear us. It helped. Resuming going forward with the answer.

All right, Ian. We've got only slight electrical engineering capabilities today. So, it's not specific to geography that we want to add additional electrical engineering capabilities. We need both high-end electrical engineering consulting services and detailed design services across the United States right now. The last three acquisitions were focused on mechanical engineering and now we just need to add that electrical capability.

Okay. Thank you. And so what are you guys I guess targeting the same sort of -- the same size as Abacus and 360 and Genesys? Or do you think you can go higher or is it just really dependent on the target?

It depends on the target, and we could go larger. I think those are representative of what we are looking at, but we do have some larger targets as well that we could also pursue.

Okay. Thank you.

This concludes today's question-and-answer session. At this time, I will turn the conference back to management for any additional or closing remarks.

Okay, thank you. I'd like to thank all of you for participating on the call today and for your continued interest in Willdan. So, have a great day. Thank you.

This does conclude today's conference. We thank you for your participation. You may now disconnect.