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NV5 Global Inc
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Good afternoon everyone and thank you for participating in today's conference call to discuss NV5's Financial Results for the Second Quarter ended June 30, 2018. Joining us today are Dickerson Wright, Chairman and CEO of NV5; Michael Rama, CFO of NV5; and Jenna Carrick, Investor Relations Manager for NV5.
I would now like to turn the call over to Jenna Carrick.
Thank you, operator. Before we proceed, I would like to remind everyone that this conference call may contain forward-looking statements within the meaning of the Safe Harbor provisions of the United States Private Securities Litigation Reform Act of 1995, including statements concerning future events and future financial performance.
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.
All forward-looking statements are based on information available to the company on the date hereof, and the company assumes no obligation to update such statements except as required by law.
I would like to remind everyone that a webcast replay of this call will also be available via the link provided in today's news release and the Investors section of the company's website. Any redistribution, retransmission or rebroadcast of this call in any way without the express written consent of NV5 Global is strictly prohibited.
We will begin the call with comments from Dickerson Wright, Chairman and CEO of NV5, before turning the call over to Michael Rama, Chief Financial Officer, for a review of the second quarter 2018 and year-to-date financial results and outlook for the rest of the year.
We will then open the call for your questions. Dickerson, please go ahead.
Thank you, Jenna, and thank you to everyone joining us for NV5's second quarter 2018 conference call. After the close of the market today, we issued a news release announcing our financial results for the second quarter and six months ended June 30, 2018.
We are once again pleased to report excellent performance for the second quarter and year-to-date, which includes positive contributions from all of our operating verticals. Notably, we saw double-digit organic growth of 11% for the quarter and the second quarter revenues increased 24%. EBITDA increased 30% and net income increased 76%.
Adjusted earnings per share for the quarter increased 63% to $0.91 over 11 million shares compared to $0.56 over 10.7 million shares in the second quarter of 2017, all of which were increases in the second quarter 2018 over the same quarter in 2017.
Now, I'd like to take a few minutes to highlight some of our accomplishments for the quarter. Our infrastructure vertical continues to have success in growing its platform. In California we executed a $24 million contract with Caltrans.
In New York we received a work order released to begin work on a $60 million multiyear contract with the City of New York. Our newly formed national power group was awarded a 5 million contract with Southern California Gas and is expanding geographically into Texas. We are seeing high organic growth in our power group.
Our building technology and sciences group continues to expand. We are awarded MEP work at the LAX Terminal 4 we are also awarded MEP work at the Charlotte Douglas International Airport in North Carolina. Our Arlington Virginia BTS Office received further commissioning work on the Beirut U.S. Embassy.
BTS in Asia has the opportunity to do large projects being now qualified for Band 2 work. Through our CSA acquisition we are now providing MEP work on 11 international airports at 420 duty-free locations. Our Hong Kong office is providing retro commissioning work on the Hong Kong-Macau Ferry Terminal. Also an added benefit is our in-sourcing of U.S. work through our Asia offices to provide MEP design work.
Our cross-selling of services has resulted in high organic growth throughout our company. Our power group has experienced significant order [indiscernible] growth with additional focus on the LNG opportunities. As a whole, utilities continue to outsource services which benefits our company. We also continue to integrate technology while delivering high-value services. Our drone survey service is providing a differentiating technology to all of our surveying opportunities.
NV5 is still very focused on mergers and acquisitions. Our pipeline of opportunities is full and we anticipate additional acquisition opportunities for the balance of the year which should expand our geographic footprint and service lines. Integration of acquisitions is very important and has provided additional organic growth and profit synergy.
I would now like to turn the call over to our Chief Financial Officer, Michael Rama, for a more detailed overview of the financial results for the second quarter and six months ended June 30, 2018, as well as our outlook for 2018. Michael?
Thank you, Dickerson and good afternoon everyone. First I will review the results for the company's second quarter and six months ended June 30, 2018 and then I will provide an updated outlook for the remainder of 2018.
