ENGlobal Corp (ENG) 2009 Q2 法說會逐字稿

Greetings and welcome to the ENGlobal Corporation's second-quarter 2009 earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Ms. Natalie Hairston, Vice President Investor Relations and Chief Governance Officer for ENGlobal Corporation. Thank you, Ms. Hairston. You may now begin.

Thank you, Christian. Good morning, everyone, and thank you for joining us today. With me on the call are Bill Coskey, Chairman and Chief Executive Officer of ENGlobal Corporation, and Bob Raiford, Chief Financial officer and Treasurer.

In a moment, I will turn the Bill Coskey, who will highlight management's perspective on our financial results for the quarter ended June 30, 2009. Bob Raiford will then review other financial points of interest for the quarter and in particular those topics that relate to our balance sheet and cash flow.

Before we begin, I would like to remind everyone that some of the information discussed on this call will contain forward-looking statements that involve risk and uncertainty. These statements are based on current expectations. Actual results may differ materially from those set forth in such statements. Additional information concerning factors that may cause actual results to differ is contained in the risk factors section of our previously filed Form 10-K and 10-Qs. All of those filings are available on the investor relations page of ENGlobal's website at ENGglobal.com. Our filings with the SEC are also available on the SEC's website at SEC.gov.

As usual during Q&A, please let yourself to one question and then one follow-up as necessary. Now I would like to introduce our Chairman and Chief Executive Officer, Mr. Coskey. Go ahead, Bill.

Thank you, Natalie, and good morning, everyone. I would like to begin the call this morning on a confident and positive note. While no one can predict the future with absolute certainty, I am optimistic that ENGlobal may have experienced the low water mark of this economic downturn from an operational standpoint during the second quarter. Also I believe the Company is well positioned to participate in what we believe will be a slowly improving market in the second half of 2009 then hopefully followed by a stronger 2010. I am basing these comments on three observations.

First, it's based on recent project awards and just as importantly, the renewal of many of our existing contracts with long-term clients. Second, is the much higher level of proposal activity that has picked up since the end of the second quarter, and finally, is the general improving trends we see from our internal metrics, which have also improved somewhat since the end of the second quarter.

It is clearly obvious in today's results that ENGlobal has experienced a contraction in its business thus far this year given reduced domestic spending by our clients across all energy sectors for both capital and maintenance projects. A large part of our work is performed on domestic projects, which appears to have been affected to a greater extent than international work. Also many of our engineering and related project services occur early in a project cycle, which can be expected to drop off sooner with any downturn in new project awards as opposed to construction activity.

With respect to earnings ENGlobal reported basically a breakeven second quarter compared with diluted earnings of $0.24 for the same period last year and $0.07 in the first quarter of this year. We realize that we are in the unpleasant position whereby all of today's comparisons are against the second quarter of 2008, which was the best quarter in the Company's history.

Some general comments about recent trends, during the second quarter, our business has been at a low very flat level of activity. Biweekly billable hours for the month of April, May, and June stayed in a tight range and averaged 147,000 man hours. Our utilization of billable resources was also flat and averaged around 86% over the same period which is lower than our targeted range of 88% to 92%. It is also about 6 points lower than the same period in 2008. We have started to see both of these metrics trending upward which we believe is an early but still encouraging sign.

Our reduced revenue creates less of a need for working capital which in large part has resulted in our business producing positive cash from operations of $14 million for the first six months of this year. Most of this cash was used to repay debt so since January, our long-term debt has been reduced by about 41%.

For several years ENGlobal has talked about sustainable sources of revenue from a variety of long-term sources, which typically represents about two-thirds of our revenue. I think it is reasonable to say that in the second quarter, our business primarily operated on these sources of smaller run and maintained projects and what has been missing in our business for most of 2009 is any significant contribution from larger capital projects.

And now some miscellaneous highlights from our business segments. In engineering, the outsourcing of personnel to client locations -- what we call in plant staffing -- has remained a steady part of this business during the downturn while the engineering work we perform in our offices have been hurt most by the downturn. Again, it appears that most of our offices are beginning to report improving activities.

In our construction business, our inspection numbers are beginning to pick up again, driven by major pipeline construction projects getting underway. We have added approximately 100 inspectors to our staff thus far in the third quarter. Through automation, we have recently moved into a new 85,000 square-foot fabrication facility in Houston and this part of the business is now operating at record levels. We benefit here through our ability to participate in large international grassroots projects mainly in the Middle East. We provide remote instrument buildings for distributed control systems and process analyzer equipment to large integrated oil and gas companies, and also some of the Tier 1 engineering and construction companies.

