ENGlobal Corporation Q2 2009 Earnings Call Transcript

| About: ENGlobal Corporation (ENG)

ENGlobal Corporation (NASDAQ:ENG)

Q2 2009 Earnings Call

August 7, 2009 11 am ET


Natalie Hairston - VP of IR and Chief Governance Officer

Bill Coskey - Chairman and CEO

Bob Raiford - CFO


Craig Bell - SMH Capital

Tahira Afzal - KeyBanc


Greetings and welcome ENGlobal Corporation Second Quarter 2009 Earnings Call. (Operator Instructions).

It is now my pleasure to introduce your host Ms. Natalie Hairston, Vice President, Investor Relations and Chief Governance Officer for ENGlobal Corporation. Thank you, Ms. Hairston. You may now begin.

Natalie Hairston

With me on the call are Bill Coskey, Chairman and Chief Executive Officer of ENGlobal Corporation; and Bob Raiford, Chief Financial Officer and Treasurer. In a moment, I will turn the call over to Bill Coskey, who will highlight management's perspective on our financial results for the quarter ended June 30, 2009. Bob Raiford will then review other financial points of interest for the quarter, 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 factor 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.

As usual, during Q&A please limit yourself to one question and then one follow-up as necessary.

Now, I would like to introduce our Chairman and Chief Executive Officer, Mr. Coskey. Go ahead, Bill.

Bill Coskey

I want to begin the call this morning on a confident and positive note. While no one can predict the future with absolute certainty, I am optimistic that ENGlobal might have experience a low watermark of this economic downturn from an operational standpoint during the second quarter. Also, I believe the company is well positioned to participate in what we believe to be a slowly improving market in the second half of 2009, and hopefully, followed by a stronger 2010.

I am making these comments on three observations. First is based on recent project awards and just as important the renewal of many of our existing contracts with long-term clients. Second is a much higher level of proposal activity that has picked up since the end of the second quarter. Finally, there's a general improving trends we see from our internal metrics, which have also improved somewhat since the end of the second quarter.

It is clearly obvious in today's results that ENGlobal have experienced a contraction in its business so far this year, given reduced domestic spending of our clients across all energy sectors through for capital and maintenance projects. A large part of our work is performed on domestic projects, which appears to have been affected to a greater extent in international work. Also many of our engineering and related project services occur early in the projects cycle, which can be expected to drop off sooner with any downturn in new project awards as opposed to construction activity.

With respect to earnings, ENGlobal reported basically a breakeven second quarter compared with diluted earnings of $0.24 for the same period last year and $0.07 in the first quarter of this year. We realize that we are in the unpleasant position whereby all of today's comparisons are against the second quarter of 2008, which was the best quarter in the company's history.

The general comments of our recent trends, during the second quarter our business has been at a low, very flat level of activity. Bi-weekly billable hours for the month of April, May and June stayed in a tight range and averaged 147,000 man hours. Our utilization of billable resources was also flat and averaged around 86% over the same period, which is lower than our targeted range of 88% to 92%. It's also about 6 points lower than the same period in 2008.

We have started to see both of these metrics trending upward, which we believe is an early, but still encouraging sign. Our reduced revenue creates less of a need for working capital, which in a large part has resulted in our business producing positive cash from operations of $14 million for the first six months of this year. Most of this cash was used to repay debt. So, since January, our long-term debt has been reduced by about 41%.

For several years, ENGlobal has talked about sustainable sources of revenue from a variety of long-term sources, which typically represents about two thirds of our revenue. I think it's reasonable to say that in the second quarter our business primarily operated on these sources of smaller run and maintain project, and what has been missing in our business for most of 2009 is any significant contribution from larger capital projects.

Now, some miscellaneous highlights from our business segments. In engineering, the outsourcing of personnel to client locations, what we call in-plant staffing, has remained a steady part of this business during the downturn, while the engineering work we perform in our offices has been hurt most by the downturn. Again, it appears that most of our offices are beginning to report improving activities.

In our construction business, our inspection numbers are beginning to pick up again, driven by major pipeline construction projects getting underway. We have added approximately 100 inspectors to our staff thus far in the third quarter.

For automation, we have recently moved into a new 85,000 square foot fabrication facility in Houston, and this part of the business is now operating at record level. We benefit here to our ability to participate in large international grassroots projects mainly in the Middle East. We provide remote instrument building for distributed control systems, process, analyze the equipments to large, integrated oil and gas companies, and also some of the Tier I engineering and construction companies.