Gross revenues in the second quarter of 2018 were $104 million, a 24% increase compared to gross revenues of $83.7 million in the second quarter of 2017. Net revenues for the second quarter of 2018 were $84.2 million, an increase of 26% from the second quarter of 2017. These increases were due to organic growth from our existing platform as well as the contribution from acquisitions closed during 2017 and 2018.
EBITDA for the second quarter of 2018 was $13.2 million or 16% of net revenues, an increase of 30% from $10.1 million or 15% of net revenues in the second quarter of last year. Net income in the second quarter of 2018 was $7.6 million, an increase of 76% compared to net income of $4.3 million in the second quarter of 2017. Second quarter 2018 adjusted earnings per share, that is excluding the impact of amortization of intangible assets from acquisitions was $0.91 versus $0.56 in the second quarter of 2017.
Second quarter 2018 GAAP earnings per share was $0.69 versus $0.40 in the second quarter of 2017. Our second quarter 2018 adjusted and GAAP earnings per share reflects the weighted average shares outstanding of 11 million shares for the three months ended June 30, 2018 compared to the weighted average shares outstanding of 10.7 million shares for the three months ended July 1, 2017.
Now we will review the year-to-date results for the six months ended June 30, 2018. Gross revenues in the six months ended June 30, 2018 were $198.6 million, an increase of 34% when compared to the same period in 2017. Net revenues year-to-date in 2018 were $161.4 million, an increase of 34% from the same period in 2017. These increases were due to organic growth from our existing platform as well as the contribution from acquisitions closed during 2017 and 2018.
EBITDA for the six months ended June 30, 2018 was $23.3 million or 14% of net revenues, an increase of 54% from the six months ended July 1, 2017. Net income for the six months ended June 30, 2018 was $11.9 million, an increase of 81% compared to net income of $6.6 million for the six months ended July 1, 2017. Adjusted earnings per share for the six months ended June 30, 2018 was a $1.51 versus $0.92 for the same period in 2017.
GAAP earnings per share for the six months ended June 30, 2018 was $1.09 versus $0.61 for the six months ended July 1, 2017. Our year-to-date 2018 adjusted and GAAP earnings per share reflects weighted average shares outstanding of 11 million shares for the six months ended June 30, 2018 compared to weighted average shares outstanding of 10.7 million shares for the six months ended July 1, 2017.
As of June 30, 2018 our cash and cash equivalents were $16 million compared to $18.8 million as of December 30, 2017. Cash flows from operating activities for the six months ended June 30, 2018 were $10.8 million compared to cash flows of $4.5 million for the six months ended July 1, 2017. At June 30, 2018 we reported backlog of $315 million, an increase of 21% from $261 million as of July 1, 2017. Our backlog is an estimate of revenues to be recognized over a rolling 12-month period.
Now moving over to our outlook for 2018. We are raising our 2018 guidance for revenues and earnings per share. We expect full-year 2018 revenues to range from $390 million to $425 million which represents an increase of 17% to 28% from gross revenues in 2017 of $333 million. Net revenues is expected to range from $312 million to $340 million which represents an increase of 16% to 27% from net revenues in 2017 of $268.
We expect full-year 2018 adjusted earnings per share will range from $3.04 to $3.35 per share, an increase of 28% to 41%. We expect full-year 2018 GAAP earnings per share will range from $2.29 per share to $2.57 per share. This guidance excludes any anticipated acquisitions for the remainder of 2018.
This completes our prepared remarks and now we'd like to open up the call for your questions.
Thank you, sir. [Operator Instructions] And our first question will come from Michael Shlisky with Seaport Global. Please proceed.
Hello, good afternoon.
Hi Mike.
So starting off your organic growth has been double-digits so far I think this year. Can you maybe update as how you see that progressing in the back half of the year?
Well, as you know Mike we've always given guidance to be in the high single digits and we are very proud to report that we're doing a little better than that. Not having a crystal ball, I would rather say that we're still going to see organic growth, we're still going to see it in the high single digits and it could be – it could continue to exactly the way it is doing right now.
I think the key thing is where do we see this coming from and it really shows that for us, at least for me and our team is that our integration of our acquisitions is doing very well. We're getting into new markets, new service lines and they are growing. And it's through our cross-selling that ties these all together that has really added to this organic growth that we think is higher, that we know it's higher than industry standard and we think that it will continue.
