Willdan Group Inc (WLDN) 2017 Q3 法說會逐字稿

Good day, and welcome to the Willdan Group Third Quarter 2017 Conference Call. Today's conference is being recorded.

And at this time, I would like to turn the conference over to Mr. Tony Rossi. 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 29, 2017.

With us today from management are Chairman and Chief Executive Officer, Thomas Brisbin; Chief Financial Officer, Stacy McLaughlin; and Mike Bieber, President of Willdan Group. Management will review prepared remarks, and we'll then open up the call to your questions.

Statements made in the course of today's conference call which are not purely historical are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The forward-looking statements involve certain risks and uncertainties, and it is important to note that the company's future results could differ materially from those in any such forward-looking statements.

Factors that could cause actual results to differ materially and other risk factors are listed from time to time in the company's SEC reports, including but not limited to the Form 10-K for the year ended December 30, 2016, and subsequent quarterly reports on Form 10-Q. The company cautions investors not to place undue reliance on the forward-looking statements made during the course of this conference call. Willdan Group 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 services and other direct costs and EBITDA. We believe revenue, net of subcontractor services and other direct costs allows for an improved measure of the revenue derived from the work performed by our employees. 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 will now turn the call over to Chief Financial Officer, Stacy McLaughlin. Stacy?

Thanks, Tony. 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 guidance.

Total contract revenue for the third quarter of 2017 increased 17.6% to $69 million from $58.7 million for the third quarter of 2016. By segment, including both organic and acquisitive revenue, Energy Efficiency Services revenue increased 19.2% to $50 million, Engineering Services contract revenue increased 16.1% to $15 million, revenue from Public Finance Services increased 2.3% to $3.3 million, and Homeland Security Services revenue increased 27.7% to $724,000 in the quarter.

Our total contract revenue included incremental contract revenue of $0.5 million attributable to the acquisition of Integral Analytics, which is included in our Energy Efficiency Services revenue. The organic growth rate was 16% over the prior year period. Net revenue, defined as contract revenue minus subcontractor services and other direct costs, was $31.7 million, an increase of 19.5% from $26.5 million in the year-ago quarter. Direct costs of contract revenue were $48.7 million for the third quarter of 2017, an increase of 14.5% from $42.6 million in the same period last year. The increase was primarily as a result of the growth in total contract revenue in the Energy Efficiency Services segment and the corresponding increase in subcontractor services and material costs related to the implementation of new contracts.

Our direct costs of contract revenue were 70.6% of our total contract revenue in the third quarter of 2017, down from 73.8% in the second quarter of 2017. As we discussed in our last 2 conference calls, we believed that the percentage of subcontractor services and other direct costs would trend downward. This quarter demonstrated this trend. As we move from 58% subcontractor services and other direct costs to 54% this quarter, this change has -- this change also positively impacted margin in the quarter.

General and administrative expenses for the third quarter were $16.1 million compared to $13.1 million for the prior year period. As a percentage of total contract revenue, our G&A expenses were 23.3% compared with 22.3% in the third quarter of 2016. The increase in G&A as a percentage of total contract revenue over the prior year was primarily attributable to higher stock-based compensation expense and an increase in depreciation and amortization.

Operating income was $4.2 million for the third quarter of 2017, an increase of 37% over $3.1 million generated in the third quarter of 2016. EBITDA was $5.8 million for the third quarter of 2017 compared with $4 million for the third quarter of 2016. EBITDA margin for the third quarter was 8.4%, up from 6.8%. As a percentage of our net revenue, our EBITDA margin was 18.3% in the third quarter, an increase from 14.9% from the same period last year.

We recorded income tax expense of $1.3 million in the third quarter of 2017 compared to $548,000 in the same period last year. Our effective tax rate in the third quarter was 30.9%, up from 18.2% in the year-ago period. The increase in our effective tax rate is due to the Energy Efficiency commercial building tax deductions that we utilized in 2016, which have not yet been approved by Congress for this year.

Net income for the third quarter of 2017 was $2.9 million or $0.31 per diluted share compared to net income of $2.5 million or $0.28 per diluted share for the third quarter of 2016.

