ENGlobal Corp (ENG) 2010 Q2 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the ENGlobal Corporation Second Quarter 2010 Earnings Conference Call. At this time, all participants are in 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. Thank you. Ms. Hairston, you may begin your conference.

Thank you, Heather, and good morning, everyone, and thank you for joining us today. With me on the call are Edd Pagano, Chief Executive Officer; and Bob Raiford, Chief Financial Officer and Treasurer.

In a moment, I will turn the call over to Edd Pagano, who will highlight management's perspective on our financial results for the quarter ended June 30, 2010. Bob Raiford will then review other financial points of interest for the quarter and, in particular, those topics that relate our balance sheet and cash flow.

Before we begin, I would like to remind everyone that some of the information contained on this call will contain forward-looking information that involve risks and uncertainties. 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-Q. All of those filings are available on the Investor Relations page of ENGlobal's website at englobal.com. Our filings with the SEC are also available on the SEC's website at sec.gov.

In addition, non-GAAP measures may be reference during the conference call. Pro forma data is provided for informational purposes only and is not a measure of financial performance under GAAP. This data does not represent, and should not be considered as an alternative to, net income, operating income, net cash provided by operating activities or any other measure for determining operating performance or liquidity calculated in accordance with GAAP.

And now I would like to introduce our CEO, Mr. Pagano. Go ahead, Edd.

Thank you, Natalie. Good morning, everyone, and thank you for joining us.

ENGlobal reported a second-quarter net loss of $4.5 million, or a negative $0.16 earnings per diluted share for the quarter ended June 30, 2010, a decrease from break-even earnings per diluted share for the quarter ended June 30, 2009.

Second-quarter 2010 revenue decreased 7.7% to $73.7 million from $79.9 million for the same period in 2009.

Results for the second quarter of 2010 include a non-routine pre-tax charge of $3 million related to the Bigler matter that negatively affected our earnings.

As today's results demonstrate, ENGlobal continues to face a number of challenges. The following factors, in combination with the economy -- which has seen only modest improvement during the quarter -- adversely impacted our financial performance year over year. In order of magnitude, the first being fewer projects are available; available projects are relatively small; pricing remains competitive; delays in reducing our staffing levels; declining backlog; and increased competition.

Management is in the process of evaluating and making changes in our internal operations to address these issues in order to increase revenues, profits and utilization rates.

Likewise, we have begun to take aggressive measures to reduce costs amid weak market conditions. We anticipate most of these changes will take effect during the third quarter and the balance will be completed in the fourth quarter.

We continue to see internal metrics that demonstrate an imminent recovery to our business. Strictly from an operational perspective, ENGlobal's second-quarter financial results showed slight improvements over the first quarter of 2010. Excluding the non-routine charges, our revenue, gross profit, net operating income and billable hours increased, and our SG&A expenses decreased when compared to the first quarter of 2010.

As these sequential quarter comparisons indicate, we are pleased to report that we have begun to realize productivity and operational efficiencies. Based on this trend, we anticipate certain of our internal metrics, such as employee count and bi-weekly billable hours, to increase by 5% to 10% before year-end.

Meanwhile, ENGlobal's capital structure has remained strong throughout this economic downturn. Our successful efforts to reduce our line of credit and days sales outstanding are significant achievements for ENGlobal. This allows our company to focus on serving our clients and strengthening our businesses for the opportunities that will be available as the economy improves.

Simultaneously, we remain committed to prudently leveraging the company's capital. ENGlobal's stock repurchase program, which began in the second quarter, is an important part of our overall capital management strategy. This strategy includes maintaining a strong liquidity position with positive cash flow from operations of $2.4 million during the second quarter and $8.9 million year to date.

Now I'd like to take you through an overview of ENGlobal's sectors.

The downstream market remains weak with limited awards coming from small run-and-maintain projects. Our clients' second-quarter numbers reveal that refinery margins are improving; however, they continue to defer major capital expenditures.

Having shown a slight improvement in recent weeks, ENGlobal's engineering business sees the petrochemical and international markets as the driving forces for its 2010 revenues, as well as second-half opportunities in refinery turnarounds for its in-plant staff.

To a lesser degree, we believe proposal activity will increase in government, infrastructure and power projects, such as electricity, steam and biomass. Clients in a downstream market, more than in other markets, continue to force downward pressure on pricing, reduce their capital projects, budgets -- specifically on fabrication-related projects, and delay the release of project funding.