In our land group, we continued to see a fairly steady stream of pipeline right at our acquisition work and a growing amount of electric transmission activity. Land has been a relatively steady performer during the downturn.

It's important to note that ENGlobal has been spreading its wings into new areas to make up for the reduced level of activity in our heritage energy-related domestic project work.

As to our international marketing efforts, through relationships we have developed in the US, ENGlobal is increasingly proposing on work for international projects, mainly on facilities in the Middle East. Any results from this initiative should be known by yearend, but as a general comment, I believe it will be important over time for our company to have greater access to international sources of work.

We continue to maintain alliances with a number technology providers in the area of alternative energy. These technologies relate to the production of biofuels, gasification of (inaudible) and utilization of municipal-derived fuel to produce power. These opportunities are sizable, so we continue to be involved at little cost, but project financing for developers continues to be the biggest hurdle.

Several other strategic points can be summed up from our announcement this morning of an agreement to acquire a power-related business in Chicago. PCI, which used to be known as Power Consultants, Inc., for some time our company has focused on increasing our capabilities in power and today we are closer to achieving that objective. I’ve been impressed with PCI's significant history and expertise ever since the first day I met with Chuck and Bill Tyburk in Chicago.

My first and lasting impression of PCI is that although it’s a relatively small business it has a huge underlying potential, which I believe we together can unlock. The key will be PCI's impressive project histories together with ENGlobal additional resources. PCI performs engineering services on power related work, with a total installed cost of several $100 million a year. Our combined goal will be to expand ENGlobal's participation in these project and the value we can earn from them.

In addition, we have be looking for a way to expand our services into the Chicago area much like we have successfully done in the Rocky Mountain area by leveraging our land group office in Denver.

In general terms, ENGlobal has become much more active on the acquisition front, and I believe you will see additional transaction announcements from us over the next year. Successfully integrating newly acquired firms have been the core competence of ENGlobal for many years.

In closing and to acknowledge a significant accomplishment. I'm very excited to announce that we recently received an award in Washington D.C. from the Associated Builders and Contractors Group also known as ABC. The Eagle Award was presented to ENGlobal as engineer and to Starcom a contractor both together providing outstanding design and construction work on the crude unit turnaround at the [Mayor Congress] Binary and Garyville, Louisiana.

My sincere and hearty congratulations go up for our fine group of professional in our Baton Rouge office. For your excellent work on this project and for you well deserved Eagle Award. You have made all of us in ENGlobal very proud. Thank you for your time this morning.

I will now turn the call over to Bob.

Bob Raiford

Thanks Bill. Good morning everyone. A large specific details of our second 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 compared to the second quarter of 2009 through results of those of the second quarter of 2008. Liquidity remain strong, operations produced 5.7 million in net cash during the second quarter, compared to approximately 4.1 million produced during the comparable period in 2008.

For the current year, operations has produced 14 million in net cash during the six months ended 30, 2009. Non-cash items in both quarters of 2009 and 2008 totaled approximately 1.6 million with amortization of intangibles totaling approximately $440,000 during both periods.

Second quarter working capital was positively impacted by a decrease in credit receivables, net of a re-class of [1As] account converted to note receivable. And an increase in accrued compensation and benefits. However, these positive changes were offset by unfavorable impacts during the quarter resulting from a decrease in accounts payable primarily related to payments for significant pass through procurement items. The self contracted services, previously recorded in the last quarter of 2008 and the first quarter of 2009. And a decrease in taxes another liabilities.

Capital expenditures during the second quarter, totaled 1.2 million, compared to expenditures of less than $900,000 during the second quarter of 2008. The increase in capital expenditures during the quarter, primarily related to our facility, expansion and both Houston and Beaumont we do not foresee additional expansion cost in the third quarter and we not expect to exceed our credit facilities, annual limit of 3.25 million for CapEx commitments during 2009.

Overall our long-term commitments consisting primarily of a $13.2 million, well, I guess our credit facility with Comerica Bank and $1.7 million related to acquisition notes these decrease approximately 41% or approximately $10.5 million or $25.7 million at the end of December 2008 to $15.2 million as of June 30, 2009.

The decrease in our long-term commitments during the second quarter, was primarily related to the positive cash flow and a subsequent pay down of our credit facility. As a percentage of stockholders' equity, our overall long-term debt at the end of second quarter decreased to 18%, compared to 33.5% at the end of 2008.

