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PowerSecure International, Inc. (NYSE:POWR)

Q1 2014 Results Earnings Conference Call

May 07, 2014 05:30 PM ET

Executives

John Bluth - SVP IR and Corporate Communications

Sidney Hinton - Chief Executive Officer

Chris Hutter - Chief Financial Officer

Analysts

Rob Brown - Lake Street Capital Markets

Philip Shen - Roth Capital

William Bremer - Maxim Group

Eric Stine - Craig-Hallum

Operator

Good day, ladies and gentlemen and welcome to the First Quarter 2014 PowerSecure International, Inc. Earnings Call. My name is Sara and I'll be your operator for today. At this time all participants are in listen-only mode and later, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I’d now like to turn the conference over to your host for today, Mr. John Bluth, Senior Vice President of Investor Relations and Corporate Communications. Please proceed.

John Bluth

Thank you Sara and thank you very much for joining us today for our first quarter 2014 earnings call. Joining me on the call from the PowerSecure management team are Sidney Hinton, our Chief Executive Officer and Chris Hutter, our Chief Financial Officer.

Before we begin, I want to remind you that during the course of the discussion today, we expect to make forward-looking statements under the Safe Harbor provisions of the federal securities laws. These are all statements other than historical facts, including statements concerning the future business, financial results and outlook of the company.

Forward-looking statements are based on the current expectations, assumptions and beliefs of management but are not guarantees of future performance or events and they are subject to risks, uncertainties and other factors, including those discussed in the Company's SEC filings, as well as on the call today and in the earnings release, which could cause actual results to differ materially from those projected or implied in our outlook or other forward-looking statements. Any such forward-looking statements speak only as of the date made and the company assumes no duty to update any forward-looking statements and does not intent to do so except as it otherwise expressly states.

Now, I would like to turn the call over to Sidney, who will provide a business overview. Then Chris will walk you through our financial results discuss our outlook for the remainder of 2014 and I will take you on our strategic planning process and then we’ll open the call to Q&A

Sidney Hinton

Thank you, John. Before I speak to the investors who make up the majority of our listeners today, I do want to thank those customers and utilities who have dialed-in we appreciate the opportunity to serve you and believing that we work hard everybody to earn your trust and earn your respect and we appreciate the opportunity to that. With that the rest of the calls when we direct to our investors.

As you will guess we have prepared remarks in almost, and I will go to those in just a second but I want to speak to investors, I will look at the list of people who dialed in, I know almost all of you personally and we have appreciate the confidence you placed in us and I believe comments are relatively unprepared, but I want to speak to you first before I go into explaining where we are at.

First we have been through tough times before, we have overcome all of them. Second we hate absolutely hate that we have disappointed you, we have disappointed ourselves, but please understand we are not defeated and we are not giving up. We have made hard decisions to tune the business up. It’s easier to tune it up, the car than it is to build a car from scratch. By God’s wish and grace we are the people that built it, we understand the business, we are focused like crazy on getting it tuned up, so it will go further and faster than it would have before. We built the company, we understand the company we know that is a present situation as not acceptable. I’m focused, our team is focused, on fixing it and moving forward, we own it.

We are tuned up, we’ll be successful. A 20,000 foot we are going to spend 45 (inaudible) as long as you want, but a 20,000 foot perspective over was changed so dramatically since the last few, two things, we had as you know as investors will really announced $23 million in new business since the last quarterly report that same period last year, we announced $60 million in new business that definitely calls us to pause. We also look at the velocity of closing on our biggest opportunities in DG and decided to be slightly more conservative in our estimates (inaudible) we close.

Normally with those two things that slowing of sales and particularly a little caution, if it was are just a little caution into DG, we were to try to hit the accelerator and power our way through the situation with extra growth, you’ve seen us do it with extra growth in the utility services. As still deliver the earnings per share that The Street and you as investors had expected.

Our assessment when we look at the lack of sales that we were announced during, since the last quarter, and when we assess the velocity that we're closing in DG, our assessment was the hitting the accelerator on the utility service sales, we need to stick to our game plan which we stated in the last call, which was to slow our growth there and make sure that we had it tuned up for profitability.

Those decisions for what it changed our outlook for the balance of the year. We believe they are the right decisions and we believe that we will be a much better company as a result of it with a much strong foundation. At the end of the day, you are all investing, we are investing, we are owners. We are doing that for the future earnings stream. We believe it provides a better view of that as we look out in 2015 and beyond. With that the balance of the comments will be targeted toward 2014 Q1 we're trying to explain what's occurring here and then we'll give you more details around the outlook for 2014.

PowerSecure system is an outstanding foundation for long-term success. We have a highly differentiated distributed generation business that is well positioned for years of growth with large data centers, hospital opportunities. We've transformed our energy efficiency business into a great -- a business with very great growth potential and strong margin growth. And we've built a robust homegrown no acquisitions, utility services and utility infrastructure division that creates exciting cross-selling opportunity for us.

Before I (inaudible) further talking about the strengths of the DG business and the strengths of the energy efficiency which I will point out from a margin standpoint you'll here in the call from a margin standpoint use investors, we have in sales or often DG, our gross margins were strong. I'd say that normally they wouldn’t go that way; you have some fixed costs you can allocate. We have healthy gross margins in DG, we have very healthy gross margins in energy efficiency, we have very healthy gross margins in utility engineering business, we have one division that has had difficult gross margins and we'll talked about that utility services. But don't look at roughly 21% gross margins and think it's systemic across the company, it’s one area that we're focused like crazy and we’re getting it tuned up.

With that, let me talk about that area of our business. Revenue; we're very disappointed with overall first quarter revenues and the degree to which our utility infrastructure revenues shortfalls and operating inefficiencies negatively impacted gross margins stand our bottom-line. Our strategic priority and utility infrastructure is to increase its long-term profitability. But we missed time the shift and resources from less profitable customers to more profitable customers, as revenues from the new customers did not materialize fast enough to sustain the margins that we were hoping to achieve.

As you can see in the outlook we provided for the remainder of 2014, we expect these inefficiencies combined with the revenue lumpiness associated with the larger DG projects we're pursuing, they will have a significant impact on the remaining quarters, quarterly and financial results in 2014.

While there is painful force in the near term 2014, as I stated early in the opening, we believe these actions will allow us to improve the efficiency of the utility and services business and set ourselves with a far stronger foundation for overall company growth that we anticipate in 2015 and beyond.

We feel good about the future, but we've been working relentlessly over the past few weeks to understand how the business dynamics that impacted our first quarter results and 2014 expectations could jump up and bite us so hard and so quickly following the record fourth quarter and record full year 2013 results that we were just describing back in March a couple of months ago.

