ENGlobal Corp (ENG) 2011 Q4 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the ENGlobal Corporation's fourth quarter and fiscal year 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, Corporate Vice President, Investor Relations and Chief Credit Officer. Thank you. Ms. Hairston, you may begin your conference.

Thank you, operator. Good morning, everyone, and 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'll turn the call over to Ed, who will highlight management's perspective on our financial results for the fiscal year 2011 and our strategic direction. 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 involving 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?

Thank you, Natalie, and good morning, everyone. 2011 was a year of transition and positioning for ENGlobal. Since I arrived in mid-2010, we have been acutely focused on reengineering ENGlobal to become a more efficient and effective enterprise. While the evolution of a dynamic organization is an ongoing process, I am pleased to say we made great strides in 2011 by assuring we had the right people in the right positions, developing expectations of excellence in each of our operating segments and, most importantly, refocusing the Company on our top priority, providing exceptional and responsive services to each of our ENGlobal clients.

While the transition has not been without its challenges, our progress is both measurable and encouraging. Our efforts to secure new business are beginning to take hold, as we noted in our press release this morning. For example, new business awards in the first two months of 2012 exceeded those received in the entire third quarter of last year. We believe that momentum will continue into the coming months, which should provide support for meaningful growth for the balance of 2012 and beyond.

That said, while we are pleased with our progress, we are not satisfied with our 2011 results. We recognize it's never good to lose money and we have redoubled our efforts to ensure we turn the corner to profitability. We continue to examine every aspect of our business to assure its stance in support of our core objective to provide exceptional client service and results and profitability. We will not be timid in continuing to adjust and reshape our business in order to meet those goals.

However, there is no quick fix to consistent profitability, and we will not sacrifice our longer-term vision of ENGlobal's success for short-term projects that do not provide long-term profit potential.

Our focus on profitability and new business growth should, if successful, make 2012 a good year for all ENGlobal stakeholders. While we won't be perfect, we will strive for perfection. We will measure our success based on the satisfaction of our clients, the growth in our client base and the returns for our shareholders.

In short, our hope for this year is that ENGlobal can make a positive difference for our clients, our employees and our stakeholders. While ENGlobal has faced its share of challenges in the past 18 months, I believe those challenges have not only lead to future opportunities for the Company, but also made us stronger both as individuals as well as a team. It's now my responsibility along with the ENGlobal leadership team to seize these opportunities and turn them into profits for our Company. I'm convinced we now have the team in place and we will work tirelessly as we strive to provide industry-leading returns for our stakeholders.

While we will spend some time discussing 2011, it's important to know we are squarely focused on the future. While it's true that those who ignore history are bound to repeat it -- and believe me, the history of the last 18 months is hard to ignore -- our use of ENGlobal's experience will allow us to learn from our mistakes and build on our successes as we continue to re-create an ENGlobal that will make us all proud.

Before a brief review of our financial results for the quarter and fiscal year, I want to take a moment to clearly address the delay in our earnings announcement and our Form 10-K filing. I am more disappointed than anyone that we were unable to complete our filing as originally planned. However, a series of extraordinary events led to the delay; and, candidly, it was in the best interest of all our stakeholders to do so.

As you may know, our senior credit facility with Wells Fargo Bank was originally scheduled to mature at the end of April 2012. We have been discussing options with Wells Fargo for more than six months with all indications suggesting we would extend our relationship with Wells Fargo for a new term. However, Wells Fargo recently indicated that it was not interested in continuing the relationship, which was a significant departure from previous conversations. While it's no secret that their strict fixed charge covenant had challenged our Company, we believed we have made progress towards restructuring the facility to meet our needs.

Wells Fargo informed us their decision was not simply based on its relationship with ENGlobal, but on a change at the bank regarding its outlook for contract-based businesses in general. While surprised by the sudden change of heart, we had no choice but to accept their decision and move forward. Wells Fargo did agree to extend the maturity of our facility through May 31, 2012, and waive our fourth-quarter covenant violation. We believe this provides ENGlobal with plenty of time to transition to a new senior lender. We would like to thank Wells Fargo for their past service.

In response, we sought interest from other financial institutions and are currently in advanced discussions with two equally capable commercial banks. Moreover, these discussions are likely to lead to a new facility that is less expensive with fewer covenants and will also provide additional flexibility for future growth. We are confident the extension Wells Fargo has provided will allow us to forge a new credit relationship by May 31.

