ENGlobal Corp (ENG) 2012 Q2 法說會逐字稿

Good morning and welcome to the ENGlobal Corporation second-quarter 2012 earnings conference call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference call is being recorded.

It is now my pleasure to introduce your host, Ms. Natalie Hairston, Corporate Vice President Investor Relations and Chief Governance Officer.

Thank you, Stephanie. Good morning and thank you for joining us today. With me on the call are Bill Coskey, Chairman and Chief Executive Officer, and Mark Hess, interim Chief Financial Officer. In a moment, I will turn the call over to Bill, who will highlight management's perspective on our results for the second quarter of 2012. Mark 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.

Now I would like to turn the call over to Bill Coskey, ENGlobal's new Chief Executive Officer.

Think you, Natalie, and good morning. Yesterday ENGlobal reported $77 million in revenue and recorded a net loss of $0.37 per share for the second quarter of 2012. This compares to revenue of $73 million and net income of $0.01 per share for the same period last year.

While we have calculated that approximately $0.33 per share of this quarter's loss is attributable to specific one-time events, this fact still does not make yesterday's report any easier to accept.

One positive however is that operationally our quarter-over-quarter revenue as well as our current backlog remains stable. Earlier this month, I reassumed the CEO role in order to focus our efforts on achieving profitability and improving our financial health overall. Important goals of mine are obviously to inspire all of our employees to perform at their highest capabilities and also to instill confidence amongst all our stakeholders.

But my ultimate goal is to make the important and necessary decisions whereby ENGlobal is a successful and profitable business for the long term.

Over the last 2 1/2 years, ENGlobal has undergone a transformation both through a major management restructuring and also by implementing processes and procedures to solidify our foundation. I believe we are a better organized Company today in many respects. It is important to note that our business is now running leaner when compared to earlier this year resulting in approximately $5 million less in annual overhead expense. This savings is the result of proactive measures during the second quarter to reduce expenses as well as subsequent attrition of overhead personnel.

Our reduced overhead structure has positively impacted our July results. Although these results are internal and unaudited, we expect to generate a small operating profit during the month. This is welcome news and while there can be no promise of a trim, hopefully it's the beginning of one. Just as important, though, our internal analysis shows that our liquidity is expected to improve over the course of 2012.

It is also a positive that our recruiting efforts remain in full swing. During the second quarter we added about 340 new team members to ENGlobal and by June 30 we still had 125 job openings to fill.

Our Caspian Pipeline Consortium project, a major project for our firm, has seen an acceleration in performance in recent months. The pace of the project has picked up and the next five groups of control panels used to upgrade CPC's existing pipeline facilities will be shipping before the end of October. Given this increased pace and more timely approval of our work product by CPC, this project is anticipated to be roughly cash neutral by the end of August and cash-positive going into year-end.

Since taking on the CEO role 20 days ago, I have made a concerted effort to reach out to our employees both through personal visits to our various locations as well as through five companywide communications being issued thus far. I am encouraged to say that the response from our people has been overwhelmingly positive. Our people are welcoming my intent to restore a family-like culture and also proud that we are defining our collective set of values, what we are calling the ENGlobal Way, which is, one, working safely first above all else; two, operating ethically and with the highest integrity without exception; three, being totally responsive to our valued clients, serving them with quality services; four, always exhibiting teamwork and collaboration across our entire business; five, continuously seeking to improve, to innovate, and to differentiate ourselves; and finally six, displaying urgency, passion, and commitment in all of our business dealings.

We at ENGlobal expect to be known as leaders in our industry as we translate these simple but important words into reality, thereby creating a growing and exciting environment. It is still early, but the ENGlobal Way is being infused in each of our business decisions.

Finally, I would like to recognize the significant contribution of our most important asset, the talented men and women of ENGlobal, who will work hard to achieve these objectives. Our people are ready. They are up to the task and firmly believe that patients and dedication will ultimately pay off. My thanks go to each and every one of you.

In closing, rest assured we will make every effort to restore the standing of our Company and generate good results for all who have a stake in our success. There is much work to be done but I'm cautiously optimistic about what can be accomplished.

I'll now turn the call over to Mark.

