Willdan Group, Inc.
Q4 2019 Earnings Call Transcript

Published: 6 Mar 2020

[Operator:]

Good day, everyone. Welcome to the Willdan Group Fourth Quarter 2019 Conference Call. Today's conference is being recorded. At this time, I'd like to turn things over to Tony Rossi of Financial Profiles. Please go ahead.

[Tony Rossi:]

Thank you, Kellyanne. Good afternoon, everyone, and thank you for joining us to discuss Willdan Group's financial results for the fourth quarter ended December 27, 2019. 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's 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 27, 2019, 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, 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 are supplemental measures of operating performance, which removes the impact of certain expense items from our 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, Stacy McLaughlin. Stacy?

[Stacy McLaughlin:]

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, and our balance sheet and finally our guidance.The Q4 2019 results were by far the strongest results in the Company's history. Total contract revenue for the fourth quarter of 2019 increased 49.7% to $129.4 million from $86.4 million for the fourth quarter of 2018. The increase was driven by growth in our Energy segment. Net revenue, defined as contract revenue minus subcontractor services and other direct costs, was $61 million, an increase of 51.8% from $40.2 million in the year ago quarter. Within the Energy segment, net revenue increased by 84.5%. Within the Engineering and Consulting segment, net revenue declined 5.2%.Direct costs of contract revenue were $86.2 million for the fourth quarter of 2019, an increase of 44.9% from $59.5 million in the same period last year. The increase was primarily related to the growth in contract revenue. Our direct costs of contract revenue were 67% of our total contract revenue in the fourth quarter, down from 70% in the third quarter of 2019 and 69% in the same period of the prior year. The decrease from both periods reflects a slight decrease in the use of subcontractors in the recent quarter.General and administrative expenses for the fourth quarter were $37.7 million compared to $25.3 million for the prior year period. This increase is consistent with the percentage growth in contract revenue.We generated operating income of $5.5 million for the fourth quarter of 2019 compared to operating income of $1.7 million in the fourth quarter of 2018. Adjusted EBITDA was $13.8 million for the fourth quarter of 2019, an increase of 110% from $6.6 million for the fourth quarter of 2018. The adjusted EBITDA margin, as a percent of net revenue, was 22.7% compared to 16.4% in the prior year period.We incurred $1.3 million in net interest expense in the fourth quarter of 2019 compared to $625,000 in the same period last year. The increase was due to the debt utilized to finance our recent acquisitions.During the fourth quarter, we recorded income tax expense of $1.2 million, reflecting an effective tax rate of 27.1%. Net income for the fourth quarter of 2019 was up 145.5%, from $0.11 per diluted share in the prior year to $0.27 per diluted share in the current year -- current quarter, excuse me. This represents net income of $3.2 million in the fourth quarter compared to $1.2 million in the same period last year. On an adjusted basis, our net income was $11.5 million or $0.97 per diluted share. This represents an increase of 60% year-over-year. The most significant adjustments from our GAAP net income was stock-based compensation and intangible amortization. Both of these items are non-cash and are not a result of the increased performance within the operating segments.For fiscal year 2019, consolidated contract revenue was $443.1 million, an increase of 62.8% over the prior year. Net revenue was $199.5 million, an increase of 42.9%. Adjusted diluted earnings per share were $2.27, an increase of 9.7%. Adjusted EBITDA was $37.7 million for the year, an increase of 48.4%.Turning to the balance sheet and cash flow from operations. We had $57.5 million in accounts receivable net at December 27, 2019, down from $61.3 million at December 28, 2018. For the full year, our cash flow from operations was $11.6 million, an increase of 54% from $7.6 million in the prior fiscal year. As of December 27, 2019, we had $130 million outstanding on our total credit facility. This leaves $70 million available within our credit facility as well as an additional $100 million accordion.Turning to our outlook. I'd like to provide our financial targets for fiscal 2020. These targets do not include the assumption of any revenue from new contracts to be awarded through the California IOU procurement process or any future acquisitions. For the full year, we expect net revenue to range between $215 million and $230 million; adjusted diluted EPS to range between $2.47 and $2.60; and effective tax rate of approximately 17%, which I will discuss further; a diluted share count of 12 million shares; depreciation of approximately $4.1 million; amortization of approximately $13 million; stock-based compensation of approximately $19.8 million; and interest expense of approximately $4.5 million.In December of 2019, Congress renewed 179D, an energy efficiency tax deduction. This deduction applies to projects where Willdan is the engineer of record, the project is fully constructed and the client is a non-tax paying entity. For instance, Willdan's work making publicly owned infrastructure more energy-efficient falls into this category. This has the effect of lowering the Company's cash taxes paid by several hundred basis points. This benefit will exist throughout 2020. As we've talked about before, software sales volume can change our sales materially. For 2020 guidance, we are assuming that our software business breaks even, which represents approximately $4.5 million in new software license revenue. For purposes of modeling, our adjusted EBITDA distribution throughout the year is expected to be around 10% in Q1, around 25% in Q2, around 35% in Q3 and around 30% in Q4.I'd now like to turn the call over to Tom.