As I stated, this is a business that we’ve built organically, from scratch. We have an excellent understanding of the our challenges that we need to attack primarily around the utilization efficiency in our fleet and in our staffing and by fleet I mean -- and so forth and the staffing in that business. We're committed to addressing those issues and getting them fixed.

Since, we started that business, we've been careful to scale our crews and our equipment, our fleet as we have won the work. Historically, we've done an excellent job of managing that growth with excellent utilization rates.

As we move through 2013 we and you, as well as investors could see that the pace of the growth was accelerating, but we also saw that the gross margins, the utilization was a significant issue. And we made a conscious decision late in the year to try to slow that growth down and fix these gross margins. Again, we missed time there which resulted in this first quarter results.

The rapid growth that we had introduced some inefficiencies some new inefficiencies into the business. Again, we remember the situation in the third quarter when we held all the crews associated with a large award that we had won and gross margins dipped, it dipped around 7% if I recall during that -- for that particular division.

In the fourth quarter that same customer those crews were in position and able to do new work that was $7.5 million of work with that customer. And accordingly we had higher utilization rates and higher gross margins across utility services.

As you’ll hear later in the call, the revenues from that customer did not materialize in the first quarter as we had anticipated. With the benefit of (inaudible) as we talked earlier we want to slowdown the growth of it, fix the operating efficiencies in the business to make sure we have the measures in place with benefit of (inaudible) we probably should have pulled that lever one or two quarters earlier.

We made the decisions to slowdown and pull crews out of one’s particular customer and reposition them. Where we reposition them the work did not materialize unfortunately. To a large extent, that’s associated with an opportunity with the new customer. And we are just more familiar with the rhythm at which they assign work. We thought would work as we have been in the cycle, we now have a better feel for that. And as Chris will talk either in his prepared remarks during the Q&A as to what we are anticipating from that account going forward.

So where are we at? That’s where we’re at with utility service. Growth is accelerated, we’re a couple of quarters late, slowing things down, the inefficiency associated with the growth is hard, this is very hard this quarter.

Our management team has a strong track record of delivering against expectations and I assure you. We are very disappointed to have failed you; we are very disappointed to have failed ourselves. Again, we’ve built the company from the ground up, the problem is clear and it is [discreet]. We are focused intently on facing it and we will get it done.

Over the history of the company, we have an outstanding track record of delivering and adjusting challenges. Many of you looking at list have been investors for years. You’ll remember when we completed a large batch of our initial work with publics back in 2008, we needed a final ways to replace that revenue and growth and you saw us do just that by investing in innovation right in the tip of the recession of ‘09 to build our own power block solution and to expand our company owned business model, both of which allowed us to open up the new possibilities that we’re harvesting now in the hospital and data center markets.

In energy efficiency just one year ago we had a challenged business that wasn’t growing and wasn’t innovating and was hamstrung with unsustainable cost structure. Today it’s been transformed and positioned to deliver strong growth with new products and strong profitability.

This experience and the tremendous strength of our DG and energy efficiency businesses have us very excited about our future along with incredible team we have in utility services and utility infrastructure.

When we look at our DG business, while we are anticipating slightly less sales this year, we’ve never had a higher quality of pipeline. The opportunities that we are chasing are big, they are game changing opportunities. In the forecast that we included in the press release today, we have not assumed that we win those and recognize revenue this year. We are hopeful that and we are aware and going to backlog much as when we announced in 2005, I believe it was November 21, 2005 when we announced the first batch of public work, was transformational, as our same goal here to be transformational with the work we're chasing. Unfortunately, we have adjusted down the revenues for 2014 just billing it our responsibility to guide U.S. investors on what our current thinking is.

We talk every quarter about how the timing of projects can be fluid and it’s very true, completely true, on these large DG projects.

As we noted last quarter, the average size of our individual distributor generation project increased in 2013 by 28%. The key for us in our distributor generation business is to convert these huge pipeline opportunities in the contracted sales which appear in our backlog and produce near term revenues.

We definitely are finding this as we pursue these larger projects, the timeline for conversion is longer than what we had experienced on the smaller projects. We are more accustomed to chasing, winning and forecasting.

For our turnkey projects, lots of projects in the backlog, it simply takes one to three quarters for us to recognize it in revenue. That longer sale cycle is a contributing factor to the lower guidance as I stated when we opened.

We have several opportunities that we're actively chasing with large data centers and large hospital organizations; they would be game changers for us if we’re blessed to win them.

To support our growth in 2015, we have to grow our backlog in the second half of this year as we convert those pipeline opportunities in to new win. We're not confused about this as a priority, it is an absolutely a priority.

It’s a transition that we've been through before in DG and as we look over the breadth of the pipeline we have today, we feel it's actually the most exciting time we have ever had in the DG business in terms of the quality and size of the pipeline of the opportunities that we have in front us. We simply have to convert it into backlog.

Another potential game changer for us and DG is the opportunity to accelerate the pace of the high margin recurring revenue projects from the company owned DG systems. We told your last quarter that we expected to deploy $10 million of our capital towards company owned DG systems in 2014.

Please note that's a double of what we deployed in 2013. And I can tell you we're off to an excellent toward that in Q1.

Our strategic priorities in 2014 like accelerating the pace of company owned DG are targeted at increasing our profitability. Another of these priorities is the transition of our LED manufacturing process, which we believe will significantly reduce our COGS in our LED business. We're very pleased to report that we made a substantial progress on this transition and expect to be substantially completed with the transition at the end of Q2.

As we move towards the end of the second quarter, we're starting to see orders being filled at higher gross margins resulting from this transition and manufacturing. We have consolidated the leadership on our lighting business under the Solais leadership team and we are seeing exceptional results.

Our ESCO team is also positioned for a year of growth in 2014. We believe they have the opportunity to pull our DG and LED solutions through with their ESCO customers, which will lift the margins in ESCO and add new customer channel for us in our DG business. We made this acquisition just over a year ago and it's exceeded our expectations by just about every measure. Between this acquisition and the Solais acquisition, it's been a transforming 12 months in the energy efficiency business.

Overall, PowerSecure is in great position for long-term success. Our DG solution provides the highest reliability in industry as measured by outside parties and has been actively evaluated by some of the giants in cloud computing in the financial data space.

Our energy efficiency business has been transformed and we've gained a painful, but necessary understanding of how we need to improve the efficiency and utilization in our utility services, to prepare ourselves for the growth all ahead of us in 2015 in utility services and in the other divisions.

As you look to measure our success from this point forward. I direct you several indicators of our progress going forward. And I'm not saying progress today, these are benchmarks growing out there, what are the things you can look for to see, if we're being successful or not as owners in the company.

One, we need to achieve the revised gross margin metrics that are in our newly-issued guidance. It will be a strong indication that we're having success in improving the efficiency, utilization/profitability in our utility infrastructure business. Our backlog needs to build in the second half of the year to support the strong revenue growth that we’re anticipating in 2015. By the second half of the year you should also see gross margins begin to lift as we capture the full impact of the LED manufacturing transition.