And so then that presents kind of a next question, all the great cross-selling, your subconsultant percent of gross revenues has been roughly 14% in the first half. Any major changes expected to that going forward?
I don’t know if it will continue that low. I think we are now experiencing work that particularly as some of our units grow our Bock & Clark Group that does a lot of the outer surveys and property surveys we're structured to use more subconsultants [ph] and so I would think and as you know most of our work is 70% or so with public or quasipublic, most of that has minority or MBE, DBE requirements. And so I wouldn’t expect that to get – to drop any. I think if anything it could still increase closer to 18% or 19%.
Okay. Also just given all the strong growth and good work, I've been hearing elsewhere in the country that there's been [indiscernible] engineering personnel in some parts of the economy, could you share with us if you're experiencing any issues with getting enough personnel at NV5?
Yes it is an issue Mike. Attrition is something we watch very, very closely. We track our attrition in percentage and we're happy to report that we are at 8% or slightly under 8% and that's between voluntary and involuntary turnover and getting engineers it is a macro issue, it is – getting technical people and it is something that we are very active, we're active in college campuses, we're active and I have some kudos to our HR and our recruiting group that is working all of the time.
And the public companies attrition is more in the double-digit, but even high as high as 15%. So although it is a problem it is something that we are aware of and I don’t think it is anything that we can address anytime soon as to down to zero attrition. However, it's a nice problem. It shows that we are growing and we are growing with more work, but getting good people throughout the country, technical people has always been a challenge.
Okay then the last one from me, we have not seen that many M&A deals the last couple of months and years something you got a lot in the pipeline, but is there a point where you've got enough cash generated that maybe if there is no imminent deal you might think about paying down some of your debt?
Well, let me speak to the M&A. As you know we are always active on the M&A front. We have it in our pipeline and as I said many times before we have 10 to 15 opportunities that we're looking at. We're in due diligence on some now. We have some that are in various stages of this due diligence. So we're not backing away from the acquisition front and it's not linear.
We can't say in this quarter we're to do two ad in the second quarter three, and then maybe in the third quarter four or five. It's just when they happen and when we close. But Mike, we are very – still very, very aggressive in acquisitions and we think that we will continue to do that.
And as long as using financing to grow the company we'll continue to do that because we do cash flow and as Mike said you can see that our cash flow is increasing. We feel the better use of funds right now is to use either debt or equity financing to grow the company and so we'll probably continue to be focused on that.
Okay, fair enough, thank you very much, thanks.
And our next question will come from Rob Brown with Lake Street Capital Markets. Please proceed.
Good afternoon.
Hi Rob.
First question is on the power group, you talked about some activity there. Could you just a little color on what's happening in that area and what's driving your organic growth there?
Thank you, Rob. We have seen significant organic growth in the power group and the overall infrastructure group is growing considerably led by the power group. What we like is the stability in the utility market. Utility is tending now, the trend that we're seeing a macro trend is that they are outsourcing a lot of their activity and because of that outsourcing work we as consultants and embedded consultants with many of them we see that growth.
So we have set an organization for the power group nationwide and we want to grow that power group so that it may be its own sustaining vertical, but we see a lot of opportunities and specific opportunities that we see in the LNG or liquefied natural gas we see that and we think the country will be an exporter of natural gas and we see a lot of utility conversions doing that work and we seem to be benefited from that. So that's where our positioning is and we're growing in Texas. We now have five people in Texas we're doing that work where we weren’t before and we continue to grow in traditional power generation, as well as new markets such as LNG.
Okay great, and then to just in terms of your margin trends, sort of where do you see those going, are you sort of fully integrated with the acquisitions you've done over the last couple of years or do you see more room there on the margins side?
Hi, Rob this is Michael Rama. Yes, we see our margin expanding as we've integrated the acquisitions over the past call it 12 months from the acquisition from 2017. We've seen our operating margins go from 6% up to over 8% for this year, year-to-date. For the quarter we were at - we were at - last second quarter last year we were about 8% and now we're at 9% operating margin. So we're seeing the scale. Our direct - our indirect costs have gone down about 2% compared to our gross revenues. So as we're integrating these acquisitions as Dick mentioned, we're seeing the margin expansion reflective in that.
