ENGlobal Corp (ENG) 2011 Q3 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the ENGlobal third-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 my pleasure to introduce your host, Ms. Natalie Hairston, Corporate Vice President Investor Relations and Chief Governance Officer. Thank you, Ms. Hairston, you may begin.

Good morning, everyone. Thank you for joining us today. With me on the call are Ed Pagano, President and Chief Executive Officer, and John Beall, Chief Financial Officer. In a moment, I will turn the call over to Ed who will highlight management's perspective on our financial results for the third quarter ended September 30, 2011. John 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 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 referenced during this conference call. Pro forma data is provided for information 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.

Thanks, Natalie. Good morning, everyone. ENGlobal recorded a net loss of $1.3 million, or negative $0.05 per diluted share, for the quarter ended September 30, 2011. This represents an increase of 76% over a net loss of $5.2 million and an increase of 74% over earnings per diluted share of negative $0.19 for the same period last year. Third-quarter revenue decreased to $79.8 million, which were 2% lower the $81.8 million for the third quarter of fiscal year 2010. But a slight increase from the $79.6 million in the second quarter of 2011.

The results in the third quarter were primarily due to a $1.6 million loss in our electrical division. Even after implement in certain reductions in the last quarter, the division continued to under perform. Since the division is not part of our core business and management continues to generate losses, we decided to discontinue the operation in the third quarter. We removed the existing management and are actively looking for a buyer. In the meantime, we will continue to execute the projects and meet all of our contractual obligations.

The Company's third-quarter operating results also include a pretax charge of approximately $890,000 that was necessary to increase reserves for an uncollectible note receivable from a bankrupt client and a litigation matter involving standard industry pay practices. Adjusted EBITDA from continuing operations, which excludes the non operational items I just mentioned, was $2 million in the third quarter, compared to $2.3 million in the second quarter. This marks the second sequential quarter of strong results and improved business metrics.

Management believes that by excluding legacy issues, results from continuing operations reserves as a more meaningful metric to track the Company's progress. Although the pace of the recovery slowed somewhat during the summer, due mostly to worldwide economic uncertainties, our third-quarter operational results underscores the success of our corporate strategy. During the third quarter, ENGlobal continued to see gradual operational improvements in each of our segments. Excluding the legacy issues, both revenues and gross margins have shown improvements. And operating costs were down slightly compared to the first half of the year.

Comparing our numbers briefly to the second quarter 2011, third-quarter revenues increased 0.2% and our gross profit margin increased to 10.6% from 9.4% in the second quarter, and from 7.4% in the first quarter. Our gross profit margins increased due to our cost control efforts and better execution of our projects. It's our goal to gradually return our operating margins to the high single-digits over the next couple of years.

Earlier this year, we had predicted top line growth of approximately 10% to 20%. While our revenues have shown a slight increase in recent quarters, there are three reasons to explains why higher revenues have not been achieved. Worldwide macro economic uncertainty has caused lower than expected construction progress and hence lower revenue recognition. Our casting pipeline project has been low to ramp up, but the project is expected to be pushed out beyond the initial four-year project projection. And finally, our electrical division's revenue was removed from the top line and future revenue will be realized in discontinued operations.

Despite these headwinds, we believe revenues can be improved based in part on work we are receiving from new and existing clients as well as from our alliance partners. We are encouraged by the increasing level of interest in our services, proposal activity, and subsequent projects awards from our targeted markets both domestically and internationally. We believe that a significant portion of any improvements will be based on our continued pursuit of higher margin opportunities and our expansion into international markets where industry conditions have remained more robust. In fact, our new Senior VP of its International Business Development has already made significant headway to give ENGlobal a presence in the Middle East. He has reached out to his contacts in the region and has begun the registration process to execute business with national oil companies in various countries. The response received thus far has been quite encouraging, and we expect our efforts will have a positive impact in the future.