In our land group, we continued to see a fairly steady stream of pipeline right-of-way acquisition work and a growing amount of electric transmission activity. Land has been a relatively steady performer during the downturn.

It is important to note that ENGlobal has been spreading its wings in its new areas to make up for the reduced level of activity in our heritage energy-related domestic project work. As to our international marketing efforts, the relationships we have developed in the US, ENGlobal is increasingly proposing our work for international projects, mainly all facilities in the Middle East. Any results from this initiative should be known by year-end but as a general comment, I believe it will be important over time for our Company to have greater access to international sources of work.

We continue to maintain alliances with a number of technology providers in the area of alternative energy. These technologies relate to the production of biofuels and gasification of tires and utilization of municipal drive fuels that produce power. These opportunities are sizable, so we continue to be involved at little cost but project financing for developers continues to be the biggest hurdle.

Several other strategic points can be summed up from our announcement this morning of an agreement to acquire a power-related business in Chicago, PCI, which used to be known as Power Consultants, Inc. For some time our Company has focused on increasing our capabilities in power and today we are closer to achieving that objective. I have been impressed with PCI's significant history and expertise ever since the first day I met with Chuck and Bill Tyburk in Chicago. Our first and lasting impression of PCI is that although it is a relatively small business, it has a huge underlying potential, which I believe we together can unlock. The key will be PCI's impressive project histories together with ENGlobal's additional resources.

PCI performs engineering services on power-related work with a total install cost of several hundred million dollars a year. Our combined goal will be to expand ENGlobal's participation in these projects and the value we can earn from them.

In addition, we've been looking for a way to expand our services into the Chicago area much like we have successfully done in the Rocky Mountain area, leveraging our land group office in Denver. In general terms, ENGlobal has become much more active on the acquisition front and I believe you will see additional transaction announcements from us over the next year. Successfully integrating newly acquired firms has been a core competency of ENGlobal for many years.

In closing and to acknowledge a significant accomplishment, I am very excited to announce that we recently received an award in Washington, DC from the Associated Builders and Contractors Group also known as ABC. The Eagle Award was presented to ENGlobal as engineer and to STARCON as contractor for together providing outstanding design and construction work on the crude unit turnaround at the Marathon refinery in Garyville, Louisiana.

So my sincere and hearty congratulations go out to our fine group of professionals in our Baton Rouge office for your excellent work on this project and for your well-deserved Eagle Award. You have made all of us at ENGlobal very proud.

Thank you for your time this morning. I will now turn the call over to Bob.

Thanks, Bill. Good morning, everyone. A lot of these specific details of our second-quarter results were disclosed in our press release this morning, but I would like to highlight other selected items. Unless otherwise stated, the financial comparisons I will make compare the second quarter of 2009 to results of those of the second quarter of 2008.

Liquidity remains strong. Operations produced $5.7 million in net cash during the second quarter compared to approximately $4.1 million produced during the comparable period in 2008. For the current year, operations has produced $14 million in net cash during the six months ended June 30, 2009. Non-cash items in both quarters of 2009 and 2008 total approximately $1.6 million, with amortization of intangibles totaling approximately $440,000 during both periods.

Second-quarter working capital was positively impacted by a decrease in trade receivables, net of a reclass of 1/8 account converted to notes receivable and an increase in accrued compensation and benefits. However, these positive changes were offset by unfavorable impacts during the quarter resulting from a decrease in accounts payable, primarily related to payments for significant passthrough procurement items and subcontractor services previously recorded in the last quarter of 2008 and the first quarter of 2009 and a decrease in taxes and other liabilities.

Capital expenditures during the second quarter totaled $1.2 million compared to expenditures of less than $900,000 during the second quarter of 2008. The increase in capital expenditures during the quarter primarily related to our facility expansions in both Houston and Beaumont. We do not foresee additional expansion costs in the third quarter and we do not expect to exceed our credit facility's annual limit of $3.25 million for CapEx commitments during 2009.

Overall, our long-term commitments consisting primarily of a $13.2 million line against our credit facility with Comerica Bank and a $1.7 million related to acquisition notes, these decreased approximately 41% or approximately $10.5 million from $25.7 million at the end of December 2008 to $15.2 million as of June 30, 2009. The decrease in our long-term commitments during the second quarter was primarily related to the positive cash flow and subsequent paydown of our credit facility.