Okay, great and then just kind of stepping back, I think in the past you've talked about long term goals $600 million in revenue, given the organic growth you're having in kind of your acquisition pipeline you see is that still a near term target I guess at this point and is there any room on the upside there?
Yes, Rob. I think you're mentioning the $600 we have stated that and we will be at $600 million in run rate revenue by the end of 2020 and we don't see anything that would discourage us from that projection and hopefully we can exceed that number, but we feel that we're on track and if not ahead of schedule on making that $600 by the year end 2020.
Okay, thank you. I’ll turn it over.
And our next question will come from Jeff Martin with ROTH Capital. Your line is open.
Thanks, hi Dick, hi Michael how are you?
Hi, Jeff, great.
I was wondering if you could get a little more granular a little more detail on the organic growth, I think last quarter projects in the Northeast were a big driver of that, I'm wondering if that was the same or if there were other factors as well?
Well, our organic growth is - we're really seeing in the infrastructure group which makes up about two thirds of our company is where we've see significant organic growth. And that is, we mentioned at the power group, we haven't had the benefit of some delayed projects. We think that the northeast, you'll notice in my narrative comments I said that we were awarded a $60 million contract from the New York City. And we've been now receiving work orders there, that's growing.
We see a real support in the cross-selling that's been helping our infrastructure offices grow. And I must add that I think a lot of it, we're getting great growth from new acquisitions in Asia. The CSA group has grown significantly. Our Energenz group has grown significantly. But the driver has really been in the infrastructure space and we feel it's in the expansion of transportation, it's in our power delivery systems, and in new markets in both the utility and in the infrastructure space. So I would say that the majority of our growth is coming from the infrastructure group and we've been – we haven't seen as high growth in the - in our other pieces of business in the MEP and the design group.
Okay and then to circle back around on the acquisition strategy, $10 million of revenue roughly purchased this year relative to the last couple of years is well below. I'm wondering if you're seeing deal terms that are less favorable, if there are other factors coming into play here, are ther, is there any other detail you can provide us?
Yes, well as I said Jeff, it's not a linear. We look for opportunities that really fit us and the fortunate thing now we can be a little bit more selective and we're looking for a larger opportunity. So I would not discount our ability to do M&A for the balance of this year. We still think we have some great opportunities ahead of us. We're very deep in due diligence in on valuation agreements on deals and so I think that's still going to play a significant part of our growth strategy for the year. And I think earlier, in earlier comments, we had said that we're looking for run rate revenue of about $90 million or so in acquisition growth and I think we can still, we're still looking forward to that.
Okay, that's helpful. I’m wondering, there was a question regarding the availability and how difficult it is to find qualified engineers. I'm wondering if you're seeing wage inflation there, you having to bid higher or pay more for the engineers?
Well, the better thing, yes that is - there is a pressure on wages. As you know Jeff, a significant part of our business is public work, much of that work is on what we call a far audit and that audit allows us certain mark-ups. So if we pay people more on most of our work, we have the ability to charge more because we're on a multiplier of that cost. So we benefit sometimes on the public side and then on and since we are blessed with a good economy, we're a little more selective on the private side. So that pressure right now we're seeing, it has been more in, has been mitigated by the amount of public work that we're doing.
Got it, okay, that's helpful and then quick one for Mike, you had previously guided to 25% effective tax rate, it was about half that in Q2, I assume there was something anomalous to the quarter and 25 still is the right number?
Yes, 25 is the right number that we'd use from a forecasting standpoint. In the quarter we had share, restricted stock invested that we were able to get a tax benefit during the quarter, that impacted the rate for the second quarter.
Got it, okay, great, thanks guys. Nice quarter.
Thank you.
Our next question will come from Christopher Sakai with Singular Research. Please proceed.
Hi, good quarter. My question is on your backlog, it looks like it has increased about $50 million. Just wanted to know what were the biggest verticals that increases backlog?