In summary, income from operations has increased more than twice as fast as revenue to 37% over the prior period. Had we been able to utilize the 179D tax deductions as we have in the past, our EPS would have been approximately $0.37.

Turning to the balance sheet. We had $5.6 million in cash and cash equivalents at September 29, 2017, which is a decrease of $17.1 million since the beginning of the fiscal year. The decrease was primarily driven by the use of cash for the acquisition of Integral Analytics and payments for contingent consideration and on notes payable related to our prior acquisitions. This was partially offset by cash generated from operations.

Our DSO was 74 days at September 29, up from 64 days at the end of the prior quarter. Since the end of the third quarter, we have worked down our DSO to 70 days. The improved collections has had a positive impact on our cash balances, which have increased to $7.3 million as of the end of October. As of September 29, 2017, we had approximately $1.5 million in outstanding borrowings under our revolving line of credit. Compared to 2016 year-end, stockholders' equity has increased 33% to $66.5 million.

Turning to our outlook for fiscal 2017. We have updated our financial targets. We have increased our full year revenue to range from $255 million to $265 million. Our diluted earning per share has changed to $1.12 to $1.18. We have increased our expected diluted share count to 9.25 million shares and have not made any changes to our forecasted depreciation and amortization. For the final quarter, we expect our effective tax rate to be 40%.

I'd now like to turn the call over to Tom.

Thanks, Stacy, and good afternoon, everyone. We had another good quarter with positive trends. We had strong year-over-year increases in revenue, operating income, EPS and EBITDA, which is largely being driven by the performance of our Energy Efficiency and Engineering Service segments.

From a client perspective, the major contributions to our revenue were largely consistent with what we have seen throughout 2017. The notable differences are primarily related to more work with end users. These include hospitals, medical facilities, financial institutions, schools, real estate. An example is a program to implement Energy Efficiency upgrades at Wells Fargo branches across the country. As a result, we are seeing a more diversified revenue mix than we have historically experienced. The increase in these types of end-user projects reflects the strong performance contracting capabilities that we have built over the past few years. We are incorporating our performance contracting groups into the business development efforts of our utility and municipal business units. The collaboration across the company has led to many cross-selling successes.

With our Energy Efficiency programs for utilities, we continue to execute well and deliver the energy savings that we are targeting. As a result, we have won all of the recompetes that have come up for bid this year, and the outlook for this area in the business continues to be strong. We continue to see more work coming from different areas of the country. At the same time, the opportunities to expand our business [win] in California are substantial.

As we announced earlier this year, we have been awarded 2 new master service contracts to perform energy efficiency and water conservation upgrades in facilities managed by the state of California's Department of General Services. These contracts have the potential to contribute meaningful revenue over the next 8 years, and we have received our first assignment under this contract to perform upgrades on a 22-story building in Oakland. As you know, we have talked about the mandate to increase the amount of outsourcing by California utilities to bridge the procurement period while this new initiative is implemented. All of the existing energy efficiency programs have been extended at least through 2018. Thus, we have good visibility on our California-related revenue going to the -- going into the next year. We anticipate that the first awards for the newly outsourced programs will be made in late 2018 or early 2019.

Winning as much as the new programs to be outsourced in California is a top priority for the company right now. We are committing more resources to developing our proposals. In fact, because of the expanded array of Energy Efficiency Services and solutions that we can now provide, the number of markets that we can serve and the types of clients that we can target, we have more business development activity ongoing than at any point in our history.

We believe we will see strong dividends in the form of continued organic growth in the years ahead. We are incorporating our new data analytics capabilities via Integral Analytics into many of our proposals. We believe this is going to be a significant differentiator that will enhance the value to our utility customers.

On a stand-alone basis, Integral Analytics continues to win new business, including the license agreement recently signed with Hawaiian Electric, and we anticipate seeing a meaningful amount of higher margin licensing and maintenance revenue in 2018.

We are very excited about our outlook for continuing to drive profitable organic growth. We also intend to continue our M&A strategy that has proven highly effective in improving our financial performance and positioning the company for distributed energy resource solutions.

For example, our Air Quality Management District Award, $7 million CEC Award is the beginning of several microgrid awards being procured in California. We expect to pursue schools, universities, military bases and any area that needs resiliency.

