Q3 2019 Earnings Call
Good day walks to two building group's third quarter 2019 conference call.
This conference is being recorded at this time I would like to turn the conference over to Tony Rossi piece of financial profiles. Please go ahead.
Thank you Eduardo good afternoon, everyone and thank you for joining us to discuss Willdan group's financial results for the third quarter ended September 27th 2019.
With us today for management, or Thomas Brisbin, Chairman and Chief Executive Officer, Stacy Mcglaughlin, Chief Financial Officer, like deeper president or will that group.
Management will review prepared remarks, we'll then open up the called 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.
Forward looking statements involve certain risks and uncertainties and it's important to note that the company's future results could differ materially from those at 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 FCC reports.
Putting but not limited to the Form 10-K for the year ended December 28, 2018, 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.
Addition to GAAP financial result, well then also provides non-GAAP financial measures that we believe enhance investors ability to analyzer business trends and performance.
Our non-GAAP measures include net revenue adjusted EPS and adjusted EBITDA.
We believe net revenue allows for an improved measure of the revenue derived from the work performed by our employees.
Adjusted EPS and adjusted EBITDA or supplemental measures of operating performance, which removes the impact of certain expense items reduced operating results.
GAAP reconciliations for all of these non-GAAP measures are included at the end of the earnings release, we issued today.
With that I'd now like to turn the call over to Chief Financial Officer see Mcglaughlin Stacey.
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 than our balance sheet and finally our guidance.
Total contract revenue for third quarter of 2018 increased 65% $217.5 million from $71.4 million for the third quarter 2018. The increase was driven by growth in our energy segment, primarily related to the contributions from our recent acquisition.
Net revenue to find his contract revenue minus subcontractor services and other direct cost was $50.8 million, an increase of 47.1% from $34.5 million in a year ago corridor.
Within the energy segment net revenue increased by 81% what's in the engineering consulting segment net revenue was consistent with the same period last year.
Direct cost of contract revenue were $82.8 million for third quarter 2019, an increase of 72.3% from $48.1 billion in the same period last year.
Our direct cost of contract revenues were 70% of our total contract revenue in the third quarter 2019, compared with 67% in the same period of the prior year.
Increase was primarily attributable to the impact of our recent acquisitions, which have programs that utilize a higher percentage of subcontractors and include a significant amount of material and equipment costs that are pass through.
General and administrative expenses for the third quarter were $33.4 million compared to $18.4 million for the prior year period.
Increase is primarily driven by higher salaries and wages related to the personnel added through the last four acquisitions and the investment we're making in the California investor owned utility procurement.
The next no significant change with an increase of $4.7 million and amortization expense largely due to the increase in intangible assets, resulting from our acquisition.
He also had an increase in stock based compensation expense of approximately $2.4 million, our third quarter results. In 2019 included approximately $225000 an acquisition call.
We generated operating income of $1.3 million for third quarter 2018, compared to operating income of $4.9 million in third quarter 2018.
We incurred $1.3 million, an interest expense in the third quarter 2019 compared to $22000 in the same period last year.
Increases due to the debt utilized to finance our recent acquisition.
During the third quarter, we recorded income tax benefit of approximately $400000.
Net income for this or third quarter of 2019 was $400000 or four cents per diluted share.
On an adjusted basis, our net income was $7.6 million or 65 cents per diluted share. The most significant adjustments from gas for stock based compensation of $3.2 million and intangible amortization of $3.8 million. Both net of tax both of these items are noncash and are not results of the increased for.
Formants within the operating segment.
Adjusted EBITDA was $11.6 million for third quarter 2019, an increase of 63.3% from $7.1 million for the third quarter 2018.
Turning to the balance sheet, we had $52 million in accounts receivable net at September 27, 2019, as compared to $61.3 million at December 22018.
Our cash flow from operations was $8.3 million in the first nine months severe.
As of September 27, 2019, we had a 97.5 million dollar term loan outstanding and $5 million on our revolving credit facility outstanding, but no amount outstanding on our $50 million delayed draw term loan.
Turning to our outlook I would like to update our financial targets for fiscal 2019.
For the full year, we now expect net revenue to range between 185 million and $285 million.
Adjusted diluted EPS to range between $2.10 and $2.25.