During the second half of 2010, we expect to see the most midstream activity in gas processing, pipeline, pipeline blending and compression stations. These projects are smaller in size than those from a few years ago, but margins are better than in other sectors.

In most cases, our staff capabilities, client relationships and past histories are the reasons we are awarded midstream work, not necessarily on price alone.

More so than in the past few years, our land group is experiencing more proposal activity for infrastructure-related projects, such as pipeline, electrotransmission, wind, solar and other alternative energy solutions.

In addition, utility and energy companies have enough cash in reserve to afford these projects, but delays are inevitable while political compliance and regulatory policies are being considered. We believe that ENGlobal has positioned itself for the economic rebound and subsequent infrastructure expansions and repairs.

With the addition of Control Dynamics during the second quarter, ENGlobal's automation segment has forged an entry into the offshore upstream oil and gas sector. We have seen a slowdown in the offshore sector but expect to bid work as a result of this crisis in the Gulf of Mexico.

Several of our clients, including major drilling ship operators, are interested in pursuing system interconnectivity and secured data transmission products. We also expect that compliance regulations, such as increased safety measures and OSHA [top-side] audits, to increase our offshore presence in the future.

In advance of the recovery and considering weak market conditions in the US, we have already undertaken a series of growth initiatives, including ENGlobal's previously-announced focus on international markets, such as the Middle East, Trinidad and Brazil, among others. These markets allow ENGlobal to expand to overseas markets while performing the work in our existing offices. This initiative is just getting underway, and we'll provide more specific information once our international efforts expand.

Let me spend some time on our business development efforts. Our quarterly assessment of business development activity showed that the total value of our proposals in the first half of 2010 was 75% higher than in the second half of 2009. For the same period, the average size of these proposals doubled from the prior period. In addition, the total value of new project awards in the second quarter of 2010 was 110% higher than those awards in the first quarter. The average award during the second quarter was 44% higher than compared to the first quarter.

In addition to the 12 master service agreements executed in the first quarter, ENGlobal signed another 8 MSAs in the second quarter. About 50% of the MSAs were signed with refining or chemical clients, while about 12% were pipeline-related. The remaining 38% could be classified as miscellaneous project work. We anticipate that one or more of ENGlobal's businesses will be able to benefit from these multi-year agreements.

With the exception of the latter part of the fourth quarter, which is seasonally slow, we believe more opportunities will be announced later this year and into 2011 compared to the first half of 2010. To support this fact, the Independent Project Analysis Inc., IPA, a global capital project consulting firm, has completed an extensive study of onshore mega-project developments. The study predicts that demand for mega-project developments will increase at a rate -- a high rate over the next few years as the global recession subsides. Further, the study found that the increase in mega-project spending is expected to be more rapid than in the boom period from 2005 to 2008. Assuming the rebound in the commodity prices, such as oil and metals, continues, we believe large capital projects will rebound in due course.

In summary, the macroeconomic environment has been a dominant theme of 2010, and despite emerging signs of recovery, we expect this theme will continue through year-end. For the first time in a long while, we are cautiously optimistic about our revenue trends and our ability to create and capture operating leverage. We have a balanced portfolio of businesses that are well-positioned for continued growth as the economy improves.

With that, I'll turn the call over to Bob.

Thanks, Edd. Good morning, everyone. A lot of these specific details of results of the second quarter were disclosed in our press release this morning, but I would like to highlight other selected items.

Unless otherwise state, the financial comparisons I will make compare second quarter of 2010 results to those of second quarter 2009.

Operations produced approximately $2.4 million in net cash during the second quarter, compared to approximately $5.8 million produced during the same period in 2009.

Non-cash items in the second quarter totaled $1.2 million and included $0.6 million in depreciation of fixed assets, $0.5 million in amortization of intangibles, and $100,000 in stock-based compensation.

Overall, we had a decrease of approximately $325,000 in non-cash items year over year.

The positive impact of working capital in the second quarter was primarily the result of increases in accounts payable, accrued compensation costs and other liabilities.

Total capital expenditures during the second quarter totaled $436,000, compared to expenditures of $1.2 million in 2009.

If you recall, the high level of capital expenditures during the second quarter of 2009 were primarily related to facility expansions in both Beaumont and Houston.

