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Operator
Good morning. My name is Victoria, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Bowman Consulting Group third quarter 2021 conference call. All lines have been placed on me to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by one on your telephone keypad. If you would like to withdraw your question, press star followed by two. Thank you. Please note that many of the comments made today are considered forward-looking statements under the federal securities laws. As described in the company's filings with the SEC, these statements are subject to numerous risks and uncertainties that could cause future results to differ from those expressed, and the company is not obliged to publicly update or revise these forward-looking statements. In addition, on today's call, the company will discuss certain non-GAAP financial information, such as adjusted EBITDA and net servicing billing. You can find this information together with the reconciliations to the most directly comparable GAAP information, the company's earnings press release and the aid scale filed with the SEC on the company's investor website at investors.bowman.com. Management will deliver prepared remarks after which they will be taking live questions from published research analysts. Throughout the call, attendees on the webcast may post questions for the management to answer on the call in subsequent communications, but there will be no live Q&A from the webcast attendees. Replays of the call will be available on the company's investor website. Mr. Bowman, you may begin your prepared remarks.
Bowman
Gary Bowman Great. Thank you, Victoria. And welcome to the Bowman third quarter 2021 earnings call. I'm Gary Bowman. I'm joined this morning by Bruce Leibovitz, our CFO. We look forward to taking questions at the end of the call. Before we get going, I want to acknowledge all the Bowman employees listening to this call, and especially our veterans. We're a people business, and it's our people who work at Bowman that make us successful. Thanks to everyone for another great quarter. The third quarter was our first full quarter as a public company. During the quarter, we began to execute on our strategic plan for growth, both organic and acquired. We closed on the acquisition of McFarland Dyer Associates early August, and we followed that up with three acquisitions in October after the third quarter ended. We've been very active on the acquisition front with several deals in due diligence under exclusive letter of intent and several more at the indication of interest phase. Our teams have been successful at integrating acquisitions into Bowman. And we welcome all of our new team members, the Bowman family, and look forward to continued success in serving our growing client base. We expect 2022 to be another big year for acquisitions. Bruce is going to give you more information about our M&A program later in the call. A quick note about our markets. You'll note in our earnings release, we've changed the title to our largest reporting market from communities, homes, and buildings to building infrastructure. We make this change because we feel it more accurately reflects the work we perform in the market and is more aligned with how the market is evolving. Please note this is only a market name change. Nothing has been reclassified into other segments. As in prior quarters, building infrastructure has accounted for most of our revenue, representing 71% of gross contract revenue in the third quarter and 64% year-to-date. residential and commercial end markets each accounted for approximately 45 percent of the building infrastructure revenue in the third quarter with municipal and other representing the remaining 10 percent all residential segments were strong with demand for buildable locks and construction readiness continuing to be robust build for rent community developers continue to be a growing part of this business as well Within commercial, mixed-use, industrial, and retail dominated our mix during the quarter, with office a much smaller component. Currently, we include the MEP services within our commercial and industrial business. Data centers are a core part of our commercial portfolio, and this business remains as strong as ever. Based on our revenue so far in the fourth quarter, we expect continued and near-term growth from our building infrastructure market, but we expect it to represent a smaller percentage of our total revenue in 2022 as we expect other markets to grow at a faster pace. Transportation-related revenue fell to 10% of total revenue in the third quarter as large projects in Texas, Virginia, and Florida were completed, and new projects have been slow to be released, approved, and begin. Transportation represents 19% of our revenue year-to-date. We have solid backlog in transportation with over $12 million of net backlog on one project alone. Since the close of the quarter, we've been awarded several new transportation assignments from clients including the City of Chicago, Corovial, Cook County, and Florida Department of Transportation. We believe the recently passed infrastructure bill, along with the acquisitions we have in our pipeline, will increase the concentration of transportation revenue as a percentage of our total revenue in 2022 and beyond. Power and utilities represented 16 percent of revenue, both in the third quarter and year-to-date. Increased revenue over the last year was primarily attributable to utility undergrounding in Florida, gas pipeline replacement in the upper Midwest, and utility infrastructure work in the Austin, Texas area. We believe the power and utilities market has a bright future for us. Our contract for gas pipeline replacement engineering in Chicago has been renewed, and