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Furmanite (NYSE:FRM)

Q3 2013 Earnings Call

November 01, 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

Tristan Richardson - D.A. Davidson & Co., 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 set a slide available on our website that will closely follow the speakers presentations this morning. [Operator Instructions].

I would now like to introduce Mr. Charles R. Cox, CEO of Furmanite Corporation. Mr. Cox, you may begin.

Charles R. Cox

Good morning, and welcome to the call. Thank you, for joining us here today. Let me first direct your attention to the Safe Harbor Statement in the presentation, which as always applies to this call. Also, please be aware that we have prepared supporting slides, which may be found on our investor website under the tab labeled, the Events & 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 first provide a bit of perspective regarding our year-to-date performance and our future direction. Obviously, the financial results for both this quarter and year-to-date are well beyond our results of a year ago. The 27% year-to-date and 31% third quarter revenue improvements continue to validate, that the transformational change we have made and our commitment to work as One Global team, the 'Orange Way', is in fact the right way for Furmanite.

Now turning to our most recent strategic development, the ENGlobal Gulf Coast asset acquisition completed about 2 months ago. This 900 employee engineering and project management addition to our capabilities has now been organized as a division of Furmanite America known as Furmanite Technical Solutions or FTS. We have been very pleased with the speed and smoothness of the integration process, as well as the extraordinarily positive reception of this new capability by our customers. Our new FTS associates have received a very warm welcome from the old Furmanite gang and are already busily creating expanded customer connections and new growth opportunities. Joe will share more detail about this integration process in a few moments. We are now reshaping FTS to operate profitably as a fully self-contained entity and expect to include their projected results in our 2014 earnings guidance scheduled to be issued next March.

Turning to our ongoing operations. The operating income results this quarter include some positive trends beyond the Americas in several of our international units. Bob and Joe will highlight some of these encouraging results. While we are pleased with these positive developments, a great deal of additional upside potential exists internationally, as we continue to implement our 'Orange Way' program in all regions. This is our third quarterly scorecard operating as a single global team. As a very different Furmanite than that of our past history of independent fiefdoms as we have called them. As one of the analysts covering our company recently put it, this is not your father's Furmanite anymore. These major changes opening up new opportunities to take on more and larger projects and execute that work more efficiently and effectively than ever before. There's very little about Furmanite that has not been touched by this positive change other than the extraordinary depth of experience and skill represented to by our now 2,500 strong workforce. While we gradually are leaving less upside on the table, as these changes take hold, many additional opportunities for improved revenue and margin retention growth continue to positively if -- sometimes also a bit painfully are becoming obvious. As we said last quarter, we are still a long way from hitting on all cylinders. Whereas, however, the continuing positive message is that these good overall results appeared to be well below our future potential as we continue to spread the 'Orange Way' and mature our teamwork and work processes.

Going forward, we will continue to aggressively expand our efforts to engage everyone, in both the accelerated revenue growth and project execution excellence to support that growth. Our long-term goal is to make our nearly 4-year transformation a global, consistent and permanent reality for every Furmanite operation around the globe. The details and specifics of how that will be accomplished will continue to be adjusted as we engage with market realities, but the goal will remain the same. The 'Orange Way' and the vastly improved global teamwork, support and collaboration, which results from a shared set of values, consistent strategies, shared resources and one financial objective is creating a world where we can truly sell and execute work without constraints.

Now let's move on to a brief update on our longer-term strategic direction. Nothing has changed from the 5-year commitment we made back in 2010, to create substantial long-term global growth for Furmanite. We are continuing to define and target our larger market size as well as a greater share of that larger market. This will require both organic growth and growth through further M&A activity as we assure that FTS is solidly structured and focused on growth, we will continue to explore and evaluate further strategic acquisitions, which may strengthen existing capabilities or further expand our range of integrated specialty industrial services. We will soon enter 2014 having achieved a vast improvement and growth in each service line, far beyond where we started back in 2009. This progress has moved us well along our way to achieving our first 5-year vision. That of establishing world leadership in each of our legacy, service lines by the end of 2014. While we just entered the nondestructive testing and inspection market last year, and the engineers solutions market this year, our goal for each of these new service lines is also world leadership.