In our press release this morning, ENGlobal reported $313 million in annual revenue and recorded a net loss of $0.27 per diluted share for 2011. This compares to 2010 revenue of $306 million and a net loss of $0.43 per diluted share. In our fourth quarter, which is typically our weakest seasonal quarter, we recorded a negative $0.15 per diluted share compared to a net loss of $0.02 per diluted share in the prior-year period.

As we reposition the Company for future growth, there are a number of extraordinary items that impacted our financial results. Complete details can be found in our annual report on Form 10-K that will be filed this morning with the Securities and Exchange Commission.

For example, the Company accrued project losses of approximately $4.3 million in our electrical division. As I noted in the previous quarter, we explored a sale of this underperforming division; but, absent buyers, we recently sold most of the assets of the division. Going forward, we plan to complete the projects and sell the remaining assets by midyear.

Our 2011 results were also impacted by an uncollectible notes receivable from SLE, expenses relating to right-sizing our Company, extracting employees from Libya and a class-action litigation involving standard industry pay practices. All told, nonrecurring items, excluding the electrical division, were $3.2 million for the full year.

While these legacy issues were painful, our goal in the transition process was to purge all of the distractions to allow the Company to focus on providing best in class project delivery solutions to our clients and create returns for our shareholders.

While 2011 was difficult, it has positioned us well for 2012. So far, the new year has provided meaningful new opportunities. For example, proposals year-to-date are 23% higher than the same period in 2011, and the trend appears to be continuing. We received approximately $70 million in awards in January and February, a 35% increase over the same two months in 2011, and compared to $66 million in all of the fourth quarter. Our utilization rate increased 2 percentage points to 91% in fiscal year 2011 when compared to fiscal year 2010.

Backlog at December 31, 2011 was $302 million, a 24% increase over the prior year. We attribute this increase to our efforts to cross-sell our suite of services to new and existing clients. We expect backlog to increase throughout 2012 by implementing a more effective business development program. The business development group has moved from a geographical focus to a market-based approach. Operations and business development personnel are taking a collaborative and consultative approach to meet our customers' needs. The new approach has already been successful. We are receiving awards from new and existing clients as well as our alliance partners. These same clients have higher-margin opportunities similar to those found in international markets. In addition, we have already been qualified by several national oil companies, which is the first step to bidding on future international work.

We continue to be encouraged by the increasing level of interest in our products and services, proposal activity and interest from our targeted markets. That said, even the best companies face challenges, and ENGlobal is no different. Our Caspian Pipeline Consortium project has been impacted by administrative issues which have delayed our portion of the project by approximately six months. We are working diligently to understand the ever-changing client processes in order to reduce the lag time between submitted documents and ultimate approvals. These issues notwithstanding, we have a solid working relationship with the client and we still anticipate completing the project and recognizing approximately $86 million over the life of the project. Throughout the remainder of the year, we expect to earn approximately $15 million in revenue from the CPC project. And be certain -- I will personally monitor this project with our team to assure we are progressing as planned and work with our client to meet all project objectives.

As I mentioned during our last earnings call, we have developed a three-pronged strategic growth initiative, a strategy focused on the combination of achieving organic growth, pursuing domestic and international partnerships and engaging in the acquisition of companies whose operations are synergistic with ENGlobal. This includes identifying joint ventures with specific engineering and construction firms and forming consultant agreements with overseas representatives, among other objectives.

Now I would like to talk about each of our business segments. Our Engineering and Construction segment achieved its top-line revenue plan for 2011, commensurate with our strategic plan for the midstream and downstream sectors. The in-plant division exceeded both revenue and net operating income for 2011 as we continue to experience strength in this market. We view this continued strength as a leading indicator of our clients' 2012 CapEx budgets. Clients continue to indicate that run-and-maintain project spending will remain strong for 2012 as well as continued work with existing clients as they restart mothballed facilities.

Even with increased competition, we continue to see signs in this segment that pricing is firming as we continue to negotiate higher rates.

Our government services division also exceeded 2011 budget targets as a result of the growth in market share on our current base contract for fuel handling systems. Proposal activity was unusually strong in the final months of 2011, indicating clients' conference in the 2012 capital spending plans, particularly in the midstream sector.

We expect our Automation segment will benefit over the course of 2012 from having built a good level of backlog from both foreign and domestic sources. Automation has seen a 53% increase in proposal activity for the first quarter of 2012 versus the same period in 2011. We have also seen a 67% increase in project awards, comparing the first quarter of 2012 to 2011, and we continue to see opportunities from the Middle East and Brazil. While domestically the US shale play remains extremely active, and our services as well as our products are in demand.

