Baker Hughes Company
Q2 2013 Earnings Call Transcript

Published: 8 Aug 2013

[Operator:]

Good day, ladies and gentlemen. Thank you for standing by, and welcome to the Michael Baker Corp. Second Quarter and First Half 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call may be recorded. I would now like to turn the conference to our host, Mr. David Higie. Sir, you may begin.

[David G. Higie:]

Thank you, Eric. Good morning, everyone, and welcome to our second quarter and first 6 months 2013 financial results conference call. I am David Higie, and I serve Baker as Vice President of Corporate Communications and Investor Relations. Joining me on the call today are Jim McKnight, our Chief Legal Counsel; and Mike Zugay, our Chief Financial Officer, who together form the Office of the Chief Executive. Also with us are Jeff Hill and Bob Kallenbaugh, 2 of the 3 members of the Operations Committee; and Michael McLean of K&L Gates, our outside counsel. 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 our future business trends of Baker's engineering business, contract-signing activity, regulatory activity, changes in management, backlog, revenue forecasts, comments about acquisitions, divestitures or other corporate finance activities. 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 have an opening statement. Jim?

[H. James McKnight:]

Thank you, David, and good morning. Undoubtedly, in the forefront of your thoughts this morning is our recently announced transaction with Integrated Mission Solutions or IMS. Unfortunately, we once again find ourselves in a position which we are limited in the remarks we can make and the information we can provide you concerning the topic. The transaction will be implemented by a tender offer, which is expected to commence later this month. When it does commence, an offer the purchase and a recommendation statement will be mailed to shareholders and filed with the SEC. These documents will contain important information about the transaction, and we encourage you to read them. Until these documents are filed, however, I suggest you refer to the information contained in our recently filed 8-K and press release. And now I will provide the necessary legal disclaimer regarding our remarks. Our statements today are not an offer to purchase or a solicitation of an offer to sell securities of Michael Baker Corporation. Michael Baker shareholders will be able to obtain a free copy of the offer to purchase and recommendation statement when they become available, and other documents filed by Integrated Mission Solutions or Baker with the SEC in connection with the tender offer and merger at the website maintained by the SEC at www.sec.gov. These materials also may be obtained when they become available for free, by contacting the information agent in the tender offer once one is selected. With those remarks, I will now turn the call over to Mike Zugay who will provide you with the review of our second quarter financial results. Mike?

[Michael J. Zugay:]

Thanks, Jim, and good morning, everyone. Total revenues for the quarter were $146 million versus $155 million, a period-over-period decline of approximately 6%, but this was right in line with our 2013 forecast. Transportation revenues were $80 million compared to $84 million, and this decrease was primarily due to a reduction in work performed for various state DOTs, as well as a decrease in construction management and inspection services related to roadrails for Marcellus Shale drilling activities. This was partially offset by increases in services provided to the Pennsylvania and Connecticut DOTs. Federal revenues decreased $66 million compared to $72 million. This was primarily driven by less work provided to the Department of Defense, principally for architectural services. This decline was partially offset by increases in work performed for Montgomery County, Maryland, for architectural and engineering services for a multiagency service partner. Gross profit remained relatively flat at $25.3 million compared to $25.5 million for the same period in 2012. The profit loss due to lower revenue volume was somewhat offset by higher utilization, better project performance and a decrease in acquisition-related amortization expenses. SG&A cost declined to $17.9 million from $22.3 million in 2012 or to 12.2% of revenues versus 14.3% of revenues in 2012. These expenses decreased due to the successful performance of our performance improvement plan, which included the reduction in force, less occupancy and travel costs and lower overhead expenses related to such things as cellphone usage, fleet vehicle expenses, as well as the closing of our international operations in the UAE. The company's effective income tax rate was 37% for the quarter compared to 42% for 2012. Our total backlog decreased to $1.2 billion due to the removal of approximately $400 million related to the FEMA Risk MAP Program, as described previously in our press release. Our balance sheet remains very strong, and cash and cash investments increased to $82 million from $77 million at year-end. And we also continue to have no outstanding borrowings on our $50 million short-term revolver. Year-to-date cash flow from operations was $8.3 million, which was a decrease from $7.2 million in 2012. This decrease was due to an increase in our DSOs to 89 days from 87 days at year-end. We also funded our biweekly payroll just prior to the quarter end, and this impact was approximately $8 million on our cash position. Year-to-date, our CapEx expenditures were $1.8 million and our depreciation and amortization expense totaled $6.3 million. In addition to this, our Board of Directors declared an 18% -- $0.18 per share dividend for Q3, payable on October 2 to shareholders of record on this September 16. With those updates, I'd now like to turn the call back to our operator.

