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Willdan Group Inc (WLDN 0.52%)
Q3Â 2020 Earnings Call
Nov 6, 2020, 5:30 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day, ladies and gentlemen. Welcome to the Willdan Group Third Quarter 2020 Conference. [Operator Instructions]
At this time, I would like to hand the conference over to Mr. Al Kaschalk. Please go ahead, sir.
Al Kaschalk -- Vice President, Investor Relations
Thank you, Lisa. Good afternoon, everyone, and welcome to Willdan Group's third quarter earnings call. Joining our call today are Tom Brisbin, Chairman of the Board and Chief Executive Officer; Stacy McLaughlin, Chief Financial Officer; and Mike Bieber, President of Willdan Group. The call today builds on our earnings release we issued after market close today. You may find the earnings release and the Willdan investor report that accompanies today's call and updated Q3 results in the Investors section of our website, willdan.com.
Management will review prepared remarks, and then we will open the call up to your questions. Statements made in the course of today's conference call, including answers to your questions, 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 disclaims any obligation and does not undertake to update or revise any forward-looking statements made today. In addition to GAAP results, Willdan also provides non-GAAP financial measures that we believe enhance investors' ability to analyze the business trends and performance. Our non-GAAP measures include net revenue, adjusted EBITDA and adjusted EPS. We believe net revenue defined as revenue net of subcontractor services and other direct costs 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 these non-GAAP measures are included at the end of the earnings release we issued today.
We expect to file our Form 10-Q for the quarterly period ended October two in the next few days. In today's prepared remarks, Stacy will provide a review of our third quarter financial results, discuss our balance sheet and related cash flows. Stacy will be followed by Tom will who provide a brief commentary on the business environment and Q3 results, opportunities to capture operating efficiencies as we make permanent changes to the way we do business as we evolve from the pandemic and then conclude with the business development update, including California IOU procurements. We will then open the call for a Q&A session.
I will now turn the call over to Stacy.
Stacy B. McLaughlin -- Chief Financial Officer
Thanks, Al. I'll start with a brief recap of our business and provide financial details on the third quarter, including our income statement and then discuss our balance sheet. Since our last earnings call, the overall business environment did not materially change, but our operations continued to be impacted by the COVID-19 pandemic, albeit to a lesser extent than in the second quarter. All contracts have restarted, except for the Los Angeles Department of Water Power Small Business Program. With no contracts canceled, net revenue increased by 18% sequentially. Overall, our third quarter performance was better than our internal plan. Tom will provide additional details related to Q3 performance and new contract awards during his prepared remarks. Total contract revenue for the third quarter of 2020 decreased 11.1% to $104.5 million from $117.5 million for the third quarter of 2019. This decrease is primarily due to the suspension of the LA BWP Small Business Program.
Net revenue was $51 million, a slight increase from $50.8 million in the year ago quarter. While net revenue in our Energy segment was unchanged, net revenue in our Engineering and Consulting segment increased less than 1%. Direct costs of contract revenue were $69.9 million in the third quarter of 2020, a decrease of 15.7% from $82.8 million in the same period last year. The decrease was primarily as a result of decreased contract revenue from our direct installed program for small businesses in our Energy segment, partially offset by additional direct cost of contract revenue related to our acquisition of increase. Our direct cost of contract revenue or 67% of our total contract revenue in the third quarter, up from 65% in the second quarter of 2020 but down from 71% in the same period of the prior year. The difference in each period primarily reflects changes in the mix of work and the degree to which subcontractors are utilized.
Total general and administrative expenses for the third quarter were $33.1 million compared to $33.4 million for the prior year period. The net decrease in total general and administrative expenses was due to lower companywide travel expenses as we conduct business more efficiently and lower amortization of intangible assets derived from prior acquisitions. These lower expenses were partially offset by higher personnel and facilities costs attributable to the acquisition of E3. In response to the COVID-19 pandemic, the company has taken and will continue to take measures intended to help minimize the risk of COVID-19 to its employees, including requiring the majority of its employees to work remotely, suspending nonessential travel and restricting in-person work-related meetings. Adjusted EBITDA was $11 million for the third quarter of 2020 compared to $11.6 million for the third quarter of 2019.