In our DG business we’ve told you we want to accelerate the pace of company-owned projects that deliver higher margin recurring revenues. We had a strong first quarter in this area and you’ll be able to track our progress through the year. And in our ESCO business we’ve stated that we want to start pulling our DG and LED solutions through that channel to our ESCO customers.

Like our traditional DG pipeline we see these opportunities in the pipeline but we need to convert them into backlog signed contracts. That’s offer for you to watch for our progress like that are on that. We’re anticipating progress on every one of these measures. We’re anticipating being here a year from now with a healthy vibrant company.

Clearly we have work to do in 2014 to regain your confidence and deliver on your long-term expectations for us. We take this responsibility very seriously. And we have the experience in the track record of success in building a business and building at better business through challenging periods. We’re very excited about what the future holds for PowerSecure and we’re very focused on addressing situations we’ve faced today. We appreciate you as investors and we’re focused on serving you.

With that I’ll turn it over to Chris.

Chris Hutter

Great, thank you Sidney. I am going to focus my comments in several areas today. I am going to discuss the details of the P&L including trends in our revenue, our gross margin and our operating expenses. I will also discuss our newly issued guidance and breakdown our backlog as I usually so you get a feel for our revenues and margins are likely to be realized in the upcoming quarters, and I will review our key balance sheet metrics our cash, our debt and our CapEx. Finally I will just give an update of where we are in our overall strategic planning process as we come through 2014.

Also one overall comment before I get into it is that we are and will continue to provide more on our gross margins by product area to help everyone understand more clearly the dynamics impacting this quarter and measure our success in improving our profitability as we move forward.

We are providing specific financial guidance as well for the first time because number one, we owe you that and number two so you can measure us against it as we move forward. So with that I will move into some specifics. While we saw revenue growth of 17% in the first quarter because of the efficiencies in our utility services and our protracted sales cycle times of our larger DG projects, this level of revenues did not provide enough scale to support our margins in the quarter.

Our two largest business areas DG and utility infrastructure are lumpy businesses. And in the first quarter we just did not have enough DG revenue to make up for the inefficiencies in our utility infrastructure business, which lead to what are obviously very disappointing results for us.

Considering the 66.8% revenue growth we had in 2013, we will have significantly more difficult prior year revenue comp to work against as we move through the remainder of this year of 2014. We saw total revenue for the first quarter $52.8 million, as Sidney mentioned that compared to $45 million last year, which is really our only quarter of easy 2013 comps.

In terms of our revenue performance by product and service area for the first quarter, we provided our revenue chart that we always do in earnings release which breaks out revenue and year-over-year growth there. And we saw substantial energy efficiency, revenue growth of 104% which is driven largely by the additional acquired revenue from our Solais and ESCO acquisitions.

We saw utility infrastructure growth of 35.2%, which reflects our efforts again to slow our growth at a lesser pace than we recently had to slow our growth and focus on profitability within utility services and our DG revenues declined 16.5% year-over-year as our team has been focused on pursuing larger projects, which are a bit lumpier. And we have also increased our focus on increasing the velocity of our company on DG projects generated less immediate revenue, but provides significantly higher margin over the long-term, under long-term recurring revenue contracts.

As we described, our inefficiencies and utility services amplified by lower than anticipated revenues in that group and the year-over-year revenue decline in DG drove a gap EPS loss of $0.19, which was a loss of $0.17 on an adjusted basis excluding the restructuring charge in our LED business.

You will recall that in our fourth quarter we took the majority of this charge to restructure LED lighting operations including sourcing our products directly from Asia, a project we took to lower our cost of sales and overhead and position our LED product lines for enhanced future growth and profitability. The remainder of the charge, which we took in the first quarter with $700,000 right in line with the expectation we communicated to you last quarter.

From an accounting standpoint, just note that $300,000 of this first quarter charge relates to the inventory that was recorded our first quarter 2014 cost of sales above the line and $400,000 relates to severance facilities and equipment charges that was recorded as a restructuring charge in our operating expense.

As of the end of the first quarter of 2014, these restructuring activities were virtually complete. From an accounting standpoint and we expect to be seeing positive gross margin impact from this manufacturing transition in the second half of 2014.

Okay. Moving down the P&L, our GAAP gross margin for the first quarter of 2014 was 20.9%. This compares to 30.6 percentage points in the first quarter of 2013. On a non-GAAP basis which excludes the inventory-related portions of the first quarter restructuring charge, our gross margin as a percentage of revenue was 21.5%.

This year-over-year gross margin decrease was primarily driven by the inefficiencies we've described in utility services as we took actions the shift resources including the equipment and people away from certain lower profit assignments. Our intent was to deploy these resources towards customer opportunity to increase our long-term profitability.

However, we were not successful in redeploying all of the assets, the new assignments in a timely manner as a result of lower than expected revenues from certain customers. These productivity losses caused us to incur higher levels of personnel and equipment cost in our cost of goods sold as a percentage of our revenues, driving the gross margin on our utility services revenue to 5.9% in the first quarter of 2014. Overall utility infrastructure revenue gross margins are 9.9% that includes the consulting fees of that.

This compares to 25.6% for the entire utility infrastructure revenue growth in the first quarter 2013 and an average quarterly gross margin of 19.5% for utility infrastructure for the full year 2013. So, you can see that really was just a dramatic drop off there.

In the past few weeks, we've been digging in, looking very specifically at both our fleet and crew utilization rates, both of which jumped to uncomfortable levels in the first quarter and highlight the inefficiencies that we have to correct. In the first quarter, our fleet expense cost, I'll just give you couple of data points, our fleet expense cost increased 10 points as a percentage of revenue compared to recent run rates.

We saw similar levels of inefficiency with our current utilization as our direct labor cost as a percentage of revenues declined climbed seven percentage points compared to recent run rates. These are obviously very substantial increases, especially in a business that generate a $112 million of revenues last year just in terms of the scale of our operations now is obviously much bigger than it has been in the past.

What we're doing about it? While we basically deployed a swap team, a finance and operations leaders into the utility services business to specific assignment is to partner with our strong UI team to correct these inefficiencies as we move our people and equipment from lower margin to higher margin opportunities.

As Sidney said, this is a business our team built with their bare hands and we’re very confident in our ability, in our team’s ability to make the necessary changes to strengthen our utility infrastructure platform for the long-term.

All right, so that kind of takes us down to gross margin those are the headlines. I’ll hit our operating expenses then I’ll run through the backlog and our outlook. Our company-wide operating expenses in the first quarter were $17.2 million that excludes the restructuring charge of $400,000, 17.6 all-in. This represents an absolute year-over-year increase of $4.6 million and the $4.6 million increase in operating expense is consisted $2.8 million of incremental operating cost related to the acquisition of our ESCO Solais and Encari businesses, finally the year-over-year utilization of those acquisitions and $300,000 of incremental depreciation and amortization expense, as well as $1.5 million increased op expense just related to the broad growth in our business.