During the third quarter, we announced three significant contract awards. First, an award from Mississippi power to provide analytic equipment for the Kemper County integrated gasification combined cycle plant. The second, two separate lump sum EPC project awards from our North American mid-stream service provider worth a combined value of $11 million. And third, an award from the US military to provide automated fuel handling equipment services at their facility in Okinawa, Japan.

We continue to see growth in the domestic midstream market and the active shale plays which also present attractive project opportunities. Our fuel solutions segment was recently awarded two projects from two separate natural gas pipeline providers to provide right-of-way and inspection services in the Northeast and Midwest. We hope to be able to provide more information about these projects soon.

Keep in mind that these project announcements do not immediately generate revenue for that quarter. Rather, there is somewhat of a bell curve in the progress as it takes time to ramp up these projects. ENGlobal booked approximately $65 million in awards during the third quarter, which is down from the $168 million in the second quarter. That included the $86 million Caspian project. And $77 million in the first quarter. However, our internal business development prospect and proposal metrics improved in the third quarter. Prospects were up 50%, and proposals increased 43% over the second quarter. Our efforts to cross sell our services across all segments have put us in a good position to win contracts. ENGlobal will continue to focus on efficient execution which will result in higher levels of profitability in the future.

Now I'd like to talk about each of our business segments. Our engineering and construction segment has experienced a seasonal leveling off of new business opportunities, which is consistent with the nature of small capital improvement projects that are generally budgeted annually. Clients continue to indicate that run and maintain project spending will remain strong through 2012 as well as continued work with existing clients as they restart moth balled facilities. Even with increased competition, we continue to see signs in this segment that pricing power is beginning to come back. And we have successfully negotiated higher rate multipliers with some clients, which is reflected in our improving gross profit margins.

We are also experiencing the benefit of implementing new business processes for project selection, evaluating high-risk opportunities, and exercising greater diligence in the selection of opportunities to pursue. We have seen increases in revenue from our government service projects as well as projects in chemicals, petrochemicals, refining, and midstream sectors. Our automation segment has benefited from the significant uptrend in revenue, proposal volume, and orders since the beginning of the year. The Middle East, Russia, and Brazil are targeted regions that are experiencing a sharp increase in project activity. While domestically, this segment is benefiting from the increase in activity relating to the development of the US shale plays. We have developed several proprietary products specifically for our shale, offshore, and international clients. And we anticipate that revenue from these products will continue to grow.

The fuel solutions segment is continuing to benefit from increasing activity within the midstream, utility, and interstate pipelines sectors, much of which is related to the high level of activity in US shale plays. The land business, in particular, is seeing demand, growth, and right-of-way work on new pipeline construction and major shale drilling regions. And we believe that we will continue to see growth in domestic pipeline activity, not only from product transportation in shale regions but from LNG import facilities. Heavy Canadian crude transfer from Canada into the US and repairs and upgrades to aging utility and pipeline infrastructure.

Much of the new work we are awarded can be attributed to our efforts to move toward our one and global strategy, as our business development group continues to make headway in selling our capabilities across all business segments. We remain to committed to implementing this strategy in order to make the best use of all of our strengths. And in doing so, we have put ourselves in a very good position to win contracts. Our revenue momentum is building and accountability is being embedded throughout the Company's culture. As we continue to pursue the further integration of our businesses to increase the scope of our bidding activity, we remain focused on maintaining tight controls and efficient execution which should result in higher levels of profitability in the future.

Since my arrival in May of 2010, we've been dealing with several legacy issues that have depressed our overall results. While our most important objective has been to strengthen the Company, both internally and externally, you may recall that our 2011 strategic plan was focused primarily internally. As such, we were able to improve our internal processes, implement new procedures, and reinstate certain employee benefits among other items. With our foundation in place, our strategic plan direction will change somewhat in 2012. While we continue to strengthen our internal processes, we have developed a growth strategy which will allow us to achieve significant growth either organically or through acquisitions. This will include identifying and pursuing acquisition targets, joint ventures with specific engineering and construction firms, and forming consultant agreements with overseas representatives, among other objectives. The executive team is very excited about the prospects that we have identified to date. And we intend to keep our clients, employees, and stockholders updated on our successes.