[Thomas Brisbin:]

Thank you, Stacy, and good afternoon, everyone. We executed well in the fourth quarter and delivered our highest level of revenue, earnings and EBITDA. Organic net revenue in the quarter jumped to 9%, driving the full-year organic growth to a positive 3%. The improvement in organic growth was driven by the expansion of existing energy efficiency programs in the quarter and the Xcel software contract, which was signed in December. First, I would like to make some general observations.The New York Public Service Commission announced on January 20 -- excuse me, January 16, 2020, nearly $2 billion in additional utility energy efficiency to 2025. Also the commission reauthorized $1.3 billion of existing energy efficiency, resulting in over $3 billion for (NYSE

[Operator:]

[Operator Instructions] We'll hear first today from Moshe Katri with Wedbush Securities.

[Moshe Katri:]

Thanks. Nice quarter. Couple of questions. First, I just want to -- it's on the December numbers, maybe you can talk a bit about what are the largest drivers for the revenue side for the quarter. Obviously, they are strong numbers, maybe both on the individual contracts and then in that context, can we get a sense for the revenue contribution from IA for the quarter?

[Thomas Brisbin:]

Moshe, could you -- you were really garbled. I don't know if it was just to us or everyone on the phone. Is there a way you could ask that question again? And we probably understood about 30% of it.

[Moshe Katri:]

Sure. Is that any better?

[Thomas Brisbin:]

Keep talking.

[Moshe Katri:]

I'll say it again. What were the largest drivers for the revenue upside for the quarter? And maybe if you can go through some of the individual contracts, that will be helpful. And then in that context, what was the revenue contribution from IA during the quarter?

[Mike Bieber:]

Yeah. Moshe, this is Mike. We got some contract expansions on the East Coast in most of our utility programs, including Con Edison and some of the programs in upstate New York. They contributed strongly in the quarter. That was true on the West Coast in some programs and the Midwest in places like Rocky Mountain where we had a good quarter as well. Sometimes in these programs, utilities get behind and toward the end of the year, they push in additional funds. So that happened in the examples that I just gave.So utility programs broadly in Q4 were very good and were strong. Direct-to-customer programs were also strong. Good work at -- DASNY was very good in the quarter. On software sales, we didn't break out and won't be breaking out a specific contribution from IA in the quarter. But Tom mentioned, it's a good software, award that happened in December with Xcel Energy, that was the only one that hit in Q4. And we've got a good pipeline of those opportunities moving into 2020.

[Moshe Katri:]

Okay. Understood. And then you spoke a bit about the quarterly numbers, actually in terms of what we should look for in terms of EBITDA contribution for the -- by quarterly -- for the year. But can we -- how should we model revenue also for the next quarters in calendar '20?

[Mike Bieber:]

Now, revenue should -- revenue and EBITDA should follow the proportions approximately that Stacy laid out in her script. So we can -- if you want, we can talk after the call about your particular model for 2020 if you'd like.

[Moshe Katri:]

Okay, OK. And then a follow-up question. Obviously, you spoke about the California awards, it seems that all the three utilities seem to be moving along. Do you believe that we're going to get to that 40% mandate by year-end? Is that where directionally we're going to? And then how do you feel about your capabilities in terms of delivery on this pretty large pipeline that's coming through? Thanks.