We are also well aware that it's easy to lose our way strategically and our clear vision and mission help us to stay on course. We continue to keep ourselves tightly focused on what we know we do extraordinarily well. And while we'll add value or enhance the growth and excellence of our selected specialty industrial services, our target end markets will remain a highly complex challenging and specialized world of small capital projects, revamps, maintenance and turnarounds. Our customers will continue to be the thousands of owners and contractors, who serve all sectors of the global energy and industrial markets.

We work on over 3,000 customer plant sites around the world each year, and our mission is to constantly expand the range and volume of world-class services we provide locally to each one. As the industry leader, we also expect to further benefit from the continuing customer movement to use an ever smaller number of more qualified contractors with broader capabilities working on their sites. We believe the extensive range of mechanical services we offer, plus the nondestructive testing and inspection services, plus our new engineered solutions and program management skills, together put us in the catbird seat as this movement continues. We believe these same broad capabilities also position us well to benefit from the desire of many customers to combine or integrate a number of skills or services into a single responsibility.

Finally, everything we do happens through the efforts of the very special people who have chosen to be a part of the Furmanite team and who create the value our customers pay us for. We are currently introducing additional creative and fun ways, we can personally recognize our team and express our appreciation for their remarkable skills, dedication, loyalty and commitment to outstanding customer service. We are a service company and that means our people determine our success. We respect and appreciate every member of our team and do our best as our Orange Code Values statement says, "to make Furmanite's a place where we can all truly have fun succeeding together." Making that a reality includes bringing the personal touch to everything we do.

With that perspective on the quarter, our future and our people, let me now turn the floor over to Bob who will take us through the numbers. Bob?

Robert S. Muff

Thank you, Charlie, and good morning, everyone. Okay let's take a look at our financial results. Once again, you'll note the income statements presented here differ from the presentation and our 10-Q filing, as we've segregated our prior relocation and restructuring charges from our operating costs and selling, general administrative expenses and reflected them on a separate line in order to better provide a comparison of current year information operating results to prior year periods.

You'll also note, we've not provided separate financials information for our new FTS business, as the amounts were insignificant for the quarter and year-to-date. However, beginning with the year-end financial results, we will start providing information separately on FTS to ensure clarity on the impact of the acquired business on the company's consolidated financial results.

Looking at the third quarter results. Revenues of $99.5 million were $23.9 million higher than prior third quarter including a $1.2 million unfavorable foreign currency impact on our current year revenues due almost exclusively to weakening in the currencies in the APAC region. Gross margin percentage of 27.8% was favorable to last year's third quarter percentage of 25.7%.

Selling, general administrative expense dollars increased over prior year due to our growth. However, were 2.7% improved as a percentage of revenues compared to prior year with current year being helped by increased leverage from higher revenue levels, as well as the effects of previous cost-reduction initiatives. These factors result in $4.4 million in operating income for the quarter versus prior year's small operating loss.

Income tax rates for the current quarter due to the mix of pretax income between countries are at 42% of pretax income, which still remains higher than our anticipated long-term normalized effective rate in the mid-30s, and also slightly higher than the first half of the year and our expectations of approximately 39% for the year. But have substantially improved over prior-year tax rate, which was negatively impacted by the restructuring activities and related operational effects. As a result, net income for the quarter was approximately $2.1 million or $0.06 per diluted share versus a loss of $0.03 per diluted share in last year's third quarter.

Moving on to the next slide. You'll note revenues were up year-over-year by approximately $63.6 million to $296.9 million including a $1.9 million negative foreign currency impact due to effects from weakening in the Australian dollar and to lesser extent, the British pound. Margin percentage year-to-date of 30.6% is 2.1% improved over the first 9 months of 2012. And selling and general and administrative costs as a percent of revenues are 2.3% lower than the prior year same period. Again, both primarily due to the increase in activity and associated increased leverage, as well as the effects of the 2012 restructuring initiative.

