Baker Hughes Company
Q1 2013 Earnings Call Transcript

Published: 2 May 2013

[Operator:]

Good day, ladies and gentlemen, and welcome to the Michael Baker Corporation First Quarter 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator instructions) I would like to introduce your host for today's conference, David Higie. Mr, Higie, you may proceed.

[David Higie:]

Thank you, Charlotte. Good morning, everyone and welcome to our first quarter 2013 financial results conference call. I am David Higie, and I serve Baker as Vice President of Corporate Communications and Investor Relations. First let me apologise for the delay and the start of our call, we were experiencing some technical difficulties with our telephone equipment, but now we are ready to go. Joining me on the call today are the individuals who make up our executive leadership team. First Jim McKnight, our Chief Legal Counsel and Mike Zugay, our Chief Financial Officer, who together form the office of the Chief Executive. Also Jim Twomey, Jeff Hill, and Bob Kallenbaugh, who constitute the operations committee. We will have a slide presentation as part of today's formal remarks and copies of those slides are available on the Investor portion of Baker's website www.mbakercorp.com. I would like to begin with the safe harbor notice. During this call, we will make comments and/or answer questions related to events or circumstances that may or may not occur in the future. These forward-looking statements may include references to future business trends of Baker's engineering business, contract signing activity, regulatory activity, changes in management, backlog, revenue forecast, comments about acquisitions, divestitures or other corporate finance activities and the potential effects of our ongoing strategic assessment process. Forward-looking statements are subject to risks and uncertainties, which may cause actual results in future periods to be different. Such forward-looking statements are made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. I would now like to turn the call over to Jim McKnight, who will comment on a number of non-operational issues, the company is dealing with at the present time. Jim?

[Jim McKnight:]

Thank you, David, and thank you all for joining us today. As I referenced in our previous call, we have a number of non-operational issues ongoing, most of which have been the subject to press releases or SEC filings. As you might expect, I continue to be limited on what I can discuss regarding most of these matters beyond what has been disclosed in our public announcements to you. However, I would like to start off by recognizing the substantial improvement we made in our financial performance during the quarter, which Mike Zugay will comment on in greater detail. This is attributable in large part to the dedicated efforts of Baker employees all across the company who have redoubled their focus on excellent customer service, high quality work and cost control. We thank them for their efforts. As you know in 2012, we initiated a $0.14 dividend for the fourth quarter, which was paid in December and we increased that dividend from the first quarter of 2013 to $0.16, which was paid in April. I am pleased that we were able to announce another dividend increase to $0.18 per share for the second quarter, which will be paid in July. Last year as you know, we also announced a share repurchase authorization of up to $10 million of the company stock. No action has been taken to date on that authorization. Our Board in conjunction with the financial and legal advisors has made significant progress in its review and assessment of various strategic options available to increase shareholder value. While I am not in a position to provide a meaningful estimate of when this process may be completed, I can assure you that our Board is committed to moving forward aggressively toward a final conclusion. With assistance from Korn/Ferry, our retained executive search firm, the governance committee of the Board continues its search for a new CEO with a proven track record of success. A number of candidates [were invited] and several interviews have been conducted, but as of this stage, no selection has been made. The Board is committed to its core for retaining an exceptional candidate for this position. Lastly we are deeply engaged in a strategic review of all of our operations and businesses with the intent of acting aggressively to take steps to focus our resources where they offer the best opportunities to improve short and longer term results, initially in the oil and gas and land development areas. While I appreciate your desire and more about some of these topics and I would sincerely like to accommodate you, I am unable to elaborate further at this time. However, both Mike and I commit to keeping you informed in the future as our situation permits. I will now as Mike Zugay to provide you with a financial overview of our 2013 first quarter results. Mike?

