ENGlobal Corp (ENG) 2011 Q1 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the ENGlobal Corporation first-quarter 2011 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 of Investor Relations and Chief Governance Officer. Thank you. Ms. Hairston, you may begin.

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

With me on the call are Ed Pagano, President and 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 first quarter ended March 31, 2011. 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 risks 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 ENGlobal.com. Our filings with the SEC are also available on the SEC's website at SEC.gov. And now I would like to introduce our CEO, Mr. Pagano. Ed?

Thanks, Natalie. Good morning, everyone. ENGlobal reported a net loss of $2 million or a negative $0.07 per diluted share for the quarter ended March 31, 2011. This represents an increase of 28% over net loss of $1.5 million and an increase of 17% over diluted earnings per share of a negative $0.06 for the same period last year.

First-quarter revenue increased to $77.3 million, 14% higher than the $60 million for the first quarter of 2010. In addition, our consolidated gross profit margins increased to 7.4% in the three months ended March 31 from 7.2% in the prior-year period.

Although our revenues increased quarter over quarter, at the first of the year, local management did not react quickly enough to changing market conditions. Subsequently, senior management began to look closely at our underperforming operations as well as those divisions that were not performing up to their budgets.

We instituted more cutbacks and expense control efforts during March. Those efforts included a reduction in force which will provide approximately $4.3 million in cost savings during 2011. We will continue to monitor divisional budgets as a normal course of business.

Despite accounting for certain legacy projects and legal issues, ENGlobal generated net income in the month of March for the first time since September 2010. I'm particularly pleased that both revenue and margins increase over the year-ago quarter, providing further evidence that our end markets are improving and that our lower fixed cost structure and ongoing focus on productivity are yielding results. It's our goal to gradually return our operating margins to the high single digits over the next couple of years.

ENGlobal has certainly faced a number of challenges in the past and we are slowly working through these issues. Our objective has been to strengthen the company both internally and externally. For example, our 2011 and 2012 strategic plan is focused primarily internally with the exception of our market strategy. And our internal processes have improved dramatically as we implement our new procedures.

Externally, we are working to positioning ENGlobal as a leading full-service provider of services to the energy industry by marketing our range of capabilities in the areas of engineering and construction, automation and field solutions services. Accordingly, our new sales indicate that we have made significant progress towards our goal, One ENGlobal Philosophy, by empowering our business development group to sell our capabilities across all business segments with special attention to our key client relationships.

I will discuss more about our business development progress in a minute.

As outlined in our project execution strategy, we also want to focus more on high-quality responsive and cost-effective work product. We recently evaluated and changed our internal project management operations to address these issues. For example, we have developed project office that share overhead with other locations. This ensures that labor support to our project services is focused on sustaining high levels of utilization.

While management changes such as those in process can be disruptive in the short term, we believe that the long-term impact of these changes will be favorable. During the process, constant communication is required to provide thorough explanations of the changes in order to avoid disruptions to our business, not only on our progress to date, but on our future financial performance. We have and will continue to implement the changes in such a way to minimize any negative impact on the morale, cohesion, and effectiveness of our segments.

Our balanced and structured approach to ENGlobal's recovery should drive positive results across our company. In the meantime, we plan to make prudent decisions as we move in the right direction.

Now I would like to give you an overview of each of our business segments. Our Engineering & Construction segment is beginning to see some positive trends. Some of these offices have continued to struggle as we slowly recover, but overall volume seems to be picking up. We will continue to evaluate underperforming locations and make changes where appropriate to address backlog slowdown or profitability issues.

Our in-plant business has remained steady and we recently announced an alliance with a chemical company to perform in-plant services in all of our clients' Texas-based facilities. In fact, we are pleased to report that we have adjusted our anticipated 2011 revenue from this alliance because it's running higher than our estimated contract value of $15 million over three years, as we previously announced.

Our Field Solutions segment is seeing rising activity within the midstream, utilities, and interstate pipeline sectors. This segment primarily benefits from the active shale plays that have emerged across the country, including the Bakken, Marcellus, and Eagle Ford.