Let’s kind of moving down the P&L, GAAP EPS I mentioned loss of $0.19 compared to income of $0.04 in a year ago first quarter excluding the charge non-GAAP was a loss, EPS was a loss of $0.17 again also compared to $0.04 a year ago.

Now let me turn to our revenue backlog and then I’ll look into our overall outlook. As of today, our backlog stands at $225 million. This compares to $248 million at the time of our last earnings release in March and $206 million a year ago. Sidney described some of the dynamics we are seeing in our backlog. And while there is a year-over-year increase in our backlog, it demonstrates forward progress; it’s down on a sequential basis as the sales cycle in DG has lengthened with the larger projects we are pursuing in our pipeline. Our backlog has historically been a very good predictor of future revenues. Last year between the time of our fourth quarter earnings call in March and our first quarter earnings call in May, we added $60 million in new business to our revenue backlog which supported our year of record revenues last year.

And just to put that in context. So, between last year, between the two releases, the fourth quarter and the first quarter release, we added $60 million to our backlog; this year we added $23 million. And that’s sort of a key factor in the revenue outlook that we provided for the remainder of the year. Obviously, if we were going to grow our revenues, we needed to grow that backlog and just in that interim period, we needed to add more revenues year-over-year than we have.

As Sidney noted, conversion of projects from pipeline to backlog in the second half of the year will be obviously a key signal for our 2015 revenues.

Now, I’m going to give you the additional analytics on our backlog that I usually do. But again, given the state of the business, we are providing very specific guidance that of course incorporates what I’m about to tell you and also builds in revenues we expect to realize from our pipeline i.e. the backlog conversion for the rest of 2014.

Again, we wanted to provide enhanced visibility so you could see exactly what our expectations for the business are for the next several quarters.

As we described in earnings release, we break down our backlog into three categories, we’ve got a near term backlog for project based work; we’ve got our longer term project base work that we recognize -- anticipate will be recognized fairly evenly really from the first quarter of 2015 through 2016; and then we’ve got long term recurring revenues that we expect to recognize over the next 7 to 10 years.

If you look at our backlog number of 225 million, 112 million of that is near term backlog. That’s what drives to your near term estimates. Specifically we are estimating that 42.5% of this near term backlog will be recognized in the second quarter, 40% will be recognized in the third quarter and 17.5% will be recognized in the fourth quarter.

Of course, projects can and do move in both directions and this is -- we’re seeing it right now. But it’s proven to be a pretty good proxy for our revenues to come in over time.

The next component, the longer term backlog currently stands at 38 million and the last component is our long term credit recurring revenues and that number stands at 75 million and that should total 225.

So let me -- I do this every quarter, I’m going to do it again, but the truth is we're going to talk about specific items and so this kind of underlies specific guidance, but I didn’t want to eliminate it from call for the analysts as a practice for years using this method, but the simple method is to look to try to figure out what our near term revenues are going to look like. If you take our near term project made backlog of our 112 million, you spread it according to percentages as I just laid out, 42.5% in Q2; 40% in 3Q; 17.5% in 4Q. We add 6 million bucks to that and then you may layer an assumption about additional project sales, you expect we'll make and complete between now and the period you're estimating.

Now let me turn to our specific outlook for 2014. This is the first time, we provided an outlook by quarter on revenues and we also added gross margin and EPS to bring visibility all the way to the bottom-line. We can’t promise that we'll provide an outlook in this format for periods beyond 2014 frankly, we feel like what we've done for I guess 6 or 7 years, 6.5 years has worked pretty darn well, but given the [state applied] we saw that it's important to make our internal expectations for the business known in a more concrete sense. So we're providing you with additional visibility for the remainder of the year.

We anticipate our revenues to ramp throughout the year, with our anticipated Q2 revenues in the range of 55 million to 60 million; Q3 revenues in the range of 62 million to 67 million; and Q4 revenues in the range of 67 million to 72 million. We anticipate a similar progression with gross margins. We currently expect gross margins in Q2 to be in the range of 21 to 23 percentage points; 22 to 24 percentage points in Q3; and 25 to 26 percentage points in Q4.

We expect GAAP EPS to range between a loss of $0.15 and a loss of $0.09 in Q2; and for Q3, we expect the range to be a loss of $0.10 to $0.03; and in Q4 we expect will be somewhere between breakeven and income of $0.05 to EPS. This outlook reflects a pull back as Sidney mentioned on our revenue assumptions for both utility infrastructure and DG, as we retool our UI business and deal with the full tracking sales cycle in DG. It also reflects us improving the productivity of our UI business as we work through the year.

One additional point about this guidance is that we are not -- we did not provide specific operating cost guidance, the reason being that as we move through the coming months, if we determine that our fixes plans are going to take longer than we think, I want to be clear, we will take actions to address our overall cost structure.

So, we decided to hold back on operating cost guidance, obviously it's implied, but the truth is that it’s depending on the timing of our fixed operations, if we think they are going to be protracted as well, and we've got a bigger challenge on hands than we think, then we're going to take some cost out. And that's that.

So, also as we've discussed we're in the process of updating our long-term strategic plan. Our goal is to share this with you on our earnings call in August. And while it's not yet completed our work on it, we do expect to provide you with top-line, bottom-line and profitability metrics, which will communicate our strategic view of how the business should grow and evolve from 2015 and beyond.

Our previous strategic plan was launched in 2010 and it covers the five year period ending in 2015, which is projected a 26% compound growth rate, which even frankly in order step back for 2014, we're still on target to achieve.

Now turning to our balance sheet; our cash balance at the end of the first quarter is $38.2 million. We expect cash to stay in the 30 plus range throughout 2014. In the quarter, we invested $1.5 million in CapEx, but half of that invested to deploy systems to support company-owned DG projects and about half to purchase additional equipment. We continue to anticipate the CapEx in the $10 million for 2014 and frankly with opportunities to grow that number with some of the opportunities we’ve got in our company owned DG pipeline. We’ve got $26 million of low cost term debt at 3.73%, that includes our capital leases by the way and nothing drawn on our $20 million credit facility so there is plenty of flexibility to push the business forward with our balance sheet.

And I just want to add here that sort of sums up my financial comments that we’re disappointed but we are not depleted. The truth is our team has faced more significant challenges than this over its history and is demonstrated incredible determination and successfully meeting with challenges that have confronted them as the business has grown. I mean it’s not easy to grow a business as we have tripled it over the last several years. Because of this and because of the strong foundation we have we’re very confident that we’ll come out on the other side of this, a better company poised to capitalize on our full revenue and profit potential.

