Willdan Group Inc (WLDN) 2018 Q1 法說會逐字稿

Good day, and welcome to the Willdan Group First Quarter 2018 Conference Call. Today's conference is being recorded.

At this time, I would like to turn today's call over to Mr. Tony Rossi with Financial Profile. Please go ahead.

Thank you, operator. Good afternoon, everyone, and thank you for joining us to discuss Willdan Group's financial results for the first quarter ended March 30, 2018. With us today from management are Thomas Brisbin, Chairman and Chief Executive Officer; Stacy McLaughlin, Chief Financial Officer; 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 29, 2017, 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 net revenue and adjusted EBITDA. We believe net revenue 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 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 first quarter of 2018 decreased 20.1% to $54.6 million from $68.4 million for the first quarter of 2017. The decrease was primarily driven by the reduction in pass-through equipment cost that we recognize as little to no margin. We are pleased to report that the percentage of subcontractor and equipment pass-through costs dropped sequentially again from 52% in Q4 2017 to 44% in Q1 2018. Entering 2018, we consolidated our reportable segments into 2 segments; Energy and Engineering and Consulting. The Engineering and Consulting segment includes Public Finance Services and Homeland Security Services, which were previously broken out as their own segments. However, with the faster growth we have experienced in other areas of the company, they no longer met the criteria for separate segment reporting.

Net revenue, defined as contract revenue minus subcontractor services and other direct costs, was $30.5 million, an increase of 7.3% from $28.5 million in the year-ago quarter. The increase is due to growth in both of our segments. Net revenue for our Energy segment was $16.3 million, an increase of 11% over the prior year. Net revenue for our Engineering and Consulting segment was $14.2 million, an increase of 3% over the prior year.

Direct costs of contract revenue were $35.1 million for the first quarter of 2018, a decrease of 30.8% from $50.7 million in the same period last year. The decrease was primarily the result of lower pass-through equipment cost related to our Energy segment projects. Our direct cost of contract revenue were 64.2% of our total contract revenue in the first quarter of 2018, down from 74.2% in the same period of the prior year. The decline was due to lower subcontractor services and other direct costs, which represented 44.1% of total contract revenue this quarter, down from 58.3% last year.

As I have explained in the previous 2 quarters, we expect this percentage to reduce into the low 40s in 2018. General and administrative expenses for the first quarter were $17.6 million, compared to $15.7 million for the prior year period. The increase was due to higher payroll taxes and stock-based compensation expense, as well as increases in a number of miscellaneous expense items, including insurance, facilities and accounting fees. Compared to the fourth quarter of fiscal 2017, our G&A expenses were relatively flat.

As the percentage of net revenue, our G&A expenses were 57.5%, up a bit from the 55.1% we had in the first quarter of 2017. Operating income was $2 million for the first quarter of 2018, an increase of 0.5% over the first quarter of 2017. Adjusted EBITDA was $4.5 million for the first quarter of 2018, compared with $3.6 million for the first quarter of 2017.

Adjusted EBITDA as a percentage of net revenue for the first quarter was 14.7%, up from 12.5%, compared to the prior year period. This continues the trend of margin expansion we have seen over the last several quarters. During the first quarter, we recorded an income tax benefit of $242,000. This was attributable to significant tax deductions resulting from 179D, energy efficiency tax deductions that we were able to realize in the quarter. In the first quarter 2017, we had recorded a tax benefit of $673,000 as a result of tax deductions related to stock option exercises pursuant to new accounting rules that went into effect for the company in 2016.

Net income for the first quarter of 2018 was $2.2 million or $0.24 per diluted share, compared to net income of $2.6 million or $0.30 per diluted share for the first quarter of 2017. The decline in net income was entirely attributable to the higher tax benefit recorded last year. Adjusted diluted EPS for the quarter was $0.37.

Turning to the balance sheet. We had $5.4 million in cash and cash equivalents at March 30, 2018, which was a decrease of $9.1 million since the end of the previous fiscal year. The decrease was primarily due to bonuses paid and payments for our contingent consideration and notes payable related to our prior acquisitions. Our DSO was 82 days at March 30. We expect to see stronger cash flow from operations as we move through the year, due in part to the cash flow characteristics of certain projects.

