Furmanite Management Discusses Q1 2013 Results - Earnings Call Transcript

May. 3.13 | About: Furmanite Corporation (FRM)

Furmanite (NYSE:FRM)

Q1 2013 Earnings Call

May 03, 2013 10:00 am ET

Executives

Charles R. Cox - Chairman of the Board and Chief Executive Officer

Robert S. Muff - Chief Financial Officer, Principal Accounting Officer and Controller

Joseph E. Milliron - President and Chief Operating Officer

Analysts

Stephen Ragard - Stephens Inc., Research Division

Operator

Good morning, and thank you for joining the call. Before I introduce today's speakers, allow me to explain the format of the call. For your convenience, we have a set of slides available on our website that will closely follow the speakers' presentations this morning. Following the presentation today, we will invite questions from analysts and fund managers. [Operator Instructions] Now I would like to introduce Mr. Charles R. Cox, CEO of Furmanite Corporation. Mr. Cox, you may begin.

Charles R. Cox

Good morning. This is Charlie Cox, and I would like to welcome everyone to our first quarter call. Thank you all for joining us today.

Let me first direct your attention to the safe harbor statement in the presentation, which applies to this call as always. Next, let me explain that we will refer during our comments to slides, which may be found in our investor website under the tab labeled Events and Presentations.

With me today are Joe Milliron, Furmanite's President; and Bob Muff, our Principal Financial Officer.

Before we hear from Bob and Joe, I'd like to provide a bit of perspective regarding 2013 and our first quarter results. As you have seen in this morning's press release, our results were significantly improved over first quarter results a year ago. This has been our first quarter of performance with substantially all elements of the company-wide transformation we committed to 3 years ago now in place, and we are directionally pleased with our first scorecard. But these are very early days of marketing and executing as the new Furmanite, and frankly, we left some further upside both at the top line and at the bottom line on the table.

Our revenues of $89 million for the quarter were up 24% from 2012 first quarter results, and our $4.1 million operating income results were a very positive improvement over last year's first quarter loss.

But both results are well below our future potential as we mature our teamwork and work processes to earn more market share and take more of our revenue to the bottom line.

As will be obvious, as Bob and Joe discuss our numbers, the initial concentration of growth creation efforts thus far has been focused on the Americas. We are now expanding our efforts to drive accelerated growth from both a geographical and service line perspective in all of our other global operations.

A special concentration of support will be provided to our central European operations team to help them reestablish momentum and grow market share in a challenging market after the major restructuring completed there last year in response to poor macroeconomic conditions.

Our overall goal is to make the key results of our transformation, which fundamentally strengthen our competitive effectiveness, a permanent and vibrant reality for every Furmanite operation around the globe.

Those key results are vastly improved global teamwork and confidence across the world that we can sell and execute without constraints. Our vision continues to be world leadership in every aspect of our business, in safety, in customer responsiveness, in project execution excellence and, of course, in financial performance.

Now let me provide a brief update on our strategic direction. First of all, nothing has changed from the 5-year commitment we made back in 2010 to create substantial long-term global growth for Furmanite. We continue to have the same Orange Code of Values and priorities. We have the same change commitment, culture change commitment. We have the same growth strategies. We have the same transformation objectives and the same Orange Way of doing business as one global team. As you know, we have continuously shared our plans and progress openly with our investors, and yes, even with our competitors.

Second, we still enjoy a very small share of the global markets for our services, even though we have grown nicely since 2009, and our market share in the NDT, nondestructive testing and inspection markets is only a surface scratch. Having the leading brand recognition and an unparalleled geographical footprint, we continue to believe that Furmanite has virtually unlimited growth potential in both our mechanical service lines and in the nondestructive testing and inspection service line we entered in 2012.

We are also well on our way to our vision of world leadership in each of our legacy service lines by the end of 2014, and we'll continue to expand our growth platform and market differentiation through internal investment, as well as synergistic M&A activity as appropriate.

We are also focused on broadening our customer interface as well, as one of -- as both the range and number of services that we provide to each one.

Finally, we plan to stay focused on the specialty industrial services market and the technical and management capabilities, which will further differentiate and add value to our service offerings.

Now with that, let me turn the floor over to Bob, who will take us through the numbers in more detail. Bob?

Robert S. Muff

Thank you, Charlie, and good morning, everyone. Okay. Let's take a look at our financial results for the quarter. As foreign currency effects were insignificant to all line items, we will not be presenting slides to show those impacts. Also, no restructuring costs were incurred in either first quarter.