As noted earlier, Caspian will be ramping up and moving into the fabrication stage, which should provide a steady level of activity.

The Field Solutions segment was impacted throughout 2011 by the winding down of the El Paso's Ruby Pipeline project. We have worked to diversify the inspection client base to allow for future growth in the division. Field Solutions continues to be in position to benefit from activity in the midstream and intrastate pipeline sectors related to the shale plays, particularly in Texas, North Dakota and Pennsylvania. Both the land and inspection divisions were impacted by the annual seasonal decline during the winter months, which was particularly difficult through the warm and wet season that slowed construction projects. This segment has seen an increase in proposals for 2012 as a result of upgrades to US utilities and the shale plays.

For example, clients in the West are beginning to react to accidents caused by aging pipeline infrastructure, and the shale plays are creating major pipeline projects in other parts of the US, specifically transporting natural gas from Pennsylvania to major southeastern metropolitan areas.

While 2011 was full of challenges, we believe we have positioned ENGlobal to better respond to future opportunities and to achieve profitable growth for 2012. I am pleased to be the Chief Executive Officer of your company and look forward to working with our dedicated team, our clients and all of our stakeholders as we continue to reach for profitability and beyond. While there is a lot of hard work ahead of us, I'm certain our team is up to the task. We thank you for your patience and support in the past year and look forward to sharing our progress in the coming months.

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

Thanks, Ed, and good morning. While the details of our 2011 fourth quarter and fiscal year results were disclosed in our press release and 10-K to be filed this morning, I would like to highlight a handful of key items. Unless otherwise stated, the financial comparisons I will make year-over-year comparison to the fourth quarter and fiscal year of 2010.

As Ed mentioned earlier, ENGlobal reported $313 million in annual revenue and recorded a net loss of $0.27 per diluted share for 2011. This compares to 2010 revenue of $306 million and net loss of $0.43 per diluted share.

In our fourth quarter, which is typically our weakest seasonal quarter, we reported a negative $0.15 per diluted share compared to a net loss of $0.02 a share -- per diluted share in the prior-year period. Operations used approximately $4.5 million in net cash during the fourth quarter compared to approximately $8.4 million produced during the same period in 2010.

For the 12 months ended December 31, operations used approximately $5.5 million in net cash compared to approximately $6.2 million provided during the full year of 2010. Non-cash items for 2011 totaled $3.9 million and included $1.4 million in depreciation of fixed assets, $2 million in amortization of intangibles and $450,000 in stock-based compensation. Overall, we had a decrease of approximately $900,000 in non-cash items year-over-year.

Total capital expenditures for 2011 totaled $700,000 compared to expenditures of $1.2 million in 2010. If you recall, we incurred a higher than normal level of capital expenditures during the first quarter of 2010, primarily related to expansions in both Beaumont and Houston. We anticipate an increase in capital investment for IT assets during 2010 as we upgrade our systems and technology support.

Total liquidity, which includes cash plus availability under our credit facility, was $9.7 million at the end of 2011 compared to $5.4 million at the end of 2010. Our average days sales outstanding were 70 days for the year just ended, which was the same as the end of the third quarter for 2011. Our DSO was 56 days at the end of 2010. We do not expect our average days sales outstanding to materially change for the first quarter of 2011 but do see the DSO decreasing to the mid-50-day range in the middle of this fiscal year.

Our leverage ratio as measured by total debt to stockholders equity remains low for 2011 at 0.78 compared to 0.69 in 2010. Our effective tax rate for the year ended December 31, 2011 was 16.4% compared to a rate of 34.9% for the fiscal year ended December 31, 2010. The primary reason for the increase in our effective tax rate in 2010 is our revenues decreased significantly from the 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 on net income, so our state tax liability did not decrease proportionally with our overall net income.

So with that, I will turn things back over to Ed.

Thanks, John. At this point, I will turn the call back to our operator to conduct our question and answer session.

(Operator instructions) Matt Tucker, KeyBanc Capital.

Good morning and congrats on putting 2011 behind you. First question is on the utilization in the fourth quarter. You indicated that it remained pretty high at 90%, only slightly lower than the fourth quarter of last year. But your billable hours was down significantly, as was your hours per employee. So I was curious how you kind of look at utilization, and if you could help me kind of reconcile those data points.