Thank you, Bill. As you are aware, during the quarter, we replaced our credit facility at Wells Fargo with a three-year credit facility with PNC Bank. This has resulted in a few changes on our balance sheet that I would like to point out.

When we changed to PNC, we were required to collateralize all of our outstanding letters of credit at Wells Fargo with cash. This is why our restricted cash has increased by $4.2 million. Over time we will replace those LCs issued by Wells with LCs issued by PNC and as we do the restricted cash will be released and the amount will be reduced.

At June 30, the Company was not in compliance with all of its covenants under the PNC credit facility and the Wells Fargo Ex-Im credit facility. We are working with both banks to resolve the current default situation.

As a result of these defaults and certain other accounting rules, our PNC credit facility is included in current liabilities on our balance sheet even though it has a three-year term. However, even including the credit facility and the current ratio, it still remains respectable at 1.4 to 1.

Total liquidity includes cash and availability under our credit facility and varies on a daily basis. At the end of the quarter, our availability was $4.5 million and as of August 15, it was $2 million. The outstanding balance on our line of credit was $31.3 million at the end of the quarter, which represents a $15 million increase from the end of last year.

In addition to the increase and restricted cash, we have also invested $8.4 million in fixed-price contract work where we have not yet met our milestone billing requirements and our accounts receivable has increased by $2 million.

We continue to focus on collections. Although our accounts receivable has increased at the end of the quarter, 14% of these receivables are over 60 days past due as compared to 23% at the end of last year.

Capital expenditures at the end of the second quarter totaled $0.2 million for normal recurring maintenance items. Although we are opening a new office in the ship channel area of Houston and expanded our West Houston office, we do not expect a significant increase in capital investments during the remainder of 2012 compared to the first half of the year.

Due to our historical and recent performance, during the quarter we were required to place a valuation allowance on our deferred tax assets. As a result of this adjustment, our income tax expense for the year is $5.2 million. This is a non-cash charge.

I will now turn the call back over to the operator to conduct our question-and-answer session.

(Operator Instructions). Matt Tucker, KeyBanc.

This is actually Elena on for Matt. I am an associate of his. Good morning. I actually had a couple of questions. First of all, when do you think that you might be resolving the talks with the banks? Do you think it will be coming in the next three to six months or -- and do you expect to be in compliance with the covenants at what time maybe in third quarter or sometime this year?

Yes, I understand your question. We expect to be in communication with our bank over the next one to two weeks and we are going to be in active discussions with them regarding the terms of a forbearance agreement. We believe it's going to be possible to achieve that together with our bank though we hope to resolve that sooner rather than later. But it's in active discussions.

We have not had particular discussions on the terms of the forbearance agreement as of this time, but will soon.

Okay, just thinking about -- you expect liquidity to improve going into the second half. Do you expect positive free cash flow in the second half? Do you expect your overall operating performance in the second half to also improve over the first half?

We do expect both of those, operating performance to improve over the first half of the year and for there to be free cash flow generated from that.

And would that free cash flow be significantly more positive or do you think that you might be hitting cash neutral at the end of 2012?

I would say that we would be looking for some positive cash flow by the end of 2012.

Okay, great. One last question.

If I could follow-up there, I'm sorry --. The biggest part of our negative results in the first half, a good part of it happened from two EPC projects, one of which is now being completed, another of which is being completed by the end of September, we expect. And we do not have any other EPC field construction type projects currently in our book of business. So (multiple speakers) a distinction to make about our second-half versus our first half.

Thanks for that. You actually sort of led me to my next question, which was I was wondering what the impact of the loss making project in the E&C segment was in the second quarter, if you had that on you?

In the quarter we took approximately $1.3 million in discontinued operations and indirect costs.

Okay, but for the E&C project in continuing operations?

That's included in that number.

Okay, great. Thank you.

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

Thank you, Operator. I would also like to thank everyone for being on the call today and for your continued support of ENGlobal. If you have any follow-up questions over the coming days, please feel free to contact Natalie at IR.ENGlobal.com and Mark and I will make ourselves available.

Thank you and have a good day.

Thank you. This concludes today's conference. You may now disconnect.