As a result, the current year operating income of $20.1 million reflects a $14.4 million improvement over 2012 results, excluding the prior restructuring and relocation costs. Considering the previously mentioned 39% annual estimates effective income tax rate, net income for the first 9 months of 2013 is $11.4 million or $0.30 per diluted share versus adjusted diluted per share earnings of $0.04 in the same period in 2012.

On the next slide, we've broken out revenues by segment to illustrate the foreign currency impacts on revenue for the quarter and year-to-date, which I just mentioned previously. The foreign currency effects are insignificant at the operating income level and therefore, are not presented here.

Moving on to the next slide. We've broken out revenues and operating income prior to allocation of certain corporate overhead costs, to show year-over-year changes by geographic segment. Similar to the first half of the year, you'll note significant increases in revenues and operating income in the Americas. And while EMEA revenues remain below prior levels, they do show a $4.2 million improvement year-to-date at the operating income level, due primarily to the effects of the cost-reduction initiatives as well as some moderate improvement in our U.K. and Scandinavian results.

Asia-Pacific year-to-date results remain down compared to prior year primarily related to large shutdown we had in Australia last year that did not recur this year, but we have shown improvement across the region in the third quarter. Joe, will talk in a bit more detail about the regions in just a minute.

Next look in the balance sheet. You'll notice the largest increases are in accounts receivable and long-term debt, which is primarily associated with the ENGlobal Gulf Coast asset acquisition as well as other increases in inventory, property and equipment, other long-term assets and current liabilities, which are attributable to a combination of the overall increase in activity levels in the current year, as well as effects of capital expenditures and other acquisitions over the past 12 months.

Moving over to cash flow statement. You'll note that our cash has decreased approximately $1.5 million in 2013 as our net income non-cash items and additional borrowings on our line of credit, have been offset by increases in working capital requirements associated with our increased activity levels and acquisitions, as just noted in the balance sheet comments, as well as cash paid for capital expenditures, acquisitions and payments on other long-term debt. Our cash balance of $31.7 million combined with approximately $39.3 million availability under our line of credit, provides the company with approximately $71 million of liquidity as of September 30.

That concludes my remarks on the financial results. I'll now, 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 third quarter financial performance. From the operational side of the business, I continue to be very pleased to see the speed with which our leadership have embraced the new structure and culture of the 'Orange Way' that we launched at the beginning of this year. Although we have delivered another solid quarter through organic, service line expansion and acquisitions. We have just scratched the surface of our potential to deliver greater value to our customers and seriously drive sustainable growth. The third quarter was a continuation of our first half of 2013.

Let me share with you our updated global delivery service network, then our growth through On-line Services and Off-line Services before wrapping up with information on our Furmanite Technical Services, FTS acquisition. Let's begin with our global service network, 65% of our year-to-date revenues was generated in the Americas with 1,132 technicians and engineers. 24% of our year-to-date revenue was generated in EMEA with 284 technicians and engineers and 8% of our year-to-date revenue was generated in Asia-Pacific with 130 technicians and engineers. FTS, or Furmanite Technical Services group, added an additional 915 billable engineers and technicians from 5 locations in the Gulf Coast. With the addition of FTS, Furmanite now has over 2,500 billable employees.

Let me speak with you about our services and how they perform. First is On-line Services in the third quarter. Overall, On-line Services for the third quarter were $33.1 million up $2.6 million or 8.6% compared to last year. This growth was driven by leak sealing, line isolation and hot tapping. The Americas was $18.8 million up $2.5 million, while EMEA was $11.3 million up $1.1 million and Asia-Pacific was $2.9 million, down $1.1 million.

Now moving to our year-to-date September 30 On-line Services. The revenue was at $102.7 million for the year, up $12.1 million or 13.3% compared to the same period last year. This growth was driven by leak sealing, line isolation and hot tapping. The Americas was $61.9 million, up $12.8 million or 26.2% while EMEA was $31.1 million, up $1.1 million. And Asia-Pacific $9.7 million, down $1.9 million.