As Charlie mentioned, the revenues for the quarter were just over $89 million, $17.3 million higher than prior year first quarter. Our margin percentage, which benefited from additional leverage on the higher revenues, increased to 29.5% from 27.1% in the prior year quarter. Our selling, general and administrative expenses increased in dollars, however, were lower as a percentage of revenues by 3.5%, resulting in just under $4.1 million of operating income for the quarter.

Income tax expense was $1.6 million in the quarter, a much more reasonable 38% effective tax rate, but still a bit higher than our long-term expected rate, which we estimate to settle in the lower 30% range.

As a result, net income for the quarter was approximately $2.6 million or $0.07 per diluted share versus the $0.02 per share loss in the prior first quarter.

On the next slide, we've broken our revenues and operating income prior to allocation of certain corporate overhead costs to show year-over-year changes by segment. You'll note the significant increases in revenues and operating income in the Americas. EMEA had a downturn in revenues but nearly a $2 million improvement at the operating income level, which is due primarily to the effects of the cost reduction initiative in the prior year and, to a lesser extent, moderate improvement in our U.K. results, while Asia Pacific turned in slightly improved operating income on flat sales compared to last year. Joe will talk in a bit more detail about these improvements in just a minute.

Next, looking at our balance sheet, you'll notice increases in several of our items, accounts receivable, inventory, property and equipment, long-term assets and long-term debt, which are attributable to a combination of the overall increase in activities in the current year, as well as the effects of acquisitions and capital expenditures in the past 12 months.

And finally, moving on to the cash flow statement, you'll note our cash decreased approximately $8.8 million in the first quarter due to $3.3 million of cash used in operating activities, as net income and noncash items were more than offset by the impacts of increased activity levels and the effects of acquisitions on our working capital. In addition, cash of nearly $5 million was paid for capital expenditures, acquisitions and payments on debt. Our cash balance of $24.4 million, combined with approximately $34.2 million of availability under our credit facility, provide Furmanite with approximately $58.6 million of liquidity at March 31.

That concludes my remarks on the financial results. So now I'll turn it over to Joe for his discussion on operations. Joe?

Joseph E. Milliron

Thank you, Bob. Good morning, ladies and gentlemen. Bob updated you on our first quarter financial performance. I am pleased with our organic growth, while at the same time, onboarding our nondestructive testing and inspection services per the announcement made earlier in the first quarter. The first quarter revenue growth was a result of global teamwork and collaboration. I will share an example of this, but I'd like to first update you on our global service delivery network that our On-line and Off-line Services followed specifically on our NDT inspection service line before wrapping up.

Let's begin with our global service network. In the Americas, they generated 68% of our revenue with 1,070 technicians from 30 locations. In EMEA, they generated 23% of our revenue, utilizing 353 technicians from 30 locations. And over in Asia Pacific, they generated 9% of our revenue, utilizing 131 technicians from 15 locations. Compared to the end of the fourth quarter, we were up over 210 technicians, roughly 140 related to acquisitions, while the remaining 70 or so were to support our organic growth.

Now let me speak to you about our services and how they performed. The first is our On-line Services. Overall, On-line Services for the first quarter was $31.4 million, up $1.2 million or 4% compared to last year. The Americas was $2.5 million up or 15%, while EMEA was down by $0.6 million or 7%, and Asia Pacific was down $0.7 million or 16%.

Now moving over to our Off-line Services. Overall, our Off-line Services for the first quarter was $45.6 million, up $16.9 million, a 59% growth compared to last year.

The Americas was up $16.8 million or 98%, while EMEA was down $0.7 million or 9%, and APAC was up $0.8 million or 25%. The Americas had significant total revenue growth of 49% in the first quarter compared to the same period last year, along with bottom line improvement in each of our 3 operational regions, that'd be in the Americas, EMEA and APAC. These results affirm that the companies transformation to a single-minded global organization operating in a matrix structure is beginning to yield the anticipated outcomes.

Now moving to our NDT and inspection services, I am pleased to report these services generated over $9 million in revenue in the first quarter. In addition to this revenue, the NDT service line has been a precursor to many projects that we've traditionally not been in the running for, including a large turnaround project for a major refinery in the U.S. The NDT group collaborated with our matrix organization with both our service lines and service delivery centers to successful -- successfully land and execute the turnaround project that added heat treatment, line isolation and on-site machining as incremental services with the NDT provided to this refinery.