[Operator:]

[Operator Instructions] Our first question comes from Tahira Afzal from KeyBanc.

[Tahira Afzal:]

First of all, congratulations on another good quarter. And I know you can't probably comment on this, but it's good to see really the brand name of Michael Baker and really its employees being recognized by the offer that's out there now. So my first question is really in regards to your revenue line and your profitability. Over the last 2 quarters, you've definitely seen both stabilize, some offsets to the positive and negative. So could you please talk about, a, your utilization percentage at this point? And as you look forward based on your bids, seems like you can maintain that same revenue and utilization rate.

[Michael J. Zugay:]

Tahira, this is Mike. Our utilization rate in the second quarter was a little greater than 63% compared to a little less than 62% in Q2 from last year. And our year-to-date basis we're a little over 63% versus about a 61% year-to-date, again, compared to the prior year. We have had, from a revenue perspective, we have had a hole in the bottom of our revenue bucket related to the Federal Government and the sequestration going on there. When we originally put our branches together, we anticipated revenues from the Federal Government to be about $125 million in 2013, and based on what we know right now, and we're pretty confident on this, we believe those revenues are going to be in the $110 million to $112 million, $114 million range. So we have a leak at the bottom of our revenue bucket. But on the positive side, our transportation business has been going fairly well. And in our Federal segment, we have 2 areas that are doing very nicely and above plan. Our oil and gas initiative is doing very well. We've gotten a tremendous amount of new work up in Alaska, from the state of Alaska and some agencies up there. In addition to that, the land development or the urban development business that is centered out in Irvine, California with our acquisition of RBF is also percolating a little bit and doing better than planned. So from a revenue perspective, we have a hole, but luckily enough on the top, we're being able to fill it in with some other areas of our business. We had projected to be about $565 million in revenue in '13, and it looks like we're going to be able to exceed that slightly as we stand here today halfway through the year.

[Tahira Afzal:]

Okay, great. And as a follow-up question, I just wanted to ask about 3 opportunities. Number one, Utica Shale play, clearly, very little infrastructure there. Could you see a pretty big opportunity and traction from what you've been doing on the Marcellus side? Number two, in terms of opportunities, clearly the Hurricane Sandy plan, you guys are fairly close and well-connected within New York City and would love to get an idea if you could have it rolling back. Number three, in terms of opportunity, something you brought up, the open land development side. Since when I talked to some of your peers on the public and private side, when that business takes off typically, it doesn't -- it probably has some of the steepest inclines to the upside, but it's moved in C [ph] sectors. So would love to get an idea of timing over there if you see it right now and really the scope of that?

[Jeffery S. Hill:]

Okay, this is Jeff Hill. I maybe can take a shot at answering the first 2. To the Utica Shale question, absolutely. The Utica Shale area is in the eastern part of Ohio. So it's positioned well to be serviced by our Marcellus team. And we've already been out working in that area and we'll continue to support our existing oil and gas customers as they shift their focus of operations to the Utica Shale. As far as the Hurricane Sandy, what we're seeing is opportunities through our traditional client base there to add additional services and support them, and we will continue to pursue that through our traditional clients and supporting them in the recovery missions. Bob, do you want to talk about the urban development?

[Samuel Robert Kallenbaugh:]

Sure. We see a growing market in the urban development. While it is a cyclical business, we think it's -- there is strong demand, particularly in California for new housing, which generates a lot of our business, which is more delivering the infrastructure for the projects. And so we -- and sometimes those tend to be 1 or 2 years ahead of the actual building of their homes. So we're encouraged with the marketplace now, and see that as, again, a long-term situation for us.

[Operator:]

Our next question comes from Sachin Shah from Albert Fried.

[Sachin Shah:]

So you mentioned the tender offer was going be later on this month. Can you just maybe tell us the reason for that delay, specifically? And are you potentially looking to file a proxy as well? Or are you just kind of having a dual track for the transaction? Or are you just planning on filing a tender offer documents?

[H. James McKnight:]

Yes, it's Jim McKnight. First of all, I would not see the tender offer being filed toward the end of the month as a delay. We're looking at that as just proper preparation of the documents and we consider that a relatively normal schedule. With regard to the proxy, we are not proceeding on a parallel track. We will be following the tender offer through a conclusion.

[Sachin Shah:]

Okay. Now as far as the SG&A is concerned, I was just kind of wondering, because you saw the improvement year-over-year that -- how much more improvement is there still left, or opportunity for improvement still left? In addition to that, just the tax rate being lower, is that kind of just a onetime issue year-over-year from 42% to 37%?