In closing, we are filing an S3 Shelf with the SEC tomorrow. While we don't have any current plans to use it, it allows us to be opportunistic with respect to future acquisition opportunities.

With that, I would now like to turn the call back to the operator for Q&A.

(Operator Instructions) And we will take our first question from Mike Shlisky with Seaport Global.

I kind of want -- can you hear me okay, by the way?

We can.

Yes.

Okay. That's great. All right. I wanted to start...

We can hear you.

All right. Perfect. I wanted to start off by just looking into your guidance just for one quick second here. Maybe I'm looking at this wrong if I calculated -- but are you guiding to a revenue decline in the fourth quarter? Is there any reason why that might be the case, because -- was it a very tough comp from last year?

Mike, if you look at our updated guidance, we've raised the top end -- the top and bottom end of guidance, $255 million to $265 million. If you just do the pro forma, we had a very strong Q4 last year, especially from Engineering, we had some unexpected revenue there. If you do the math, there's a slight decline in Q4. We don't know that, that will occur, as we beat guidance on revenue I think for each of the last 6 or 7 quarters. But when you're going into Q4, you often don't know what kind of year-end spending the customers, especially the large utilities, have. You don't see that until November and December. So this represents a view as we see it today, and we're optimistic that we're going to continue our good growth trends.

Okay. Got you. So then -- I mean, then more broadly speaking, if you do feel good about the organic growth rates, are still pretty much (inaudible) into double-digits, maybe not [every single] quarter, but certainly, that's the general trend in most quarters going forward?

Yes, that's correct.

Just wanted to make sure. Going even broader here, I wanted to talk about next week for election day. Are there any states or cities that you're watching that have other, some kind of referendum out there on changes to their local energy policy? Or is there any candidate that you're watching that might be looking at a more favorable tone towards what you do for your [look over] there?

Our answer would be no. We don't see any of the elections affecting anything we do. We are watching what's going on in the tax world, hoping that our tax credit for energy gets passed before the end of the year. But that's the only political thing that we're watching.

Got you. Then I wanted to just touch on the IA business. I wanted to get your impression now that you've owned it for a couple of months now. [So what are your] first impressions, kind of seeing it on a more granular level. That's a pretty big change that you've made at that organization now that you officially own it.

Broke up a little bit on that one. Did you hear it, Mike?

I just wanted to talk about IA.

Yes, I was just curious if you -- yes, I was just curious if you'd tell us, now that you've owned it for a couple of months, kind of now that you've seen it a little more closely, have you made any big changes? Are you satisfied with what you've seen so far? Kind of your thoughts as to what's been surprising to you over the first 2 months of ownership?

We haven't made any changes to the business. We've integrated the back office. We did that actually before we closed the transaction. So they're on our accounting system. We've had a lot of collaboration with IA on the new bids that we are going after. And I guess, the one thing that we've actually seen is that clients, when we go to oral interviews, respond very positively to the ideas that we can put forth using IA tools and concepts about modeling different scenarios. That -- a lot of these ideas are new to these utility customers, and so that's what we're seeing. They're very impressed with that, and we think it's a good technical differentiator.

Okay, got it. I also wanted to touch on the subcontractor percentage. You did promise it will come down this quarter. You're certainly delivering on that. Nicely done. I kind of wanted to get a sense as to where you think, is there an additional step down happening in Q4 or next year? Or have we reached a kind of appropriate level that you (inaudible) kind of near- to medium-term?

Yes, you're right. It did goes from 58% to 54%, just like we thought it would. We thought it would trend down. We think it's going to continue to trend down over the next 3 or 4 quarters. It will trend slowly down, so if we lose 1% or 2% here or there over the next couple of quarters, that's sort of what we would expect. Don't be surprised if it moves around a little bit each quarter, up or down, but the trend line over multiple quarters should follow exactly what you've seen in the last 4 quarters, which is that it's come down by about 5%.