[Mike Zugay:]

Thanks Jim and good morning everyone. Total revenues for the quarter were $144 million versus $152 million in 2012. Transportation revenues were $75 million compared to $81 million and this decline was due a decrease in service provided to South Carolina, Louisiana, Florida and Indiana at the ERPs as well as decreases in work performed on our US 290 project in the Texas. These were partially offset by increases in services provided to both Connecticut and Wisconsin's DOT. Federal revenues were $69 million in 2013, compared to $71 million in the previous year's quarter. This reduction was driven primarily by lower services provided to the Department of Defence. This was offset by increases in work performed from Montgomery County, Maryland and the Department of Homeland Security US business program. Gross profit increased to $27 million for the quarter, compared $24 million. This increase was primarily attributable to the timing of revenue recognition on certain projects, primarily in our transportation segment, higher utilization period-over-period and a decrease in acquisition related amortization expense. These increases were partially offset by lower revenues and a favourable impact of an insurance related claim that was paid to us back in the first quarter of 2012. SG&A expenses decreased from $22 million in 2012 to $19 million in the current quarter. These expenses decreased primarily due to our performance improvement plan, which included a reduction in force in our employees and a reduction in other overpaid cost, also coupled with a decrease in acquisition related amortization expense. The company's effective income tax rate for the current quarter was 39% compared to 38% in the first quarter of 2012. The difference between our effective rate and our tax expense as we showed on our income statement relates to a settlement with the IRS on a previous assessment and -- which resulted in a reversal of some tax liabilities. Our backlog remained flat since yearend at about $1.6 billion and our funded backlog decreased slightly to $644 million. Our balance sheet remained very strong as cash and cash investments increased to $79 million from $77 million at yearend. We also continue to have no outstanding borrowings on our $50 million revolving line of credit. Cash flows from operations was $2.7 million, which was a decrease from $13.3 million in the first quarter of 2012. This decrease we believe is temporary and was primarily a result of an increase in receivables, which had the impact of increasing our DSOs from 91 days in the current quarter from 87 days at yearend. Our capital expenditures were above $800,000 for the quarter and our depreciation and amortization expense was $3.2 million. With those updates, I would like to now turn the call back to our operator.

[Operator:]

(Operator Instructions) Our first question comes from the line of Tahira Afzal from KeyBanc Capital Markets. Your line is now open and you may proceed with your question.

[Saagar Parikh:]

Hi. Good morning. This is Saagar on for Tahira.

[Mike Zugay:]

Hi Saagar, how are you?

[Saagar Parikh:]

Good. First off, congrats on a solid quarter. Hitting right into it, you know, you guys did a great job on delivering on your performance improvement plan in terms of the cost cuts that you guys stated. In order to get some more color on the utilization that you saw in the first quarter, how it changed from the fourth to the first and what you are seeing so far in the second quarter?

[Mike Zugay:]

Yes Saagar, our -- when we take a look at the quarter-over-quarter comparison, first quarter of '12, the first quarter of '13, our first quarter of last year was about 60% and the utilization in Q1 of 2013 was above 63%.

[Saagar Parikh:]

Okay. And then how is that compared to the fourth quarter of '12?

[Mike Zugay:]

The fourth quarter of '12, we were about 60%.

[Saagar Parikh:]

Okay. Great. Looking at your different markets, federal market, transportation market at least in my view the federal market didn’t drop as much as I thought it would for you guys in terms of other sequestrations tough going on and this softness of sponsorship spending, could you just talk about your federal market where you guys are seeing strength? Where you are seeing stability and then where you are seeing may be a little more softness than you originally expected?

[Mike Zugay:]

Yes Saagar, this is Mike again. I am going to talk a little bit in general and then I will turn it over to Jeff Hill, who is on the line, who runs our Federal segment.

[Saagar Parikh:]

Thank you.

[Mike Zugay:]

Our federal revenues are about $124 million a year and now we are projecting them to be about $112 million or $113 million. So we are looking at about a $12 million or basically 10% decline. But what we have seen is that we are backfilling that shortfall in our oil and gas market as well as from other private sectors and with that, I would like to turn it over to Jeff.