Adjusted EBITDA as a percent of net revenue was 21.6% for the third quarter of 2020 compared to 22.8% for the third quarter of 2019. I would like to point out that contract revenue was down 11% due to COVID suspension, but adjusted EBITDA in the quarter is only down 5% from the prior year period. We have continued to do a good job of controlling costs in the quarter. Third quarter net interest expense was in line with the same period last year. Despite the higher debt borrowings, our borrowing rate reduced approximately 200 basis points versus the year ago period due to reductions in the one-month LIBOR. For the three months ended October 2, 2020, we recorded an income tax benefit of $1.6 million versus an income tax benefit of $0.4 million in the same period last year due to increased tax deductions and tax credits. We had net income in the third quarter of 2020 of $2.6 million or $0.21 per diluted share compared with net income of $0.4 million or $0.04 per diluted share in the same period last year. On an adjusted basis, our net income was $8.5 million or $0.68 per diluted share.
The most significant adjustments from our GAAP net income were stock-based compensation and intangible amortization, which are both noncash items. Turning to balance sheet and cash flow from operations. We entered 2020 focused on improving our cash flow with an emphasis on cash collection particularly from some of our large utility customers. We continue to see improvements in this area. And for the nine-month period ended October 2, 2020, we generated $26.9 million in cash flow from operations, a record level for the company. During the same period last year, we generated $8.3 million in cash flow from operations. As of October 2, 2020, we had $115.3 million outstanding on our credit facility. We had no borrowings under our revolving credit facility with $50 million available.
Our net debt to adjusted EBITDA trailing 12 months leverage ratio as measured by the terms of our credit facility was 3.1 times. I want to take a moment to provide you with some additional details about our near-term outlook. First, our business development efforts remain robust with proposal activities for new programs continuing to advance. Second, our 2021 budgeting process is under way, and we expect to be in a position to provide you with additional details in March 2021. Third, last quarter, we expected the Los Angeles Department of Water programs to resume in the fourth quarter of 2020, but we no longer expect that to occur due to the high rates of COVID-19 in Los Angeles County. And lastly, we are anticipating a decrease in adjusted EBITDA when compared to Q4 2019 due to the large sale recorded at the end of last year.
Combined with the impact of COVID-19 outbreak and actions to contain the virus or treating the impact, the fourth quarter 2020 adjusted EBITDA is expected to be down approximately 15% for the third quarter of 2020 results. In terms of interest expense, we estimate fiscal 2020 to be approximately $5.5 million, down from $6 million previously communicated to you. This pandemic has taught us several things over the past seven months, one of which is the ability to work efficiently remotely. As part of our long-term strategy, we will be adding a focus on real estate costs. Our average lease duration is three to five years, and we spent $7.2 million or 4.8% of G&A per year on real estate expense. As these leases expire, we are setting a goal to reduce facilities costs by 25% on a permit count basis. When complete, this should result in a 100 basis point margin improvement.
I'd now like to turn the call over to Tom.
Thomas D. Brisbin, Ph.D. -- Chairman of the Board and Chief Executive Officer
Thanks, Stacy, and good afternoon, everyone. Overall, we performed well during the third quarter. Given the reopening activity in nearly all of our markets, I will provide highlights on our third quarter results, our business models emerging from this year's pandemic and conclude by sharing insights into our business development pipeline. During the third quarter of 2020, our business continued to be impacted by COVID-19. Third quarter revenue in the Energy segment was up 25% sequentially. The Small Business Program in the LADWP territory remains on lockdown. During the third quarter, LADWP shift of resources to the Los Angeles Unified School District provided some relief to the program. The shift allowed us to implement energy efficiency services into many schools. We now expect the entire program to resume early in January 2021.
Our business volume in New York improved during the quarter with all New York utility programs fully ramped. The city is open, customers are signing up. Incentives have increased and contractors continue to run fast as customers capture a better deal. We entered 2020 with an increased focus to improve our cash conversion cycle and reduce our debt levels. As Stacy mentioned, we generated the highest level of cash flow from operations for a nine-month year-to-date period in the company's history. We will continue to work on cash flow to invest in the business and reduce debt. During the second quarter conference call, I discussed how the company took all appropriate actions to limit the effects of the COVID-19 financial impact. These actions included furloughs, layoffs, salary reduction, board fees suspension, suspension 401k match funds and stopping all discretionary spending.
