Q3 2014 Earnings Conference Call November 13, 2014 4:30 PM ET.

Q3 2014 Earnings Conference Call November 13, 2014 4:30 PM ET.

Don Markley - Investor Relations Dickerson C. Wright - Chairman, Chief Executive Office and President Michael P. Rama - Vice President and Chief Financial Officer.

Jeff Martin - ROTH Capital Partners, LLC.

Greetings and welcome to the NV5 Holdings, Incorporated Third Quarter 2014 Financial Results Conference Call. [Operator Instructions] As a reminder this conference is being recorded. I would now like to turn the conference over to your host, Mr. Don Markley. Thank you, sir. You may begin..

Thank you, operator.

Before we proceed I would like to remind everyone that this call contains forward-looking statements within the meaning of the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995 including among others statements with respect to our ability related to completing acquisitions, developing business opportunities, achieving operational efficiencies, generating organic growth, expanding our backlog, building and maintaining long-term client relationships, optimizing utilization, and increasing our guidance related to gross revenues and earnings per share.

The Company cautions that these statements are qualified by important factors that could cause actual results to differ materially from those reflected by the forward-looking statements contained herein.

Such factors include but are not limited to changes in demand from the local and state government and private clients that we serve; general economic conditions nationally and globally and their effect on the market for our services; competitive pressures and trends in our industry and our ability to successfully compete with our competitors; changes in laws, regulations, or policies; our ability to successfully execute our mergers and acquisition strategy including the integration of new companies into the Company's business; backlog cancellations and adjustments; and finally, the risk factors set forth in the Company's most recent SEC filings.

All forward-looking statements are based on information available to the Company on the date hereof and the Company assumes no obligations to update such statements. I would like to remind everyone that this call will be available for replay through November 20, 2014, beginning at 8 PM Eastern tonight.

A webcast replay will also be available via the link provided in today's press release as well as available on the Company's website at www.nv5.com. Any redistribution, retransmission or rebroadcast of this call in any way without the expressed written consent of NV5 Holdings is strictly prohibited.

We will begin the call with commentary from Dickerson Wright, Chairman and CEO of NV5, before turning the call over to Michael Rama, Chief Financial Officer, for a review of the financial results and outlook. We will then open the call for your questions. Dickerson, please go ahead..

Thank you, Don, and good afternoon, everyone. As you saw at the close of the market today we issued a press release announcing our financial results for the third quarter which ended September 30, 2014. We reported record third-quarter results with revenues increasing 69% and net income increasing 85% year-over-year.

Our quarterly increase in revenues and net income has continued uninterrupted since our inception. This is the result of our focus on successfully driving business development, achieving operating efficiencies and making strategic acquisitions as well as an improving industry environment.

There are three areas that I would like to highlight in my prepared remarks today. First, our ongoing effort to strengthen, enhance and expand our business development opportunities. With our seller-doer model we empower our professionals via continual resource to our clients.

This has resulted in larger proposal opportunities and subsequent contract awards. The success of this model is evident in our backlog which increased to $80.7 million as of September 30, an increase of 34% year-over-year. I would also like to mention a few recent notable contract wins. First the city of Bakersfield.

This two-year contract for infrastructure engineering represents approximately $10 million in fees for NV5. The University of Kansas hospitals. This $3 million fee project extension to 2018 is in our program management vertical, a result of the ORSI acquisition earlier this year.

This extension is particularly gratifying as it expands our presence in healthcare facility program management which is a relatively new area for us and one with significant growth potential. The San Diego Water Authority.

This $3 million fee project over five years is in our infrastructure and construction quality assurance group, a diversification of our service offering in this locality. And finally Princeton University. Here we were awarded a three-year basic order agreement for construction projects.

Princeton is a legacy client for NV5 and this agreement reflects our ability to build and maintain long-term relationships. Second, I would like to recap the four strategic acquisitions we have completed to date in 2014.

In chronological order we first acquired Air Quality Consulting, or AQC, which specializes in occupational health safety and environmental solutions. This was followed by our largest acquisition so far this year, AK Environmental which immediately gave us a strong presence in the oil and gas distribution markets.

At mid-year we acquired Owner's Representative Services, or ORSI, which introduced our program management services to the healthcare facilities industry. And finally our most recent acquisition, the Buric Companies, a program management firm that strengthens our offering in the Midwest to the healthcare market.