We are reducing the bottom end of this range by 30 cents and the top end by 25 cents because of the slower earnings ramp that we have experienced its first three quarters of 2019, we anticipate that we will continue to ramp earnings in the fourth quarter, Tom will discuss this in further detail.
We also expect an effective tax rate of approximately 24% eight diluted share count of 11.9 shares depreciation of approximately 3.7 million amortization of approximately 12 million stock based compensation of approximately 11.9 million and interest expense of approximately 5.1.
$9 I'd now like to turn the call over to Tom.
[laughter], Thanks, Stacy and good afternoon, everyone.
We delivered a strong quarter Vernon, but did not meet expectations, we ramped up program expansions with a number of our largest client compared to the first half of the year. We saw significant increases in our work for Con Ed New York, L.A.'s, DWP, Duke and the dormitory authority for the state of New York since.
Finalizes the scope and funding for these program expansions, we have seen steady improvement in profitability.
One area that we were disappointed with whats organic growth organic growth was minus 11% for the quarter.
4% was due to a reduction of software sales through a inter go analytics.
Software has a strong has a growing pipeline, but the sales cycle is providing to be longer than expected.
6% was due to our California, investor owned utilities I O U.S.
Only down due to the expectation for new contracts.
We have done caught in this process before we expect California to start and 20, twond and organic growth rate to return to greater than 10%.
Looking at this from a dollar perspective on $51 million for the quarter, we missed 2 million in sales from.
Okay, and 3.5 million sales from the California, I O U.S.
We are fortunate that we have to broaden national presence and diversity that can sustain our earnings growth much better than our previous positions when concentrated only in California.
I'm sure.
You want to update on California, given the prior discussion.
As we mentioned before we had been Shortlisted for all love of programs that we submitted abstracts.
Were now in the full proposal submission phase seven of proposals have been submitted to PGT and San do gas and electric.
We're waiting on S C Southern California, Edison, we do not expect any announcements until 2020, however negotiations could start in the fourth quarter.
We're also having success expanding the scope of our work with other customers around the country. We were recently awarded Puget Sound Energy small business direct install program for the fifth consecutive time.
It's a two year contract with the value of $10 million, which is at 4 million dollar increase from the prior contract. In addition to offer an up pretty good energy efficiency services.
Scope of the program has been expanded to include services related to age factor and controls. This is representative of a larger trend there we're seeing across.
Our energy efficiency programs, we've referred to it is.
On lighting.
This is a very positive development for will dance capabilities and creates opportunities for organic growth in the future.
We also received our first task orders for the Port Authority of New York. This is reflective of the growing momentum we have in our New York operations in General our business development activity continues to increase since acquiring the white group and onsite energy earlier. This year, we have begun joint business development efforts with each firm.
We have good have a good pipeline onsite energy is building a great relationship with 18 T. The White group is expanding to California.
Turning to the acquisition that we announced today, we have always said say policy consulting firm was one of our top priority.
With today's announcement.
Energy and environmental economics or easily as recall, we have been able to fill fulfill our goal is three is one of the top firms in the country in our opinion the top from.
C was founded in 1991 by Dr. rent or.
For years later, Mr., Brian or a transition from P. journey.
Mr Snow or price a young graduates drawn from Stanford was there first new higher.
The fourth senior partner Mr. Already Olson joined the 1999 from Washington State Energy Office today. He three is 70 professional strong the professionals are subject matter experts in their respective field.
Three has a portfolio of 250 projects.
It is our most impactful energy industry.
I've worked under they have worked on the Paris climbed the core which led to how countries creates a sustainable policies. They work on the most Progressive States, New York, California, Hawaii.
There are clean energy policies again, creating a path forward for other states to and then to enact sustainability goals.
Eathree has been growing at a very fast rate and we expect a trend to continue beyond the economic value of its own performance.
The three will provide strategic value to will that are provided us with visibility or roadmap into the future. We believe this will enhance our strategic planning efforts enable us to effectively position the company to serve the needs of our customers.
Now I want to wrap up with a few comments about her outlook since June we have been seen a higher profit generation each month.
Programs that we have finalized our multiyear program. So we now have better visibility on organic growth based on program budgets any additional program wins through the California broker procurements or other business development efforts would be additive to our already strong backlog.
