Nii Tetteh - Stacy B. McLaughlin - Chief Financial Officer Thomas D. Brisbin - Chief Executive Officer, President and Director

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division Wyatt Carr - Monarch Bay Securities, LLC

Good day, and welcome to the Willdan Group Third Quarter 2014 Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Nii Tetteh. 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 26, 2014. With us today from management are Chief Executive Officer, Thomas Brisbin; and Chief Financial Officer, Stacy McLaughlin. Management will review prepared remarks, and we will then open the call up to your questions. Statements made in the course of today’s conference call, which are not purely historical, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The forward-looking statements involve certain risks and uncertainties, and it is important to note that the company’s future results could differ materially from those in any such forward-looking statements. Factors that could cause actual results to differ materially and other risk factors are listed from time to time in the company’s SEC reports, including but not limited to, the Form 10-K Annual Report for the year ended December 27, 2013, filed on March 25, 2014. The company cautions investors not to place undue reliance on the forward-looking statements made during the course of this conference call. Willdan Group, Inc. disclaims any obligation and does not undertake to update or revise any forward-looking statements made today. With that, I will now turn the call over to Chief Financial Officer, Stacy McLaughlin. Stacy? Stacy B. McLaughlin: Thanks, Nii. I'd like to add my welcome to those joining us on today's call. In addition to GAAP financial results, we are providing non-GAAP financial measures that we believe enhance investors' ability to analyze our business trends and performance. Our non-GAAP measures include revenue net of subcontractor costs. We believe this allows for an improved measure of the revenue derived from work performed by our employees. We also provide adjusted EBITDA, 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. I'm pleased to share our financial results with you today. Let me begin with an overview of our financial results for the third quarter. Total contract revenue increased 33.2% to $28.2 million from $21.2 million for the third quarter of 2013. By segment, revenue from Energy Efficiency Services grew 58.4% to $13.6 million. Engineering Services contract revenue increased 22.3% to $11.1 million and revenue from Public Finance Services was $2.8 million and Homeland Security Services was $714,000. Revenue, net of subcontractor costs, increased 28% to $22.2 million compared with the third quarter of 2013. Direct costs as $16.5 million for the third quarter of 2014 compared with $12 million for the third quarter of 2013. The majority of the increase was the result of greater demand for services performed by Willdan Energy Solutions, which generally utilizes a higher percentage of subconsultants than Willdan's other subsidiaries. Gross margin was 41.6% for the third quarter of 2014. General and administrative expenses for the third quarter were $9.1 million, a 9.1% increase from the prior year period. G&A expenses as a percentage of total contract revenue improved more than 7 percentage points to 32.2% from 39.3% for the third quarter of 2013. Net income for the quarter was $4.2 million or $0.53 per diluted share. Consistent with the prior quarter, our estimated annual effective tax rate was reduced due to our use of federal and state net operating loss carryforwards and the related release of the valuation allowance against the NOL carryforwards. In addition, each reporting period, we analyze our deferred tax assets in order to determine whether it is more likely than not that we will be able to recognize the benefit of these assets in the future. During the third quarter of 2014, we concluded that we would be able to recognize the tax benefit for these assets. Accordingly, we released the valuation allowance against our deferred tax assets recognizing an additional income tax benefit of $1.7 million in the current quarter. Excluding the reversal of the deferred tax asset valuation allowance, net income was $2.7 million or $0.34 per diluted share. This compares with net income of $842,000 or $0.11 per diluted share for the third quarter of 2013. Turning to financial results for the first 9 months of 2014. Total contract revenue increased to $77.8 million, up 23.5% from the first 9 months of 2013. Higher revenue was due primarily to an $11.1 million or 41.9% increase in contract revenue for Energy Efficiency Services to $37.6 million. Energy Efficiency revenue accounted for 48.3% of total contract revenue for the first 9 months of 2014 compared with 42% for the first 9 months of 2013. Engineering Services revenue increased 13.6% to $29.5 million and represented 37.9% of total revenue compared with 41.2% of revenue in the prior year. Revenue from Public Finance Services was $8 million and Homeland Security was $2.7 million. Revenue net of subcontractor costs for the first 9 months grew 21% to $61.8 million compared with the first 9 months of 2013. Direct costs of contract revenue were $46 