we've started working on a large multi-year cellular expansion project in Virginia. As with transportation, we believe this market will be positively impacted by the recently passed infrastructure bill, as well as the ever-increasing need for utilities to bolster their capital spending on strengthening their infrastructure. Emerging markets includes water resources, mining, renewable energy, and energy transition. Most of our emerging market revenue currently comes from mining clients. As mining returns to pre-pandemic levels of production, we expect revenue related to copper mining to continue to grow. Water resources continues to be an area of investment for us as we expect demand for services relating to water scarcities and water management to outpace other natural resource markets. We were recently awarded two projects relating to implementation of new large-scale water systems. Renewable energy and energy transition are segments in the market in which we are aggressively investing in resources. The recent addition of Solly Van Meter is a prime example of how we are committed to building our depth in the renewable and clean energy markets. We're excited to offer Solly's expertise to clients who are planning the development of solar energy generation sites. As everyone knows by now, Congress passed the $1.2 trillion infrastructure bill last Friday with $550 billion of new investment pledged to U.S. infrastructure. This is a significant piece of legislation for our industry, and we believe it will have a positive impact on Bowman for the foreseeable future, both in direct spending and the multiplier effect the bill will have on the overall U.S. economy. It's a bit early to know exactly how it will impact us and what projects will materialize. I'm confident we're positioned to benefit from the bill and will continue to update the market on its direct impact on our business and future earnings calls. In August, we closed on McFarland Dyer Associates, and in October, we closed on three additional acquisitions, Triangle Site Design in Raleigh, PCD Engineering in Denver, and BTM Engineering in Louisville. These acquisitions add both geographic and service offering diversification. We talked about McFarland Dyer on our last call. I'm pleased to report that the integration has been very successful, and we are already experiencing revenue synergies. PCD expands our presence in MEP services and strengthens our building ventilation and mechanical acoustics capabilities. Triangle adds depth to our Carolina's presence, and their team is already working closely with other regional offices to increase revenue for everyone. BTM expands our reach into Louisville that structural and cell tower infrastructure capabilities, among others, that we can extend nationally. As I mentioned, we're extremely active on the acquisition front. We currently have multiple opportunities in the pipeline. The firm's reevaluating cover water resources, transportation, oil and gas, MEP services, ports infrastructure, and traditional land planning. I have a high degree of confidence that we will continue to deliver on our commitment to deploy capital in an efficient manner to achieve growth over time. With that, I'm turning the call over to Bruce, who will elaborate on our financial results and on our M&A activities.
Gary Bowman Great
Bruce? Great. Thanks, Gary. Good morning, everybody. This is another great quarter for us. With the IPO closed in the second quarter, we put the transactional distractions and the transitional accounting work behind us and focused on deploying capital we raised and replenishing working capital through cash flow from operations. Adjusted EBITDA for the third quarter was $4.4 million, bringing the total for the nine months year to date to $12.7 million. These results, combined with our current backlog and the anticipated contributions from recently closed acquisitions, puts us on pace to exceed the high end of our previously issued guidance range. In the third quarter, we delivered record gross revenue of $40 million with $36 million in net service billing. This represents a 25% increase in gross revenues over last year, a 90% net to gross ratio, and a 40% increase in net service billing year over year. Year to date, gross revenue is 108 million with 97 million of net service billing. This represents a 17% increase in gross revenue over last year, a 90% net to gross ratio, and a 26% increase in net service billing. Historically, we've run a lower net to gross ratio. As we reduce the concentration of building infrastructure revenue within our mix, we do expect the ratio to return to a normalized level in the mid to high 80s. Gross margin net for the quarter was 56.6, an increase of 7.9 percentage points as compared to 48.7 last year as we came out of COVID. Year-to-date, gross margin net was 55.8%, an increase of 3.4 percentage points as compared to 52.4 last year. Gross margin net is a non-GAAP measure, which is defined as gross revenue less contract costs divided by net service billing. Gross margin net is relatively consistent across our markets and services, but not generally affected by our revenue mix. What affects gross margin is our ability to maximize utilization and realize multipliers. As a result, we continue to invest in work share platforms, automated geomatics technologies, high resolution imaging equipment, and similar to enhance these metrics. For the third quarter, selling general administrative expenses increased by $4 million to $18.4 million, or 51.4% of net service billing, as compared to $14.4 million, or 56.9% of net service billing last year. Year-to-date SG&A increased by $9.7 million to $48.3 million, or 49.8% of net service billing, as compared to $38.6 million or 49.9% of net service billing in the year-ago period. Eliminating one-time