In the third quarter, we rehired a larger percentage of the employees and continue to add back where warranted. We also restored salaries and benefits for employees and expect to resume company matching of 401(k) plans during the fourth quarter. We'll this year that we can permanently operate our business virtually more efficiently and with a lower cost structure. While still early, we see signs of holding on to cost savings and operating efficiencies. As projects have resumed, we have been extremely disciplined in bringing back employees and controlling other direct costs. The pandemic has allowed us to integrate technology at our project job sites. We have used technology to develop and implement effective protocols to keep our employees safe. For instance, in some cases, we are able to do a virtual audit.
These are virtual energy audits, our ability to deliver energy efficiency measures without entering the facility. We are planning to publish our initial company sustainability report in the fourth quarter of 2020 and plan to update this report annually. This report will also address diversity, and we'll be able to track our progress. Despite the impact of COVID-19, we continue to see customers actively conducting procurements. We finally have some information that we can share on the California IOUs. First, we thank the IOUs for meeting the schedules and second, for awarding Willdan a significant amount of work. We have signed a total of $781 million in new California IOU contracts to date. These six contracts are three to five years in duration and on a weighted average basis, represent $150 million per year in incremental revenue.
This is, of course, based on successful execution. The new work will begin slowly and pick up in the back half of 2021. four of the six executed contracts are awaiting California Public Utility Commission approval. two have been approved. We will announce more details on the contracts when the PUC approves the contracts and the utilities allow us to announce them. In summary, the six California energy efficiency contracts are expected to have an average duration of four to five years. The programs are expected to ramp in the second half of 2021 with peak ramp expected to occur in years three and four. Additional budget is likely to go to the program or programs that can ramp, execute milestones and deliver required savings. Even though the market potential for these programs has been cut due to the pandemic, Willdan still won more than the incremental dollar amount that we told you during our secondary offering. We stated then that if we could win more than $100 million per year in incremental revenue, we give ourselves a any.
About $150 million per year has been awarded to us thus far. We have additional California IOU proposals still outstanding. Thus, we will provide you additional details when it doesn't compromise our competitive position. Beyond the California IOU procurement process, business development and proposal efforts remain robust. Our Engineering segment remained strong during this quarter and the opportunity pipeline is growing. Within the Energy segment, we see demand for area efficiency services, including grid modernization. For example, we've kind of moved from California to the East Coast now with New Jersey. We're looking at, at least $25 million per year for small business and other commercial demand side management programs. Pepco in Maryland is $50 million per year designed to implement small business and combined heat and power programs.
And NYCHA, the New York City Housing Authority, is $90 million over a two-year period for electrification of the steam boiler plants. On behalf of our Board of Directors, management and shareholders, we would like to thank our employees and customers for their resiliency, value to dedication and hard work during this pandemic. I also want to thank our teams for their commitment to developing and implementing effective protocols to keep our employees safe and projects running. The health and safety of our employees is our first priority, and I'm proud of what we've accomplished.
Operator, we are ready to begin the question-and-answer session.
Questions and Answers:
Operator
Thank you. [Operator Instructions] We will take our first question from Craig Irwin with ROTH Capital Partners. Please go ahead.
Craig Irwin -- ROTH Capital Partners -- Analyst
Good evening and thanks for taking my question. Tom, $781 million. That is a beautiful number. Congratulations. I know you guys have been working really hard on this for years and a big accomplishment.
Thomas D. Brisbin, Ph.D. -- Chairman of the Board and Chief Executive Officer
Thanks, Craig. You're right. We have been and it's a great number.
Craig Irwin -- ROTH Capital Partners -- Analyst
So I wanted to check...
Thomas D. Brisbin, Ph.D. -- Chairman of the Board and Chief Executive Officer
I expect you to ask more questions.