[Thomas Brisbin:]

They have to be signed by December 31, 2020. They have by -- two of them, I believe, Mike, are July 1. They have to be signed with the PG&E. And [indiscernible], we had to outsource 25% by July 1, 2020. So we expect to see revenue for sure. Not for sure, nothing's for sure, but in the last half of 2020 and that 40% doesn't start until 2021. There was one more part to your question.

[Mike Bieber:]

Right. The [indiscernible], how do you feel about your ability to deliver once these guys -- once these contracts are signed and ready to, I guess, execute?

[Thomas Brisbin:]

Yeah. The good thing is that both PG&E and San Diego Gas & Electric, we've been incumbent, and our team is a team of incumbents. And we're ready to hit the ground and deliver. So these are a team of companies that have been delivering for the past 10 to 15 years.

[Moshe Katri:]

Understood. Thank you.

[Operator:]

[Operator Instructions] Your next from Craig Irwin with Roth Capital Partners.

[Craig Irwin:]

Good evening. And thanks for taking my questions. So 9% organic growth in the fourth quarter is a pretty nice rebound to your long-term target rate. Can you maybe describe whether or not there were elements in there that might not repeat in the first half of 2020 or are there specific items that were one-time and that we need to flatten out of our models as we look for sort of a normalization back to the 10% growth over the next few quarters?

[Mike Bieber:]

Yeah, Craig. Stacy mentioned the ramp that we expect throughout 2020. So overall, organic growth can move around between quarters. We would expect it to be, but we've got an easier comp in Q1. So I think that we, for the full year, should expect a single-digit type of organic growth for the full year. And that may persist through all four quarters. As Tom mentioned, the upside to that is, in Q3 and Q4, if we get some of these California awards, which now that looks more than -- looks likely. And we see revenue in 2020, that would be upside that we've not included in our forecast.

[Craig Irwin:]

Okay. So you're talking about awards, which I like. When we look at the update given last week by the four major IOUs, PG&E has several contracts that they indicated that they're already in negotiation for a first half award as did San Diego Gas & Electric. That usually means that the vendor has been selected and that barring any unforeseen disagreements that the selected vendor will get the award, do you have anything that you can share with us about contract negotiations that would maybe give breadcrumbs for the potential awards around the middle of this year as these items are wrapped up?

[Thomas Brisbin:]

I would say for PG&E and San Diego Gas & Electric, we have taken one, two, maybe three firms to active negotiations. And that would be unwise for us to say whether or not we're in that group because that would put us in a poor negotiating position.

[Craig Irwin:]

Understood.

[Thomas Brisbin:]

We're actually well aware of active negotiations both in San Diego and PG&E. And we're optimistic. [Indiscernible].

[Craig Irwin:]

Good. So are we -- that's really good to hear. So then to circle up on integral analytics, I should say, congratulations for the Xcel award during the quarter, that was a very nice win. Can you maybe frame out for us the range of scenarios for IA in 2020? You were very specific in excluding software licenses from your guidance, but it's quite possible that you do book software revenue in 2020 and even possibly in each quarter.So can you maybe frame out for us the scope of what you're looking at that could be awarded? And given that it's not in your guidance, are you likely to press release even smaller awards that are in the range of potentially $0.5 million or less as these potentially come out over the course of the year?

[Mike Bieber:]

Craig, to clarify, in Stacy's script, we said that we expected the software business to break even. That does not mean that we don't expect additional licenses. To break even, we have to book approximately $4.5 million in new software sales to break even. And that is what is assumed in our guidance, and that is consistent with what Stacy said in her script. However, if you point it out, you're right. Could you have a pipeline far in excess of that? That would indicate a revenue for the year of around $6.5 million, and they did around $8 million in revenue this year. So they would actually have to decline from their current run rate to hit that guidance number. So there's upside there. That's what we're pointing out to investors.The size deals range anywhere from $0.5 million to multimillion dollar type contracts. And so, that's a pretty wide range of possibilities. Accordingly, you're right. We will announce significant contract sales awards to give you visibility on how we're progressing throughout the year.

[Craig Irwin:]

Okay. Then a point of clarification. My understanding was that the $4.5 million in revenue was primarily maintenance contracts on existing installs and then, some of the consulting and pre-installation activities that go with customers getting ready to potentially go forward with a license fee. It's a small spend for them and an opportunity to really see what's capable before they write the big ticket at the CFO's office. Am I misunderstanding or mischaracterizing that when I share that? And do you have annual renewals of your maintenance agreements that I expect would be in place across the existing installed base.

