Good day, everyone, and welcome to the Willdan Group Fourth Quarter and Fiscal Year 2020 Conference Call. Today's conference is being recorded. And at this time, I'd like to turn the conference over to Al Kaschalk, Vice President, Investor Relations. Please go ahead, sir.

Thank you, Telari. Good afternoon, everyone, and welcome to Willdan Group's Fourth Quarter and Fiscal Year 2020 Earnings Call. Joining our call today are Tom Brisbin, Chairman of the Board and Chief Executive Officer; and Stacy McLaughlin, Chief Financial Officer; and Mike Bieber, President of the 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 in the Investors section of our willdan.com website. 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, 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 annual report on Form 10-K filed for the year ended December 27, 2019, and subsequent quarter reports on Form 10-Q, including quarterly report on Form 10-Q filed for the quarter ended April 3, 2020. 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 that 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 expenses -- expense items from our operating results. GAAP reconciliations for all of these non-GAAP measures are included at the end of the earnings release we issued today. We expect to file our Form 10-K next week. Stacy will provide a financial discussion and will be followed by Tom. After management's prepared remarks, we will take your questions. Stacy, over to you.

Thanks, Al. I'll start with a brief recap of our business and provide financial details on the fourth quarter and fiscal year 2020, including our income statement, and then discuss our balance sheet. Since our last earnings call, the overall business environment did not materially change during the fourth quarter. The small business program for the Los Angeles Department of Water and Power, LADWP, remains suspended. Despite traditionally being seasonally weaker quarters in the third quarter, fourth quarter consolidated net revenue decreased only 0.5% sequentially from the third quarter. For the fourth quarter, overall, our revenue was on plan, and our profit was slightly ahead of plan. Total contract revenue for the fourth quarter of 2020 decreased 25.1% to $96.9 million from $129.4 million for the fourth quarter of 2019. The decrease is primarily due to the COVID-related suspension of the LADWP small business program within the Energy segment. Net revenue was $50.8 million, a 16.8% decline from $61 million in the year ago quarter. While net revenue in our Engineering and Consulting segment decreased 2.5%. Net revenue in our Energy segment decreased 21%. Direct costs of contract revenue were $62.4 million in the fourth quarter of 2020, a decrease of 27.6% from $86.2 million in the same period last year. The decrease was primarily as a result of decreased contract revenue from our COVID-related suspension of our LADWP program, partially offset by additional direct costs of contract revenue related to our acquisition of E3. Total general and administrative expenses for the fourth quarter were $40.2 million compared to $37.7 million for the prior year period. The net increase in general and administrative expenses were primarily due to an increase in contingent consideration for Integral Analytics. We recorded a tax benefit of $1.9 million for the fourth quarter compared to…

Thanks, Stacy, and good afternoon, everyone. During our call this afternoon, we will highlight our fiscal year 2020 activities, provide an update on business development and some thoughts on the year ahead. Before we begin, it would be fair to say that Willdan is in the right space at the right time. That space is sustainability. We believe the market is just beginning and will continue to grow. We help our customers save electron, water and natural gas, all required to be more sustainable. Now let's look at 2020. First, I would like to thank all our employees. 2020 was an extraordinary year due to the COVID-19 pandemic. We had to change how we do business and our financial sacrifice for all. Our employees' resiliency and dedication have been greatly appreciated. When COVID struck in early March, we were tracking to a record quarter and year. Then with COVID, about 40% of our business slowly came to a halt. This 40% was primarily our utility direct consultant business, where we assist utilities customers across the nation with energy efficiency. We interface daily with commercial, industrial, multifamily and public sector customers. We actively conduct sale, energy audit, installations and construction inspections at our customers' locations. This customer interface came to a rapid halt as utilities, cities and states locked down to prevent the spread of COVID-19. Fortunately, 60% of our work was not affected by the lockdown, and our employees were able to work from home. It should also be noted that most of our state and local work was identified as essential. We took immediate action to limit the effects of the COVID financial impact. As a company, we matched our costs with declining revenues. To reduce costs, we had furloughs, layoffs, salary reduction, board fee suspension, suspension of 401(k)…

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

Congrats on the very strong bookings through last year. So we were waiting for the bookings to come through, and it seems like you're able to do really well in terms of some of those competitive wins. The big question now is, how does it translate into the financials for the second half? I appreciate the color about double-digit growth during the next few years, but can we get some more clarity on how Q3 and Q4 could look like, especially given the fact that visibility looks better for Willdan as a whole?