Craig Irwin -- ROTH Capital Partners -- Analyst
Yes. No, I have a bunch more. I just -- I wanted to verify that we're roughly at the 40% mark of the $900 million opportunity. And using your comments about the weighted average of $150 million a year, over the duration of the 3.5 -- three to five years, these contracts represent -- is this basically $150 million out of $360 million that was awarded, meaning a 40% plus win rate of available scope?
Thomas D. Brisbin, Ph.D. -- Chairman of the Board and Chief Executive Officer
Okay. It's a little hard to answer. So you want to answer win rate? Do you want to answer how much they've awarded? What...
Craig Irwin -- ROTH Capital Partners -- Analyst
Well, I guess there's a couple of questions in there. Yes. So are the awards done from the procurement you've already submitted for this year? Do we have a final tally? Or are there potentially other awards that can come through?
Thomas D. Brisbin, Ph.D. -- Chairman of the Board and Chief Executive Officer
There are a few other awards for us. They're not as big. But let me give you a little bit of an answer here. We've proposed -- and these are rough numbers, about $1.2 million -- $1.2 billion. Those budgets were reduced by the IOUs to about $903 million. So there was an effect that took place due to the pandemic, due to the lateness of the procurement. They adjusted their awards, all right? So of the $900 million -- that was one thing that took place. So of the remaining $903 million, we won $793 million or 88% of what we went after. Now the next part of your question, what's left, yes, so our understanding from public information and what we know -- let me get to that page. I know you'd go into this. So we think the total awards, either pending or publicly available, will be about $1.5 billion. Willdan's awards, either awarded or pending, will be about $825 million or 50% of the total -- 54% of the total available funding.
Craig Irwin -- ROTH Capital Partners -- Analyst
Wow, that's pretty fantastic win rate. So congratulations. How do we think -- turning on for you as far as revenue in the release and in your prepared remarks, you were very clear, it doesn't start today. This comes on incrementally as these jobs ramp up in 2021. Do we see a revenue impact in the first quarter of '21? Proportionately, how far do we get toward that $150 million run rate by the end of the year? How should we be looking at the ramp?
Thomas D. Brisbin, Ph.D. -- Chairman of the Board and Chief Executive Officer
I would say nothing in the first quarter, a little in the second, third and fourth, we ought to be at about -- wanted to be half, I don't think. I don't know, Mike. This is a guess guide.
Michael A. Bieber -- President
Yes, it's a guess. By the fourth quarter, we don't think we'll be fully ramped up and certainly not to the maximum. And revenue will follow -- it will lag the actual work we're doing by whatever, 60 to 90 days. So that's like it, Craig.
Craig Irwin -- ROTH Capital Partners -- Analyst
Got it. So then the margins available on this work, I know you were in long negotiations with both utilities and the commission here. Should we expect something similar to the corporate average? Maybe if we take off software, the corporate average, is this something that's going to be pretty typical as far as profitability for you?
Thomas D. Brisbin, Ph.D. -- Chairman of the Board and Chief Executive Officer
We still have competition going on, Craig, and we said about all we can say.
Craig Irwin -- ROTH Capital Partners -- Analyst
Got it. Got it. Then the other side of the business, I wanted to ask on is integral analytics that you guys are one of the few out there with a really credible solution. Got a green light from a bunch of commissions, but we haven't necessarily seen all of the all the contracts inked. I know there's a lot of fish in the pond, to use an analogy we all like. How should we be thinking about the contribution from Integral Analytics as we head into the back end of the year? Is growth there a focus in 2021? I know you have been putting resources in there. Do you feel like those resources are yielding results?
Michael A. Bieber -- President
Craig, I think it's going well, and we have been investing there. And by comparison, we only had one large contract in the pipeline, the -- whatever, multimillion-dollar XL contract last year. Now we have three large contracts in the pipeline. So that's good. I think it's a pretty good probability that one of those three, at least, will hit between now and the end of Q2 of next year. But any time in there trying to predict when a contract is signed is too difficult. We can't predict at this point whether we will have one of those that hits this quarter, this fiscal year or the first half of next year, too difficult to predict. But the pipeline itself looks good. We have some chunky contracts in there and also a flattering of smaller contracts in the $1 million range. So we're pleased with their activity.