[Mike Bieber:]

No. This $4.5 million, Craig, is in addition to that, what I'll call, annuity type revenue that you talked about. The annuity type revenue is $2 million to $3 million per year. And that is continuing into 2020, just like it did in 2019. No change there. And then in addition to that, we need to book about $4.5 million in new software sales.

[Craig Irwin:]

The last question along this line is, I understand you may have hired actually a couple of people into Integral Analytics, which, from our side, looks like you're pretty constructive rather than taking cost out. So they're going in the right direction. Can you confirm that you maybe have hired a couple of people in there to provide sales support and some of the other things that would help this business deliver in 2020?

[Mike Bieber:]

We have expanded the sales force. I think we talked about that earlier with you. And so, they're off to a good start this year.

[Craig Irwin:]

That's what we wanted to hear. That's excellent, that's excellent. Just to go back to the California energy efficiency solicitations, on past calls, you've talked about the total scope that you've bid for. Has anything changed materially there over the last small number of months or are we still looking basically at the same contracts, while we wait for the new RFP processes to get going into 2020?

[Thomas Brisbin:]

New RFP. So are you talking about the statewide stuff?

[Craig Irwin:]

Yeah. I mean, I think different utilities have different buckets they're putting things in, and they've moved these buckets around twice now. So this is the third time. Like SCE, it's got their local public sector and agricultural for local customer programs. And then they have their public programs and their cost-cutting programs. And that all happens much later this year. It's just an example of what the four utilities are doing.

[Thomas Brisbin:]

So let's say SCE, the ones that were on the table that we've bid on now were commercial, industrial and multifamily. And we're very much aware that public will be coming probably middle of next year. In contrast to that, public came up for PG&E. And we're in for that. So -- and San Diego Gas & Electric, neither industrial, public or multifamily has come out.

[Craig Irwin:]

Yeah, they're definitely behind.

[Thomas Brisbin:]

Yeah. Well, the other thing, as you noticed, I don't speak anything about residential. So we do not plan to bid on any residential. And then there's this other element of the state, which are called statewide, which are being -- each utility is given the lead. So we're looking at new construction, for example, PG&E has the lead, that's where the Weidt Group came in and we submitted an abstract. And that's as far as they've gotten on that. But there's also higher ed, there is prisons, there's community colleges. They might even go state colleges. I can't remember codes and standards, all are being considered as statewide programs where we'll take one utility needed rather than split it four ways among utilities. None of those are have come up yet.

[Craig Irwin:]

Understood. And then last question before I jump back in the queue.

[Thomas Brisbin:]

We have new construction in PG&E.

[Craig Irwin:]

Yeah. Thank you, Tom. Last question before I jump back in the queue. California is not the only place where there's good things happening, right? There's multiple other geographies across the country. Do you think that if you were to book, maybe a $50 million or $100 million award that California is most likely to deliver first, or is there a potential for us to see similar-sized projects from other geographies that you obviously are not naming specifically for competitive regions?

[Thomas Brisbin:]

I think California will go first. We were looking at a couple of other states that are [Technical Difficulty]. So the only other thing that could happen is with the new New York legislation. We're the incumbent for all the major utilities in the Northeast, which is a big advantage. That's why I kind of read the opening statement about what New York's doing. They are between two times and three times in new programs, and we are the incumbent for Con Ed, National Grid, Central Hudson. So the reason I started off the presentation with that and showed how much of a New York hold we have as the two states likely to either increase budgets or award new contracts will be New York and California where our greatest presence is. But we're also prepared for the other states that will be coming online.

[Craig Irwin:]

Do you have a timeline for New York potentially making a decision or is that also kind of open to variance?

[Thomas Brisbin:]

The decision's made. How long it takes to get the procurement, what they do about, we don't have any information.

[Craig Irwin:]

Congratulations on solid quarter. And thanks again for taking my questions.

[Operator:]

There are no further questions. I would like to turn things back to management.

[Thomas Brisbin:]

Okay. Well, thank you all for attending the call today, and we look forward to seeing you next time.

[Operator:]

And that will conclude today's conference. Again, thank you all for joining us.