Moving to Off-line Services. Overall, Off-line Services for the fourth -- third quarter was $54.7 million, up $22.6 million or 70.6% compared to last year. This growth was driven primarily by nondestructive testing and inspection, on-site machining and the addition of $9.5 million from our FTS division. The Americas was $41.3 million, up $24 million or 138%. Excluding FTS from those numbers, the Americas was up $14.5 million or 83.4% while EMEA was $9.1 million, down $1.3 million and APAC was $4.3 million, flat compared to the same period last year.

Moving over to our September 30 year-to-date numbers. Overall, Off-line Services revenue was $158.7 million, up $55.2 million or 53.4% compared to last year. This growth was driven by nondestructive testing and inspection, on-site machining, heat treatment in the FTS division. The Americas was $118.3 million, up $60.6 million or 104.9%. Just a reminder, FTS was $9.5 million of the increase. Excluding FTS, the Americas was up $51.1 million or 88.5%. Our service line expansion into nondestructive testing and inspection is a major contributor to the Americas performance. While EMEA was $26.4 million, down $4.3 million. And APAC was $14 million, down $1 million for this period.

I would like to wrap-up with our FTS acquisition. The reaction from both employees and customers alike has been outstanding. Our first priority with FTS, as it is with any acquisition, was to personally visit all local teams in a series of open forum, town hall meetings, to discuss our culture and our strategic direction and the significant role that those new employees will play in our continued growth. The engagement exceeded our expectation and the excitement was contagious.

Our next step has been a systematic rollout of these new combined capabilities to existing customers of both FTS and legacy Furmanite. On each occasion, there seems to be an instant understanding from our client and employees as a synergy this acquisition brings and the value of the connected service offering from engineering, inspection and specialty mechanical as a bundled technical solution. The consensus has been that the new Furmanite fills the gap in the market and promotes a lean efficiency that our clients are clamoring for in the wake of increased project demands and reduced resources. As an example, in a recent rollout, to a major refiner on the Gulf Coast, a discussion of our expanding capabilities with an existing FTS client yielded new opportunities for hot tapping, line stopping, nondestructive inspection, composite repairs, tank roof repairs and technical bolting. In each case, the client had been using multiple, different vendors for these services and was awakened to the notion that our FTS engineers could not only plan the project but also facilitates the execution of these services through a single source, thereby, reducing the client's total costs of the projects.

I look forward to reporting our fourth quarter operations results in March. Charlie, let me turn this back over to you.

Charles R. Cox

Thanks, Joe. This concludes our prepared remarks but we will now open up the line for questions from analysts covering Furmanite and our institutional investors. Derek?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from the line of Matt Duncan, Stephens Inc.

Unknown Analyst

This is Will, on the call for Matt. Charlie, with the ENGlobal deal now closed, can you talk about what you think that business can contribute to Furmanite in the remainder of '13 and into '14?

Charles R. Cox

I'm sorry, I missed the last part of your question. Can you repeat that Will?

Unknown Analyst

Yes, I'm sorry. Can you talk about what you think ENGlobal can add to Furmanite in the remainder of 2013 and into '14?

Charles R. Cox

Yes, I think we've touched on that in some of the remarks earlier. But I guess, probably the thing we need to say first is, it's early days and it's very hard to be clear on what the contribution is. I think you heard Joe's comments about the pretty much surprising and the overwhelming kind of a response we've had from our customers with the new capabilities and the kinds of new work opportunities that are coming via the FTS organization and their relationships with their customers. But to quantify that, at this time would be real hard. From the other side of the equation as to the results for FTS, at this point, we're expecting essentially neutral financial results for the balance of this year as, I think, Bob pointed out. But when we give our earnings guidance in March of next year, we expect at that time to have a pretty good sense of what the expectation should be going forward for 2014 and we'll include it, in that guidance.

Unknown Analyst

Okay. And how do you guys see the fall turnaround season shaping up and how's the next spring looking for what you see today?