In summary, macro economic trends continue to influence our client spending trends and tense competition affects our ability to increase profit margins. Nonetheless, we believe that the Company wide efforts underway have positioned global to take advantage of improving market conditions. And we are confident that the changes we have made will allow us to make the most of opportunities going forward.

Thanks for your time this morning. I'll now turn the call over to John Beall, who, as we announced last week, has agreed to accept our position of Chief Financial Officer on a permanent basis. John has been an important member of our team, and we are happy to have the opportunity to continue to work with him. John?

Thanks, Ed. Good morning, everyone. Most of the specific details for the third-quarter results were disclosed in our press release this morning, but I'd like to highlight other selected items. Unless otherwise stated, the financial comparisons I will make compare third quarter of 2011 results to those of third quarter 2010. We experienced our second straight quarter of positive operating income as we are trending in the right direction with continued operations.

Our gross profit margins net increase for this quarter of 2.8% are due to the reduced variable cost and improve efficiencies across all three business segments, with our largest contributing increases are more automation segment. Our SG&A expenses reduced this quarter to 10.3% of revenues, or $8.2 million, compared to 7.8% of revenues or $14.5 million last year. This decrease was largely due to a bad debt expense. While we realized this SG&A is higher than the prior quarter, it includes the $890,000 of non operational items we discussed earlier. We have stated that we expect to be in the $28 million to $30 million range for the full year.

Operations used approximately $6.5 million in cash during the third quarter, compared to approximately $6.7 million used during the same period in 2010. The $6.5 million in cash used by operations is due to increased accounts receivable. Because we use all available cash to reduce our borrowings on the credit facility, cash on hand in September 30 total $34,000. Capital expenditures during the third quarter totaled $187,000 and for the 9 months of 2011 totaled $452,000 compared to the $880,000 in the same 9 months of 2010.

We do not expect our fourth quarter capital investment in fixed assets to materially increase. And we expect our annual investment in fixed assets to be well below our credit facility's annual limit of $3.5 million. Accounts receivable are up for the quarter to $57.9 million, compared to $51.3 million for the same quarter last year. And our working capital was $29.6 million for the quarter, compared to $27.7 million. Our average sales days outstanding was 70 days for the third quarter, which is up by a few days from compared to the second quarter. This is not an acceptable level for the Company, and there is some unusual factors contributing to this DSO level. We do intend for this figure to improve over the next few months, and we've taken effective measures to make this happen.

As September 30, we had no long-term debt on the balance sheet. The amount outstanding on the Wells facility recorded as a current liability was $21.3 million at quarter end, compared to $18.7 million at the end of our last fiscal year. This reclassification caused our fixed charge ratio to breach our covenant and Wells has subsequently granted a waiver. As of November 4, 2011, we have reduced borrowings on the facility of $14.4 million, which increases our availability for working capital. We are currently working with Wells Fargo to extend the facility for additional year from April 2012 maturity and are confident that they provide us with sufficient liquidity to meet our domestic and international financing needs as our business continues to grow.

Our total debt to equity ratio increased slightly from 0.71 at the end of the last quarter, to 0.87, primarily due to increased borrowings under the credit facility. But the Company still maintains a low leverage position. Our income tax provision for the third quarter of 2011 was abnormally high due to the impact of the Texas gross margins tax on our level of earnings. However, it should be normalized on an annual basis. Thank you for the time this morning. I will now return the call to the Operator.

Thank you, ladies and gentlemen. (Operator Instructions) Your first question comes from the line of Matt Tucker.

Good morning, Ed, Natalie, and John. Congratulations on the new position.