As of March 30, 2018, we had $2.5 million in outstanding borrowings under our revolving line of credit.

Turning to our outlook for the remainder of 2018. We have not changed our financial targets. We continue to expect our net revenue to range from $130 million to $140 million and adjusted diluted earnings per share to range from $1.95 to $2.05. We continue to expect our diluted share count to be 9.3 million shares, depreciation to be $2 million and amortization expense to be $3 million. For 2018, we expect our effective tax rate to be 23%. I'd now like to turn the call over to Tom.

Thanks, Stacy, and good afternoon, everyone. Our operating performance was right in line with our expectations. As Stacy mentioned, we now have 2 reportable segments, Energy and Engineering and Consulting. Also, these segments had growth in net revenue. Energy had 14% organic growth and Engineering and Consulting had 3% in the quarter. Over the rest of 2018, we anticipate that Engineering and Consulting will make a nice contribution to our overall performance.

The City of Inglewood has just awarded us the traffic management plan for the new Los Angeles Football Stadium. We also see the continuing economic growth in California. Our Energy segment continues to perform well. We are ramping up new programs focused on data centers and small public sector facilities for ComEd in Illinois and a small business direct consulting program for Potomac Edison in Maryland. We have also received our third cast order under the $120 million 5-year California Department of General Services Program that we were awarded last year. This program covers energy efficiency and water conservation upgrades to state facilities. We're doing the preliminary auditing and engineering work on the first 3 tests quarters, and they should result in more meaningful revenue later in 2018, as we move into the later stages of these projects.

In terms of recent program awards, we were awarded Puget Sound Energy's Small Business Direct Install Program for the fourth consecutive time. And our role as one of the engineering companies on Public Service Enterprise Group Hospital Efficiency Program in New Jersey, which we have held since 2012, was extended through 2020. These 2 awards demonstrate an important point about the energy efficiency programs that we implement for utilities. If we execute well and deliver the targeted level of savings, these programs turn into long-term stable sources of revenue and earnings and can frequently be expanded in scope. In the case of Puget Sound, this has been expanded to also include lodging and small agricultural facility.

Furthermore, if you demonstrate the ability to deliver on one program, it enhances your ability to win additional programs from the same utility. In the case of the New Jersey Public Service Enterprise, our successful efforts on the hospital efficiency program, as well as our track record executing on direct install, helped us win their direct install program focused on government, nonprofit and small business facilities. It's another example of the success we have had in expanding our relationships with utilities after delivering on initial assignments.

We were just awarded a $14 million performance contract by the Pueblo County School District in Colorado to do energy efficient facility improvements on 23 buildings. This contract is similar to the work we are doing for the City of Lawrence, Kansas. This is the most meaningful work we have won to date in Colorado and serves as a great foundation for building our office and growing our revenue.

Overall, we are seeing very positive trends in the energy efficiency services market. The incentive programs for utilities are being changed in many states to reward utilities for minimizing capital expenditures and increasing energy efficiency among their customer base. The reward systems being set up for utilities will only serve to increase demand for energy efficiency services and makes us increasingly optimistic about the long-term growth opportunities for Willdan.

Our Integral Analytics acquisition is doing well and proceeding with their work for Hawaiian Electric. The adoption of IA's software for Hawaiian Electric is significant because they have the largest solar rate of adoption in the country. As distributed energy resources such as solar, wind, battery, demand response and energy efficiency become more prevalent, utilities are turning to IA software for planning the future -- distribute energy resource disruption to their grid. Currently, more than 20 utilities have adopted IA software. As you saw earlier this week, we announced another acquisition that will further enhance our ability to capitalize on this long-term opportunities. We acquired Newcomb Anderson McCormick, or NAM, a California-based firm that fills the need we have had for mechanical engineering expertise on the West Coast.