We have reduced guidance based on what we have delivered through the third quarter, we expect our ramp to.
Ramp up to continue and there's the possibility for incremental awards that would cause us to perform higher than this revised guidance.
For me to our investors with the most current information is what we want to maintain.
Without I would now like to turn the call back to the operator for questions and answers.
Force, if you'd like to ask a question. Please signal that pressing star one on your telephone keypad for using a speakerphone. Please make sure. Your mute function is turned off to layer signal to reach or equipment.
I get press star one to pose the question, we'll pause for just a moment until everyone opportunity to signal for questions.
I think our first question from Chip Moore at Canaccord. Please go ahead.
Hey, Tom Stacy Mike has gone.
Wondering if you could talk a bit more about on the ramp of new projects what specifically.
Helpings back in the quarter and now that we've got one quarter left what are we thinking about for sort of the low end in the high end of that outlook.
[laughter] chip well, we revised guidance, we took the bottom end EPS guidance down 30 cents and the top end done 25 as Stacy mentioned.
That's basically what we were short this quarter.
So we do expect the ramp to continue into next quarter and you can calculate flighty P.S. from that what's ramping specifically.
Is.
Con Edison number one has.
More budget than our incremental goal. So if we can do more energy efficiency, we have budget for that in the Con Ed program.
The similar phenomenon is happening in both the Duke and Elie DWP ended the customers have more budget for us if we're able to execute the work, but we are we're gonna have to continue to ramp up throughout the fourth quarter to get those so that's why we brought down guidance, that's what's driving it.
It's a really due to the performance we've had year to date, because we do issue only annual guidance not quarterly guidance.
Got it that makes sense that's helpful and Tom you talked about organic right now three quarters in a row on an upside down it sounds like you're still confident that in that 10% goal.
Do we really need to see California get going to get back to that or perhaps some lumpier ideals or how should we think about that.
A little bit of both.
[noise] lumpier ideals, and California, going but there are other things in the pipeline will help so we're not too concerned about.
I know it looks like a bad quarter number that you're number but.
We're in a big wait and see.
So.
Okay.
The next so overall overall, we're not concerned.
It's good to hear and that he three maybe talk a bit more about.
How long you've known them what they bring and then is that 16 million net and what are we thinking about in terms of contributions from that business.
We've known or the reputation for as long as we've been doing the business.
E three is a.
Pretty common name in the business.
Yeah.
They have.
Hi, great reputation.
Got a known.
Over the last two and a half years, we worked jointly on projects.
We've won projects together already.
Oh.
Can't speak to them because they haven't been announced.
But.
I think the synergy with Eathree.
And we'll then we'll be fantastic, we're very excited about with regards to the other part of the question. The net revenue I think.
Most of it is not revenue.
They don't have had very little Passthrough farrah.
Yep.
Does that answer all of your question I was a net revenue and synergy type and how yeah. No Thats thing that's good yeah I'll hop back in human let let others hop on there thanks guys.
Trying to your question, it's been answered immune movies. So from the coupon for things start to one I'll take your next question from Craig Irwin at Roth Capital. Please go ahead.
Hi, good evening and thanks for taking my questions.
So the first thing I wanted to ask about is the Fourpoint million 4.9 million dollar intangible amortization expense.
You called out as an adverse impact in the quarter can you discuss the accounting for this and what drove this expense.
Yeah, Hi, Craig the it's related to the purchase price allocation from acquisition.
So when the purchase price is first recorded it is then adjusted be a working with our auditors as well as valuation specialists. So it was an adjustment to the intangible it was an increase in intangibles.
Which brought an increase in the expense site.
So then why Didnt you pull it out of your your adjusted Yes. You are included in the.
In the release I mean are traditionally most companies will actually pull that out which means you had a fantastic quarter on an earnings standpoint of 80 cents.
And as it is can you maybe share with us the logic, so how you evaluated in versus out.
Yeah, we do pull out intangible amortization when calculating our adjusted EPS. So it is pulled out.
And if you go to page 11 on the press release, the detailed list there.
So this is not this is not a separate charges. This is just bundled in your standard monetization.
Correct.
Okay. Okay, Yeah, I know the weight was called out in the press release I thought it was ER was a charge show.