And with that we’d be happy to take your questions. Operator, please start the Q&A session.

Question-and-Answer Session

Operator

Great. (Operator Instructions). Our first question comes from Rob Brown from Lake Street Capital Markets. Please proceed.

Rob Brown - Lake Street Capital Markets

Good afternoon.

Sidney Hinton

Hey, Rob.

Rob Brown - Lake Street Capital Markets

Just wanted to go in a little bit more on the utility infrastructure margins, and just one of your thoughts on, is that business what’s this long term sustainability in that businesses margin structure? And you’ve had good margins in the past where goes that get back to ultimately? And is that a business you want to be in given that margin structure?

Chris Hutter

Yes. No; it’s interesting. When we started the business we also were able to pick our stocks and the team built the business around picking really smart stock and our gross margins were in the mid 20% range very consistently. The truth is and I gave you the number, 2013 those gross margins were 19.5%. So we definitely have some element here of gravitating towards to me. And we have to own up to that and we understand that. Now having said that the growth has been terrific, it’s taken us into multiple sort of new utility relationships, it’s helped us with cross selling, having said all that we are not happy with where it sits.

We do think that our mid teens gross margin is very achievable. When you layer on the consulting services on top of that and as we talked about a lot of the acquisitions we have made recently and intend to make in the future they are neck up type acquisitions. How can we margin up that business overall, we will continue to look for those. But we are committed to the business Rob, it’s been a really nice sort of third leg to the stool and gives us great visibility with our utility partners from that standpoint.

I know if Sidney you want to add anything.

Sidney Hinton

Yes. Rob I would just add the color, I don’t want you think we're just blindly committed to it. Candidly, over the past couple of weeks, three weeks, we’ve looked at really three different options with it, with the full engagement of the leadership team. I mean they are actively involved with us on every step of the analysis, but candidly we looked at three options; one is do we want to sell those business, the people that operate these type businesses, should we step aside from it, and let someone to operate this type business that does that all the time, we looked at that.

Second option was we looked at, should we scale it back a little bit and cherry-pick our accounts and then focus on a few key strategic opportunities that we see as higher margin, just because we think we understand the market better than other people, but it would be less revenue, but more earnings to the company, more earnings than today, not more earnings than the potential of it or three do we want to slow business. We don’t believe we could just continue, we believe that tires are out of balance, just because the engine, the car maybe ready for 200 miles an hour, but the tires are not balanced. We are going to wreck, we just keep it in accelerated, we’ve got to get it in balance, we have got to get it tuned.

And that was our third option, slow it down, have the ambition to moderate the growth, fix it, get it where we can have operational excellence and with financial metrics that we know we are the best in class we are already best in class when it comes to deliver in quality to our utilities, we hear that all the time. We want to get that operational. We want to take that operational excellence and match it with financial management excellence and they hit the accelerator on it. But I don’t want you to think, we just blindly pushed into that option, it was the option we think that we felt best served our existing investors today.

Rob Brown - Lake Street Capital Markets

Okay. Thank you for that color.

Sidney Hinton

Yes sir.

Rob Brown - Lake Street Capital Markets

And then on the DG slowdown, how do you differentiate between longer product cycles or sales cycles to the seismic contracts? And then how do you have confidence that the end market hasn’t slowed down out there?

Sidney Hinton

Well, great question. And I would tell you, we don't have perfect insight, let me be clear on that. It definitely comes out to the confidence factor. It’s just the robustness of our pipeline and the velocity of our pipeline and we haven't seen a change in the velocity of great opportunities coming in. We’re just seeing, just not popping out of the other end as fast as the smaller opportunities would have. And you can believe, you're going to do one hospital, we've seen those decisions turn in seven, eight weeks. I mean normally that decision cycle is more like six months.

So we have big think data centers and given that we're trying to change their design. We had hoped for fast turns, we've gutted ourselves up for 12 to 18 month cycle, which we’re well into it at this point, but just the velocity of stuff coming into the pipeline and I guess the zeal with which customers receive their concepts, leaves us confident that we're in a great position. I would say mechanically we’re privately owned.

This would not be a big deal, I mean as owners of the company, we've been looking at it not focused on earnings from today, but the potential for earnings off the stream, we’d be gauging that pipeline and with perfect visibility every person on this call is an owner, we feel great about that. That being said, we have to convert from pipeline of backlog. So your question has a turn in there, but that's what gives us the confidence in it to maintain our convictions. Is that helpful, Rob?

Rob Brown - Lake Street Capital Markets

Yes, that’s very helpful. Thank you. And then sort of looking, you gave really good guidance for the rest of this year, but do you feel like there is things that got pushed into ‘15 now or what sort of -- kind of looking out is this just sort of pushing everything to the right or do you feel like there is stuff that can't move into ‘15 that will sort of you're going to catch up so to speak?

Sidney Hinton

I’m going to let Chris address the exact 2015, but let me give you context. There is definite opportunity. If we were wobbling a little bit, our utility service team is great, they can execute, they can build the stuff, the opportunity is there, they can win the customer’s heart, we just got to have the operational metrics in place to help them manage the fleet utilization and the personnel utilization.

I don't have any doubt in that space. We can resume our growth rate there that market is robustly strong. And we see the DG market as robust and strong, but let me turn it over to -- and the energy efficiency, we love the spot we're in there as well, but let me turn it over to Chris for specific color.

Chris Hutter

Yes. And I just -- I'm going to answer the question little indirectly, Rob hopefully kind of get there. Early and directly it is we really are, I mean this is our next focus is working on our strategic plan and we'll come out with some specific metric that will help you gauge 2015.

Right now, where we sit, I’d say it’s a push out. But having said that, our team has not stop showing. So it's nothing like -- the opportunities have grown. And so if we can convert, there is upside to that. But at the present time, I will call a push out.

Rob Brown - Lake Street Capital Markets

Okay. Thanks for the color. I'll turn it over.

Chris Hutter

Thanks Rob.

Operator

Great. Our next question comes from Philip Shen from Roth Capital. Please proceed.

Philip Shen - Roth Capital

Hey guys, thanks for taking my questions.

Sidney Hinton

Yes sir.

Chris Hutter

Thank you.

Philip Shen - Roth Capital

So, I want to explore the situation what happened a little bit more. Things haven’t kind of gone along long quite well for quite some time, but it seems like just in the past month, you guys were hit with something. Is there something specific that happened that you can share?

