ENGlobal Corp (ENG) 2010 Q4 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the ENGlobal Corporation fourth quarter and fiscal year 2010 earnings conference call. At this time all participants are in a listen only mode. A brief questions 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, please go ahead.

Thank you, Tabitha. Good morning, everyone, and thank you for joining us today. With me on the call are Ed Pagano, Chief Executive Officer, and Bob Raiford, Chief Financial Officer. In a moment I will turn the call over to Ed Pagano who will highlight management's perspective on our financial results for the fourth quarter and fiscal year ended December 31st, 2010. Bob Raiford will then review other financial points of interest. 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 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 the 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 ENGlobal.com.Our filings with the SEC are also available on the SEC's website at SEC.gov.

And now I'd like to introduce our CEO, Mr. Pagano. Go ahead, Ed.

Thanks, Natalie.Good morning, everyone. This morning ENGlobal reported $321 million in annual revenue and recorded a net loss of $0.43 per diluted share for 2010.This compares to 2009 revenue of $344 million and net income of $0.04 per diluted share. In our fourth quarter, which is typically our weakest seasonal quarter, we reported a negative $0.04 per diluted share compared to a net loss of $0.03 per diluted share in the prior year period. In the second quarter of 2010, the Company wrote off the long term claims receivable of $3 million related to the Bigler litigation and subsequent bankruptcy filing. In the third quarter ENGlobal took a pre-tax charge of approximately $7.2 million resulting from the write-off against a long term notes receivable to a bankrupt client, South Louisiana Ethanol. We recently settled the Alon matter which is recorded as a $100,000 charge to earnings in the fourth quarter. These and other, what we would call non-cash non-recurring items totaled $867,000 during the quarter and $10.3 million for the year.

Before I present management's analysis of the quarter and year, I thought I would reflect on some of our accomplishments since I joined ENGlobal about 10 months ago. We restructured the executive team, adding several key people with a vast amount of E&C experience.We reorganized the focus of key businesses and removed construction as a reporting business segment. We incorporated it into the engineering group to validate our focus on construction management. We reorganized the business development group to sell our capabilities across the full and ENGlobal portfolio. We launched our 2011-2012 strategic plan Company-wide which was developed with an internal focus on our people, markets, project execution, business management and culture. We consolidated all domestic legal entities, less our government operations, into one ENGlobal Company. We decentralized a few corporate functions to help the business segments run more efficiently and to ensure accountability. We streamlined several departments, including business development, project controls and procurement. Finally, we launched several working groups to shore up our policies and procedures, procurement processes, and project controls management.

Regarding that last item, I'm pleased to announce that we have successfully completed the project controls and estimating initiatives. I firmly believe that our methodology is a game changer for ENGlobal, and will help to improve the overall quality of our estimates and our projects. We have already received positive feedback from many of our employees, ensuring we have cooperation and enthusiasm as we begin the implementation phase.

Throughout 2011, we will continue to launch initiatives in order to improve our internal processes and procedures. As far as management's assessment of fiscal year 2010 is concerned, we continue to be disappointed in our financial performance. And frankly, our management team will have to make some tough decisions in the very near term. We're looking closely at our underperforming operations as well as those divisions that are not performing up to their current budget. We have identified several areas where we reduced cost, and as part of this plan we have pinpointed even more cutbacks.This process is ongoing and we expect to find additional areas for reducing cost.

As I mentioned last quarter, we are now recognizing the full $2 million in cost savings made during 2010, including capital lease reductions in several of our offices. From an operational perspective, we saw the usual tailing off of activity in the fourth quarter of 2010, which was expected. Likewise, we anticipate our first quarter 2011 will be similar due to normal seasonal declines in demand, delays in targeted project awards, and some atypical weather conditions during the month of February. However, we expect activity to increase gradually throughout the remainder of the year, which I can elaborate on in a minute.

Although we have accomplished a lot, we have more work to do to get back to profitability, which continues to be one of ENGlobal's biggest challenges. Profitability should improve as we identify further cost savings and measure their impact on Company performance.We continue to focus on the collections of outstanding accounts receivable, as well as prioritizing all cash disbursements in an effort to further pay down our debt. Also, given the types of projects we're pursuing and the opportunities available to us, the mix of our work should gradually change from lower margin to higher margin project work.In addition, while our client mix is principally focused on midstream and downstream energy sectors, we expect to see an increase in upstream activity. We should begin to see incremental improvements towards these objectives if we are able to improve project execution and roll out of additional process enhancement initiatives.

