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?

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%…

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…

[Operator Instructions] We'll take our first question from Al Kaschalk with Wedbush Securities.

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?

I think we're $77 million year-to-date.

DSO?

No, revenue.

Yes.

Yes, $78 million actually.

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?

I don't have my slide rule with me, I'm sorry.

Come on, $77 million divided by 3, $25 million on top of $77, I don't know, somewhere on...

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?

On Con Ed?

Yes.

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.

And then what happens to July or August next year? You look for an extension? Or you look for the next funding? What's...

I might be off there. Is the year past '15? Is it '16?

18 months.

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.

Do you have any update or commentary as a result of the recent elections, whether that will help or enhance the business going forward?

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.

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?

There was. Yes, yes.

On the bonus?

Yes, you're reading it correctly.

Can you tell me how much that was?

No.

No, because you don't have it? Or no, you don't disclose it?

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.

Okay. Finally, Stacy, with the reversals of valuation allowance. What should we think about in terms of an effective tax rate going forward?

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.

Just a couple of quick questions. Were there any additions to the Con Ed contract during the quarter?

No, are you asking did we get in -- other modifications or amendments or any of that?

Right. Any new additions besides the ones you've already announced.

No.

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?

What are you looking at, Wyatt? I got Stacy going through papers.

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.

Stacy knows where you are now. She's looking at it and she's following along.

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.

Okay. And then in the segment assets that were applied to those to Engineering Services and to Energy Efficiency Services...

Wyatt, you're doing the same thing. I'm reading it, so go ahead.

So my question is does that represent the capital expense increase in those segments?

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...

It's not a capital expense.

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.

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?

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.

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?

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.

Great. And you haven't -- you still haven't identified the larger city out there.

No.

Is it in Northern or Southern California?

It's in California.

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?

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.

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?

We've identified things. And if all goes well, it'll be close.

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?

Yes. Sorry, we're having a little discussion here.

Anything else, Wyatt?

No, that's it.

And we do have a follow-up question from Al Kaschalk with Wedbush Securities.

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?

We have a pipeline. They're in the pipeline. It has nothing to do with valuation or goal line. Things take time.

Okay. But are you able to comment whether things have fallen out? In other words, you...

They have not fallen out.

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?

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.

Sorry, we're having a discussion on gross margin.

What's that?

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.