Sidney Hinton

It really goes back to just the lack of conversion own opportunities that we have for new wins really over eight weeks and I would disagree with your assessment on the last month. That, combined with the just the materialization of these incredibly poor gross margins from the fleet utilization, so we couldn’t hit the accelerator there, but we’d normally would have. It just left set a vaccine [foundry], what do we do, do we just push forward and explain the results from Q1, but not provide insight and color. But at the end of the day we just feel like this just feels different than while it’s a distasteful message to deliver it really is we know that and we’re not confused on that, we hate that we delivered it, but at the end of the day we feel convicted this is what we really think we need to deliver is and yes you’re right, it is a change from how we’ve seen and it’s just it’s a complex of those three phenomenon that just left us uncomfortable not providing the specific insight and color.

Philip Shen - Roth Capital

Did you guys lose any utility customers or…?

Sidney Hinton

No, no.

Philip Shen - Roth Capital

Okay. So margins had been…

Sidney Hinton

We might be trying to lose one, but no we haven’t lost any.

Philip Shen - Roth Capital

But let’s say that one that you might be trying to lose I mean your margins have been pretty good throughout ‘13 and then where the margins for that one like that the way utility customer specifically or group of utility customers start to put the struts to you guys or doesn’t like way overnight jus go. You know we’ll paying you 30% less I mean what help me out?

Sidney Hinton

I’ll give you specific colors, probably (inaudible) on record -- yes I am sorry I was looking at but I am (inaudible) CFO and Head of Investor Relations. The fact that of the damn situation is we have a big client and we won another big contract fall, but they change geographies we were serving and our people live in a different part of the state. It would be like having a contract in California this Southern San Francisco, and you won a dam contract in Los Angeles and people are going to drop their work down every day.

We actually get paid more for the other territory, but it’s a question of effectiveness it’s a dams area and you get paid or need it, can you get enough units done, and you got new people and these hour results internally you could see it, I mean that shift occurred at the end of the second quarter. We knew we were ramping in the third quarter, so we want that conversably noted you face that every time you step up.

We faced it again in the fourth quarter which again, we expected but we really come to question or I am sorry excuse me, hey what are the gross margins, you know what’s the potential here what are we measuring ourselves again. So we’ve beaten our head against the law, and we are doing something that we just need to run a better practice for or this just the front-end opportunity is there because of the urban nature of the work.

But that’s exactly the biggest driver there it was then we had a customer a key that, I think we I we said it specifically it’s $7.5 million of work in the fourth quarter that we think our $1 million the work in the first, they are great customer, we expect to get a much order from over the remaining most of this year and over the coming years we love the great account. No issue with them at all, we try to guess the rhythm of how work is released and as for new account we just guess wrong.

Philip Shen - Roth Capital

Okay, Sidney. That’s really helpful. So let me just characterize what I understand for that large client you guys having work serving and helping out for a while, you guys want a new territory but your cruise and your trucks definitely step for that territory, is that correct? And then it’s question of do we -- how do we, I mean is that you continue to service that territory but within outsourced group of…

Sidney Hinton

No, basically we hired people and built up from scratch in that area to serve it. From the utilities perspective, they gave us the same amount of work; they just changed the geographies, so it’s not a negative from their perspective. And operationally, candidly we probably owned or estimated the negativity of it that just the complexity of basically starting from scratch in a new territory, yes you are right, your summary is right.

Philip Shen - Roth Capital

So do they take away the existing territory and then give you a whole new territory but they would say value…

Sidney Hinton

They did. And on paper it actually looks better. But I would say that’s an excel spreadsheet that looks better, it doesn’t look better on our income statement. And even we're not doing our units good and putting our people work on night and day around the clock to optimize that for it; it might be a lot of work there but the environment maybe just too difficult for us to be profitable in.

Philip Shen - Roth Capital

Now have you gone back to that utility or just trying to get the original territory back, I mean is that a possibility and also…?

Sidney Hinton

Unfortunately they have signed these territories for several years at a time and they make strategic decisions around that. And truthfully and unfortunately your workforce kind of lives in those territories, so they just change the company they work for, the utilities doesn’t really get hit with it as bad. And I would say somebody is probably getting the benefit of our damn good crews that we have trained and we are dealing with the consequences and somebody else is [placed] for training and management and we’re now trying to build something out of.

Philip Shen - Roth Capital

Okay. So you actually lost [awful] a lot of crews as well that were in that good territory that original territory.

Sidney Hinton

Literally lived way away, I mean they weren’t committed to work, they have been able to -- they didn't have the per diem for overnight because they lived at home and they weren’t interested in being migratory, part of our crews, so it’s not…

Philip Shen - Roth Capital

So, on a kind of magnitude basis, if last year's revenues were 112 million, 100 plus million plus invest for utility. I mean how with the size of this client relative to the overall ‘13 kind of is?

Sidney Hinton

10%.

Philip Shen - Roth Capital

10%, okay.

Sidney Hinton

Roughly, yes.

Philip Shen - Roth Capital

All right. Now, were there any other issues at all; I mean is this the main one or are there…

Sidney Hinton

Now getting to is that issue, it’s very, very simple. It’s that issue and then the, and the fact that we staff, there is actually more work in this territory. So we bought the truck and staffed for it. But if you’re getting paid, I mean you just go to somebody sale and what you’re selling to more units, but we're selling for dollars, $1.10 how you think. We still had -- we slowed down, because the question can we ever make money on these unit. We slowed down to do with our best people and see, but we still had the fleet and we were hoping to redeploy the fleet elsewhere with a nice opportunity that we won verbally but not put in a backlog or really I think that we announced it.

Chris Hutter

Yes, it was in backlog.

Sidney Hinton

I'm not talking about -- I'm talking about….

Philip Shen - Roth Capital

Yes.

Sidney Hinton

Yes. Sorry that's a downside of the live call. But anyway, we couldn’t move that fleet. So we are stuck with the fleet not utilized and the fleet and the people we are utilizing would probably lose in nickel for every dollar. And that's one thing. And then at the same time not having the work we had anticipated from one of the another client, that's not a criticism of them. I'm sure they go listen this call, we do want them to blame, we're not trying -- we are big boys, big boys, we are just simply trying to explain that you’re owners without being offensive to our customers, because we appreciate the opportunity to serve them all.

Philip Shen - Roth Capital

Right. So, let's talk about this new opportunity. So, if the new territory that you have is bigger, obviously it takes some time to train up some of these crews that you have. What is the -- from a magnitude basis, how much bigger is that opportunity relative to one that was shifted out?

Sidney Hinton

It's probably 2x.

Philip Shen - Roth Capital

Okay. Now how long do you expect it could take for the training and the work to kind of get the best efficiencies through your new crews in this new territory; is that six months or are we talking about year?

Sidney Hinton

Unfortunately the pace we're moving now, if we went all the way to 2X, I'd say it's a solid year, we definitely learned. You just can't add enough. We added enough to start with, basically doubled and we -- the marginal productivity which is horrific. And we're trying to please the utility at the same time by staffing quick and it was just a [vexing] scenario. We want to serve them, same time we have responsibility to our investors to -- we just have to balance this. Obviously we want to serve them long-term. But we have to manage the amount of short term pain we observed, and candidly observed a little more than we had planned to.