On a positive note, several of our 2011 operational metrics continue to show gradual improvements across several of our segments.Let me spend some time talking about some of those specific metrics and their revenue, gross profit, biweekly billable hours and utilization. The Company averaged 175,000 man-hours for a two week period during the fourth quarter of 2010,. Which is a 5% increase from the third quarter of 2010, and an 11% increase from the fourth quarter of 2009.In fact, we reached the highest biweekly man-hours of the year during the fourth quarter, which was 197,000 man-hours. Likewise, the Company's overall utilization was approximately 91% for the fourth quarter of 2010 compared with approximately 89% for the comparable period of 2009. When comparing sequential quarters, the fourth quarter showed a slight 1% increase over the third quarter in 2010.

Other metrics showing sequential improvements are, first, quarterly revenue reached $93 million in the fourth quarter, an 8% increase when compared to $86 million in the third quarter. Our gross profit margin increased to 8.1% in the fourth quarter, up 4 percentage points from the 7.7% in the third quarter. And finally, net of what we would define as non-cash non-recurring charges, our SG&A decreased slightly in the fourth quarter to $7.3 million from $7.4 million in the third quarter. We expect our 2011 SG&A to be maintained at approximately 7.5% of revenue for the full year.

We're also pleased to report that 2011 proposal activity continues to strengthen. Our business development group has seen some encouraging signs. First, we have been awarded and booked approximately $28 million worth of new business in January 2011 alone. This compares to $25 million worth of awards in all of the fourth quarter, and $21 million in all of the third quarter. Second, the number of larger proposals is increasing significantly, especially in engineering work along the Gulf Coast. Third, we have identified several large sole source opportunities, and we are actively working to finalize all contractual terms and conditions. Finally, we have seen a dramatic increase in cross-selling all of our capabilities across our portfolio. And regional business development teams are working closely together to pursue multi-segment project opportunities. We believe that our performance will improve over the course of the year as we begin the project work from these awards, gain additional backlog, and continue to provide quality execution to our clients.

In addition, ENGlobal's 2011 end markets continue to show a slight recovery. Industrial Info Resources Inc., an industrial market intelligence firm, recently reported a $237 billion, or a 3% increase, in overall US industrial spending over 2010. In addition, IIR announced its 2011 market activity forecasts which include the following. Almost 200 pipeline/transmission projects with a 33% spending increase over 2010. Over 1,200 power generation projects, with a 24% spending increase over 2010. About 550 petroleum refining projects, with a 5% spending increase over 2010. Approximately 1,000 chemical processing projects, with a 2% spending increase over 2010. We anticipate that this market activity could benefit ENGlobal in the mid to long term.

In summary, we'd like to thank our stockholders and employees for their support. We have a great deal of work to do, and it will take some time as we work to become a better performing and profitable Company. In the meantime, our positive trends have resulted in a tempered amount of internal optimism.We are tasked with making prudent decisions in the near term to ensure accountability in our business and in our management team.

Thanks for your time this morning. I'm going to now turn the call over to Bob.

Thanks, Ed.Good morning, everyone. A lot of the specific details of our results for the fourth quarter and fiscal year ended December 31 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 are year-over-year comparisons to the fourth quarter and fiscal year 2009.

Operations used approximately $8.4 million in net cash during the fourth quarter compared to approximately $4.5 million produced during the same period in 2009. For the 12 months ended December 31, operations used approximately $6.2 million in net cash compared to approximately $23 million provided during the full year 2009. Non-cash items for 2010 totaled $5.1 million and included $2.5 million in depreciation of fixed assets, $1.8 million in amortization of intangibles, and $438,000 in stock-based compensation. Overall, we had a decrease of approximately $400,000 in non-cash items year over year.

For the fourth quarter, working capital was negatively impacted primarily as a results of an increase in accounts receivable, a decrease in accounts payable, and a decrease in accrued compensation primarily related to the timing of our final biweekly payrolls for the year. Total capital expenditures for 2010 totaled $1.2 million compared to expenditures of $3.2 million in 2009. If you recall, we incurred a higher than normal level of capital expenditures during the first quarter of 2009 primarily related to expansions in both Beaumont and Houston. We do not expect an increase in capital investment for fixed assets during 2011.