[Jeff Hill:]

Thanks Mike. Yes the defence market, our defence market services and our federal agency services as Mike alluded to are dropping on an annualized basis or about 10% and what we are starting to see is visibility on the sequestration in the discretionary spend in the defence department as it affects the projects that we had anticipated coming online at this time or throughout the remainder of this year as well as some delays in avoiding of work because of the continuing resolution which is with budget. But we -- what we are doing is focusing on the oil and gas and other segments of the product as well as some opportunities that we see in the fed market and we've been able to project that we are going to recover most of that decline in defence and federal civilian for the balance of this year to our other markets.

[Operator:]

Thank you. Our next question comes from the line of Cory Mitchell from D.A. Davidson. Your line is now open and you may proceed with your question.

[Cory Mitchell:]

Hi, good morning.

[Mike Zugay:]

Good morning.

[Cory Mitchell:]

Going back to SG&A, is that $19 million a sustainable run rate?

[Mike Zugay:]

Yes, from an SG&A perspective, what we -- what we saw was about a net $3.3 million decline. There is a lot of plusses and minuses in that. One of the things that's impacting that is our performance improvement plan that we implemented in the fourth quarter of 2012, so that net decline from $22 million to $19 million is a common -- is a net number, is a culmination of our performance improvement plan starts coming into play. We also have some onetime cost that we reference in the -- I believe in the press release, but we have some costs related to the hiring of our CEO, we had some severance cost related to the elimination of our COO and then in addition to that, we have about $600,000 of costs we are recurring on a quarterly basis for our -- what we call our strategic options review and that's primarily the financial advisor that we hired Houlihan Lokey from LA that we announced in January as well as the hiring of our legal counsel to work us through this above for future [conjunctions].

[Cory Mitchell:]

Okay.

[Mike Zugay:]

And to answer your question, our SG&A cost in total for the quarter were 13.3% of growth revenues, but when you back out these what we call one time or non-recurring items, unrelated to our operations on an ongoing basis, the SG&A percentages comes down to about 12.1%. So as it stands right now, we are pretty happy with how we've been able to impact our SG&A as a percentage of revenue. As you know, our revenues declined quarter-over-quarter and -- but yet the percentages of our SG&A cost to the growth revenues are declining even further.

[Cory Mitchell:]

Great. Thanks. That's helpful. Can you break out that $3.3 million reduction from what was a reduction overhead versus reduction headcount?

[Mike Zugay:]

It's mostly -- 80% of that was in headcount. 20% of it was related to other items like Microsoft licensing fees, like the use of cell phones, reducing our travel cost, reducing our occupancy cost. We have closed a few offices. We have consolidated a few offices. We have as leases expire we negotiate at lower rates on a square footage basis for the same space. We have actually vacated some space and have them for sublet and those kinds of things are what we've done on the occupancy side. In addition to that, the amortization cost related to the acquisitions that we did in 2011 are down from 2012 and we saved about $400,000, '13 over '12 in that regard as well.

[Operator:]

Thank you. (Operator instructions) Our next question comes from the line of George Walsh from Gilford Securities. Your line is now open and you may proceed with your question.

[George Walsh:]

Good morning, gentlemen.

[Jim McKnight:]

Good morning.

[Mike Zugay:]

Good morning, George.

[George Walsh:]

Just a question relative to the -- as you referred to at making up the revenue decline in the DOD with the oil and gas, is there a big margin difference or any difference there between those two revenue streams?

[Mike Zugay:]

I don’t believe so. I think they are fairly similar.

[George Walsh:]

Okay.

[Mike Zugay:]

So as the revenues are declining in certain sections of our business, we have been successful in the first quarter and we anticipate to be successful for the rest of the year to change or to backfill that gap with our business relatively at the same margins.

[George Walsh:]

Okay. And are you -- do you feel you are primarily done with your headcount reductions as part of the process improvement plan?

[Mike Zugay:]

Yes we are. The program is complete. We believe that we match the business and the people in the business to the current revenue stream that we currently have. We are happy with where we are in that regard.

[Operator:]

Thank you. At this time I am not showing any further questions. I would like to turn the call back over to management for closing remarks.

[David Higie:]

Well let’s just wait a second Charlotte. We may have some people come back on.