million, up from $35.4 million a year ago, primarily due to the increase in services performed by Willdan Energy Solutions. Gross margin for the first 9 months of 2014 was 41%. This is in our target range of 40% to 45%. Adjusted EBITDA increased to $6.3 million from $2.6 million for the first 9 months of 2013. Adjusted EBITDA margin was 8.1%. Total general and administrative expenses for the first 9 months of 2014 increased by less than $500,000 to $26 million. Net income for the first 9 months of 2014 was $7.4 million or $0.96 per diluted share. Excluding the reversal of the deferred tax asset valuation allowance of $1.7 million I discussed earlier, net income would have been $5.7 million or $0.74 per diluted share for the 9-month period. Net income for the year-to-date period more than tripled the net income from the prior period of $1.9 million or $0.26 per diluted share. Accounts receivable days outstanding for the first 9 months of 2014 was 77. Turning to our balance sheet. We reported cash and cash equivalents at September 26, 2014, of $13.4 million, up from $12.1 million at the end of the second quarter and up from $8.1 million at December 31, 2013. Our primary sources of liquidity are cash generated from operations and a revolving line of credit with BMO Harris Bank. At the end of the third quarter, we had not drawn against our revolving line of credit. Also of note, on our balance sheet, was the increase in accrued liabilities during the year that included an accrual for employee bonuses. In our 3-year financial outlook announced in June, we targeted annual year-over-year contract revenue growth of up to 15%. I'm pleased to report that given our strong results for the first 9 months of 2014, we are confident that we will exceed the 15% revenue growth target for 2014. We are reaffirming our 3-year financial targets of gross margin in the 40% to 45% range, adjusted EBITDA margin of 5% to 10% and accounts receivable days outstanding of 70 to 75. Also I'm reaffirming our target for year-over-year annual contract revenue growth for 2015 and 2016 of up to 15%, including both organic growth and acquisitions. I'd now like to turn the call over to Tom Brisbin. Thomas D. Brisbin: Thanks, Stacy. Good afternoon, and welcome, everyone. We had a strong third quarter. We reported revenue of $28.2 million and earnings of $4.2 million. These results were driven primarily by strong performance in our Energy and Engineering businesses. As Stacy said, net income benefit -- benefited from an NOL-related tax benefit. So adjusted net income is the best indication of our performance for the quarter. In addition, I think it's important for our investors to know that even as we grow revenue, we are running our operations more efficiently. Looking ahead, we expect to continue to grow and remain profitable. Now I will provide an update on each of our business units. I'll begin with Engineering Services, which accounted for 38% of our third quarter revenue and grew 18% as we continue to benefit from increased demand for outsourced city services. Tax revenues have increased following the recession. Many cities continue to restaff critical positions through outsourcing. This is an efficient and cost-effective way to meet increased demand for services. Last quarter, we mentioned our plan to bring additional cities under contract. I'm pleased to report that our Engineering Services group was recently retained by the city of Beaumont in Southern California to provide engineering services. Also during the third quarter, our Engineering group expanded its engagement with the county of Sacramento to provide technical services including development plan review, permit support and land surveying services we have provided for some time now. These are 2 great examples of how our Engineering group is executing on our strategy to develop new clients and expand services. Our Engineering group also won 4 civil infrastructure projects with a navy, this is a tough one, Navy Heavy Horizontal Civil multiple award construction contractor. I've been working on that. We will serve as the engineer and participate on the design team for these projects, the Naval San Nicolas Island airfield, the Marine Corps Air Station Yuma, the Naval Weapons Station Seal Beach and a Marine Corps Recruitment Depot in San Diego. Many of you asked me about our work on the California High-speed Rail project with our team with Tutor Perini-Parsons and they are working on a proposal for the next 2 segments and our services will be a part of that proposal. We believe these contracts will be awarded early next year. As I have said before, the High-speed Rail project is more important to Willdan from the strategic perspective than as a revenue generator. We see our involvement in this project as a means to reestablish our presence in the Central Valley after closing 9 offices along the Highway 99 corridor during the recession. This region has been important to Willdan in the past and we look forward to regaining our foothold there. It is also important as we pursue large infrastructure projects. Now turning to Energy Efficiency, which was 48% of our third quarter revenue. Most of our growth for the third quarter came from this segment, which has generated 58% year-over-year