Sure, Moshe. This is Mike. We said that we expected around $40 million of revenue in the back half of the year and that most would be in the fourth quarter. The way we'll book revenue on these contracts is that we won't actually record revenue until about 75 to 90 days after we do the work. So that's the reason we're ramping up the contracts right now. And the ramp-up will occur in Q2, but we'll recognize the revenue for that ramp-up in Q3. And then as we continue to ramp up, one of the contracts, for instance, starts at the beginning -- or the end of Q3, we won't be recording revenue bid until Q4. So if I had to split the $40 million, this is just a guess, maybe $12 million or so in Q3 and the balance in Q4, something like that.

And we'll move and take our next question from Craig Irwin with ROTH Capital Partners.

Can you maybe start with a discussion of the stimulus that's proposed? There's a lot of sort of back room conversations going on right now. A lot of people in D.C. are talking quietly to their contacts across the country, saying that almost anything we ask for, we get. What do you think the probability is that we'll see fairly heavy spending in energy efficiency, utility services, carbon abatement, really, which is -- the areas that you're focused on, it sounds like there's a tremendous amount of activity coming.

That is true. There's a lot of talk. We are -- we have one of our Executive Vice presidents fully committed to working with lobbyists in Washington on that to ensure legislation gets, how do I say it, climate change at the forefront, energy efficiency at the forefront. So we are actively engaged in that type of activity. Craig, how much gets here and when? I don't know, but it's a hot topic. That's all I can really say.

Understood. Understood. The other thing, I was kind of hoping for an update on Integral Analytics, right? This is a business where when it's coming along, when it's producing for you, is it really this contributor to the profitability of Willdan. Can you update us on any changes in the pipeline for Integral Analytics? Are you seeing some of these contracts that have been out there now, I guess, for more than 2 years continuing to inch forward? Are you seeing customers coming in for integration revenue that would point to probable future license agreements, license signatures, whatever you want to call them, that would really give us visibility on some of this chunky high profit revenue materializing?

Sure, Craig. This is Mike. We said that we've got a robust pipeline, and we do coming into 2021. It -- there's a lot of large clients that we've been talking with for a number of years that seem much more interested and ready to sign this year for whatever reason. There's a lot more activity than there was last year. Now the conversations have actually gone within the group. How do we get all this work done if everything gets in 2021 that's now in our pipeline? So it looks really good. I won't say anything more than that until press releases come out. And so we're in a good spot right now for 2021.

Understood. Understood. And then just looking at the P&L for the quarter. In your general and administrative expenses, you break out several line items. And one of it is labeled other. That was up materially, was up $4.7 million year-over-year to $12.051 million. Can you maybe help us understand what's in that line item and why we saw such significant growth there while the revenue growth has been tepid given the COVID headwinds?

Craig, it's Stacy. The increase there is related to an increase in the earn-out or contingent consideration for Integral Analytics and the California IOU wins. That's why there's a big jump from Q4 2019 to Q4 2020.

So if we were going to take an earn-out out of earnings to get to an adjusted number, which a lot of analysts do think is the right way to do things, what is the approximate size of the earn-out contribution in there? Is this really something like $4.7 million? That would mean, on an operating basis, you had an absolutely fantastic quarter.

Yes, it's actually the earn-out was an increase in expense in that other row of about $6 million, which is then offset by some other smaller items within. If we had not booked that increase in earn-out in Q4, we would have also had positive GAAP earnings.

Wow. Okay. That's a good deal. Now, I guess, the quarter looks really different for those of us paying attention.

[Operator Instructions] We'll move next to Marc Riddick with Sidoti.

I was wondering if you could talk a little bit about it. I appreciate all the detail that you've given on the -- on multiple fronts, but particularly some of the work that you're going to be doing in the timing that you see coming for a lot of things that have been delayed as well as California. I wanted to talk a little bit about how that may play as to visibility of labor needs and how we should think about maybe that mix of what we should expect to see first half versus second half as far as subcontractor work and the like.

With respect to labor, we are hiring, and we looked at more than 50 people right now. We've been adding several per week over the last few weeks. So look for those metrics to go up. Labor availability has not been a major issue for us. We have been able to effectively recruit and hire. So that's been good for us. Did you have anything else? Because we couldn't understand. You were breaking up a little bit on the latter part of your questions, Marc.