I look forward to reporting on our operation's results in August for our second quarter of 2013. Charlie, let me turn this call back over to you.

Charles R. Cox

Thank you, Joe, and thank you, Bob. Before we take your questions, let me make just a few additional comments regarding where we believe Furmanite stands today in our transformation process.

We started out on this mission 3 years ago, expecting that this was going to be a 5-year journey from the old Furmanite to a very different new Furmanite. And that many tough decisions and a lot of difficult change for all of us were going to be a necessary part of the journey, and we, of course, were right. But having been down this road before, I know that we are now entering the magical fun part of the transformation that helps you remember what all that pain of change was all about.

As we now begin to see ideas become reality, an organizational concept become a committed team and watch empowered and talented people begin to accomplish things they never before thought possible. And most importantly, as we begin to feel the energy and can-do spirits of our motivated global team resonate with our customers, earn their trust and lead to our success and growth.

Yes, we are beginning to see positive change within Furmanite, but we still have a long way to go. Culture and mindset change is a process. And while many of our people are embracing and leading that change, for some of our people, it may take as long as a few more days and maybe a little bit longer than that. But we all know that plenty of challenges will be there along the way, and that as a result, our progress will almost certainly not be in a straight line.

But like the caterpillar, we are very pleased to be out of our cocoon. We know we can now fly to make far greater and faster progress in our new form and have confidence that we are now ready to try our new wings. We appreciate the confidence and patience of our long-term investors as well as the many that have joined us along the way. Our investors can be absolutely certain that our central objective in everything we do is maximizing long-term shareholder value, as we thrill our current customers, create new customers and serve them all better than anyone else.

This concludes our prepared remarks, but we will now open up our line for your questions.

Question-and-Answer Session

Operator

[Operator Instructions] We have your first question. It comes from the line of Stephen Ragard at Stephens.

Stephen Ragard - Stephens Inc., Research Division

My first question's on the spring turnaround season. Can you maybe talk a little bit about how that's performing? I know one of your peers talked about the average size of projects being lower this spring versus last. Are you guys seeing the average size of your turnaround projects this spring up from last year?

Joseph E. Milliron

Yes. Steven, this is Joe. We absolutely, absolutely, absolutely this year see the sizes of the projects being larger this year than last year. And I think part of it is on the -- as I spoke about, with the NDT services. It's been a precursor, introducing us to additional opportunities that we've been able to close on that we didn't have that availability or capability in the first quarter of last year.

Stephen Ragard - Stephens Inc., Research Division

Okay, that's great. And then any -- is it too early or any commentary on the fall season at this point?

Joseph E. Milliron

Right now, in the fall season, we're seeing -- we believe it's going to be a very active period, but again, things can change as we move through the rest of the spring and summer here moving into the fall, but we're expecting it to be a strong fall period.

Stephen Ragard - Stephens Inc., Research Division

Sure, okay, that's helpful. And then my next question on guidance. Can you maybe talk about your decision to take up the revenue guide and leave EPS unchanged at this point? It sounds like the tax rate ran a little high this quarter. I guess, going forward, what do you expect the tax rate to kind of be? Well, yes, and that's my first part.

Robert S. Muff

Yes. I think you're exactly right, Stephen. We did have a strong first quarter on the revenue side, so we did take that revenue up. And as you pointed out, our tax rate is still a bit higher than what we'd expected. So the fact we'd come out less than 2 months ago with the guidance it's -- we do feel comfortable that the -- on the revenue end of notching that up a bit and leaving the net income guidance as we'd -- or the EPS guidance as we'd announced 2 months ago.

Stephen Ragard - Stephens Inc., Research Division

Okay. And your guidance does not include any future M&A, that's correct, right?

Robert S. Muff

There is not future M&A included. That is a correct statement.

Operator

There's no further questions in the queue at this moment. [Operator Instructions] There's no further questions at this time, so I'd like to pass it back to you, Mr. Cox, for closing remarks.

Charles R. Cox

Absolutely. Hearing no more questions, we've enjoyed our time with you this morning, and we will now sign off with our thanks to each one of you for joining us for the call this morning. We appreciate your interest in Furmanite and look forward to sharing our second quarter results with you in August. Thank you and goodbye.

Operator

Thank you. Ladies and gentlemen, that concludes your conference. You may now disconnect. Thank you for joining us. Do enjoy the rest of your day.

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