Our land, permitting, regulatory and inspection services are positioned to repair old systems and create new expansions in these areas. Both the land and inspection divisions are working to increase the number of clients in their baseload operations and payment support, and synergistically, leverage common industry relationships to benefit one another.

Since [landmen] are often first on the project, we expect this to lead to more capital project opportunities for all segments over time. Although improving, we have seen a slow release of capital that has been a factor of projects won but not released.

Our Automation segment has driven our expansion into higher-margin opportunities. In addition to their core fabrication and electrical divisions, which are typically lower margin, they recently developed several proprietary products with higher profit margins that has translated into growth and success.

Specifically, proposal volume is high in this segment, and we have identified several large, sole-sourced automation opportunities that we expect will come to fruition throughout 2011.

Another high-margin opportunity is expanding globally. Our visibility has improved in certain high-growth international markets that we are already serving. Similar to our domestic successes, our 2012 international business plan expands our existing client relationships and cross sells our capabilities to overseas markets.

We believe that international expansion in 2012 and beyond will drive sustainable earnings growth and long-term stockholder value.

To date, we are still experiencing high proposal activity. We were awarded approximately $60 million worth of new business in the first quarter of 2011. This compares to $25 million and $21 million worth of awards in all of the fourth and third quarters, respectively.

As I mentioned on our fiscal year 2010 earnings call, we were awarded $28 million in January alone, which is unusual when considering the first quarter is seasonally our second weakest quarter.

Our mix of project awards has been diversified across all of our business segments and we can say the same about the prospects that we have identified. We believe that our performance will continue to improve over the course of 2011 as we begin the project work from these awards and gain additional backlog.

In closing, as we move further into 2011, we remain cautiously optimistic about our recovery timeline as we work through some legacy issues. In the meantime, I truly believe that client satisfaction drives every segment of our business. Overall, the engineering and construction industry continues to trend positively and we will look for additional operational efficiencies to best position ourselves for achieving future successes, and, most importantly, profitability. Thanks for your time this morning.

I will now turn the call over to Bob.

Thanks, Ed. Good morning, everyone. A lot of these specific details for the first-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 first quarter of 2011 results to those of the first quarter in 2010.

Operations produced approximately $6.8 million in net cash during the first quarter compared to approximately $6.5 million produced during the same period in 2010, and a negative $8.4 million in the fourth quarter of 2010.

Non-cash items in the first quarter did not materially impact cash flow as $400,000 in depreciation of fixed assets, $500,000 in amortization of intangibles, $100,000 in stock-based compensation were offset by approximately $1 million in deferred income tax expense. Overall we had a decrease of approximately $1.1 million in non-cash items year over year.

The positive impact of working capital in the first quarter was primarily the result of decreases in accounts receivable and notes payable, and an increase in accrued compensation and benefits.

Total capital expenditures during the first quarter totaled $109,000 compared to expenditures of $259,000 in 2010. We do not expect our second-quarter capital investment in fixed assets to materially increase, and we expect our annual investment in fixed assets to be well below our credit facilities' annual limit of $3.5 million.

Our long-term commitments, net of current portion, remained relatively the same at $253,000 and $253,000 as of December 31, 2010, and March 31, 2011, respectively.

The company's credit facility with Wells Fargo Bank was classified in the current portion of long-term debt due to our not being in compliance with our fixed charge coverage ratio within the credit facility for the quarterly period just ended plus the credit facility's pending expiration April 30 of 2012.

As a percentage of stockholders' equity, our overall long-term debt at the end of the first quarter remained the same as of the end of 2010 at 0.4%.

Total liquidity, which includes cash plus availability under our credit facility, was $9 million at the end of the first quarter compared to $5.5 million at the end of 2010 and $24.7 million at the end of the first quarter in 2010.

As of the end of March 31, 2011, the amount outstanding on the company's line of credit was $12.3 million compared to $18.7 million as of December 31, 2010. During the current quarterly reporting period, the company was not in compliance with a fixed charge coverage ratio under the Wells Fargo Credit Facility. Our fixed charge coverage ratio for the period was a negative 0.96 to 1. The Wells Fargo Credit Facility requires the company to maintain a fixed charge coverage 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 first quarter of 2011 only. The company was in compliance with all other financial covenants as of the quarter ended March 31, 2011.