[Michael J. Zugay:]

Well, on the SG&A. Our SG&A cost in the second quarter was 12.2% of our revenues. And buried in that is about $700,000 of what we would call onetime costs related to the professional and financial advisors that the company hired to help the Board of Directors review and explore strategic options. If you take that amount out, our ongoing or sustainable SG&A costs are about 11.7%. And we believe that is sustainable. We have done a tremendous -- I believe our people have done a tremendous job in reducing our SG&A cost as our revenue has declined. And I think in the not-too-recent past, that number was upwards of 15% to 16%, and we've been constantly knocking that one down.

[Sachin Shah:]

Okay. Is there any kind of estimate of how much more improvement you guys could do on that?

[Michael J. Zugay:]

I don't think there's too much more improvement we're going to able to do that. Until we have some better understanding of IMS, and obviously immigrate IMS with Baker to see what work could be done on any functions on the support side that may overlap.

[Sachin Shah:]

Okay. And then the tax rate, is that kind of a onetime item? Or is it -- is that tax rate expected for the rest of the year?

[Michael J. Zugay:]

Our historical tax rate has been in that 39% or 40%. It's a little bit lower this quarter because we have some things roll off, we have some statute of limitations on some tax accruals, related old tax accruals related to our energy business has fallen away. And we also was able to settle and audit with the IRS this year as well that pertains to, I think, years prior to 2009, and we settled that favorably. So with the settlement and with some statute of limitations on some old tax accruals sloughing off, and us being able to reverse those, that explains the difference between 42% and 37%. But historically, I think from our standpoint, we're in that 38% to 39% rate without any of these other items coming into play.

[Operator:]

Our next question comes from George Walsh of Gilford Securities.

[George Walsh:]

I wonder if you can just talk about the backlog going forward. You made the adjustment there. But I'll just be curious in terms of if you could just give a quick overview of the funded and unfunded backlog and just the components of the backlog. I'll just be curious as the kind of work that's there that you see going forward. And also relative to the unfunded backlog, just your sense of your confidence level of how much of that might be realized.

[Michael J. Zugay:]

Yes, our funded backlog from the end of the year through the end of June, at the time about $32 million. But we believe that there is no concern there whatsoever. We have won a series of recent projects that have not hit the backlog yet because we don't have the paperwork, the I's dotted and the T's crossed from a standpoint of the contracts with the people and the project that we've won. So we don't believe there's any problem with the reduction of the funded backlog. It's just a matter of timing differences. And as soon as we get these contracts finalized, we're going to be able to put it in our funded backlog, and we're going to be off and running on those projects. From an overall standpoint, our unfunded backlog dropped about $400 million, and that's because we finally come to the realizations that the FEMA project, the Risk MAP project, is not going to be left out as much from a revenue perspective as we anticipated. Just to refresh your memory, about 5 years ago, we won that, 4 years ago, and that was a $600 million project. Our best estimate at this time is that we are only going to perform slightly over $200 million on that project. The project continues and it doesn't end until March 2014. So there are task orders that could still be released up until March 2014. And in addition to that, it's been our experience on the first FEMA project that we will probably continue on existing task orders and working under those for at least 2 or 3 more years. But our best guess at the moment, given all that knowledge, is that we're probably not going to receive $600 million of work. It is going to be slightly over $210 million of work, and that's why we, at this point in time, given what we know, we reduced the unfunded backlog by that $391 million specifically related to FEMA. Jeff, would you have anything more to add to that?

[Jeffery S. Hill:]

No, Mike, I think you touched on it quite well. Our contract ordering period will extend to March '14. We'll have task orders in place, so we'll continue beyond that. But at this point, the bottom of work for the comp doesn't appear to show what the original intent of the contract was, and that's based on a lot of things that are beyond our control.

[Michael J. Zugay:]

And the repeat, our audit fee is due in by late August. And we expect to have some results published by FEMA by the end of December '13, correct?

[Jeffery S. Hill:]

Yes, FEMA, this year, request for information on their go-forward contract, including a draft statement of objectives. That was issued at the end of June. There is going to be an industry day later this month. And then in their release, FEMA is indicating that they're on track to facilitate new contracts at the end of the year. So that's all out there available for all of the consultants, and certainly that's what we're focusing on here at Baker as well.

[George Walsh:]

Okay, and any of the unfunded backlog, just non-FEMA portion, anything you can say, in general, just about that?

[Michael J. Zugay:]

No. We're pretty confident that most of that stuff in the unfunded will eventually, over a period of years, turn into funded and then turn into revenue.

[George Walsh:]

Okay, so mostly transportation work?

[Michael J. Zugay:]

No, most of that is Federal Government work.