Sure, Matt. Well, of course, utilization is based on the hours that are in, so regardless of the headcount -- but certainly our headcount tailed off towards the end of the year. Seasonally, we tend to lose a lot of inspectors at that time of the year. But also, in our case, as we discontinued the electrical operation -- or the electrical division, that is -- we certainly saw a lot of headcount drop off there.

So again, you and I talked about this before -- 90% is kind of about where we are targeting. We would like to be in about that range, so we have some availability to prepare some proposals. So we are staying right around our target area right now.

I guess what I'm still a little bit confused by is the fact that headcount was down about 6% year-over-year, yet obviously billable hours were down closer to 26%. Can you help me understand why that is?

Well, we don't have a company where people work 40 hours a week. Most of the folks we lost, if you will, from the electrical division as well as the inspection division worked well over 40 hours a week. So you are losing -- it's not really a direct, one person/40 hour kind of thing.

Got it, okay. And then your backlog was up pretty significantly year-over-year, as of the fourth quarter, but we really didn't see much top-line growth in 2011. What is it going to take to really get the burn rate up on the backlog and start to see some more top-line growth? Is it really -- has it been largely the delay on the CPC that has been preventing you guys from going to top line more?

Yes. Well, certainly CPC has impacted us quite a bit. Like I said, we pushed that back about six months, so these administrative issues have pushed it back about six months. So we kind of slid the whole project to the right a bit. So we would've expected to be much further along with that project now. I believe we are about 10% complete, give or take, and we should have been much further down the pike and, again, much more revenue to the top line.

I think you said, you expect $15 million in revenue from that project this year. Could you give us a sense of the trajectory? Is it kind of flat through the year? Does it ramp up in the second half?

No. It will ramp up throughout the year and into next year. So, again, this is -- we are going up that side of that bell curve, if you will. So it's going to be ramping up to the peak and then, of course, coming back down towards the end of the project.

And are you kind of fully ramping up as you would like to be right now? Are there still things kind of holding you back?

No. We have actually moved through a lot of the administrative stuff at this point, and it's starting to improve as we are starting to get some of the approvals quicker on our documents, which tends to hold us up. We tend to have to send drawings over for approval before we continue the engineering, and that approval cycle has taken longer than they had promised. But we are rectifying that now, and so we are expecting to ramp up and we are bringing more people in. And of course, we will be moving to our fabrication facility, which will also increase revenues as we start fabricating the items.

Thanks, that's helpful; I do have some more questions, but I will jump back in the queue and give others a chance.

Craig Bell, Enerecap Partners.

I just wanted to get you to touch on sort of the weaker margin in the Engineering and Construction segment. It's sort of fallen off after a couple of improving quarters. I just wondered if you could talk about that a little bit.

We actually had a project in the third -- fourth quarter, and actually in the month of November that didn't go quite as well as we would have liked. So we actually had to reduce margin on that job, and that's what drove the margins down in that quarter. It was a pretty sizeable project.

Okay, so the rest of it -- if you exclude that, you are still seeing what you want to in that business then after it (multiple speakers)?

Well, yes. When I look year on year in that division, we are seeing the increase in Engineering and Construction. We are up well over a point on our margin. So we did have that one-off project that hurt us. So yes, I'm pretty comfortable that we are still moving in the right direction.

Okay, and then you talked about the strength you are starting to see in proposals and your bookings. Obviously, you had good bookings in Q4 and what you have had so far for the first couple months of Q1. Are you seeing that across the board, or is there any one area of strength?

Well, we are kind of seeing it evenly distributed between our Engineering and Construction, as well as Automation. And of course, a lot of it has to do with the midstream segment, if you will, and the shale plays.

Okay, and then I just wanted to clarify. You said that the DSO was at 70 days?

That's correct.

Correct, and hoping to get that down by midyear?

Also correct.

Okay, thanks.

Matt Tucker, KeyBanc Capital.

So on the credit facility, I know that in your negotiations as well that you weren't just looking I think to extend it, but also to maybe enlarge it and give yourselves a little more flexibility to invest in the business. So I guess, number one, as you negotiate now with some different lenders, are you still hoping to get that additional kind of flexibility? Or, do you just hope to get maybe something similar to what you had done?

And, two, could you talk a little bit about what you would like to do in terms of investing in the business if you do get a credit facility that kind of provides you a little more leeway?