Good morning, Matt. How are you? Thank you.

Could you guys give a little more color on what's going on with the Caspian project, why it's delayed? Do you -- when do you expect it to start to ramp up? Also, did you already start mobilizing people for the project which may have been underutilized because of the delay? Or had you not gotten to that point yet?

I can certainly give an update on that, Matt. What's happened with the project is the design was done by a design institutes in Russia and Kazakhstan. That design -- the anticipation was we were going to receive that design and start our end of the work. When we received those packages, they were actually incomplete. We had to kind of back up a bit and help the design institutes finish the detail, the up front work before we can do the detail, and then subsequently fabrication. So, that is what has kind of slowed us down.

As far as resources, what we did is when we started realizing that, we didn't ramp up as quickly as we would have. We had nobody on the bench waiting, if you will, for the work to start. What has happened is the whole thing is kind of pushing right now while we get these guys squared away and we get the design where we need to be so we can take it to the next step.

And do you have this visibility now on when you think that design process will wrap up and you can start to ramp up your work?

We are hoping that we start the ramp in the fourth quarter. Of course, that will push the bulk of the activities in 2012, of course, but we are getting close to finalizing. We should be able to start moving forward shortly.

Okay. Great. And then I was a little surprised given how strong your awards growth was in the first half, that even outside the Caspian project you didn't see a little more sequential top line growth. Was the level of revenue in the quarter in line with your expectations once you realize Caspian wasn't starting up, I guess A? And then, B; based on your backlog right now, do you think you can grow revenues going forward assuming that the Caspian project does continue to move a little bit to the right?

The awards that we announced, certainly, they don't hit immediately. They kind of roll in and ramp up. Some of these projects we are winning are larger, so they are not impacting us as quickly as some of the projects we've won in the past, frankly. We are seeing kind of a normal ramp on these projects. We are not really surprised. We do know what the ramp looks like on each of these larger projects. Not too surprising to us. I think we do believe going forward that, certainly, with Caspian kicking in and some of the opportunities we have, we should start seeing the revenue growth that we anticipated.

Great. One more and I will jump into queue. Can you just remind us how the orders you booked in the third quarter of this year compare to the third quarter of last year?

Matt, I don't think I have the third quarter of last year with me, but we can get that back to you.

Thanks. I will jump back into queue.

Great, thank you, Matt.

Graham Mattison with Lazard Capital Markets.

Good morning, Graham.

Given the Caspian project and you said that this is going to ramp up in the fourth quarter, has the season -- are we still going to see a trend of seasonality where the fourth-quarter sort of tapers off and your stronger quarters being the middle two? Or is that less of a factor now given the change in backlog and change in revenue stream?

It really depends, Graham, because if you remember back in the fourth quarter of last year, that was probably one of our stronger quarters. It's just a matter of how jobs ramp up and ramp down. It's very possible it could be a stronger quarter in the fourth quarter than the third-quarter, because of the Caspian job ramping up.

Got it. And then on the automation site, it looks like there was a sequential job on the revenue side. Is that just lumpiness in terms of the bookings and when things ship out? Could you give us a sense of where maybe backlog is now versus the beginning of the year in that segment?

Well, backlog is still pretty strong, because Caspian is in there. That's for predominantly automation. We had kind of had a double whammy there. Once we get through some of the design work on the Caspian, that gets thrown over the fence to our fabrication shops. The fact that we slowed down the Caspian project, slowed down the actual work for our fabrication facility. So, like I said, it was kind of like a double hit to us. That's why you see that revenue tail off a little bit.

I agree. It's very helpful. I will jump back in queue. Thank you.

Thank you, Graham.

Matt Tucker with Keybanc Capital Markets.

Got a few more questions here. Ed, you have made several changes to the Company since you joined over a year ago. I'm curious what happened with the electrical services unit that you have only now made the decision to sell that business. What really kind of changed over the past year plus versus the way you looked at it initially?