revenue growth. On last quarter's call, we announced the expansion of our contract with Con Ed of New York for its Small Business Direct Install Program. This expands our service areas to include the entire Con Ed service territory, which has a total contract value of $61.3 million. We are performing well under this contract, having delivered a total of 28 million kilowatt hours in savings during the third quarter. This is a 75% increase over the 16 million kilowatt hours in savings we generated in the second quarter. We have already exceeded our 2014 annual goal of 41 million kilowatt hours in savings from the original contract, and this month, we expect to surpass the additional 20 million kilowatt hours in savings stipulated under the expanded contract. All these indicates that we are performing well on both our original contract and our contract mod. A strong performance on the Con Ed contracts continues to lead to new energy efficiency opportunities. For example, the New York City Energy Efficiency Corporation, or NYCEEC, which is an independent financial services, nonprofit that supports the clean energy market, recently hired Willdan to identify at least $10 million in new loans for energy efficiency, renewable energy and other clean energy projects. This is a joint project with Willdan Energy Efficiency and Financial Services teaming up to work on how to fund renewable energy. This is a good example of energy funding in a new market for financial services. Also in New York, we expanded support services under the New York State Energy Research & Development Authority, NYSERDA, technical review contracts for both management, staff augmentation and engineering technical review. Under the new contract, we increased the number of on-site personnel from 1 to 4 project managers and we are now providing engineering technical review services for all commercial building types. We have already been assigned 6 new technical review projects as part of our expanded relationship. We were also selected by Southern California Edison to administer its new Healthcare Innovative Technology Energy Efficiency Program. This program is aimed at reducing energy usage by small to medium-sized hospitals, medical office buildings, specialty clinics, assisted-living facilities and rehabilitation centers. We currently administer a similar program with SCE for large hospitals and related facilities, hotels, resorts and data centers. This month we are beginning a new sustainable labs program with San Diego Gas & Electric to provide energy efficiency services to biotech and pharmaceutical laboratory customers. This is a notable win as medical labs represent a new vertical market for our Energy Efficiency Services. As a final note on Energy Efficiency. Our customer, Torrance Memorial Medical Center was awarded The Climate's Registry 2014 Cool Planet Award for health care for demonstrating leadership in energy and carbon management. Our ability to win new contracts and expand services with current Energy Efficiency customers is an important part of our growth strategy. I'd like to note that growth in energy efficiency is not directly related to oil prices. It's related to the increased in demand for electricity, which will continue to drive higher electricity costs and energy conservation. We now have significant technical expertise and direct experience working on a number of high-profile projects and we are building a strong track record of successful program implementation and outcome. All this positions us well to compete in the space, which is poised for long-term sustained growth. Moving on to our Homeland Solutions business. In the San Francisco Bay Area, we recently held a full scale exercise to test the ability of participants from 6 counties and 14 hospitals to respond to an explosive bioterrorist attack. Our Homeland Security group also completed work on the Amtrak Security Program conducted at 12 major train stations across the U.S. Finally, in our Financial Services business, we recently hired 3 professionals from the Utility Advisors Network who have more than 70 years of collective experience providing professional consulting services to numerous public utility systems in the Southeastern region. This is a strategic move that strengthens our position in financial services consulting and expands our footprint in the Southeast. We have enjoyed better performance this year, and I'd like to thank our entire team for their effort. Given our results for the first 9 months of 2014, I'm confident that we will exceed our 15% revenue growth target for the year. That said, our business does have some seasonality, and historically, our second and third quarters are stronger than our fourth and first quarters, which I've said pretty much each year since I've been on the call. Our balance sheet remains strong, and we continue to evaluate potential tuck-in acquisitions that strategically expand our geographic footprint, broaden our service offering and improve our competitive position. Before we take your questions, we have been invited to present at this year's KeyBanc Capital Markets Engineering & Construction Conference. The conference is being held December 8 and 9 in New York. I'd now like to open the call to questions.