Our long term commitments, net of the current portion, decreased approximately $1 million from $1.3 million at the end of September 30th, 2010, to approximately $300,000 as of December 31st, 2010. For the 12 month period of 2010, our overall long term commitments, net of current portion, decreased approximately 95% or approximately $5.8 million from $6.1 million as of December 31st, 2009. The decrease in our long term debt during the year was almost entirely due to the reclass of our credit facility to a current liability during the second quarter. As a percentage of stockholders' equity, overall long term debt at the end of 2010 decreased to 0.4% compared to 8% at the end of 2009. Total liquidity, which includes cash availability under our credit facility, was $5.4 million at the end of 2010, compared to $18.4 million at the end of 2009. The outstanding balance on our line of credit at the end of 2010 was $18.7 million, with remaining borrowings available of $5.4 million.

During the current quarterly reporting period, the Company was not in compliance with a fixed charge coverage ratio under the Wells Fargo credit facility. Wells Fargo waived its default rights with respect to the breach for the fourth quarter of 2010 only. It is probable that the Company will not be able to cure the default by the quarter ended March 31st of 2011. The Company was in compliance with all other financial covenants as of the quarter ended December 31st, 2010. On September 30th of 2010 the Company entered into an amendment to the credit agreement with Wells Fargo Bank which converts our borrowings from a revolving credit facility to an asset-based lending agreement. The Company has been in negotiation with Wells Fargo since the fourth quarter of 2010 to increase availability under its credit facility.

Our average days outstanding was 56 days for the year just ended, compared to 54 days at the end of the third quarter 2010. Our DSO was 55 days at the end of 2009. We do not expect our average days outstanding to materially change in the first quarter of 2011. Our effective tax rate for the year ended December 31st, 2010 was 34.8% compared to a rate of 54.7% for the year ended December 31st, 2009. The primary reason for the increase in our effective tax rate for the prior year is that our revenues decreased significantly from prior year but our project cost structure did not decrease proportionally.In addition, the franchise tax for the state of Texas is based on gross margin rather than net income, so our state tax liability did not decrease proportionally with our overall net income.

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

(Operator Instructions) Your first question comes from Matt Tucker with KeyBanc Capital.

Thanks and good morning. You guys have indicated previously that you're profitable in the month of September for the first time in several months. Could you talk about what, in the fourth quarter, contributed to sliding back into the red? Was that primarily reflective of seasonality or did you see some slow down in underlying business in the fourth quarter versus September?

Again, as we've discussed many times before, Matt, we lose a whole bunch of weeks in November and December combined, so there is a big seasonality part of that. That's always our slowest periods. We were also profitable in the month of October. But, again, as you saw in our results, we did take just under $1 million in nonrecurring charges, as well. So, that had a contribution to it, as well.

Makes sense, thanks. And then in terms of the pick up in awards that you saw in January, can you talk about the types of projects where you're seeing that pick up? And have you seen some of that momentum continuing through February?

Yes, we have. Again, we're seeing activity in our midstream and our downstream business, and that's where predominantly those awards are coming from. Again, we're seeing a bigger awards, or bigger pieces of our business, if you will. You and I talked about this before, Matt, where it's not just about one segment, it's about the portfolio. And we're starting to see some of those portfolio sales, as well. So, it's been very promising for us.

On the midstream side, can you talk about the outlook for your pipeline inspection activity, maybe the status of your work on the Ruby pipeline. And are you expecting that business to drop off a bit after the Ruby pipeline is complete, which I think is targeted for June?

Actually, that's starting to come down already, Matt. It doesn't just turn off, it fades away, if you will. So, that's starting to come down already. But, again, as we noted earlier, there's a whole bunch of pipeline activity coming up. So, we're very optimistic that, again, we'll get our share of that, as we always have. I think when you start looking at the midstream markets, and you talk about the Eagle Ford shale, the Marcellus, and even the Bakken, there's a lot of work coming out of there right now, and they're very, very active. And, again, we're very active with them, not only doing work but with proposals. So we're, again, pretty bullish on that side of the market.

Thanks. And then last question before I jump back in the queue, any change in your head count since the end of the fourth quarter?

Yes, Bob, do you have those numbers?I believe the head count was about 2,300 and it's down to about 2,100.

2,150, 2,160.

2,150, 2,160. And, again, a big chunk of that -- again, our inspectors tail off in December and January, so a lot of that had to do with the inspection crews just tailing off.

Okay.Just to clarify, it looked like the head count was 2,000 at the end of the fourth quarter. So, would that be then an increase of about 150 since the end of the year?

Yes.

Okay. Thanks. I'll jump back in the queue.

Your next question comes from Greg Mattison with Lazard Capital.

Hi, good morning, guys. Just wanted to follow up on the question about the bookings you saw in January. Can you talk a little bit more about the makeup, and if you could, give any color what you've seen so far in February. The make up of those bookings in terms of, were they larger projects, smaller ones, and are they mostly coming from your alliance customers?