Well, I mean, that business was one we kind of started just with a couple folks coming over. We've been wrestling with them since they've been here to try to get them up on our systems and using our tools, et cetera. Frankly, we have been unable to get them to do it. It's really not a core business for us and we've been struggling with them from the beginning. Results have been fair early on, but started at the beginning of this year, their projects started really suffering. Again, they weren't getting onto the tools we needed them on so we could proactively manage their projects. Again, we let the management go. And we made a decision that this is not a business we need to be in. The margins are low anyway and we just don't need that variable kind of number coming through our books.

Sure. Thanks. And then on the SLE write down, how much of that receivable is still left on your balance sheet?

You know, I don't know. What is it, John, about $1.2 million-ish? Is that right?

That sounds about right.

What has happened there is, you know, we are kind of in the final throes of that. We were given an estimate by the attorneys of what that net number to us would be. Of course, in this bankruptcy there was money going to a bunch of different buckets. The money that was supposed to be in our bucket at the end of the day was a few dollars less than they had told us way up front. That's what really drove the additional write down there, just to get the note to the right number.

Got it. And then your draw on your credit facility had gone up sequentially at the end of the third quarter. Although you noted in your press release that it has since come back down closer to where it ended up at the end of the second quarter. Do you have an expectation for where that is going to end up at the end of this year?

You know, I don't know that we honestly have that number in front of us. We do have cash flow projections. John, you don't have those with you, do you?

I don't.

We can certainly get that back to you, Matt. We do have a cash flow projection. We just don't have it in front of us right now. Yes, I mean, we did have a bit of a spike there, right at the end of the quarter. Of course, a few days ago the number was at 14, so we are pretty comfortable where it is at now. Of course, we are into this line as we are, because we are still funding the losses from previous years. We will need to spend profits, obviously, to get that to go in the right direction, which we are starting to do. You know, we can certainly let you know what that cash flow looks like, though.

Okay. Great. I guess last question. If you could just help me kind of reconcile your end market commentary. I mean, it sounds like bidding and proposals were up pretty significantly, and continue to move in the right direction. Certainly, no slow downs there. You also commented on slowdown in construction work related to macro uncertainty. Are you actually having customers ask you to slow down on projects you are currently working on? Or could you help me reconcile the comments on proposals picking up but the macro uncertainty weighing on the spending?

Yes. What happens in these periods is clients start becoming a little cautious. We haven't been asked to slow down anything that has been awarded. What's happening is some of the awards are slowing down, if you will. Where they might have said this project is going to bid today and be awarded by November 1, now that award date is pushed out 30 days or 45 days. That's the type of slowdown we are seeing, more so than existing projects being slowed down.

Got it. Would it be safe to say, though, that the amount of work you booked here in the third quarter was at least above the level that you got last year for this quarter?

You know, I honestly just don't know the answer to that, Matt, I'm sorry. We will pull that number out for you, but I just don't know the answer off the top of my head.

Sure. Fair enough. Thanks a lot for the color.

To be frank, I am comfortable with the number considering what the market was doing. We are not too far off of the last couple quarters. If you take out Caspian we are probably low 70s. I think with the Caspian quarters, about 75. The first quarter is about 71-ish. Off of memory here. The quarter where we are now, you know, it's not that far off. I was pretty pleased with it, considering what was going on in the macro environment.

From what I remember, that sounds like a much larger number than last year, but I will wait for you to get the official numbers. Thanks, guys.

No problem. Thank you.

(Operator Instructions) There are no further questions at this time. I would now like to turn the floor back to Natalie Hairston.

Thank you. Hello again, everyone. I will be available to answer any follow-up questions this afternoon. Or you can always e-mail directly at ir@ENGlobal.com. Thank you for being on the call today. And thank you, as always, for your continued support of ENGlobal.

This concludes today's conference call. You may now disconnect.