Craig Irwin -- ROTH Capital Partners -- Analyst
Excellent. Well, congratulations on the strong results, guys. The 88% win rate is really impressive, 50% on the -- the total opportunity is still just an absolutely fantastic result, so congratulations.
Michael A. Bieber -- President
But Craig, you do know that based on what we know at this point.
Craig Irwin -- ROTH Capital Partners -- Analyst
Yes.
Michael A. Bieber -- President
But how they adjust and what happens, who knows?
Craig Irwin -- ROTH Capital Partners -- Analyst
Yes, I know. I mean that's why your language in the release is well written. We don't know how these projects ramp. We don't know final profitability. So I completely understand that as do most of the investors listening on this call. So this is just the...
Michael A. Bieber -- President
You've been waiting a long time for some news, and we were able to give you some news. And we think it's -- we're very pleased with the outcome. And like I said, we thank the IOUs for having their confidence in us. And we're going to perform now so that we can continue to grow on this.
Craig Irwin -- ROTH Capital Partners -- Analyst
Again. Congratulations, I'll hop back in the queue now.
Operator
Our next question will come from Moshe Katri with Wedbush. Please go ahead.
Moshe Katri -- Wedbush -- Analyst
Hey, thanks. Congrats on strong results, strong bookings as well. A couple of things. One, what needs to happen for you guys to execute, assuming all these contracts get approved? How are you set up from an infrastructure perspective on the execution side? Do you need to add headcount at executives, project managers, etc.? And then maybe you can provide some more color on other funding opportunities in terms of the pipeline? And then in that context, can you remind us if there are any large renewals that you should expect heading into the next 12 -- maybe 12 to 24 months? Thanks a lot.
Michael A. Bieber -- President
Okay. We'll break it down into three parts of your question, Moshe. The first, in terms of ramp-up, we have filled all of the project management and key positions, but we do need to add staff. Why do you staff, in fact, and we're making that assessment right now. We are lucky that these procurements are staggered and some of the start dates aren't until the second half of next year, which is good for us. So we are fortunate in the way they have become staggered and we'll be able to ramp up in a much easier manner than the tidal wave of work. So we're hiring right now. We filled the key positions. We don't know how many staff we'll have to add at this point, but we're guessing 50-ish or something like that all in California. And those will come on over the next three to six months. Second, you asked about new business development activities. You wanted further color on that on the East Coast.
Moshe Katri -- Wedbush -- Analyst
Yes.
Michael A. Bieber -- President
Tom, do you want to...
Thomas D. Brisbin, Ph.D. -- Chairman of the Board and Chief Executive Officer
I mentioned a few of the states, Maryland and New Jersey. So what's happened is they have picked up on the East Coast, and we are in -- we are submitting proposals. We're in interviews. It's kind of like the same thing we've been telling you about California. It shifted to the -- again, for us, California, just about ended when the East Coast picked up. So we were able to take the team and the team on the other side of the country and respond to these opportunities. So we're in active procurement mode. That means we've submitted proposals or we're in interviews. And that's about all I can say about that and where. But I gave you some ideas in New Jersey, Maryland and some other Northeast states. That's about it.
Moshe Katri -- Wedbush -- Analyst
Are you able to quantify these opportunities?
Thomas D. Brisbin, Ph.D. -- Chairman of the Board and Chief Executive Officer
We know -- so let's take an example that we're looking at right now, New Jersey. You have the opportunity to bid on -- let's say, there's 11 counties in New Jersey. You bid on one, you can bid on all 11. And it's a strategic decision you make as to what you bid on. So that directly relates to the revenue we'll generate. And if you get too greedy, you could lose it all. If you -- those are just the things they get into it. They want to spread the work. They want to give and tell their contractors. They want to give to minority business enterprises. I mean the host of variables here are large. So to tell you what we're putting on is to tell you what we're doing and we can't do that.
Moshe Katri -- Wedbush -- Analyst
Understood. And how about renewal activity during the next 12 to 18 months?
Michael A. Bieber -- President
There's only one that I can think of, which is about a $10 million contract with Con Edison that will come up for renewal likely next year. But that's the only one.