Our credit facility with Wells Fargo is as guaranteed by essentially all of the company's assets and positions Wells Fargo as senior to all other debt. It is probable that the company will not be able to cure the default by the end of the quarter ended June 30 of 2011. The company has been in negotiations with Wells Fargo since the fourth quarter of 2010 to restructure the covenants and create increases availability under its credit facility.

Our average days outstanding was 63 days for the first quarter compared to 60 days at the end of the first quarter in 2010. Our DSO was 56 days at the end of 2010. We are unhappy with this trend and we have made some internal process changes to get back to our targeted number.

Our effective tax rate for the first quarter was 31% compared to a rate of 34.8% for the year ended December 31, 2010 and 40.8% for the three-month period ending March 31, 2010.

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

(Operator Instructions). Matt Tucker, KeyBanc Capital Markets.

My first question is, a lot of your peers mentioned seeing impact from unusually severe winter weather on their operations in the quarter. Could you comment on any impact you saw, and if possible, quantify it?

Well, Matt, we definitely had an impact in the first couple of months of the quarter. We don't have a quantification for you right now. We can certainly get it for you, but we saw projects slow down. We had people have to leave projects. We had some offices that were closed due to weather, so we certainly had a handful of those issues as well. Again, we can come up with a number. We just don't have one handy right now.

Okay. Outside of those types of impacts, would you say that the quarter -- that the results were relatively in line with your internal expectations, or better or worse?

Well, yes, I guess if you take out that slowdown in the first couple of months and certainly the one-offs we had in the -- towards the end of the month, I would say we were kind of in line with our expectations.

Okay, thanks. And then, with respect to the level of awards that you saw in the first quarter, how much of that was kind of lumpiness? Or have you really seen that type of rate continue post the end of the quarter?

You know, it's difficult to say. We -- it wasn't certainly one or two big awards. There were quite a few of them. So I don't necessarily think it's lumpiness; I think it's the market just starting to open up. I mean, things have been kind of on hold for quite a while, and now we're starting to see them actually getting released, so I don't believe we have a lumpiness in here. I think we just have a market picking up, and we are starting to get some benefit from that.

Thanks. And then final question and I'll jump back in. I think you have alluded to some opportunities kind of shifting out in terms of timing a little bit. Is there kind of a common theme on why that's happening? Is it that your customers, given they are enjoying stronger margins than in the past with their starting to -- they don't really want to take their assets off-line? Or kind of what's behind that?

Difficult to actually say what's behind their thinking. Certainly the current market conditions and what has happened in the past six to eight months, a year, I'm sure there are some people out there just trying to be a little optimistic -- or cautiously optimistic if you will, so they're probably not jumping into things as quickly as they would have in the past. Having said that, we are still seeing releases of projects. So again, we still are encouraged by the market as it stands today.

Thanks. I'll jump back in the queue.

Craig Bell, Enerecap Partners. Mr. Bell, please go ahead.

Just wondering, with your billable hours, and you had said that March was profitable -- did you see the billable hours improve throughout the quarter?

Yes, the billable hours went up each month of the quarter.

Okay. Is that something you are starting to see in the early part of second quarter here as well?

Yes.

Okay. And then, as you said you had a reduction in force but it looked like total employee count was up,. I'm guessing that means that you were sort of adding in some places and taking out in others. Could you tell us sort of where you are adding employees?

Well, Craig, as you know, we add folks when we have projects, right? So we generally hire quote, unquote billable people. The reductions in force, quite frankly, came out of kind of middle management -- overhead staff, that type of thing. So -- and we certainly try to get more people more utilized. So there's kind of a combination of things going on there. We looked at making our units more efficient, plus of course we are adding staff as work starts coming in, so there was a bit of a combination there.

Okay. And then sort of related to that, are there going to be any more -- or do you anticipate any more severance costs here in the second quarter related to the reduction?

No, no. We've taken all the costs from this redundancy in the first quarter.

Okay. Great. Thanks a lot.

There are no further questions at this time. I would like to turn the floor back over to management for any additional or closing remarks.

Thank you, Karen. Hello again, everyone. I will 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.