[Operator:]

Certainly. All right. It seems like we have another question from George Walsh from Gilford Securities. Your line is now open and you may proceed with your question.

[George Walsh:]

All right. Okay. I just had a question on utilization. Do you have a figure on that or could you just elaborate a little bit more on the improvements there?

[Mike Zugay:]

To figure it again, the first quarter came in on an average of 63% and the year ago quarter was about 60% and actually the sequential quarter was also about 60%. We've had a nice improvement George with that. Obviously it's the primary driver for that was our cost reduction program and the elimination of 150 or so people in the company because the way we calculate utilization are total dollars for total people. So we don’t manage or look at or set objectives for anything at this corporate level other than total dollars and total people. Our engineering groups all have different specific targets for utilization. They are based on their individual markets are service lines but they calculate it based on the direct labor people only and they don’t include any of the indirect people.

[George Walsh:]

Okay. All right. And also during the quarter, there was a confidentiality agreement you wanted to with Campbell, Mr. Campbell.

[Jim McKnight:]

Yes.

[George Walsh:]

Okay. What's the basic outline of that?

[Jim McKnight:]

It's essentially standard confidentiality agreement with (inaudible).

[George Walsh:]

Okay. While I guess you are not making a lot of comments on that, but nothing further to report there.

[Jim McKnight:]

No, as I kind of get into the area we are somewhat limited in what we can say about it George.

[George Walsh:]

Okay. All right. Thanks Jim.

[Operator:]

Thank you. Our next question comes from the line of George Walsh from Gilford Securities.

[Unidentified Analyst:]

Okay. Gentlemen I am George's father. As you know I have been with the firm for many years and we met and talked about different things. The big question I have today, you could elaborate on how your acquisitions are going both operationally and financially?

[Mike Zugay:]

George is that our past acquisitions or is more focused on what we will be looking at going forward?

[Unidentified Analyst:]

We know we have in the past. You made some adjustments, but going forward, how are things looking?

[Mike Zugay:]

Well going forward, right now the concentration of the company is in smaller niche acquisitions. We are looking at several and possibly the oil and gas sector, the land development sector, bridges, our bridge business as you know George we are fourth or fifth in the country. From a bridge design perspective that business is also booming for us and we are looking at a couple niche plays that were as capabilities to us in bridge design.

[Unidentified Analyst:]

Okay. Now the two acquisitions you made in the past year or so, how are they doing?

[Mike Zugay:]

Well a couple of things. RBF, the firm that we purchased in Irvine, California and Southern California had a very, very good first quarter and our order acquisition from Columbia and South Carolina that we did in 2010 LPA did not have as good a first quarter, but they are very, very -- they have a very, very positive outlook in the recent couple weeks, they are on our Southeast transportation division. We have I think may be put out one or two press releases, but they want several jobs and their backlog is growing and we anticipate them to have a stronger summer than the first quarter.

[Unidentified Analyst:]

Okay. Very good. Thank you.

[Mike Zugay:]

You're welcome.

[Operator:]

Thank you. Our next question comes from the line of Cory Mitchell from D.A. Davidson. Your line is now open and you may proceed with your question.

[Cory Mitchell:]

I am sorry if I miss this, but did you guys give any indication on the timing of new hire for the CEO? Do you expect anything within the next quarter?

[Jim McKnight:]

Cory, the Board is aggressively pursuing that, but on the other hand, they want to make sure they get the right candidate for the job. So I can’t estimate exactly when that will occur but they are totally focused on doing that as soon as practical with the right candidate.

[Operator:]

Thank you. Our next question comes from the line of George Walsh from Gilford Securities. Your line is now open and you may proceed with your question.

[George Walsh:]

Mike, what are the things -- I think it was with RBF where you were looking for improvements in the collection of receivables? Any update on that relative to the procedures of doing that?