Moreover, Buric adds complementary service offerings and strengthens our construction and litigation practice. Our acquisition pipeline remains full. And there may be opportunities to do more on this front before year-end. Third and finally I would like to highlight the scalability and leverage in our business model.

We remain very focused on operating efficiencies and the optimal utilization of our project teams. This occurs in a number of ways. As we acquire a company we can absorb their overhead needs into our existing structure. This has an almost immediate benefit to operating margins.

Longer term as we expand our capabilities from both a geographic and servicing standpoint, we create new opportunities across our verticals within the existing customer base. Whether we define it as cross-selling or synergies we are good at it. And it means we are seeing opportunities for larger and longer-term projects.

I would now like to turn the call over to our Chief Financial Officer, Michael Rama, for an overview of the financial and the 2014 outlook.

Michael?.

Thanks, Dickerson, and good afternoon, everyone. I will first provide a review of the Company's third-quarter 2014 results then a review of the nine months ended 2014 results and finally our 2014 outlook.

Total gross revenues in the third quarter of 2014 were $31.4 million, a 69% increase compared with gross revenues of $18.6 million in the third quarter of 2013. The increase was due to organic growth from our existing platform as well as a contribution from acquisitions made in 2013 and during the first nine months of 2014.

Income from operations in the third quarter of 2014 increased 143% to $2.8 million, compared to $1.2 million in the third quarter of 2013. Total operating expenses were $9.9 million in the third quarter of 2014 compared with $8 million in the same period last year.

The increase in operating expenses was due to integration costs from businesses acquired subsequent to September 30, 2013. As a percentage of gross revenues operating expenses were 31.4% for the three months ended September 30, 2014 compared to 42.8% for the three months ended September 30, 2013.

This decrease was the result of the increase in utilization compared to the same period last year and an internal focus on performance optimization and the scalability of our operations. Net income in the third quarter of 2014 was $1.7 million, an increase of 85% compared to net income of $931,000 in the third quarter of 2013.

The third quarter 2014 diluted earnings per share of was $0.31 versus $0.23 in the third quarter of 2013.

Our third quarter 2014 earnings per share reflects the weighted average shares outstanding of approximately 5.6 million shares for the three months ended September 30, 2014 , compared to the weighted average shares outstanding of only 4.1 million shares for the three months ended September 30, 2013.

Net income and diluted earnings per share for the third quarter 2014 reflect a higher income tax rate of 37.3% compared to an income tax rate of 18.5% in the third quarter of 2013. Our results for the third quarter 2013 reflect certain tax credits that are not currently enacted in 2014.

Excluding these tax credits from net income and diluted earnings per share for the quarter ended September 30, 2013, our net income and diluted earnings per share for the quarter ended September 30, 2014 would have increased approximately 115% and by $0.12 per diluted share, respectively, compared to the third quarter ended September 30, 2013.

Turning now to our year-to-date results. We reported gross revenues of $79.6 million in the first nine months of 2014, an increase of 55% over $51.3 million for the same period in 2013. Our income from operations for the nine months ended 2014 increased 85% to $5.7 million compared to $3.1 million for the same period in 2013.

Total operating expenses were $28.3 million for the nine months ended September 30, 2014 compared to $22.9 million for the same period in 2013. As a percentage of gross revenues operating expenses were 35% for the nine months ended September 30, 2014 compared to 45% for the nine months ended September 30, 2013.

Finally, net income for the nine months ended September 30, 2014 was $3.5 million, an increase of 57% compared to net income of $2.2 million during the same period in 2013. Nine months ended 2014 diluted earnings per share was $0.63 unchanged from the same period in 2013.

However, our year-to-date 2014 earnings per share reflects the weighted-average shares outstanding of approximately 5.5 million shares for the nine months ended September 30, 2014 compared to weighted-average shares outstanding of approximately 3.5 million shares for the nine months ended September 30, 2013.

The net income and diluted earnings per share for the nine months ended 2014 includes a higher income tax rate of 37%, compared to an income tax rate of 24.4% for the nine months ended September 30, 2013. The results of 2013 includes certain tax benefits that are currently not enacted in 2014.

So excluding these tax credits from net income and diluted earnings per share for the nine months ended September 30, 2014 our net income and diluted earnings per share for the nine months ended September 30, 2014 would have increased approximately 77% and by $0.07 per diluted share compared to the nine months ended September 30, 2013.

At September 30, 2014 reported backlog of approximately $80.7 million, compared to approximately $60.2 million at December 31, 2013. Our backlog is an estimate of revenues to be recognized over a rolling 12-month period.