Philip Shen - Roth Capital

Right, okay. So one last question, and I'll jump back in queue, I know this has been an extended Q&A, but a very helpful as well. And this might be a tough question. But how much risk is there for restatements on past financials?

Chris Hutter

I’d say none.

Philip Shen - Roth Capital

Okay. That’s what it sounds like it is and -- but I wanted to at least go to that question; it sounds like there was just a decision that really put you guys in tough spot?

Chris Hutter

Well I want to be very clear. I guess I don’t know what was said in all of that discussion that would have anything, any close to that type restatement, there is not even a possibility. It has nothing to do with what we’re talking about. This is a now issue with a now customer that we had an inefficiency. We tried to put our crews down and couldn’t get them redeployed, bottom-line.

Philip Shen - Roth Capital

Great. Going into the call I had that question and especially when you said you guys have faced much greater challenges in the past. So we have a clear understanding now, so I appreciate it Chris. And thank you Sidney, thank you for the question, for the answers and the consideration.

Sidney Hinton

Yes, sir.

Chris Hutter

Thank you Phil.

Philip Shen - Roth Capital

Okay. I’ll jump back in queue.

Operator

Great. Well our next question comes from William Bremer from Maxim Group. Please proceed.

William Bremer - Maxim Group

What a call gentlemen, what a call. All right. So let’s begin, I appreciate the fact that we are now receiving margins for segment. I guess my first question is let’s going right to backlog, how’s the backlog priced currently?

Chris Hutter

Very similarly the way it’s always been priced. Each of our job is customer priced depending on situation, it’s priced to give us a fair margin, give our customers full value and there is no pricing issues here.

Sidney Hinton

And we have not adjusted our pricing. Let me be clear, we have not adjusted our margin approach or pricing approach.

Chris Hutter

We try to manage anything on the velocity of the pipeline.

William Bremer - Maxim Group

What is going to DG, okay, the pullback here quite intent, can you give us a little color of what occurred here? It’s just a fact that you didn’t have the magnitude of small projects to carry it and you are anticipating larger ones to fill it, what really happens here?

Sidney Hinton

Yes, I would say it’s certainly that we don’t have enough small projects to carry the absence, basically in the guidance that we have given, we have not assumed we land the big opportunities this year. And the way that impacts the income statement materially this year. We do inspire to win them and believe me if we win me they will impact a hell out of backlog. But we basically just say you know, what we don’t have to adjust expectations with our investors, let’s don’t set ourselves up and our investors have to be disappointed again. Let’s look at it. It’s not a slammed up, let me be clear, we try to balance that we did not stack it up one inch high so we could have a jump, but we looked at it, we assessed it, put the forecast down.

But the DG -- the pipeline is growing every day.

William Bremer - Maxim Group

Okay. Chris maybe it’s a question is for you, how you see the gross margins now that you have provided them per segment. How do you see that processing throughout ‘14?

Chris Hutter

Yes. I don’t give specific but I will give general, I feel like we gave enough specific with the total, I mean that’s the bottom line, but I will give sort of general. We do anticipate that it is going to take us a quarter or two to work through our UI gross margin issues. So we’ve tried to be continue sort of the status quo, but then by the time we get sort of the third and fourth quarter that that starts to, that those start to expand and increase again. On the energy efficiency side we’ve assumed that again status quo for the next couple of quarters, but then as we move into the back part of a year that we start to get the full benefit of the restructuring that we get and then DG very, very steady, right in that mid to upper 35% range, mid to upper 30s range, so very steady there.

William Bremer - Maxim Group

Okay. And in terms of your operating expenses, I know you said, you didn’t really want to go there, really tweak up a little bit. If you now move in into a new geographical region and I would like to get a little more color on what type of project you were doing. Is this low voltage transmission or is this really just distribution work. If you pick enough crews in that particular area, the labor rates are increasing across the board for the big players that probably traded and at the center. So if you pick enough crews there that need to be trained, how are you going to bring this altogether in a year?

Sidney Hinton

Great. Thing is some contracts are cost plus, in other words those utilities are picking people who have a proven chat record of being highly efficient which worked damn good on the operational side, and they are really eliminating the cost issue, that’s a constant across all the companies, so they can pick the people who do the work most productive and we excel at that. But it also helps us. It helps take a risk away from us from us relative to that ramping. So they can attract the high quality company like ours. So do not be a little smaller and not want to put the working capital in a long brand cycle to came that with cash on a couple of opportunities with big utilities recently, because we don't want to do that. We just feel like, we didn't want to make new investment today, but the opportunities we're looking at, we feel like it's a better risk return balance that the utility is providing their contractors thus they can give or really have quality contractor like us, so too smaller in their regards and might not be willing to invest that working capital otherwise.

William Bremer - Maxim Group

Any chance of breaking that down in terms of cost plus versus fixed contracts to that statement?

Sidney Hinton

Yes, I would say the best for partners of our work is some type of fixed price or unit price. I won’t guess, total guess 75-25. We like the fixed price once we have the work; we make more money in those, because we're more productive, that’s the upside. The downside is when you are a company like us working $50 million of working capital while -- several billion dollars of revenue that's not our money, it is for us. And then we have to choose where we’re going to invest that. And so sometimes big companies in my (inaudible) quality even they can’t get access to it because of the way they contract that forces us to invest that working capital. Return to the balance, the long-term objective which is served in all the big companies with the short-term objective which is meeting our profit and capital structure needs. Hopefully that's helpful Bill?

William Bremer - Maxim Group

All right gentlemen, I'll hop back in queue. Thank you.

Sidney Hinton

Yes, sir. Thank you.

Operator

(Operator Instructions). And our next question comes from Tyler Frank from Robert Baird. Please Proceed.

Unidentified Analyst

Hi gentleman. Ben [Taylor] here from Baird.

Sidney Hinton

Hi Ben.

Unidentified Analyst

Hi. So looking at your acquisitions, I jumped in late here, so sorry if I duke some questions here. With the cash position, when do you start allocating cash towards buying back stock. Are you looking at your stock price, you will have hands up tomorrow and is that -- could that come with a focus there as you are going to stock price?

Sidney Hinton

Yes, we believe in our future. We've got an existing and we do have an existing authorization out there right now Ben.

Unidentified Analyst

And would you remind us how big the authorization is?

Sidney Hinton

Not big enough, $5 million right now through the end of the year, it's not big enough.

Unidentified Analyst

Okay. And then how quickly Sidney can you get as you go to a special Board meeting or how could you increase that?

Sidney Hinton

Damn right, the market makes a mistake and in next few days you don't see us act on it.