Moshe Katri -- Wedbush -- Analyst
All right. Thanks a lot.
Operator
Our next question will come from Marc Riddick with Sidoti. Please go ahead.
Marc Riddick -- Sidoti -- Analyst
Hi, good evening. So congratulations. It's certainly a significant amount of success with the wins there. So wondering if you could sort of touch a little bit -- and thank you for the color on the pacing of what can be expected going into at least on the top line, maybe to some degree going into next year. So wondering from the hiring perspective, and the idea that, that has been done, are there particular areas of expertise that may require more senior folks versus some folks that can be trained? And how should we think about maybe what that mix may be? And certainly, you communicated that there's some amount of time that you have on your side, but I was wondering if you could sort of go into that and then maybe how that -- the procurement of that labor skill set might play out in the quarters to come.
Thomas D. Brisbin, Ph.D. -- Chairman of the Board and Chief Executive Officer
We're very fortunate that we've been working on these programs for in excess of 10 years here in California. And we've had the opportunity for many of our staff to take all sorts of positions from sales to installation to the M&B portion, the management portion, accounting portion. So we have a rather robust trained staff in California, just like we do on the East Coast. So we're -- because we've been working there for 10 years. So -- and these programs grow, what it really means in bringing in highly qualified entry-level people and training them by people who have been doing it for 10 years. So it's just a matter of getting more people doing what we've been doing. Does that make sense to you? It's not a big leap to...
Marc Riddick -- Sidoti -- Analyst
Yes. No, that makes sense. Yes, that makes sense. I was wondering if you could talk -- I'm sorry, go ahead.
Thomas D. Brisbin, Ph.D. -- Chairman of the Board and Chief Executive Officer
I just can say as part of The proposal activity, you have to show you have your key people in place and they're ready to go on day one. That's just a requirement. And again, we're fortunate that we've been working for these IOUs for so long. And I think it's a competitive advantage. So to you, it might look like risk. To us, it looks like a competitive advantage and we're ready to go.
Marc Riddick -- Sidoti -- Analyst
Okay, it's certainly good to hear. Wonder if you could touch a little bit on what the -- if you could share a little bit more around the thought process on the real estate footprint going forward. And you certainly touched on this a little bit in prior calls, some commentary. And so I certainly appreciate the level of specifics that was given on this call today, especially given -- in light of the business that you have in front of you. So I was wonder if you could talk a little bit about that thought process and maybe the things that led you to get there, especially as we're starting to see that little by little, of course, the corporate world and rethinking there the long-term footprint.
Stacy B. McLaughlin -- Chief Financial Officer
Hi,Marc, yes, we've been looking at and if you look at our G&A, our largest cost, our salaries, our people and our facilities. So it's one area that we can definitely make an impact on when it comes to cutting costs over the past seven or so months. We have determined that we have a lot of space, but we can get a lot done without using all the space that we have. So it's something that we want to add to our goals moving forward, to look at all of our leases as they come due and determine if they are spaces that are people really going into that office space and working, are they mostly remote and seeing where we can gain more efficiencies being one of our larger income statement items is just overhead.
Marc Riddick -- Sidoti -- Analyst
Okay, great. Thank you, for the color there.
Operator
And with no further questions, I'd like to turn it back to Tom Brisbin for any additional or closing remarks.
Thomas D. Brisbin, Ph.D. -- Chairman of the Board and Chief Executive Officer
I'd just thank everyone for joining us today and have a good day. Maybe when we get home, we might know who the President is. But maybe we'll know next week. So thanks a lot for being a shareholder in Willdan.
Operator
[Operator Closing Remarks]
Duration: 36 minutes
Call participants:
Al Kaschalk -- Vice President, Investor Relations
Stacy B. McLaughlin -- Chief Financial Officer
Thomas D. Brisbin, Ph.D. -- Chairman of the Board and Chief Executive Officer
Michael A. Bieber -- President
Craig Irwin -- ROTH Capital Partners -- Analyst
Moshe Katri -- Wedbush -- Analyst
Marc Riddick -- Sidoti -- Analyst