Okay. So then keeping his line right can you can you maybe update us on what line didn't revenue for the quarter what the.
What's the growth trajectory is applying right now you know, sometimes integrations take a little bit of time to gain traction.
Can you maybe.
The mouth Roches is it lime likely to exceed your 10% growth target and 20.
And how do you feel about them capturing additional business beyond California.
Yes, correct, Mike I don't have the quarterly numbers for line, but I know exactly what the annual numbers look like so last year line did 150 million in gross revenue at about 12 million in EBITDA and this year on year on a trajectory and we're expecting them.
To do a 162 to 165 and gross revenue and maybe fourteenish in networking and EBITDA. So they are on that right on that 10% to 11% growth trajectory that we talked about when we acquired the company.
We thought that they have the ability to maybe even do better than that and they do have funding from their customers that would support a higher number but they have to get that work done ramped up so I think it's more like a 10% growth number for this year.
Okay that's for sure.
Good execution on the first year for and for any action acquisition.
So then.
Why don't you keep question, that's coming up with investors is.
Probable execution, you know if and when we do see these California.
Materialized right. So Duke in L.E.E.W.P. were a little bit slow. This year, you know, but seem to have a rectified you know been rectified through the actions you've taken.
No you had the slowness would fit with the I'll use in the quarter.
Can you talk a little bit about your level of preparation or readiness to execute somebody. These contracts that are that are in late stage negotiation are these contracts that Chris you know realistically take six to nine months of.
Okay planning and preparation to start seeing significant revenue generation or are some of these contracts really more related to just direct hiring and capacity on existing offices with existing expertise.
[noise] Craig to your first part or hiring.
You've got to keep in mind, we are the incumbent or.
A large income, but all three of the Io use so we have people in place.
We have the program managers the staff in place.
We have acquisitions have been made in northern California in Southern California.
It had been working on these contracts.
Without talking too much about what we're doing I can tell you that.
Not only we are an incumbent but.
The way we structured this to use the people who are already doing the work are part of our teaming.
Efforts, so there's a large incumbency in our and our plan.
I do you have a ramp up.
Not so much.
It's more of a consolidation by the utility into smaller.
Fewer contracts. So we have consolidated industry to deliver that does that make sense.
Yeah, that's that's perfectly clear that's that's very helpful.
Moving on to increase integral analytics $2 million revenue shortfall you know that's.
Obviously very high margin revenue went materializes, so I'm sad Nazi that in the quarter.
This is not the first quarter, where customers have been particularly sticky for <unk>.
Can you maybe share with us what do you think is causing the stickiness to final customer decisions is I potentially losing business to other other vendors or is this really just the budgeting and extended purchase cycle issue with your utility customers.
Correct.
We're not aware of a single instance, where I T. I a has been beat by another company.
For a customer who is evaluating guy a software chosen other solution.
What we have seen though is a very slow change at the utility level towards more advanced planning tools, which we offer.
They really crawl, along and we've had opportunities in the pipeline, where we've made technical presentations to utilities for periods upwards of two years. So the sales pipeline Friday is slower than we originally thought I would say two years ago.
Having said all that they do have a strong pipeline there are a number of larger contracts out there some of which we think we're pretty close to but it's not done until it's done.
So because you really can't predict the timing of those events.
We.
Have been and are going to continue to be pretty cautious on forecasting a activity until it happens when it does happen, though we'll update you to the extent, we can press releases and it would have potentially a significant impact to earnings.
Yes, that's the that's good to hear so then.
Next question its cash right in the quarter.
Use what 27 and a half million in cash you know I know there were some.
[noise] investments as far as the acquisition 2020 5 million more or less.
Like.
Oh sure without sort of where you want to manage your your your balance sheet to two as far as leverage.
What do you see is it fair a leverage ratio for the company.
And you know its cash generation a priority for you over the next you know over the next year or are you prioritizing acquisitions and.
ER accretive growth opportunities is as more more of an important item for the company to pursue.
Now she is an important item for us most definitely our credit agreement allows us to go up to 3.5 times leverage. We're currently about three and that's where we we don't want to go above that so we don't we still have some flexibility there even though we are comfortable in the three to 3.5 range.