NAM has very similar capabilities as Genesys Engineering, which has been a very successful acquisition that accelerated the growth of our performance contracting work on the East Coast. NAM does a lot of energy efficiency projects for Pacific Gas & Electric in the City of San Francisco, and like Genesys, has a great deal of experience working for colleges and universities which are constantly looking to make energy-efficient upgrade to their facilities. We believe the addition of NAM's mechanical engineering expertise will significantly enhance our technical capabilities in California.

Now to give a quick update on the California procurements. The process continues to advance and the business plans for the utilities have been approved, which is a key interim milestone leading up to the procurements. Although there have been no definitive announcements at this point, based on information we are gathering, we continue to believe that we will see the first RFP opportunities by the end of this year. In summary, our overall business is tracking according to our expectations. Our pipeline of opportunities looks good, particularly in California, and we expect to deliver another positive year for our shareholders.

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

(Operator Instructions) Our first question will be from Moshe Katri with Wedbush Securities.

Just wanted to talk a bit about visibility for the year. Has that changed in any way versus, I would say, same time last year? And then looking at your revenue guidance, has that already factored the acquisition the DOE announced last week?

Visibility is about like last year. It's continued to improve throughout the year, so I think it looks pretty good for 2018, just as it did for 2017. The acquisition has about $7 million of annual revenue and about $4 million of annual net revenue. It's within the guidance, Moshe, within the guidance range, so we didn't update the guidance range for this particular acquisition.

Okay, that's fine. And then I think that you've also mentioned that Energy and Consulting, which grew about 3% during the quarter, as I understand, I think you said it should improve? I'm assuming that's what you said, maybe that's what you alluded to. Maybe you can talk about some of the comfort that you have that you're going to do better than 3% this year, because we have a pretty big catch-up to get to that revenue guidance that we have for the year, right?

We're deciding how to answer that. So hang on a second.

I think we're on track for revenue for the year, Moshe.

And the 3% was a first quarter comp was a big number in the first quarter of '17. But Engineering is still ticking along at 10%, 11%. It's just a bad comp from the first quarter of '17, which had -- we had a big Arizona job, which was a casino that pumped the first quarter in '17 up. So I don't think you should look at 3% as the future going forward, I think, back with 9%, 10%, 11%.

Okay, that's helpful. So what should we expect in our numbers -- what should we embed in our expectations for Engineering and Consulting for the year in terms of growth?

9%, 10%, pretty much where we've been.

Okay, that's helpful. 9%, 10% is good. And then what about margins for the year? Do you have any sort of a range that we should kind of look for?

EBITDA margin, as a percent of net revenue, has continued to trend up over the last couple of years.

Yes. Right.

It was 17.9% last year. It will continue that trend. We're marching towards 20% this year. EBITDA -- adjusted EBITDA as a percent of net revenue, you should be around that mark.

So this is going to be an exit rate? Or this is going to be for the year?

For the year, overall.

Okay, that's pretty impressive.

The last day of the quarter, of the fourth quarter.

(Operator Instructions) And our next question will be from Chip Moore with Canaccord.

Maybe on NAM, we can talk a little bit more about cross-selling potential. Is that -- where do you see that $4 million in net revenue to get into next year? How do we think about accretion on that deal?

Yes, we think they have a lot of room for expansion. I mean they are a key player in Northern California, PG&E territory. They are a key player in the Cal State, UC system. And those procurements and the amount of work headed to Northern California will be growing, and we're very, very happy to have NAM with us.

Yes, okay. That's helpful. And then on some of your key programs. The Local Capacity program in California, how are those ramping and any changes in the cadence this year into next?

Mike will talk about LCR.

We're doing very well in LCR. We exceeded our goal by 30% last year, and we're looking to exceed our goal again this year. First quarter looked great, and so we're actually a little ahead of plan on that program, looks good.

That's an increase -- last year was 1 megawatt. This year is 4 megawatts. So to give you an idea, it should go up by a factor of 4 in '18.

Yes, yes.

At least.

Okay. Great. Maybe just one last one for me. On balance sheet, with this latest deal, I assume it wasn't big, but how are you thinking about capacity and -- for future deals and how's that pipeline looking?