Now moving to our outlook for 2014, we are again raising our 2014 guidance for full-year gross revenues and diluted earnings per share.

Our revised guidance for full-year 2014 gross revenues including the impact of acquisitions closed during the first nine months of 2014 ranges between $102 million and $108 million, representing an increase of approximately 49% to 58% from 2013 gross revenues of $68.2 million.

In addition, we revised our guidance for diluted earnings per and expects that full-year 2014 diluted earnings per share will range between $0.84 per share and $0.94 per share. We note that this guidance includes contributions from acquisitions closed during the first nine months of 2014 as of the closing dates.

However, this guidance does not include any anticipated acquisitions for the remainder of 2014. This completes our prepared remarks. And at this point we would like to open up the call for your questions..

Thank you. At this time we will conduct a question-and-answer session. [Operator Instructions] Our first question comes from Jeff Martin with ROTH. Please proceed with your question..

Thanks. Good afternoon, guys..

Hi, Jeff..

Dick, could you give us a little insight into 16% organic growth? I mean that's nicely above what you had outlined at the beginning of the year of kind of mid to mid-upper-single-digit growth.

If you could shed some insight to what’s going on in the business?.

Yes, I know that the macro answer, Jeff, is we said that we are very happy with our seller-doer model. And we have revamped our business development where we have professionals leading the sales effort so that we have become more consultant and a resource for people. So we have won some really good significant projects.

Some of those whether the budget was held back a little bit or not I don’t know, but those are really contributing to the organic growth. The second piece of that of course is the success of the AK acquisition where we originally budgeted in acquiring that firm to be in the range of $24 million to $30 million.

And they have been running at a run rate of about $36 million on just the growth piece of that. So I would attribute it to, one, we are positioning ourselves in very good locations. I think our model of the doer-seller is working very well and we have been a really exposed to some significant projects that we've been successful.

So we keep driving it organically, we will growth through acquisitions, but we can't really have a robust organic growth. That is the secret to the model..

That's great. And do you expect to continue to see backlog build? I mean it’s up from $45 million at the end of 2012 and now you are up 70%, 80% from that.

Is that something that we can expect to continue to see grow at $3 million to $5 million a quarter?.

Well, a lot of it depends also of course on the actual growth of the Company, but historically solid backlogs run in the range of 60% to 70% of revenue.

So if we are anticipating and I think we gave guidance to with no acquisitions to finish this year at a run rate of about $122 million or so actual revenue of $106 million, at an $80 million that puts us well in the 70% of revenue backlog. We don't expect to drop too much below that. 65% to 70% is what we really target our key people to perform to..

Okay, great. And then could you give a little more detail on the AK Environmental acquisition.

It's outperforming your expectation, but what specifically is driving that?.

Well, the energy distribution market is very, very strong in the U.S. right now. And AK has been positioned very well for years at a high level presence in that area.

And I think it is the really ramp up of a couple of key wins, one in the Northeast and also the Sabal Trails project where I think we have about 30 people full time and that has been ramping up much quicker than was anticipated during the acquisition. But it's a real robust pipeline distribution business and they're positioned very well.

And we also like their environment component of it which is in the environmental siding and planning, which leads to work. So that's what we were - was a nice thing to expect. We look for them to have growth, but it's stronger than we anticipated..

Okay, great.

And then Mike, could you give the cash from operations number for the quarter?.

Yes, for the third quarter cash flow from operations excluding income taxes was $2 million. And free cash flow actually was $1.8 million..

And then was there any change in contingent consideration that affected the quarter?.

No not there in the third quarter..

Okay, great. Thank you, guys..

Thanks, Jeff..

[Operator Instructions] There are no further questions in queue at this time I’d like to turn the call back over to management for closing comments..

Well, thanks everyone for listening in and as you can see we are very excited about the growth and opportunities in front of us. We will continue to complement our strong organic growth with a very focused and disciplined M&A strategy. We are out there.

We have opportunity in front of us and we continue to be very active in the M&A market and our model of improving performance of acquisitions continues. And I hope you recognize that in our growth and our actual costs going down significantly. So we hope this presentation has provided more insight into the progress we have made last quarter.

And our outlook is very strong moving forward and we thank you for your support and we will speak to you again next quarter. Thank you everyone..

Thank you. This does conclude today’s teleconference. You may disconnect your lines at this time and have a great day..