Again, for us, they're good-sized contracts and they are coming from a lot of our alliance customers. We do have a couple of new ones in there, as well. But I would say the majority are coming from our MSAs and our alliance customers. Again, as I noted before, it'd say predominantly it's probably downstream, midstream. Probably a little more downstream than midstream right now.

And then can you give some update in terms of, in the past you talked about making expansions into more on the upstream international markets and government work. Where you are on that and what you're seeing?

I think, again, we're starting to get a little traction upstream. It's going to be slow because we're doing it internally. So, we're working with some of our clients now and they're giving us pieces of work in that area. So, we're very encouraged about that, and we expect to see that picking up throughout the year. International, it's been a little slower than I'd like. But we bid a couple of opportunities and we haven't been successful on them. We have a couple more out there now, so hopefully, we can spin one of those in. And again, government, we're seeing a good level of activity in government, and I hope that we'll hit our growth rates that we anticipated in the government sector.So, I'm pretty happy with the government work today.

Got it.And then just a final question. You mentioned that you're looking at other ways to save cost, and obviously continuing on your diligence in terms of keeping overall costs down. Is there any way, the costs that you would be looking to take out, would there be a meaningful drop off in revenue? Is it the type of thing that you're exiting a type of business line, or just more adjusting the people and the costs, the operating costs at the moment?

At the end of the day our goal is to turn ENGlobal profitable. And I think, frankly, we're going to look at everything we can look at to get there. And if that means looking at some businesses or operations or people. Again, we just have to look at everything, and really nothing is off the table at this point. Our end goal is to spin the Company black and we're going to do what we need to do to get there.

Got you. And would say in the current months, so far this year, have you been profitable?

I don't think we're going to talk about that until May.

All right. Fair enough. I'll jump back in queue. Thank you very much.

Your next question comes from Craig Bell with Enere Capital Partners.

Just wanted to get some more clarity on where you're at with regards to your borrowing availability.Is that really -- the run up that we saw in the quarter, was that really more of a timing issue on it or is that indicative of something I should be concerned about?Because obviously, it ran up a bit and then your availability is down quite a bit.

This is Bob. Yes, most of it has to do with timing on some of our collections and the billings on our receivables side from the ramp up we had with a new client at the end of the fourth quarter. So, we expect those receivables to clear in Q1.

Okay. So, just qualitatively, are you in a better position today than you were at December 31st?

Similar position.

Okay. And then with respect to your pipeline stuff, what kind of trends are you seeing there on the right of way versus inspection? Are you seeing any significant differences between those two pieces of it?

Differences, no. I think what we're starting to see is actually the synergies of those two businesses. Because obviously one leads right into the other. So, we're starting to see some of that benefit, if you will, where we're trying to, we're in early with the right of way work and we're trying to drag our inspection group, as well as our engineering group into that work, as well. So, I think it's working right now the way we had anticipated it to be working.

Okay. And then just one last one for you, Ed.You made the comment that you continue to be disappointed in the financial performance. Just curious whether that's more a reflection on overall 2010 or if that was still something that -- is it improving for you in Q4 and into the first part of this year?

I would say it's overall. We just came up with some pretty disappointing numbers for the year. We just have some work here to do to get that better for the next year -- or for 2011. So, I'd say it's more overall.

Okay, great. Thanks a lot.

(Operator Instructions) And your next question comes from Matt Tucker with KeyBanc.

Ed, you alluded to some under-performing divisions. Can you maybe elaborate on where you're seeing some under-performance?

I don't think I'd want to do that right now, Matt.

Okay, thanks. And then, you've commented before that you really view the power and government businesses, in particular, as having some untapped growth potential. I know it's a longer term goal for you to grow those, but have you seen a pick up in growth for those divisions?Have you started to get some traction with those initiatives there?

Yes, just deal with one first. The government group, we're starting to see a lot of opportunities there, and we're starting to pursue more opportunities with the new management there. So, that's going as I had hoped it would be going, so I'm very pleased with that. On the power side, we're starting to see more synergistic type opportunities with them, and we're bringing them more onto some of the engineering construction work that we're doing. So, again, yes, we're starting to see some traction there, as well. I still believe that those are two very key opportunities for us.

Thank you very much, that's all I had.

And we have no other questions at this time.

Thank you, Tabitha. Ladies and gentlemen, hello again. I'll be available to answer any questions this afternoon or you can always e-mail me directly at IR@ENGlobal.com.Thank you for being no the call today.And as always, thank you for your continued support of ENGlobal.