Unidentified Analyst

And then I know you guys are going to update us as long as about your long-term guidance, can we just talk about your old guidance for next year. Where do we shake out your thoughts about getting there by next year a $300 million? And then some level of operating margin?

Sidney Hinton

Yes, from where we sit today that $300 million seems very achievable. And that we'd be able to -- it's sort of like, right now our minds are okay we pushed it a year. We pushed ‘14 into ‘15 roughly. But again, we'll sharpen that up. Of course that's the effect, we've got get the gross margins up, we've got get I mean that assumes that we're successful here as we roll through 2014 and we’ll sharpen up on that, we’ll sharpen our pencils and get something more specific. Right now honestly Ben, we want to focus our guidance on the right now and here and now and then we'll work on that one when as we go.

Unidentified Analyst

Okay. Last one Sidney, from an outsider or financial perspective, maybe this is out of form question, but as you talk to your utility customers and your other customers your commercial industrial customers and you see they see some of this stability in your current P&L, you have on the break of signing a deal that might push out because of this or how do you deal with that?

Sidney Hinton

Absolutely not, we have a great balance sheet and we emphasize that we build this company, we understand that (inaudible) CEO or our CFO or President of one of divisions, they can walk in the office and talk about their business like we can we can do it from top to bottom. No, we’re not going to lose, we’re not going to, we’re in a great spot with our utility. We hate like hell the position we’re in.

Candidly I would go and tell them this is a great thing. We have the courage to stand in front of our investors and make the great long-term decision which is to slowdown take a little loss run now bear the pain in the financial markets to make sure that we can operate business in optimal efficiency to serve their as and to serve our investors in the long-term and our hope that we stand up flawless.

Unidentified Analyst

Hey guys, thank you very much for the questions -- your answers.

Sidney Hinton

Okay.

Operator

All right great. And our last question comes from Eric Stine from Craig-Hallum. Please proceed.

Eric Stine - Craig-Hallum

Hi everyone. Probably (inaudible) something in order to talk about but going back I mean this utility contract that is caused the major issues I think referring to Sidney you kind of sounded like you prefer to lose it but by the end of the answer it sounds like you’re going to keep it so I mean I just want to clarify that and then when you talk about the 2X the size of the opportunity is that how we should anticipate this going forward so maybe I’ll start there.

Sidney Hinton

Yes. You’ve heard perfectly, you’ve heard anxiety of that of which we have done a better job of masking it I’ll let Chris talk about it because our customers are probably listening to the call too. And yes, I’ll be candid and we talked about losing it, nothing whole lot about but we did. And then ultimately we concluded this better. We are a hell of [operator] company, if we can take that fair enough to say about that undesirable area from a urban standpoint; it mean it’s this undesirable service it’s so dam advanced.

We take that to develop, use our -- we know we’re better than anybody else. And let’s take our financing genes and focus out here and get the operating measures in place, we are great team, they want itself. Given the measures like tell whether they’re selling or not, we are going to excel and then we will kicking it by advance those better stocks like the one we used to have. It’s very similar to how we started this business.

We serve the customer a big, it was a gross store chain, the first contracts we have for $101,000 and it calls us to 110 to do the project and people look and say you need to drop that customer. I think that was no, no because when we excel on $101,000 projects, we will care everybody on the $3 million projects and we drilled out enough cost, we did get a $500,000 increase (inaudible) we drove our enough cost to get our margins for 38%. And that damn excellence has propelled us for forward in the DG business. And it’s our full intent to bring the same operational financial excellence. Our people are also doing the work, we just got to go in the operating metrics so they can tell financially, hey this is what we are seeing, this is what we got to do on a daily basis for productivity to achieve our desired outcome.

And we will bring that same financial discipline to that to enable that team to cut loose and serve and go out and win more market.

Eric Stine - Craig-Hallum

Okay. And then I know this is a -- it sounds like a very unique situation there but I mean knowing what you know now, is this something that you can build in some contingencies to contracts with under customers, that you will avoid this?

Sidney Hinton

We have. I can tell you, we walked away from an opportunity with more of the largest utilities in the U.S. that we would have taken I mean god knows even 12 months earlier, we would taken. We would have let our bridges to take it, and then we would have blend like -- we would have [blend] for six months, we would have probably [blend] for three, and we have [blend] for six and we hopefully after year, we would have got it up to something operating margin, where we said, we will pass on this opportunity, it’s just the contract structure doesn’t lend itself to company our size.

There is just too much investment in working capital. We have to pick and choose how many of those we invest in. Please don’t hear me saying we're not going to do more, we will, we just got to be smart about adding. And you’ll be able to communicate with investors, look these don’t take a while to grow, to make it profitable for us it’s more than a know-how, but we definitely learned from it.

Eric Stine - Craig-Hallum

Yes, okay. That’s it from me. Just on the new contract that you talked about late last year, just to clarify. I mean that was not that’s not one of the two contracts you are talking about, and has your view changed on that one, just working towards finalization of the terms? Thanks.

Sidney Hinton

Yes it’s definitely not the negative contract. We love the contract structure there, we love the opportunity to serve them. I mean it’s -- they very much have a long term view with their contractors. All contractors need stability in geographies, and probably we are being the newest, we're probably the least, the most ignorant of that. And I don’t mean our people; I know our people are smart in sale. But Chris and I from just a lack of -- and they strike us, is that bigger deal when they go to different geographies, we look at the territories and amount of business available kind of aside to get it. We won’t be that naïve again. And it’s incumbent on those utilities, most utilities they make those decisions very judiciously. And anyway, we were in great shape with that account.

Eric Stine - Craig-Hallum

Okay. Thank you.

Sidney Hinton

Yes sir.

Chris Hutter

Thanks Eric.

Operator

All right great, well that will conclude the Q&A portion of today’s call. I would like to turn the call back over to Mr. Hinton for closing remarks.

Sidney Hinton

Hey, will you let me just -- forget the prepared remarks, we appreciate and I mean you guys have been investors in this for a long time. We appreciate it. We hope and pray that we have -- and I know we are disappointed yet, I hope and pray we have enchanted your confidence in us, we work hard to sale to build this company. We [equate] it, we go and build it, the people that sell (inaudible) and people for every share sell them out there is going to buyer. And we don’t serve those people we own this company. And we are focused like crazy on doing that. And we are owners ourselves. We are committed to fix this, we made a conscious decision. I realize some of you might disagree, we are slowing down and adjusting, we feel like we made the right balance decision looking out for 2014 and sitting here a year from now and we think everybody going to be applauding to the decisions that we made.

Appreciate your time confidence in us, we appreciate your patience. We hate like hell that we disappointed you, but we're committed to being here patient and being out there communicating you. With that good night, thanks.

Operator

Great. Thank you very much. This concludes today’s conference. Thank you for your participation. You may now disconnect. And have a great day.

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