[Operator Instructions] We'll take our first question from Al Kaschalk with Wedbush Securities. Albert Leo Kaschalk - Wedbush Securities Inc., Research Division: In terms of the outlook, Tom, I appreciate the color on Energy Efficiency number of contracts there, but as I listen to your guidance at greater than 15% and the seasonality, can you help us square up the strength with an implied $20 million to $21 million in the fourth quarter on the revenue line? If you looked at year-to-date, which you've done, what you implied in the guidance, you're on track to do -- to hit your number you'd be on track to do $20 million, which clearly doesn't seem to be in the cards, seems to be much better. So could you help us on the run rate of the business? Thomas D. Brisbin: I think we're $77 million year-to-date. Stacy B. McLaughlin: DSO? Thomas D. Brisbin: No, revenue. Stacy B. McLaughlin: Yes. Albert Leo Kaschalk - Wedbush Securities Inc., Research Division: Yes, $78 million actually. Thomas D. Brisbin: So once you take $25 million a quarter and the fourth quarter, even though we're ramping up New York, which is just lagging [ph] in kilowatt hours, the ramp-up of that mod, so take 4 even quarters, you come out at $25 million. We might do a little bit better. We don't know yet, Al, but the thing that hits us in the fourth quarter on the seasonality, Thanksgiving, Christmas and New Year's and I'm selling energy efficiency in Manhattan, it does get hit. And there's a few other holidays in there along the way. So we've ramped up very, very quickly, but we do have holidays in the fourth quarter. Divide by 3 and add the fourth. That's a little better than $20 million, I think, right? Albert Leo Kaschalk - Wedbush Securities Inc., Research Division: I don't have my slide rule with me, I'm sorry. Thomas D. Brisbin: Come on, $77 million divided by 3, $25 million on top of $77, I don't know, somewhere on... Albert Leo Kaschalk - Wedbush Securities Inc., Research Division: Okay, fair enough. On the Energy Efficiency side, the increase in Con Ed so that's -- is that something now that you fully have in terms of a run rate, your visibility on what the scope of that is? Or is there additional opportunities coming on because I think we had talked about some direct install and then maybe some that you would need to be doing with subcontractors so -- or third parties. Can you help us just understand where we're at in terms of that particular contract? Thomas D. Brisbin: On Con Ed? Albert Leo Kaschalk - Wedbush Securities Inc., Research Division: Yes. Thomas D. Brisbin: Con Ed, we're ramped up pretty close. We've met the mod goal already or will meet it. So we're pretty much ramped up and it'll be our run rate through, I think, it's around July, August next year. Albert Leo Kaschalk - Wedbush Securities Inc., Research Division: And then what happens to July or August next year? You look for an extension? Or you look for the next funding? What's... Thomas D. Brisbin: I might be off there. Is the year past '15? Is it '16? Stacy B. McLaughlin: 18 months. Thomas D. Brisbin: 18 months from now? Yes, so it's 18. It's a little bit longer than that, end of next year, Al. Then we look for contract extension, mod or recompete. Albert Leo Kaschalk - Wedbush Securities Inc., Research Division: Do you have any update or commentary as a result of the recent elections, whether that will help or enhance the business going forward? Thomas D. Brisbin: I see no effect. The thing there on oil because despite oil going down, no effect in my opinion. I mean, the state PUCs, public service commissions around the country are still going to try to reduce the amount of electricity used independent of the price of it. Albert Leo Kaschalk - Wedbush Securities Inc., Research Division: How is that -- okay. Well, we can talk about that off-line. The compensation, it looks like there was some additional costs or accruals in the quarter? Or am I misreading that? Thomas D. Brisbin: There was. Yes, yes. Albert Leo Kaschalk - Wedbush Securities Inc., Research Division: On the bonus? Thomas D. Brisbin: Yes, you're reading it