Total liquidity, which includes cash plus availability under our credit facility, was $37.5 million at the end of the second quarter, compared to $26.8 million at the end of the comparable period in 2008. The outstanding balance on our line of credit at the end of the quarter was $13.2 million with remaining available borrowings of $36.7 million. Our outstanding letters of credit were approximately 700,000 primarily to cover project retentions and deductibles under insurance policies.

Our credit agreement with Comerica provided a $50 million senior secured revolving credit facility that matures in August of 2010. The agreement is guaranteed by substantially all of the Company's subsidiaries is secured by substantially all of the Company's assets and positions Comerica as senior to all other debt. At the Company's options amounts borrowed under the credit facility bear interest at prime or a euro based rate plus additional margin ranging from 125 to 175 basis points.

This additional margin is based on our most recent leverage ratio. Currently, we have $10 million of our outstanding credit facility on a 30-day EUR based rate in term. As of August end, our credit agreement will by its terms be required to be reclassified as a current liability. We have been reviewing renewal options ranging from prime to prime plus 100 basis points or a LIBOR plus 250 to 350 basis points, plus renewal fees ranging from $500 to $1 million.

We are in compliance with financial covenants and current without need or pressure to forgo current competitive interest options.

Unless we see a material turnaround in our operations over the last of the year or we are presented with major opportunity for growth through one or more of multiple acquisitions we expect to begin researching financing alternatives in early 2010.

Our average day sales outstanding was 69 day for the quarter just ended, compared to 61 days at the end of the second quarter in 2008. Our DSO was 64 days at the end of the 2008 and 72 as of the end of the first quarter of 2009.

We do not expect our average days outstanding to fairly change in the third quarter, although we expect to see improving trends for the year continue if revenues stabilize and age counts are collected.

Our effective tax rate for the first six months of 2009 was 40.9%, compared to a rate of 40.2% for the first six month period in 2008 and a rate of 39.9% for the year ended December 31st 2008. We do not expect our rate for 2009 to be materially change for the balance of year, unless we see material changes in earnings during that period.

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

Question-and-Answer Session

(Operator Instructions). Our first question comes from the line of Craig Bell with SMH Capital.

Craig Bell - SMH Capital

I'm just wondering on your comments on your internal metrics have been improving here in the third quarter. Are you seeing that as just marginal improvement or is there pretty noticeable uptick?

Bill Coskey

What we've seen early in the third quarter is that our utilization is slowly trending up, our billable hours are slowly trending up. Probably utilization what we've seen thus far has improved a couple points, maybe billable hours are higher about maybe 8%, 10% something like that. Of course, it's early in the game, but that's what we're seeing thus far in the quarter.

Craig Bell - SMH Capital

Looking at your automation segment, the gross margin there in the quarter was down. Is that just a function of reduced activity there or reduced revenue or some other factors are playing?

Bill Coskey

Well, there's a couple of factors. We, of course, moved into a new facility and encountered quite a few expenses with our move into the new facility, which we believe is going be efficient over the long run. We've had a little higher variable overhead especially in our Mobile office. We feel like we've recovered from that, Craig. We've received some work even within the last few weeks to put people back to work. So, it's probably a high variable overhead in our design staff and maybe some higher than expected expenses in what we might think of as one-time expenses at our fabrication part of the automation move.

Craig Bell - SMH Capital

On the acquisition you made, is that going to structured in a similar fashion to your past ones where you paid a little bit of cash then a promissory note on it?

Bill Coskey

In this case, yes. It's going to be some part cash and some part deferred payments over couple of years. There is no stock or no earn-out as part of it.


Our next question comes from the line of Tahira Afzal with KeyBanc.

Tahira Afzal - KeyBanc

This acquisition look pretty interesting, Bill. Could you elaborate maybe on whether it's dilutive or that's accretive or neutral, and maybe talk about perhaps the prospects going into 2010 what you want to do with it, how you plan on integrating it perhaps with your land group?

Bill Coskey

The acquisition in Chicago will not be integrative with the land group. It's really going to be integrated with our construction group mostly because looking that group we have the most experience and power. Like I said, what impressed me from the first time I met these folks was their projects' history. They work on a lot of dollars worth of total installed cost projects, but they get a very tiny amount of that scope.

So what I would like to do with them over a period of time is expand the scope of getting from these power projects. They are operating in a very robust marketplace, thing like substation design, electrical power transmission lands and small biomass-related power plants. So, we see a lot of upside potential mostly to increase their business and the scope of work they are getting on existing work.

Tahira Afzal - KeyBanc

Any indication as of right now, and I know the deals you are still closing on everything, but from your sense, is this going to be neutral to earnings?