Yes, Chip, we've got just a little bit of debt now for the first time in a little bit. So we'll exercise our credit facility a little bit. The pipeline looks good. We've got plenty of capacity to do additional deals this year. We've got almost all of the full revolver plus the accordion, and the pipeline for new deals, even this year later, looks very good right now, both in California and we're talking with some national players as well. So that looks good.

Our next question will be from Wyatt Carr with Western International Advisors.

I guess this would be for Mike, with that -- can you give us any kind of idea of what kind of margins the NAM acquisition had? What kind of EBITDA -- I'm sure that you're looking at an accretive acquisition so.

Yes, correct. Wyatt, it's about on par with the rest of the Energy segment, that EBITDA as a percent of net revenue. So it's right on par with the rest of the Energy segment. It shouldn't change our margin profile overall. And you're right, if you model that out, it should be accretive on a fully GAAP basis in the first 12 months. We didn't update guidance because it will be a small amount for the remainder of 2018, but it'll be accretive on a GAAP basis this year.

Okay, great. And then the balance sheet does not reflect the $2.5 million that was taken out, outstanding on the credit line. Is that already on -- as of the end of March? Or is that -- or was there more taken out after the quarter was over?

That was included in the Q1 results on the balance sheet. It is on there, and we have not drawn anymore since then.

Great. And the cash, the ending cash balance, did that include? Or was that pre the acquisition of NAM?

All -- the entire balance sheet is prior to the acquisition.

No, say, further questions?

No, there's 2.

There's 2?

We have another question from Moshe Katri with Wedbush Securities.

Just a follow-up, any update on some of the cross-selling efforts that we discussed a couple of months ago related to Integral Analytics?

Update, that I can talk about. We -- it's working well. We like it. They have helped us. The last one that we talked about publicly was ComEd and we have 2 more in the proposal presentation stage going on right now, so I can't really say much more than that, Moshe because -- I can't tell you if we're going to win but we are doing -- we're mixing even the Financial Services, which does the back-end of utilities, with what IA does. And we're in a situation right now where we're competing for a major job in the south. That is something we've never done before. It's kind of like LCR 3 years ago. We've never done that before. We cross-sold between Willdan and Abacus, so we're exploring that opportunity right now to improve the growth of Financial Services.

And these should be better margin deals relative to the business?

It should be. I mean, Financial Services does, what, around 10%?

Yes.

I don't know what we'll be negotiating if we were to win. I don't want to put that on the phone, but I hope -- we're not there yet.

Our next question will be from Greg Kitt with Pinnacle Fund.

Mike, Tom and Stacy, actually, I have 2 questions for you. How much did Integral Analytics contribute in the quarter? And the second question is where -- have there been any changes to the State of California PUC outsourcing and contractor consolidation mandates?

You want to do California first?

Yes, go ahead.

Why, do you think about (inaudible)? There's -- I think, Kitt, it's moving forward. I've said the business plans are approved. The utilities are actually talking about RFPs in July, August. In the comments I stated, I said in '18 because I put a safety factor in there, but we've had initial talks of seeing something in July, August. The amount over the next 18 to 24 months is in excess of $1 billion. So they are marching forward and nothing has changed in terms of the rate of what they're going to outsource in terms of the regulations, the 20 60 80 100 over 4 or 5 years. So I am more confident today than the last time we spoke on this phone that we are moving forward. I don't see any roadblocks, nobody's throwing up with red flags.

Greg, on Integral Analytics, it was less than $1 million in Q1. As you remember, the new revenue -- new recognition standard makes recognizing revenue for software a little lumpy. So it was less than $1 million that we booked in year 1 -- or quarter 1. And that will obviously increase in the next couple of quarters.

Sorry, Greg. I thought I was still talking to Moshe.

I'm showing no further questions in the queue at this time. I'd now like to turn the call back over to management for closing remarks.

Well, thank you all of you for participating in our call today and for your continued interest in Willdan, and have a great day.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may now disconnect.