Our growth and organic growth has also has to be supported by backlog. So we see more - we have seen just in this quarter, we've seen more growth in our infrastructure side of the business and also in our, which is part of the infrastructure side of the business, our CQA or Construction Quality Assurance, we’ve seen significant growth in backlog in those two areas.
Okay, have you seen any impacts from any tariffs?
No we’re asked that question and we and believe me, that’s the first question I asked of our Asia operations, we do about $15 million or so in Hong Kong and Macau. The work that we are doing there is work that and especially in our mechanical, electrical plumbing, engineering design work, that component, the hard assets physical components that make up the building are really sourced in Asia. They are not importing anything that - from the States that would necessarily impact that growth.
We haven’t seen that, we haven't seen that in any of our work on the international airports, also all of that seems to be material, the hard asset materials that are in-sourced in-country. So we haven’t seen any impact there.
On the other side of it is most of our business as you well know is labor, it’s labor generated and so that is something that that we can be more responsive to. We don’t have big inventories of equipment that is subject to tariff holds or increases, it's mostly labor and we work on utilization rates which means that we could be very sensitive and very quick in responding to any downturns and we try to be.
Okay, great. Thanks for your responses and sounds like a great quarter.
Thank you very much.
[Operator Instructions] Our next question will come from Rudy Miller with Miller Investments. Please proceed.
Mr. Wright, a voice from the dark.
Hi Rudy, how are you?
I’m good, first of all hey guys, great quarter. You never let us down. I would vote for you, would you run for President of the United States.
I don't, I'd have to lower my salary.
Well, I'm not going to touch that one, I want to move on.
Yes, everybody knows that.
To get to a serious question Dickerson, just to cover the acquisition area a bit, you said generally you’re running at 10 or 15, people at various stages of the process and certainly your track record of acquisitions, gosh I'd need an hour to talk about all the ones you’ve made in your life. So we know what's going to happen, it’s not - it’s just the timing. But let me ask you kind of a ceiling, what is the largest size of revenue acquisition in your space would you acquire subject of course the deal being right and the pricing and that's part one of the question?
So is there a saying that, would you buy a national-private business that cash flows and profitable as an example and is your revenue limit that you say look, we wouldn’t buy anything over $80 million or $100 million or $50 million or can you give me any just general guidelines or at least discussion on that subject, I'm not trying to corner you down exactly?
Rudy, those are very good questions. So let me say, generally speaking, it isn't so much the size of the acquisition and we feel comfortable with an acquisition doing $100 million, it could be more. We’ve even looked very deep due diligence on significant larger acquisitions than that. The key thing for me and for our team and our acquisition team and our company team, we don't want to do anything that internalizes our organization. We want our people thinking out, thinking outside how to grow.
And so we don't want to do a transformational acquisition that we have people worrying about things that have nothing to do with the business in front of them. For example we don't want to buy a company that has exact footprint, no matter how large they are in general areas where you are. So then we have to worry about well they have three buildings, we have two buildings, they have HR people, we have HR people, they have General Council, we have General Council, they have finance to do this.
So we, so what happens is you get your organization thinking too much internally. When the music stops, am I really going to have a chair to sit on. So we don't want - we want acquisitions like to be very large, if they’re in a strategic area that complements what we're doing. So it's not so much the size, it’s strategically how does that fit without internalizing our organization and you know some of the very large acquisitions Rudy, and you follow this, that have been done, that end up being one in one ends up being one in a third, it doesn’t end up being two.
So we look at how can we scale it? How can we have that synergy without internalizing our people. We want our people thinking of growing the business and not worrying about things that are not focused on the business that that they are doing.
Here's the followup question on that and first one Dick, I think you did make a slip there and says one plus one is two, I know historically you've always said to me that if one plus one on deals only two, if it's not one plus one I hope it's a four or five?
Yes, we never price synergy in a deal. We think if they can't make the money on their own and then if there is synergy great and that we've been blessed with getting that. So yes, I was going to name some national companies that really have gone down that have made big transformational acquisitions but I didn't want to do that.