[George Walsh:]

Okay. All right, good. If I'm still allowed a last question, just how are the acquisitions going? LPA and RBF and just the integration and contribution?

[Michael J. Zugay:]

The integration is going well. LPA was a pure transportation play for us. They've run us certain things like different aviation work, program management skills. Geographically, they were a Baker but they were in the Southeast in areas where Baker was not in, principally 12 states. They have been completely integrated from a back-office perspective, as well as an operating perspective. Most of the old LPA work sits in our Southeast transportation region. Although some of that has also been put into our mid-Atlantic transportation region as well. From an RBF perspective, we've -- last October, we've fully integrated the back office and got them on Oracle. Operationally, they've been working with our people in various different areas, for instance, to expand the urban development, the capabilities that they have in Southern California to other areas of Baker such as Denver, Colorado, San Antonio, Texas, Salt Lake City, Utah, and in North Carolina as well. In addition to that, we have another coming initiative to expand our water -- wastewater business and to take that national through Baker plants throughout the east and the Midwest. So I would say from that standpoint, we haven't really profitably gotten out of those 2 acquisitions that we originally wanted. But from a strategic standpoint, the land development business that's already up is poised to boom. Just to give you an indication there, about 5 years before we bought them, their revenues were $170 million and they had about 1,100 people. But when the land development disappeared, they were down to about $100 million when we purchased them and about 500 people, and we're starting to see that business pick up again. And RBF is confident in 2 things

[Operator:]

[Operator Instructions] Our next question comes from Sachin Shah of Albert Fried.

[Sachin Shah:]

I just want to understand, as far as the employees, I see that it shows that they own about 10% of the shares in the company, is that correct? And I want to find out if there's kind of a support agreement in addition for the deal, maybe you can just kind of explain that dynamic.

[Michael J. Zugay:]

Yes. First of all, I want to take the employees' concern. So through their 401-k, not individually owned but through their 401-k program and account, they own about 10% of the outstanding stock of Michael Baker.

[Sachin Shah:]

Okay. So do they -- so David, does a trustee tender their shares? Or consider tendering their shares, how does that work?

[David G. Higie:]

The individuals are -- the trustee does not put the shares in the individual [indiscernible].

[Sachin Shah:]

Okay. And that's the reason why there's not a support agreement in place, because the individuals/employees are basically on their own to make that decision?

[David G. Higie:]

We make that decision, that's correct.

[Operator:]

Our next question comes from Tahira Afzal of KeyBanc.

[Tahira Afzal:]

Just one last question. As you look forward in terms of amortization, just -- I haven't gone through their Q, but I'll check back. In the last schedule, it seems like your DNA sort of -- so your amortization really drops off around $2 million into next year. And so if I look at the G&A run rate, Mike, that you pointed out of, let's say, around $17.5 million or a little below that, should I be assuming that if you have the same amount of revenue, let's say, into next year and you have that, you can run at that same sort of $17.5 million run rate and -- for quarter, and then we should adjust that for the amortization, potentially falling down by a couple of million?

[Michael J. Zugay:]

Yes. Okay, here are the depreciation and amortization for 2012 because of high amortization on the acquisitions that we bought was around $17 million. But in 2013, we anticipate that dropping, the DNA, to about $11 million. And about $6 million of that $11 million was amortization. And then going forward in '14, '15, '16 and then beyond, that amortization drops to about $4 million for fiscal -- or for calendar '14, and then it drops dramatically. $1.2 million in '15 and then $700,000 in '16 and $700,000 in '17. So it drops away dramatically.

[Operator:]

Our next question comes from George Walsh of Gilford Securities.

[Geroge Walsh:]

This is George Walsh Sr., guys. As you know, my son, George, and I have follow the company since it went public. And I couldn't let this opportunity pass without telling you that this is a great company. I think you've made a great selection in going with the DC Capital Partners. Mr. Campbell and his group have a great reputation, and I can see great things ahead for the employees and for the company and for its long-term picture. It looks like the light that was under the bushel basket is now going to come forward. The stock was not always treated well, but the new era started, I think, what Don Fusilli and Bill Mooney, they ushered in some dramatic changes. The Board of Directors did an excellent job. And I'd like to congratulate first, Higie, Mallory, James McKnight and Dick Shaw, they just did a wonderful job and they had some tough decisions to make. But I've been wanting to congratulate the employees. You're going to see some very good days down the road.

[Operator:]

And I am showing no further questions.

[David G. Higie:]

Thank you very much, Eric, and thank you all for participating in our call today. And we hope to see you all or speak to you all again at some point in the future. Have a wonderful day.

[Operator:]

Ladies and gentlemen, this does conclude today's conference. Thank you for your attendance. You may all disconnect. Have a great day.