In terms of under investment.
You know, we do expect that number will come down it's probably at a peak right now and that number is actually after eathree. So it's not reflected in our current balance sheet that you're looking at but after eathree worried about three right now it'll come down a we've got a pretty closely.
And the priority will be to generate cash such that we can keep up this type of investment pace I'm I think you know on us more steady state business. The ideal leverages, probably two to two and a half turns of EBITDA.
Got it got it and then last question Eathree, you've got 63 days left in the quarter. After you after you close that.
What kind of revenue expectations do you have for for the fourth quarter.
Is this really just slightly stub period, where there's limited revenue that's actually booked given the integration and you know the disruption the operations that always happens in any acquisition you know how should we look at the impact of the four core.
Yeah on Eathree. It really is de Minimis, we have something like 60 days lift on a run rate of CNO call. It 60 million in revenue. So it was so small we built the D.N. we looked at it and said we are not going to change anything because of this.
In terms of disruption, though this is not one that will be highly disruptive maybe like line was this is a company as Tom mentioned, we're working very closely with and in the dating process. We actually were awarded two major contracts with them. So we're already working with the three right now.
Relationships are very good sometimes you don't get that kind of pull through with acquisitions, but this has been a very good process with these three so I wouldn't expect no disruption with working with them, we're already doing that.
And I'm just curious maybe you can answer this where the contracts you're referring to maybe related to a California energy efficiency procurements are these or other.
Other national contracts.
Because they have not been announced publicly I'm not going to talk about the client because Ah I don't believe the clients announced that.
You can give you an idea though I.
I guess I'm someplace in the Midwest.
What's the turn in.
Say, two blocks and to a smart city.
Yeah, that'd be stated our on everything from using the least amount of energy too.
Charlie into.
The load.
As well as using renewable.
We partnered with E three and.
Can give you.
Pretty high confidence that partnership allows us to win that job.
So we will be building something comparable to what set in Chicago at the I.T. campus for Commonwealth Edison.
Larry said Mark campus.
We have very smart two blocks in the Midwest.
Excellent.
Last question if I may.
Are there any contracts in the California E Procurements, where you have been notified that you are selected as the as the winner the contract but are in negotiation of terms and conditions for execution of a final contract I understand that that happens fairly often in this kind of.
Procurement.
I mean, I'm not asking you to disclose the names, but do you do you have indications of an award.
We are really just ironing out details with your.
Your customers.
The next step for the next utility work to be make that decision. That's all I can tell us and they have not made it.
Great well congratulations on the progress you know, we look forward to hopefully a smoother.
You and I quarter and in the fourth quarter. Thank you.
Thanks, Craig.
Once again, if you like to ask a question. Please press star one we'll now take our next question too from Robert allowing US KC capital. Please go ahead.
Hey, everyone. Thanks for taking my question I'm, just looking for a little more information on how we should think about kind of at the margin ramp going forward I know in the press release you guys.
Added a comment about you know the industry evolving from lighting toward H. Fac and I'm curious you know can you just kind of walk us through.
Kind of it you know how how we should juxtapose the kind of short term maybe.
Ramp in cost as those programs increase or like you've seen over the last couple of quarters versus the long term.
Kind of growth in that sector and kind of like the tail growth that you could see over the long term and thank thank you very much for taking my question.
Yeah. This is Mike.
If you look in the quarter, our EBITDA as a percent of net revenue was about 22% margin Oh, we have predicted that margin would improve and it did in Q3.
And then B you know up around there may be even higher on in Q4.
The the evolution from lighting towards more complex measures has not had an effect on that margin profile. Even if you go back over the last year or two years that transition is a gradual one the io use and has not had an impact on the margin thus far.
Pricing from our more complex measures, we think over time as they become more complex may improve but that hasn't happened. It's still early in that most of our I O U projects have.
Somewhere between 10% and 30% more complex measures compared to the more or a simpler lighting measures. So it's still.
Slow and gradual change.
Okay got it thank you.
It appears there no further questions at this time, let's turn the conference back to management for any additional for closing remarks.
Okay. Thank you I'd like to thank all of you for participating on our call today and for your continued interest in will doesn't have a great day.
That concludes today's call. Thank you for participation you may now disconnect.