Yes. Well, firstly, the issue we have with Wells, frankly, were the covenants and how tight they were, not really the size of the facility. So, while we were in negotiations with them, our CFO was really working to expand those covenants and loosen them up quite a bit and give us more availability of our actual line of credit. Frankly, that's what we're looking for with our new bank, is to have a less restrictive covenant scheme that gives us more availability to our actual line of credit. So, once we get that, I think we will be much more comfortable and certainly have some ability to move around.

The banks we're speaking to are also talking about offering flexibility with regards to maybe future financing of other deals or whatever, if we want to do acquisitions, etc. So they are open to that, but we have not broached any of that yet. So clearly, our three-pronged strategic approach has us getting involved with some joint ventures and some organic growth, and we have taken on some additional office space here. We've opened a new office, is underway right now. So we're working on some of the organic growth already. We've formed a couple of partnerships already.

So we are working on our strategic plan pretty hard. And that will certainly require some of this additional line that we will be freeing up for ourselves.

Thank you, and then in terms of the sale of the electrical division assets, could you give us a sense of how much cash that is bringing in, or you expect to, when you are finished with the sales?

Yes. It's really -- it's less than $500,000, so we are not talking a lot of money. We are talking about tools, some trucks and leases that are being transferred or things like that. But cash itself will be less than $500,000.

Got it, thanks. And then could you give us a little more color on the international opportunities you're seeing? And you mentioned that you focus on the Automation business. And I guess, outside of the Caspian pipeline, which we obviously know about, what types of opportunities are you seeing and where?

Sure, two-pronged answer there, Matt. Looking at just the Automation business, we have always (technical difficulty) been working internationally in the Automation business. So those type of orders are continuing to come in from both the Middle East as well as Brazil. And so that base load of work, if you will, has always been there.

The new step for us is actually registering with some national oil companies that is allowing us to, again, bid directly with them, and, again, opening up more EPCM type opportunities that will also incorporate automation work. So it's kind of a two-pronged approach. The old standby, if you will, what we were doing before we are still doing and we are still seeing a good level of work coming in. And now we are kind of opening this new door to deal directly with these national oil companies whatever, in Saudi or Kuwait, etc.

And in terms of the registration process, I guess it just depends on company to company. But are you generally done with that process, or are you still working through it?

The answer is yes and no. We are done with registering with some companies, and some we're still in the process of. So every company or national oil company -- have to go through their own process. So we are kind of working our way through it. We are registered with a handful of them already, and we have a couple more to go.

Thanks. And then, you also talked about seeing some new awards with higher margins. Is that -- you mentioned that you have in some cases been negotiating higher rates. But generally, the higher margins that you are seeing -- is that more because of pricing or because of the types of projects you are doing?

It's a little bit of both. We are starting to be able to put some new rates into our MSAs and get a little more aggressive with our clients. And in some cases, it's because we are selling the full suite of our service, if you will. And that is, we are incorporating Engineering and Automation and our Field Solutions and we are able to, again, yield a better profit because of that mix.

Thanks, and last question from me -- on the SG&A, it was up kind of higher in the fourth quarter than it had been earlier in the year, if you exclude some of the one-time type items. Was there anything in the fourth quarter that was one-time-ish or just increased costs for anything in particular?

The only thing that jumps to mind was part of that settlement on the class-action lawsuit came in in the fourth quarter. But I can't -- nothing else jumps to mind, frankly, Matt. But we could take a look at it and get back to you.

Just as a follow-up, can you give us a sense for the trajectory of G&A in 2012?

Yes. Actually, G&A will probably be up a little bit in 2012 versus 2011 because we've actually repositioned some of our costs that we used to have in the gross profit area; we've moved it to the G&A area. So I want to say the number is about $30 million, a little over $30 million, is kind of the target for 2012.

Thanks. And actually, one more last question -- on headcount, how has that been trending year-to-date, and do you expect to be growing headcount over the course of the year?

Yes, we do. We do. We have quite a few open positions and we have been doing quite a bit of hiring. The other side of that, of course, was we had, I would say, upward of 300 people, 350 people alone in the electrical division. So as those jobs came down, we were dropping people there and adding people. So it kind of looked like we were neutral, if you will. But we are adding people. We have many open positions right now that we are trying to fill.

Thanks a lot, that has been very helpful. That's it for me.

(Operator instructions). There are no further questions at this time. I will now turn the floor back over to Mr. Pagano for any additional or closing comments.

Thank you, operator. I would like to thank everyone for being on the call today and for your continued support of ENGlobal. We look forward to speaking with you next month.

Ladies and gentlemen, this does conclude today's conference call. You may now disconnect your line.