As a percentage of stockholders equity, our overall long-term debt at the end of the second quarter decreased to 18% compared to 33.5% at the end of 2008. Total liquidity, which includes cash plus availability under our credit facility was $37.5 million at the end of the second quarter compared to $26.8 million at the end of the comparable period in 2008. The outstanding balance on our line of credit at the end of the quarter was $13.2 million with remaining available borrowings of $36.7 million. Our outstanding letters of credit were approximately $700,000 primarily to cover project retentions and deductibles under insurance policies.

Our credit agreement with Comerica provides a $50 million senior secured revolving credit facility that matures in August of 2010. The agreement is guaranteed by substantially all of the Company's subsidiaries and secured by substantially all of the Company's assets and positions Comerica as senior to all other debt. At the Company's options, amounts borrowed under the credit facility bear interest at prime or a euro-based rate plus additional margin ranging from 125 to 175 basis points. The additional margin is based on our most recent leverage ratio. Currently we have a $10 million of our outstanding credit facility on a 30-day euro base rate and term.

As of August 10, our credit agreement will by its terms be required to be reclassified as a current liability. We have been reviewing renewal options ranging from prime to prime plus 100 basis points or LIBOR plus 250 to 300 basis points plus renewal fees ranging from $500,000 to $1 million. We are in compliance with financial covenants and currently without need or pressure to forgo current competitive interest-rate options.

Unless we see a material turnaround in our operations over the last half of the year or we are presented with major opportunity for growth to one or more or multiple acquisitions, we expect to begin researching financing all currencies in early 2010.

Our average days sales outstanding was 69 days for the quarter just ended, compared to 61 days at the end of the second quarter in 2008. Our DSP was 64 days at the end of 2008 and 72 as of the end of the first quarter of 2009. We do not expect our average days outstanding to (inaudible) change in the third quarter although we expect to see improving trend for the year continue if revenues stabilize an aged accounts are collected.

Our effective tax rate for the first six months of 2009 was 40.9% compared to a rate of 40.2% for the first six month period in 2008 and a rate of 39.9% for the year ended December 31, 2008. We do not expect our tax rate for 2009 to materially change for the balance of the year unless we see material changes in earnings during that period.

Thank you for your time this morning. I will now turn the call back to the operator.

(Operator Instructions) Craig Bell, SMH Capital.

Good morning. Just wondering on -- your comments on your internal metrics have been improving here in the third quarter. Are you seeing that as just sort of marginal improvement or is it a pretty noticeable uptick?

What we have seen early in the third quarter is that our utilization is slowly trending up. Our billable hours are slowly trending up and probably utilization, what we've seen thus far has improved a couple points. Maybe billable hours or higher by maybe 8% to 10%, something like that. Of course it's early in the game, but that's what we are seeing thus far in the quarter.

Okay, and then looking at your automation segment, the gross margin there in the quarter was down. Is that just a function of reduced activity there, reduced revenue, or is there some other factor at play?

Well, there's a couple factors. We of course moved into a new facility and we encountered quite a few expenses with our move into the new facility which we believe is going to be quite (inaudible) proficient for us over the long run. We have had a little higher variable overhead especially in our Mobile office. We feel like we've recovered from that, Craig, and we've received some work even within the last few weeks to put people back to work. And so probably a high variable overhead in our design staff and maybe some higher-than-expected expenses and what we might think of as one-time expenses in our fabrication part of the automation group.

Okay, then just lastly on the acquisition you made, is that going to be structured in a similar fashion to your past ones where you paid a little bit of cash and then a promissory note on it?

In this case yes. It's going to be some part cash and some part deferred payments over a couple of years. There's no stock or no earnout [part of it].

Okay, great. Thanks.

Tahira Afzal, KeyBanc.

So this acquisition looks pretty interesting. Bill, could you elaborate maybe on whether it's dilutive of or whether it's accretive or neutral? And maybe talk about perhaps the prospects going into 2010, what you want to do with it, how you plan on integrating it perhaps with your land group.

Well, the acquisition in Chicago will not be integrated with the land group. It's really going to be integrated with our construction group mostly because within that group, we have the most experience in power. Like I said, what impressed me from the first time I met these folks was the project's histories. They work on a lot of dollars worth of total installed cost projects but they get a very tiny amount of that scope.