Bob Raiford

It shouldn't right away have a material impact on earnings. We didn't issue any stock. The interest rate we would pay on the money is really minimal. So any money we make will be accretive to earnings.

Tahira Afzal - KeyBanc

I know you have a fairly impressive staff on the transmission side and your land group. Even if you not integrating them, is there going to be any information sharing, given you had some good people there sitting on the West Coast and there are lot of transmission opportunities there. Is there going to be any information sharing between the two?

Bill Coskey

Sure. Just like we do on the pipe, we found our land group to be an excellent source of prospects for engineering business because they are early to the game in both pipeline projects and power projects. They had a number of pipeline opportunities for engineering group, and I would expect they would feed a number of transmission and power related projects to our new group Chicago.

Tahira Afzal - KeyBanc

If you are looking at our pipeline side of your business and you are looking at opportunities there on the engineering side, it seems like rig counts are stabilizing and perhaps that might be the first indication of an eventual uptick, the economy also seems to be stabilizing somewhat. In your experience, Bill, what has been the typical lag factor between rig counts, et cetera, stabilizing and natural gas prices stabilizing and the engineering segment really seeing some bounce back in activity. Given in a sense the credit crisis is [dead] and creating bit of an artificial pause, would you expect this lag to be even less this time around?

Bill Coskey

Yes. That would be especially since there's been so much lack of activity over the first half of this year. I think there is some pin up activity. What we're seeing right now is a lot of underground storage work. We're working on several different underground storage projects where we as ENGlobal would do the top fives compression facilities to store natural gas underground in salt caverns, and that is something we have good experience in. We are seeing quite a bit of pipeline work along the Canadian border, may be in the [Bakken] and natural gas pipelines in the Haynesville. So I think we are already starting to see a pretty significant pick up in pipeline work already. And so I guess its probably mirroring the pick up in drilling activity.


Thank you. (Operator Instructions). Our next question comes from the line of Craig Bell with SMH Capital.

Craig Bell - SMH Capital

Yeah, I just wanted to follow up on the last question there with regards to pipelines and prospects there I guess you must be fairly optimistic about it you said you had hired a 100 inspectors in the quarter, is that right?

Bill Coskey

Well, we hired a 100 inspectors and flipped them immediately to work.

Craig Bell – SMH Capital

Okay. So I mean you obviously….

Bill Coskey

And I am sorry Craig, but this will be in the third quarter we hired those mainly in July. So since the end of the second quarter we hired a 100 inspectors and that grew up around 500 right now, just to give you we had a five may be 800 in the third quarter of last year, all got down to about a low of 350 earlier this year, so we are 500 now, expected to go higher is projects spank in bridge, Castle type projects in the Northern part of the US for these major clients for record.

Craig Bell – SMH Capital

Okay. So you’d expect to try add more people as the year progresses then?

Bill Coskey

Yes, we would expect to ramp up may be toward our previously higher levels. Towards the end of this year and maybe even exceed those next year.

Craig Bell – SMH Capital


Bill Coskey

It's pretty good proxy on pipeline construction activity our inspection group.

Craig Bell – SMH Capital

All right. And then longer term are you still I mean in the past you talked about your optimism for pipeline build and how many new miles are expected to be out there. I mean is that longer term optimism still holding?

Bill Coskey

Yes, it is. Based on all the new basins and Shale plays and the requirements transport, natural gas and crude oil [relation] those I am still very optimistic about future pipeline work. Yes I am.

Craig Bell – SMH Capital

All right. Thank you.


Thank you. Our next question comes from the line of Tahira Afzal with KeyBanc.

Tahira Afzal - KeyBanc

Hi, Bill. Just as a follow-up to that if I look back over the last couple of years you have sequentially seen a pick up of around 300 people from the first of the second quarter. Should I assume none of that was the seasonality related and hence the pick up in people you have seen in the second quarter so far is more for demand coming back and not just seasonality?

Bill Coskey

I don’t think there is seasonality, I think it's more industry conditions and clients getting back to work with projects again. I don’t want this [lead] just not going to be a V bottom what we see as the slow, steady ramp up. But we are very encouraged by recent proposal activity and some projects rewards.


Ms. Hairston, there no further questions at this time. I'd like to turn the floor back over to you for any closing comments you may have.

Natalie Hairston

Thank you, Christian. Hello again everyone. I’ll 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 this does concludes today’s teleconference. You may disconnect your lines at this time, and we thank you for your participation. Have a wonderful day.

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