Tony Rossi - SVP Stacy McLaughlin - CFO and VP Thomas Brisbin - Chairman and CEO Michael Bieber - President

Moshe Katri - Wedbush Securities Inc. Chip Moore - Canaccord Genuity Limited Wyatt Carr - Western International Advisors Greg Kitt - Pinnacle Fund

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 Profiles. 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 will 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 revenue net 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 recognized at 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 two 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 costs related to our Energy segment projects. Our direct costs 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 two 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 a 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 fourth quarter of 2018, an increase of 0.5% over the first quarter of 2017. Adjusted EBITDA was $4.5 million for the fourth quarter of 2018 compared with $3.6 million for the fourth 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 179-D, 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 reductions related to stock option exercises, pursuant to new accounting rules that went into effect for the company in 2016. Net income for the fourth 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 fourth 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 expectation. As Stacy mentioned, we now have two reportable segments, Energy and Engineering and Consulting. Both of 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 expect that Engineering and Consulting will make a nice contribution to our overall performance. The City of Inglewood has just awarded us a 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 task order under the $120 million five-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 are doing the preliminary auditing and engineering work on the first three task orders 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 in 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 two 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 source of revenue and earnings, and can frequently be expanded in scope. In that case of Puget Sound, it has been expanded to also include lodging and small agricultural facility. Furthermore, if you demonstrate the ability to deliver on one program, it enhances the 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 to install program focused on government, non-profit and small business facilities. It is another example of the success we have had in expanding our relationships with utilities after delivering on our 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 in the country such as solar, wind, battery, demand response and energy efficiency become more prevalent, utilities are turning to IA’s software for planning the future distributed energy resource disruption to their grid. Currently more than 20 utilities have adopted IA’s software. As you saw earlier this week, we announced another acquisition that will further enhance our ability to capitalize on these 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 and 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 upgrades 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 the 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 deliver another positive year for our shareholders. With that I would now like to turn the call back to the operator for questions.

Thank you. [Operator Instructions] Our first question will be from Moshe Katri with Wedbush Securities.

Hi guys, thanks. I just want 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 that you announced last week?

Visibility is about like last year. It has 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 is within the guidance Moshe – within the guidance range, so we didn't update the guidance range for this particular acquisition.

Okay, that is fine. And then, I think that you have also mentioned that energy and consulting, which grew about 3% during the quarter, as I understand I think you said it should improve seeming that is what you said. Maybe that is what you alluded to, maybe you can talk about some of the comfort that you have that you are 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 are deciding how to answer that. So hang on a second.

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

And the 3% was a first quarter comp with a big number in the first quarter of ’17, but engineering is still ticking along at 10% or 11%. It is 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 a future going forward I think, back to 9%, 10%, 11%.

It is 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 have been.

Okay. That is helpful. 9, 10 is good. And then what about margins for the year, 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. It is 17.9% last year. It will continue that trend. We are marching towards 20% this year. EBITDA – adjusted EBITDA as a percent of net revenue we 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 is pretty impressive.

[indiscernible]

Thanks.

Thank you. [Operator Instructions] And our next question will be from Chip Moore with Canaccord.

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

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

Yes, okay. That is 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 are doing very well in LCR. We exceeded our goal by 30% last year, and we are looking to exceed our goal again this year. First-quarter looked great. So we are actually a little ahead of plan on that program. It looks good.

That is an increase. Last year was a 1 MW. This year is 4 MW. So to give you an idea, it should go up by a factor of 4.

Yes. Okay, great. And just maybe one last one from me on balance sheet with this latest deal, I'm assuming it wasn't big, but how are you thinking about capacity for future deals, and how is that pipeline looking? Thanks guys.

We have got just a little bit of debt now for the first time in a little bit. So, we will exercise our credit facility a little bit. The pipeline looks good. We have got plenty of capacity to do additional deals this year. We have 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 are talking with some national players as well. So that looks good.

Okay, great. Thanks very much.

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

Hi guys. I guess this would be for Mike, but can you give us any kind of idea of what kind of, margins the NAM acquisition had, what kind of EBITDA – I am sure that you are looking at an accretive acquisition. So…?

Yes, correct. It is about on par with the rest of the energy segment, that EBITDA as a percent of net revenue. So it is right on par with the rest of the energy segment. It shouldn't change our margin profile overall, and you are 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 will be accretive on a GAAP basis this year.

Okay, great. Thanks for the guidance on that, and then, the balance sheet does not reflect the 2.5 million that was taken outstanding on the credit line, is that already 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 down there and we have not drawn anymore since then.

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

The entire balance sheet is prior to the acquisition.

Okay, and that is helpful. Thank you. Thanks a lot. Those were the questions I had.

Is there any further questions?

There is two.

There is two.

We do have another question from Moshe Katri with Wedbush Securities.

Hi, 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. It is working well. We like it. They have helped us. The last one that we talked about publicly was ComEd, and we have two more in the proposal presentation stage going on right now. So, I can't really say much more than that, Moshe, because can't tell you if we are going to win, but we are doing – we are mixing even the financial services, which does the backend of utilities with what IA does. And we are in a situation right now where we are competing for a major job in the south. It is something that we have never done before. It is kind of like LCR three years ago. We had never done that before. We cross-sold between Willdan and Abacus. So we are 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%. I don't know what we will be negotiating if we were to win. I don't want to put that on the phone, but I hope – we are not there yet.

All right, guys. Thanks.

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

Hi, Mike, Tom and Stacy. Thanks for taking my question. Actually I have two questions for you, how much did Integral Analytics contribute in the quarter, and the second question is has there been any changes to the State of California PUC outsourcing and contractor consolidation mandates?

Do I do California first?

Yes, go ahead.

[indiscernible] I think Kitt it is moving forward. I had 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 have 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 are going to outsource in terms of the regulation for the [indiscernible] over four to five years. So, I am more confident today than the last time we spoke on this that we are moving forward. I don't see any roadblocks. Nobody is going up red flags.

Greg on Integral Analytics, it was less than $1 million in Q1. As you remember, the new revenue recognition standard mix for recognizing revenue for software a little lumpy, so it was less a million dollars that we booked at year – or at quarter one, and that will obviously increase in the next couple of quarters.

Thank you.

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

Thank you. I'm showing no further questions in the queue at this time. I would now like to turn the call back over to management for closing remarks. A - Thomas Brisbin: Okay, well, thank you all of you for participating on 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.