Joe Bergera: I do want to make sure, Tim, though, you understand, I don’t want people to think like, well, you’re not going to see any benefit, then until you get there, which is not the case. You will continue to see step improvements along the way.
Tim Moore: No, no. I totally get it. That’s something we talked about. And yes, it’s just another step on the ladder if you’re seeing incremental gross margin improvement and then maybe a little bit more of a hockey stick push then. And then lastly, for you and Kerry, I mean, any update on the tuck-in acquisition appetite? Your funnel is asking valuations of targets have become more reasonable over the last few months?
Joe Bergera: Kerry, do you want to take a crack at that?
Kerry Shiba: Well, yes, I’m not sure if there’s anything new to report right now. Tim, obviously, we’re in a position from a liquidity perspective where we can start to actively search again. We are still in the process of trying to find candidates that are a good fit for – for all the things that anybody looks for in acquisition, technology, culture, fit cost leverage. But as you know, we want to be careful because we want our acquisitions to be accretive. We have not had discussions as of late that would indicate that the valuation expectations have significantly changed from, I think, the last time we talked. But I would expect that to continue to start to exhibit itself, but I think there’s probably still a little bit more lag in I guess the reality – wake up in the – from the sell side with these smaller companies.
So I think we remain on the – with the same focus and the same expectations overall. But I would just reiterate that we’re going to be careful not to overpay also.
Joe Bergera: And Tim, I guess the one thing that I would add to that is that we – I think it’s probably accurate to say that we are seeing more interest from like sort of a certain profile of potential targets who are beginning to exhibit like more realistic expectations. But as you might expect, some of those companies that kind of reached that point are not necessarily the most attractive targets. Those companies that are in a stronger financial position and, therefore, able to kind of wait it out are probably the ones we’re more interested in. So there’s a little bit of like some tug and pull going on there. But to Kerry’s point, I think that we certainly continue to expand our funnel and to have increasingly more substantive conversations with various targets.
So I do believe that we’re going to get there probably before too terribly long. But I do want to just be really clear about the fact that the opportunities that are arguably more actionable right now are not necessarily those that would be of greatest interest to us.
Tim Moore: That makes sense. I’m starting to hear that across the industry. So thanks a lot, Joe and Kerry, thanks for those insights. That’s it for my questions.
Joe Bergera: Great. Thanks, Tim.
Kerry Shiba: Thanks, Tim.
Operator: Thank you. Mr. Bergera, there are no more questions from covering analysts. Would you like to answer any investor questions before making your closing remarks?
Joe Bergera: Yes. Thank you. I would like to do that. We actually have two investor questions that I wanted to answer, and then I will make some very brief closing remarks. So the first question from investors, whether Iteris has seen an increase in the number or the size of sales opportunities since formula funding has begun to flow to state and local agencies. And the answer is that, in general, we have started to see an increase in state and local transportation infrastructure budgets due to the IIJA formula funding that did start flowing into the system over the last four quarters. In turn, that’s resulted in an overall increase in the number and size of opportunities in our sales pipeline, which is consistent with some of the questions that we just discussed.
That said, however, the labor market remains really tight. And that’s not just impacting us. It’s also impacting many agencies that have not been able to add the internal resources necessary for them to program and then disperse the entire increase in the funding. So as a result, we’ve seen contract awards sort of come in waves rather than a steady flow. And due to the delay agencies are experiencing and dispensing IIJA funding, it’s not really our expectation that there’s going to be a pretty long tail as state and local agencies continue to deploy IIJA funding even beyond the last 5-year statutory length, right? So to be clear, they’re going to be able to disperse money or transfer money to state and local agencies, but formula funding is nonspecific.
It’s highly fungible. And so state and local agencies will be able to continue to spend that after the term of the [IIJANs]. And we’re – that is our expectation that that’s going to occur because there has been some difficulty that we’ve seen by certain agencies in order to push all these funds through the system as fast as they otherwise would have liked to do. So the second question is whether Iteris could provide an update on the development of Safe Streets For All initiatives. And so for those of you who don’t know, the Safe Streets For All or also call it, SS4A grant program supports the U.S. DoT’s National Roadway Safety Strategy, and that strategy is a goal of zero deaths and zero injuries on our nation’s roadways. U.S. DoT has defined two types of SS4A grants.
One type of grant is referred to as action or planning grants. And the other type of grant is referred to as implementation grants. U.S. DoT has announced the first tranche of SS4A grants in the first quarter of calendar year 2022. And the initial tranche included 474 action or planning grants for a sum total of $212 million, which represents an average grant size of $447,000. And then arguably more importantly, it included 37 implementation grants for a sum total of $519 million, representing an average grant size of $14 million. Obviously, the implementation grants are substantially larger than the planning grants. After reviewing the details of the initial awards because now that they’re out there in the public domain, we’re talking to agencies about these grants.
Iteris has determined that about 70% of the implementation grants focused on improvement to physical infrastructure, meaning that about 30% of the money that was awarded is going to be used for advanced technology to improve safety. So as we noted in our IIJA white paper published in September, it can take 12 to 24 months from U.S. DoT’s notice of a grant award for an action or planning grant before a local agency receives the federal funding and then issues the task order to a contractor. And it can take even longer, 24 to 36 months before a local agency will be able to issue a task order under an implementation grant. And that’s due to the fact that because of the nature of the work, there’s some additional programming requirements that need to be executed.
So anyway, as discussed in our white paper, contractors who perform work under an action or a planning task order may be precluded from performing work under an associated implementation task order. So in general, it’s not always the case, but in general, Iteris prioritizes task orders related to implementation grants over task orders related to actual planning grants because implementation grants are larger, and we don’t want to be precluded from pursuing those. So anyway, although we’re very early in this process with local agencies just beginning to issue assets for a task orders, I can say that Iteris has already executed two action grant task orders and been awarded an additional four task orders that are pending final contract execution.
And then additionally, as I mentioned, 30% of all the implementation grant funding went to technology. Iteris has already been specified on four of those implementation grants, and the total value – the sum total of those grants is $75 million. And that represents 48% of the total technology funding for all the SS4A implementation grants awarded in the first tranche of such grants. And that is those grants that had a focus on technology as opposed to physical infrastructure. So anyway, we feel like we’re doing extremely well with these SS4A grants. And we expect to continue to receive more task orders from SS4A and from other grant programs as competitive grant funding is finally beginning to move through the system. So anyway, having addressed those two investor questions – and I hope we’ve done so fully and completely – I did want to offer a couple of closing remarks.