[Mike Zugay:]

Yes, we believe what we know for a fact that since the acquisition of RBF, they have provided upwards a $12 million to $13 million to the general [coupons] of the company from a cash flow perspective. As you know, they were a cash basis taxpayer originally and when we bought them, they had to convert to an accrual basis and they had some unique ways of doing things that at the end of the year to reduce their cash basis taxable income, they were prepaid, a lot of their expenses including their contracts and rent. They would also stop billing their customers in late October because they didn’t want any of that money coming in until January. We are slowly but surely changing that and we see -- we have seen and we continue to see improvements in that area. In addition to that, we integrated them into our Oracle software system in the fourth quarter of 2012 and right now the billing and the timing of their billings going out has improved and we still think that there is some cash flow there that we are going to be able to squeeze out as we convert them more into the Baker systems.

[George Walsh:]

Okay. So it sounds like there is still a fair amount of additional cash flow we would see as that comes around.

[Mike Zugay:]

Yes, I wouldn’t say as much as we've already gotten, but if there is more, the answer to that is, yes.

[George Walsh:]

Okay. All right and how is your kind of target in terms of when you feel you have that fully implemented to the Baker collection system.

[Mike Zugay:]

I think they will take is probably another six to nine months.

[Operator:]

Thank you. Our next question comes from the line of Tahira Afzal from KeyBanc. Your line is now open and you may proceed with your question.

[Saagar Parikh:]

Hi, this is Saagar in for Tahira. My apologies, I actually lost the call there for a few minutes. Mike you know, in the past you have mentioned that your longer term goal is 19% of gross margins, 13% for G&A as a percent of your revenue. Now that you've said your performance improvement plan has been completed, is that still your target for 2014 or is that something that you think you can do better than 2014 and potentially get to those numbers by the end of this year?

[Mike Zugay:]

That's still our target for 2013, but as you can see, we've made dramatic progress both in the gross margin as well as the SG&A percentage and there is a good possibility where we may be able to squeeze those numbers more favourably as we go.

[Saagar Parikh:]

Okay. And then when I am looking at your cost of goods and I am looking at your G&A and then I take into account your performance improvement plan and the $21 million or so that you cut by the end of 2012 and then what additional you cut in 1Q, how does that split between the cost of good line and the -- cost of goods line and G&A line? Is there a certain percentage that's allocated towards each?

[Mike Zugay:]

Again I think the majority of the costs are more on the SG&A side. I would think greater than 50%.

[Saagar Parikh:]

Okay. Great. Thank you.

[Operator:]

Thank you. Our next question comes from the line of George Walsh from Gilford Securities. Your line is now open and you may proceed with your question.

[George Walsh:]

Mike, just relative performance going through the rest of the year, do you feel this quarter was -- what you feel is happening with the revenue stream and the cost improvements that this is indicative of kind of a certain run rate within a range here top bottom line or do you feel there is bumps or areas of lumpiness that might have an impact through the balance of the year?

[Mike Zugay:]

Well, yes, plusses and minus to that George, our first quarter is usually not our best quarter. From a revenue perspective, the second and third quarters because of the break in the weather in the Northeast and our improvement on the construction management, construction and inspection side that leads to normally higher revenues in either Q1 or Q4. However, there are still as Jeff Hill mentioned, the -- yes I think sequestration, sequestration on the federal side is major, major unknown and we have this bucket of revenues if you would and we have a hole at the bottom of it where some revenues are going away because of that, but at this moment, and for the first quarter we think we feel that those revenues with some other things in the private sector as Jeff has mentioned. Now going forward there is some issues and unknowns, but as it stands today, we feel very comfortable there is some one time timing issues that still could be helped by us because our unclaimed is still a little bit too high and we believe we can bring that back now, but with the completion of a very good first quarter at this point in time, even given the federal uncertainty, we feel like we are comfortable with where our projections are for the rest of the year.

[George Walsh:]

Okay. Great. Thank you.

[Operator:]

Thank you. At this time, I am not showing any further questions. I would like to turn the call back over to management.

[David Higie:]

Thank you, Charlotte. Thank you all for joining us today. We will be back in touch with you in a few months. Have a good day and we will talk to you later. Bye, bye.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.