correctly. Albert Leo Kaschalk - Wedbush Securities Inc., Research Division: Can you tell me how much that was? Thomas D. Brisbin: No. Albert Leo Kaschalk - Wedbush Securities Inc., Research Division: No, because you don't have it? Or no, you don't disclose it? Thomas D. Brisbin: We don't disclose it. I'm telling you that we are accruing bonuses for people who haven't had raises or anything for 7 years through recession and for a whole new group of people that perform in this type of work and so I'm letting you know. That's what we're doing. Albert Leo Kaschalk - Wedbush Securities Inc., Research Division: Okay. Finally, Stacy, with the reversals of valuation allowance. What should we think about in terms of an effective tax rate going forward? Stacy B. McLaughlin: For the current year, we'll use almost the remainder of our NOLs. So for next year, our effective rate will be probably about 40%.

We'll take our next question from Wyatt Carr with Monarch Bay Securities. Wyatt Carr - Monarch Bay Securities, LLC: Just a couple of quick questions. Were there any additions to the Con Ed contract during the quarter? Thomas D. Brisbin: No, are you asking did we get in -- other modifications or amendments or any of that? Wyatt Carr - Monarch Bay Securities, LLC: Right. Any new additions besides the ones you've already announced. Thomas D. Brisbin: No. Wyatt Carr - Monarch Bay Securities, LLC: Okay. And then in Energy Efficiency Services, on a sequential basis, your revenues were down just slightly, but your income in that segment was up sharply. Can you explain that? Thomas D. Brisbin: What are you looking at, Wyatt? I got Stacy going through papers. Wyatt Carr - Monarch Bay Securities, LLC: I'm looking at the segment information. I'm looking at the -- for the 3 months ended June 27, you did $13,699,000 in contract revenue for Energy Efficiency and your net income on that segment was $1,473,000. And in this quarter, it was just slightly below that at $13.558 million and your net income was $1.983 million, which is pretty nice increase. Thomas D. Brisbin: Stacy knows where you are now. She's looking at it and she's following along. Stacy B. McLaughlin: So as you heard in the call, Wyatt, we talked about release of the valuation allowance. So that will have an impact on the net income because our -- we didn't have a tax expense in the current quarter. It was a tax benefit. So I would say it's a combination of the tax benefit, which is going the other way than an expense and that group working on decreasing costs, overhead-type costs. Wyatt Carr - Monarch Bay Securities, LLC: Okay. And then in the segment assets that were applied to those to Engineering Services and to Energy Efficiency Services... Thomas D. Brisbin: Wyatt, you're doing the same thing. I'm reading it, so go ahead. Wyatt Carr - Monarch Bay Securities, LLC: So my question is does that represent the capital expense increase in those segments? Stacy B. McLaughlin: So the segment net assets, they're just the assets for that. I think for Energy Efficiency, it is the slight increase you'll see from the prior periods would be, really, would be in AR. But it's just -- it's dragged their AR with for the majority of it and then there are some other items that aren't as material, but they're not a capital-intensive... Wyatt Carr - Monarch Bay Securities, LLC: It's not a capital expense. Stacy B. McLaughlin: Yes, it's not in PP&E or anything like that. It's cash with an AR. We did actually for Energy, we did add some vehicles but nothing that is going to really change these numbers in the filings. Wyatt Carr - Monarch Bay Securities, LLC: Okay. And then the increase in DSOs, your target is 70 to 75 days. You're at 77 days, was there one area that caused the increase? Stacy B. McLaughlin: Yes, there's one customer that we have with pretty sizable invoices outstanding. We are in communication with that customer and we expect to receive payment by the end of the year and that should help bring our DSO back down. Wyatt Carr - Monarch Bay Securities, LLC: Okay. And then just, Tom, can you update me on -- you didn't -- you talked about