What the mix of that labor might look like, I guess, for the first half, since you're going to be ramping up for the work that you're going to be doing back half and beyond. So I'm sort of thinking about, are we -- is it reasonable to expect that increase in mix of subcontractor needs? Or do you think you're going to be hiring and that's -- some of that to be -- more of that to be internal?

We do have a lot of commitments to subcontractors that were incumbents, that all joined our team. And it's a big plus because they can hit the ground running to deliver these savings goals. So I imagine the subcontracting during the start-up phase would be higher than when we level off, I can say, 60%, maybe 70%. They're on the ground waiting to start, and that takes away -- that helps us a lot because we don't have to carry those costs of start-up. And then we can hire people over the next 3 to 6 months to fill in and bring it down to about a 50% subcontract level. And within that subcontractor level, we also have [indiscernible], and we're fortunate to have minority business enterprises already on the team. So we're not expecting a very difficult start-up.

And Marc, those percentages Tom just gave were just a result of the incremental California work, not the portfolio overall.

Okay. That's very helpful. And then it was nice to see, in addition to the earnings release note of -- the note of another new business win. I was wondering if you could talk a little bit about it, and this might be a bit fishy, but I was wondering if you could talk about the -- whether it's inbound or how we should think about increased interest from your customer groups over the last few weeks while taking into consideration the funding environment, which has certainly changed since the beginning of the year from -- as far as government funding availability, and now, of course, with the passing of the stimulus.

I think if you mix COVID with the excitement of increased funding, you come out about neutral. That's where we are. So we could get excited about funding. The customers know it's coming, the cities, the states. But you also have the unknowns of COVID. So I'll ask a consensus of Mike and Stacy. Are we at about neutral? Yes, we're at about neutral. Stacy?

Yes.

Unknowns are great on both sides. [indiscernible] versus COVID.

Next, we have a follow-up from Moshe Katri with Wedbush Securities.

Just a follow-up, looking at the second half. Thanks for the color on the next few quarters. What should we look for in terms of EBITDA margins for Q3 and Q4? And then in that respect, looking into next year, stable, up, down? I mean, obviously, you do have to ramp. I'm assuming you will have to hire more people. Is this the right way to look at it in terms of early start-up costs? And while you're ramping, some of those new deals could actually pressure margins? Or how should we look at it?

Yes, Moshe, it's a great question. And we don't know is the final answer, which is why we haven't given you guidance. But I'll give you the variables. And it's a story of the potential of LADWP ramping up in the second half of the year, which will improve margins significantly for the company versus the ramp-up of California work, which is actually more expense. So you're right that, that ramp-up will depress margins. Overall, the way our model looks is that you should expect EBITDA as a percent of net revenue to be in the mid- to high teens for the back half of the year and higher in Q3 and 4 than probably Q1. And that's sort of similar to what we saw this year. But those are the variables.

[Operator Instructions] We'll move next to [Richard Robinson], a private investor.

What does the acquisition pipeline look like? And does Willdan have any plans to expand overseas with any international contracts?

Richard, where are you from? We've never talked to you before, I don't think.

Montreal.

Are you inviting us in Montreal?

Montreal, Canada. Yes.

Are you going to open the doors to let us into Canada?

I'd be glad to let you [indiscernible].

Okay. Mike, do you want to comment on that?

Sure. The acquisition pipeline actually looks good, and we suspended discussions when COVID hit us last year. We have recently started to restart those discussions. So the pipeline looks good. We do not have any short-term plans to make an international acquisition. However, longer term, as we grow the company through $500 million and into the $1 billion mark, we would look towards those international markets for further expansion. And Canada is a very likely place to go. We have a small operation in Canada right now, just a few people. And do some -- probably less than 1% of our revenue right now is overseas. It's been increasing slowly. So that would be our strategy.

[Operator Instructions] It appears we have no further questions in our queue. I'll turn it back over to you for any final or additional comments.

Yes, we have no more further questions. And thank you very much for joining us today. And 2021, we all hope, will be a pandemic-free year. We're all going to get better. The business is going to go better. And we're looking forward to a much better year. So thank you.

Everyone, that concludes our conference call for today. Thank you all for your participation. You may now disconnect.