IPO expenses would reduce our year-to-date SG&A as a percentage of net revenue by 1.6 percentage points to 48. As we continue to build scale, we expect to decrease the rate of SG&A growth, benefiting adjusted EBITDA margin net, which was 12.4% for the quarter and 13.1% for the year-to-date. This anticipated SG&A leverage is expected to contribute to increasing adjusted EBITDA margins over the next few years. Our cash position at quarter end was $38.7 million. Cash flow from operations year-to-date was $3.2 million, which includes one-time expenses associated with our IPO. Last year, our cash flow benefited from our cash basis tax status and certain provisions of the CARES Act, which deferred operating cash flow obligations into this year and next. Today, we're utilizing cash to expand our labor base and grow operations. We continue to have a zero balance on our $17 million line with Bank of America. As we achieve increased scale, we believe operating cash flow as a percentage of adjusted EBITDA will normalize relative to some of our peers. Since the end of the quarter, we've closed on three acquisitions, representing approximately $7.5 million of annual revenue and $1.1 million of annualized EBITDA. Total purchase price for these acquisitions was roughly $5 million, with total contingent consideration for an additional half a million dollars if certain incremental EBITDA targets are met. Base purchase multiple for these acquisitions was just under five times. These three acquisitions were not included in our previously issued guidance, Here to date, including all recent acquisitions, we've acquired approximately $19.5 million of annualized revenue, representing an estimated $2.7 million of annualized EBITDA for approximately $13.1 million, an additional $1.2 million of contingent consideration. This represents a base purchase multiple across all acquisitions of around 5X. Every acquisition is unique, and we determine an appropriate multiple based on the facts and circumstance of each opportunity. Nothing about past multiples should suggest what we'll pay for future acquisitions. We continue to pursue acquisitions as part of our strategic growth initiative. We're currently assessing multiple acquisition opportunities at varying stages of due diligence. These acquisition opportunities range in size, timing of closing, and valuation, with some potentially closing this year and others potentially closing in early 2022. Based on our current mix of cash, equity, and debt, we believe our current capital availability would be sufficient to close these acquisitions. There could be no assurance that any of these acquisitions will close, and we don't elaborate any further on potential transactions or include them in our guidance until they're closed. Backlog as of September 30 was $139 million, an increase of almost $16 million from June 30th and $26 million from year-end last year. This represents a 12.8 and 23.3% increase in backlog, respectively. Backlog at September 30th was comprised of 53% from building infrastructure, 21% from transportation, 22% from power and utilities, and the remaining 4% from emerging markets. Awards in the fourth quarter have remained strong, and backlog continues to grow. We remind everyone that backlog is a good indicator of the health of the business, but not necessarily a forward indicator of how revenue will be recognized in the future. As of November 6, restrictions and lockup agreements on all of our common stock have expired, although certain stock held by named executive officers remain subject to affiliate restrictions. In accordance with our insider trading policy, which can be found on our website, Stock held directly or beneficially by NEOs may only be sold pursuant to registered 10b-5-1 programs created during open trading windows. Transfers which are not for value, such as those related to estate planning, are not restricted by the insider trading policy. Currently, we expect there will be an open window for insiders from November 16th through December 1st. Lastly, I'll talk about guidance. As a result of the three acquisitions closed in October and with our present visibility into the fourth quarter, we're increasing our 2021 outlook for net service billing to be a range from $130 to $133 million and adjusted EBITDA to be approximately $16.5 million. We're also introducing 2022 outlook of net service billing of $150 to $170 million and adjusted EBITDA of $20 to $24 million. Again, as is our policy, our guidance only contemplates acquisitions closed as of the date guidance is issued or updated. We'll update guidance quarterly in connection with scheduled earnings releases going forward. Thanks again for participating, and reiterate with Gary, thanks to all of our employees, thanks to our veterans out there. And I'll now turn the call back over to Gary for concluding remarks.
Bowman
Thank you, Bruce. It's exciting times at Bowman. I could not be more pleased with the results that we've posted here for the third quarter. Our teams across the country are hard at work identifying ways to position Bowman to benefit from the recent infrastructure bill. We recognize the impact will not be immediate, but we're confident that our efforts are going to be successful over time. Thanks again to everyone who works every day to make us successful. I'll now turn the call back to the operator for questions.
Operator
Great. Thank you. At this time, I would like to remind everyone, in order to ask a question, please press star, fold by one your telephone keypads. We'll pause for just a moment to compile the Q&A roster. And our first question comes from Brent Tillman from DA Davidson. Please go ahead.
Brent Tillman
Hey.
Gary Bowman Great
Thank you. Good morning.
Bowman
Great quarter.
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