Got you. (inaudible) one last one (inaudible) if you don't mind. On the amortization expenses, I saw a pretty big jump up in the goodwill. Obviously, it's (inaudible) M&A. Is the [1.05] we saw this past quarter, is that the appropriate run rate going forward? Or it's just a full quarter leave it there [at IA] in the fourth quarter and beyond, that your amortization [crosses]?

We had IA for 2 of the 3 months. It is close to -- you can do a pro-rata calculation, and you'll see the data in our Q to get the full period effect of IA. But yes, that is our early estimate, and we don't expect it to move around too much in the out quarters other than the pro-rata portion of the quarter that they were with us.

(Operator Instructions) And we'll take our next question from John Quealy with Canaccord Genuity.

A couple of questions. Tom, on the outsourcing initiatives in California -- you know, thanks for the update around potential first awards. Can you just remind us some of the milestones in the process? Is this past the PUC? Have RFPs been issued by the constituent IOUs yet? Where are we on some of the nuts and bolts of that outlook that you gave earlier?

The final business plans have not been approved by the PUC. We're expecting that in November. A schedule is publicly available for all of the programs, and the schedule for when they expect procurement for all the major utilities in California. So our best guess is it does get passed in November, and we start to see the first procurements first quarter of next year. And generally, that's a 10 to 12 month award cycle, so. And then they stretch out about -- I think, it adds up to around $600 million worth of procurements over 2018 into '19.

Got you, okay. And while I have the...

And I just want to make sure I said that -- I thought of another number. I said $600 million. Go ahead.

Okay. So Tom, while I have you, bigger question on -- you brought up tax policy. So talk about -- I mean obviously the federal tax regime is hard to speculate on. But some of the things we saw today, talk about some of the things that you're focusing on? Obviously, I think you mentioned like 179D or something or makers. That's a big part of I think the business side of the initial versions of the tax plan in terms of 100% expensing. Does that apply at all to your business? And then also, who knows what they do with the ITC/PTC, but at least the initial draft had some inflation adjustments coming out of it. Does that impact your utility-related business? Or obviously were driven by state rate case economics? Just help us put in what you're looking for in these tax changes? And then, really what drives the business? Or is -- there's a risk to the business if there's anything?

Let's first address 179. And -- what did you say, it's going to go to legislation next week?

Correct. It's in the bill right now. It's in the House bill that will be reviewed on Monday. We don't know if that's going to pass, as it has every year for -- I don't know, 17 or 18 years in a row. However, even if it doesn't pass, the corporate tax reform is likely to lower everyone's tax rate down to the 25%. So whether it's 25% or 30% through 179D or everyone's corporate tax rate is lowered. Those seem to be the 2 most likely outcomes at this point.

Those are the 2 things we're watching.

Yes.

Yes, right. Right. And in terms of your projects on energy efficiency or distributed energy resources, thus far, the projects that you've done or the projects that you're pitching, do they -- how heavily do they rely on federal ITC/PTC, if at all?

Not at all.

Okay, okay. And then the last question. Back I think to the earlier comment on IA, and your relative happiness with it just 3 or 4 months in. Is that sort of $10 million revenue bogey? Is that still what you're thinking at this point? And just, if you don't mind, just coloring that in a little bit?

We still got that on the books, yes. $10 million. Do you want more detail than that?

Okay. No, just your conviction in it. That's good. That's good, Tom.

(Operator Instructions) We'll take our next question from Ariel Hughes with Wedbush.

So on the energy tax credit, just how -- what is with full likelihood that you guys see that credit next quarter? And then, just as a follow-up, how should we think about your tax rate going into 2018? Do you guys expect to be awarded this tax credit again in 2018?

Well, I can't really speak to the likelihood of whether or not the tax credit will be passed for this year. It has been passed, as Mike said, every year for the past so many years, and we would hope that, that would happen again this year. But as to the likelihood of that, I don't think I can make an opinion on that. We are utilizing other tax credits to help keep the tax rate down, such as R&D and California Competes and the like. So next year, we'll continue to do that, moving forward to try to help keep that rate down and ideally, the 179D would also go into effect next year as well. But we wouldn't obviously know that until either they pass it this year or again next year.

I show no other questions. I would like to turn the call back to management for any closing remarks.

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

And that concludes today's conference. We thank you for your participation. You may now disconnect.