Joseph E. Milliron

Will. This is Joe here. I could tell you right now, the fall turnaround season right now continues to be good for us. And we're anticipating the spring right now to also continue to be good. There's been no indicators of that slowing down. We've had 1 or 2 projects that we had scheduled here in the fourth quarter and has slipped into the early part of next year but we don't see any type of trend that, that's going to the fourth quarter or the first quarter will change from where it's currently at today.

Operator

[Operator Instructions] Your next question is coming from the line of Tristan Richardson, D.A. Davidson.

Tristan Richardson - D.A. Davidson & Co., Research Division

Curious on the Off-line Services. Joe, I know you've mentioned -- you've seen a fourth quarter scheduled event you pushed in the Q1. Did you guys see any of the fall turnaround season pulled into Q3 because of very strong results in the Off-line side?

Joseph E. Milliron

Well one of the things that, Tristan, we did in this quarter is that we're reporting. Now we made a commitment last spring, in early part of the year that as we came into the third quarter, we weren't going to have our technicians not billable. So as a result, we identified some projects out there that we went at very aggressively went after, but even though we get a smaller contribution margin, it was better for the company than have the technician sitting on the bench receiving 0. So we picked up some work that normally we would not have chased after in the past years.

Tristan Richardson - D.A. Davidson & Co., Research Division

Got you. So it's not necessarily a trend that you're seeing or at least in this particular season, that you're seeing a lot of work kicking off early? It's just pursuing different...

Joseph E. Milliron

I just think it was the -- our people being aggressive on the marketplace and picking up opportunities.

Tristan Richardson - D.A. Davidson & Co., Research Division

That's great. And then I guess, Joe, could you give a sense as inspection continues to grow, could you give a sense now or maybe even forward-looking, maybe next year, where you see the split between sort of your more traditional mechanical work and more inspection and testing type work?

Joseph E. Milliron

Well, Tristan, I probably don't want to give you anything forward-looking at this current time. As you know, we're really in just our first 12 months of being in the service line. We're very, very pleased -- we are very pleased as a company with it. We will continue investing both in a capital equipment for organic growth and looking at the acquisition opportunities not only here in the Americas but outside the Americas. So I think, anything I would share with you right now probably wouldn't be reality as we continue to grow that business. But it's a business that we're very keen on and we'll continue to grow.

Tristan Richardson - D.A. Davidson & Co., Research Division

Sure, sure. Great. And then, Bob, could you give us a sense, sort of what you would expect in terms of incremental D&A sort of associated with the technical solutions transaction, at least for '13?

Robert S. Muff

For the D&A, for '13, there won't be a significant -- I think if we look in the Q, the amount of long-term assets and intangibles that we did acquire and looking at that balance, we're not going to have a large impact on D&A in the quarter. I think what Charlie alluded to earlier, I think the impact we're going to have is the integration of the business, not from an operational standpoint but more from a back office standpoint. The IT side of things primarily getting all on our system will be a bigger piece of what we'll see in the fourth quarter. So for 2013, we don't expect -- maybe a couple hundred, few hundred thousand dollars of D&A that will come through in the quarter related to this acquisition.

Tristan Richardson - D.A. Davidson & Co., Research Division

Okay. And then I guess, from your comments, that the transaction expected to be sort of somewhat neutral to earnings per share in the current year, I mean, is it safe to say that excluding normal amortization costs and some integration cost that the technical solutions group will be profitable this year sort of on standalone basis?

Charles R. Cox

Tristan, I would have to say, it's too early to say.

Operator

[Operator Instructions] And at this time, I'm showing no further questions in queue. I would like to turn the call back over, to Mr. Charles Cox for any closing remarks.

Charles R. Cox

Well, thank you, Derek. Since there are no more questions. We will sign off with our thanks to each one of you, for joining us on the call this morning. We appreciate your interest in Furmanite and look forward to sharing our year-end results with you in March. Thank you, again, and goodbye.

Operator

Ladies and gentlemen, that concludes today's conference. We thank you for your participation. You may now disconnect. Have a great weekend.

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