During the six-month period ending June 30, 2010, we expended or committed approximately 20%, or $0.7 million, of the $3.5 million fiscal-year covenant limitation on capital expenditures.

Our capital expenditures for the first six-month period have been for normal operating requirements, including office furniture, computers, software and vehicles. We expect third-quarter capital investments in fixed assets to be less than our second-quarter investment and expect our annual investment in fixed assets to be well below our credit facility's annual limit of $3.5 million.

Our long-term commitments net of current portion decreased approximately $4.5 million from $6.1 million at the end of December 31, 2009 to approximately $1.6 million as of June 30, 2010. The decrease in our net long-term debt during the year was primarily due to positive impacts of working capital and subsequent pay down of our credit agreement.

As a percentage of stockholders' equity, our overall long-term debt at the end of the second quarter had decreased to approximate 2%, compared to 8% at the end of the same period in 2009.

Total liquidity, which includes cash plus availability under our credit facility, was $23.8 million at the end of the second quarter, compared to $18.5 million at the end of 2009 and $37.5 million at the end of the second quarter in 2009.

At the end of the second quarter, we had an outstanding balance of $823,000 on our line of credit. We had remaining borrowings available on our line of credit of $23.6 million due to outstanding letters of credit of approximately $600,000, primarily to cover deductibles under our insurance coverage.

The company was not in compliance with all financial covenants under the Wells Fargo credit agreement as of June 30, 2010. During the current quarterly reporting period, our fixed charge covered ratio was a negative 1 to 1. The Wells Fargo credit facility requires the company to maintain a fixed charge covered ratio of 1.75 to 1 as of the end of each calendar quarter. Wells Fargo waived its default rights with respect to the breach for the second quarter of 2010. The company was in compliance with all other financial covenants as of the quarter ended June 30, 2010. Due to the default of the fixed-charge covenant as of the end of the second quarter, the $823,000 outstanding against the Wells Fargo credit facility was reclassified from a long-term to a current liability. It is probable that the company will not be able to cure the default within the next reporting period, but we'll continue to monitor the covenants throughout the third quarter.

Our average days sales outstanding was 56 days for the second quarter, compared to 69 days at the end of the second quarter in 2009. Our DSO was 55 days at the end of 2009. We do not expect our average days outstanding to materially change in the third quarter of 2010.

Our effective tax rate for the current year was 30.9%, compared to a rate of 54% for the year ended December 31, 2009 and a rate of 40.9% for the six-month period ending June 30, 2009. The company makes its interim tax allocation by applying estimated fiscal-year effective tax rates to estimated fiscal-year ordinary income, together with unusual or infrequently-occurring activity for the year-to-date period. The effective rate for the six-month period [ending] June 30, 2010 is lower due to the majority of the company's work being completed in a state which calculates taxes based on gross margin rather than net income. We do not expect our tax rate to change materially for the remainder of the year.

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

Thank you. (OPERATOR INSTRUCTIONS.) Our first question is from Mr. Graham Mattison with Lazard Capital. Mr. Mattison, please state your question.

Hi. This is [Sampson Lee] for Graham Mattison. Earlier you mentioned land proposals are picking up. I was just wondering what you're seeing in the second half and if you could give us some color on that.

Again, as we had said that we're seeing a nice activity level in our proposals around solar and right-of-way-type work, pipeline-type work, and pretty much the area we've been in and the area we have a lot of experience in, so we're pleased with that. And the activity right now is probably the highest we've seen it so far this year. So again, it's predominantly from utility and energy companies, and again, these projects are in our bailiwick.

Okay. And do you see any potential, I guess, acquisitions or what -- any type of tuck-in acquisitions? Anything in the near future?

We have nothing identified at this point. Certainly if -- on an opportunistic basis, if something were to pop, we would certainly look at it, but there's nothing on our radar at this point.

Okay. Thanks for taking my call. I'll jump back in the queue.

(OPERATOR INSTRUCTIONS.) There are no further questions in queue at this time. I would like to now turn the floor back over to management for any additional or closing remarks.

Thank you, Heather. Thanks again, everyone. I'll be available to answer any follow-up questions this afternoon or you can always e-mail 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, that does conclude today's conference call. We thank you for your participation and we ask that you please disconnect your line.