Sacramento, was that aimed towards Elk Grove? And also you brought in a city that you said was larger than even Elk Grove. Is that reflected in the numbers? Thomas D. Brisbin: No, and Beaumont is not the city that's larger than Elk Grove. We're still working for winning small jobs in the city we hope will get bigger. But Beaumont was the new one that I never talked before. And then in Sacramento, that's the county of Sacramento, which we are trying to rebuild our Northern California presence. Willdan at one time went from Southern California up the 111 all the way to Redding, the northern parts of California during the recession, all the way through Sacramento. Those services were closed, I mean, we closed, like I said, 9 offices. And Sacramento, the win that I was referring to in Sacramento was not Elk Grove, but the county of Sacramento, which for us is getting back to where we were. Wyatt Carr - Monarch Bay Securities, LLC: Great. And you haven't -- you still haven't identified the larger city out there. Thomas D. Brisbin: No. Wyatt Carr - Monarch Bay Securities, LLC: Is it in Northern or Southern California? Thomas D. Brisbin: It's in California. Wyatt Carr - Monarch Bay Securities, LLC: Okay. And then Prop 39 funding, have you seen an increase there? I know you're doing some work, but has that work picked up? Thomas D. Brisbin: We've won 3 jobs now versus one when I talked to you last time -- last quarter. They're in the early planning phases so they're planning contracts for schools. Schools wonder what to do with Prop 39. So the programs are starting up, we went from 1 to 3. Hopefully, next quarter, we'll go to 6. Wyatt Carr - Monarch Bay Securities, LLC: Okay. And then lastly on the acquisition front. Can you give us a little update there? I mean, are you close to something? Or you identified -- have you identified things that -- is there anything that's close? Thomas D. Brisbin: We've identified things. And if all goes well, it'll be close. Wyatt Carr - Monarch Bay Securities, LLC: The one question that I have, lastly, sequentially, your gross margin is up from about 39.6% to 41.6%. So you improved gross margins sequentially. Is that because of the revenue increase and leveraging? Stacy B. McLaughlin: Yes. Sorry, we're having a little discussion here. Thomas D. Brisbin: Anything else, Wyatt? Wyatt Carr - Monarch Bay Securities, LLC: No, that's it.

And we do have a follow-up question from Al Kaschalk with Wedbush Securities. Albert Leo Kaschalk - Wedbush Securities Inc., Research Division: Tom, on the M&A front, can you give us an update on whether things that were in the pipeline have fallen out? Or have things just stayed in and you're not able to cross the goal line on, arguably, valuation? Thomas D. Brisbin: We have a pipeline. They're in the pipeline. It has nothing to do with valuation or goal line. Things take time. Albert Leo Kaschalk - Wedbush Securities Inc., Research Division: Okay. But are you able to comment whether things have fallen out? In other words, you... Thomas D. Brisbin: They have not fallen out. Albert Leo Kaschalk - Wedbush Securities Inc., Research Division: Okay. And then just to follow up on this gross margin question, can you be a little bit more specific than just, yes, it was due to higher revenue. Is it more mix of revenue? Self-performed? Better technical contracts, therefore, improved economics than your base business? Stacy B. McLaughlin: Yes, Al. I think besides just the increase in revenue, we've been able to do some of our -- used less subs, which we do better on as well instead of making no margin on those, which has helped.

And there are no further questions left in the queue. So Mr. Brisbin, I'll turn the call back over to you for any closing remarks. Thomas D. Brisbin: Sorry, we're having a discussion on gross margin.

What's that? Thomas D. Brisbin: Closing remarks. I would like to thank all of you for participating on our call today and for your continued interest in Willdan. And thank you, all, and have a great day.

Ladies and gentlemen, this does conclude today's conference. We appreciate your participation.