No, I think that's it. I do have a followup, so let's talk about the industry space because one of the things that you've shown is you've gotten out of core deals and do other related things. And you've even gone into some areas as you talked about a little bit internationally, but as far as the core business and is there a specific area you wouldn't go into the favorable inspection services or engineering by vertical for instance in the industry or not?
I mean is there something, are you open mind to look at a combination of anything as engineering services and inspections?
No, I think we’re good at what we know. We’re not so good at things that we don't know. But I think and I assume you've known us from our first public company where we just had one vertical, I feel that design and infrastructure with each vertical has and that’s what we promote cross-selling. Each vertical we have to have, we have has to be something that is going to be supportive of each of the other verticals and that would be have a synergy within that.
So we will look at any service that compliments what we have or there is a strategic reason for doing that. Now for example, many people would ask why would we buy a property transaction company such as Bock & Clark and it’s so nice with our surveying business, it fits so nice with our environmental business, because going in there we look for that compliment.
But we don't want to get something that has really not too much to do with engineering or just will not complement our existing business for two reasons; one, we want to look for that organic growth within that within our verticals; and two, we want - when we manage these things we want to understand and fully understand how these operations will fit in what we're doing. So that's the only - that would be the only hesitancy we would see. We would take on something if it compliments what we're currently doing.
Well, I think that, defining that a little bit more openly as you did helps me understand better. I certainly knew the general macro, but I think you've landed up so it's a better understanding for the shareholders and then the financial community. And I think that's great, when you've proven that model is working it gives me a little color and sometimes we go ourselves when we say we have a pipeline of 15 deals and yes, you've done this at this size in the past, but I want to make sure that and that now you really expressed even more of those synergies and the other aspects to it. So it's very helpful for me. Other than what about one other question under the Jobs Act if you went public on originally you're getting that close to the timing and the revenue size of the company and any thoughts on getting to that point with…?
Yes, we're way past that now. We have full reporting requirements, but before I say too much I'll let Mike tell the kind of things that we have to do with it now.
Yes, I was looking that transaction, sorry, I meant the transition you announced you're about there. Thank you for that.
Yes, we're exiting out of the Jobs Act out of the fifth year end will - part of the 2018 audit we will include the audit of our internal controls by the external auditors as well as our internal reviews as well. So yes, so we're exiting out of that space and then as a - out of the Jobs Act basically.
Well, I said it wrong, I meant to be, what's the costs associated we see now bumping up and those things, I know you were in the process. I mean as far as size and which you chose to be…
Yes, there is another probably $252 to $0.5 million of cost that's inclusive of that.
So it's not overly material, but it's that was my idea, is it $1 million or $2 million or whatever and you just helped me quantify that. Thanks a lot. That was where I was trying to get at.
It is a good observation.
Thank you, Rudy
At this time this concludes our question and answer session. I would now like to turn the call back over to Mr. Dickerson Wright, Chairman and CEO for closing remarks.
Well thank you. Thank you operator and thank you everyone for listening in. And you heard our voices, you heard us speaking, but it must be obvious and we have to say this that we really have good people. It's our people that are doing this it's our people that is, that are making us grow and it's keeping them in engaged, keeping them with us, keeping them as partners and the opportunity to be shareholders of the company is so important, and so we think this.
If we have very good people we're going to have a very good company. So what I try to do is, what we try to do very simple things. Our support services team that we call shared service focused every single day on how they can support our key people to be really the face of the client, to be really adding value, to be really embedded with the client and all of those administrative things, all of those support things. We exist to keep our best people focused with the client and dealing with the client and we really want to be someone that has adding value.
So we think if we continue to do that and many people heard me say that it's one foot in front of the other. If we continue to support our best people, we continue to motivate our people, we continue to integrate people that join our team to make them feel that they're part of what we're doing, then I think we will have a good company and that's what we try to do. So there is no magic, there’s no secret, it's just having very good people and having an organization that will support them and we think we'll be fine.
So we had a very good quarter. I want to thank everybody and our people for their support. I want to thank our investors for supporting the company, and I want to thank everyone who's listened today. So we'll look forward to speaking to you again in the third quarter and thank you for listening today.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a great day.