And so what I would like to do with them over a period time is expand the scope we are getting from these power projects and they are bringing in a very robust marketplace, things like substation design, electric power transmission lines, small biomass-related power plants. So we see a lot of upside potential, mostly to increase their business and the scope of work they are getting on existing work.

Got it, okay. Any indication as of right now -- I know the deal -- you are still closing on everything, but from your sense is this going to be neutral to earnings?

It shouldn't right away have a material impact on earnings. We didn't issue any stock and the interest rate we would pay on the money is really minimal. So any money we make would be accretive to earnings.

Excellent, okay. And I know you have a fairly impressive staff on the transmission side in your land group. Even if you are not integrating them, is there going to be any information sharing, given you have some good people there sitting on the West Coast and there are a lot of transmission opportunities there, is there going to be any information sharing between the two?

Sure, just like we don't -- we found our land group to be an excellent source of prospects for our engineering business because they are early to the game in both pipeline projects and power projects. And they've fed a number of pipeline opportunities to our engineering group and I expect they would feed a number of transmission and power-related projects to our new group in Chicago.

Got it, okay. And then if you are looking at your pipeline side of your business and you are looking at the opportunities there on the engineering side, it seems like the rig counts are stabilizing and perhaps that might be the first indication of an eventual uptick. The economy also seems to be stabilizing somewhat. In your experience, Bill, what has been the typical lag factor between rig counts, etc. stabilizing and natural gas prices stabilizing and the engineering segment really seeing some bounce back in activity? And given in a sense on the credit crisis (inaudible) and are creating a bit of an artificial pause, would you expect this lag to be even less this time around?

Yes, I would, especially since there's been so much lack of activity really over the first half of this year. I think there is some pent-up activity. What we are seeing right now is a lot of underground storage and we are working on several different underground storage projects where we as ENGlobal would do the top size compression facilities to store natural gas underground in salt caverns. And that's something we have good experience in.

We are seeing quite a bit of pipeline work along the Canadian border maybe in the Bakken and the natural gas pipelines in the Haynesville. I think we're already starting to see a pretty significant pickup in pipeline work already and so I guess it's probably mirroring the pickup in drilling activities.

Got it, okay. Thank you very much. That's all for me.

(Operator Instructions) Craig Bell, SMH Capital.

I just wanted to follow up on the last question there with regards to pipelines and prospects there. I guess you must be fairly optimistic about it. You said you had hired 100 inspectors in the quarter. Is that right?

We hired 100 inspectors and put them immediately to work.

Okay, so you obviously have some --

I'm sorry, Craig, but this will be in the third quarter. We hired those mainly in July so since the end of second quarter, we hired 100 inspectors. In that group, we are up around 500 right now just to give you -- we hit a high of maybe 800 in the third quarter of last year, probably got down to about a low of 350 earlier this year. So we're at 500 now. We expect it to go higher as projects crank up. Enbridge, El Paso type projects in the northern part of the US would be some major clients for that group.

Okay, so you would expect to probably add more people as the year progresses then?

Yes, we would. We would expect to ramp up maybe toward our previously high levels toward the end of this year and maybe even exceed those next year. It's a pretty good proxy on pipeline construction activity, our inspection group.

All right, and then longer-term, are you still -- in the past, you've talked about your optimism for pipeline builds and how many new miles are expected to be out there. Is that longer-term optimism still holding?

Yes, it is based on all the new basins and shale plays and the requirements to transport natural gas and crude oil away from those, I am still very optimistic about future pipeline work. Yes, I am.

All right, thanks.

Tahira Afzal, KeyBanc.

Bill, just as a follow-up to that, if I look back over the last couple of years, you have sequentially seen a pickup of around $300 million -- sorry -- 300 people from the first to the second quarter. Should I assume none of that was the seasonality (technical difficulty) enhanced the pickup in people you have seen in the second quarter so far is more sort of demand coming back and not just seasonality?

I don't think there's seasonality. I think it's more industry conditions and plants getting back to work with projects again. I don't want to mislead you. It's not going to be a V bottom. What we see is a slow, steady ramp up, but we are very encouraged by recent proposal activity and some project awards.

Great, thanks a lot, Bill.

Ms. Hairston, there are no further questions at this time. I would like to turn the floor back over to you for any closing comments you may have.

Thank you, Christian. Hello again, everyone. I will be available to answer any follow-up questions this afternoon or you can always email me directly at IR@ENGlobal.com. Thank you for being on the call today and thank you as always for your continued support of ENGlobal.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time and we thank you for your participation. Have a wonderful day.