ENGlobal Corporation
Q2 2020 Earnings Call Transcript

Published: 8 Aug 2020

[Operator:]

Good morning and welcome to the ENGlobal Second Quarter 2020 Financial Results Conference Call. Your hosts for this morning our Chief Executive Officer, Bill Coskey; and Chief Financial Officer, Mark Hess. At the request of ENGlobal, today's call is being recorded and will be available for replay on the Investor Relations section of the Company's corporate website, englobal.com. You may also access the teleconference replay by dialing toll free 877-481-4010 domestically or 919-882-2331 internationally, referencing conference ID 36020. The replay will be available shortly after the completion of this event through 9.00 am Eastern Time on August 13, 2020. I would like to now inform all parties that your lines have been placed in a listen-only-mode until the question-and-answer segment of this call begins. To ask a question in that segment, you will receive instructions from the operator. At this point, I would like to turn the call over to Rick Eisenberg, Media Relations Director with Eisenberg Communication.

[Rick Eisenberg:]

Thank you, operator and thanks everyone for joining us on this call. Before we begin, I'd like to review our forward-looking statements provision. During today's conference call, Company representatives may make forward-looking statements. Any statements made in this presentation about future operating results, or other future events are forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Please note that actual results achieved by the Company may differ materially from such forward-looking statements. A discussion of factors that could cause such differences appears in the risk factors section of the Company's 10-K. And now ENGlobal CEO, Bill Coskey will present an analysis of the Company's performance in the second quarter of 2020 and provide some outlook for the rest of that year. Bill?

[William Coskey:]

Thanks, Rick. Good morning, everyone, and thank you for joining this call. There is a lot of information to cover, including how ENGlobal has been doing in the midst of the ongoing pandemic. First though, as you may have read in our press release this morning, ENGlobal has achieved its third consecutive quarter of profitability. Although it was a smaller profit than what was reported in the previous two quarters, it was a very good result on a comparison basis. For our second quarter, which ended June 27, 2020, the company recorded net income of $68,000 or $0.00 per share compared to a net loss of $517,000 or a loss of $0.02 per share in the second quarter of last year. Also in the second quarter of 2020, ENGlobal grew revenue to $17.9 million, which is a 31% improvement over revenue of $13.6 million in the second quarter of 2019. This gain was mostly due to a $3.3 million or a 41% increase in revenue from our Automation segment, which as you may know, performs our higher-value modular automation and commissioning work. What's further encouraging is that our Automation segment once again increased gross profit margin from 14% in the second quarter of last year to 16.1% for the second quarter of 2020. This improvement along with the continued decrease in our SG&A expenses help produce our positive bottom line result. In a few minutes, our Chief Financial Officer, Mark Hess will provide more detail on these results. In our view, these numbers today provide added evidence that our revised strategy of pursuing larger-value modular process plant and automation systems projects, which are valued from $10 million to $200 million, is gaining further momentum. The strategy is also largely responsible for our last three profitable quarters. What's most significant from our perspective is that we have made these achievements during the height of the coronavirus pandemic and the extremely difficult energy industry environment. Around the energy industry, we've heard a lot in recent months about projects being cancelled and postponed. I am happy to report that thus far this year, our company has only experienced one project cancellation. However, we have also seen progress hampered on several projects by quarantine orders, travel restrictions and work site closures. In addition, the pandemic has also reduced our ability to make in-person business development contacts as well it has delayed our customer’s project award decisions. As a result, our backlog declined from $59 million as of year end 2019 to $42 million as of the end of the second quarter 2020. However, we currently have opportunities in our business development pipeline to replace a large part of this backlog reduction. First among these opportunities are projects similar to the $25 million agreement we saw in last November for the design and fabrication of a complete hydrogen plant. These opportunities are now similarly directed toward producing renewable fuels as well as hydrogen fuel for the expanding hydrogen economy. Both of these green energy areas are driven by the low-carbon fuel standards and in general, lowering the carbon necessity index of our facilities. The message is that these awards are not dependent on traditional oil and gas economics. However, these projects are often led by developers who require project financing. We believe the total value of these potential opportunities for ENGlobal, which includes active prospects plus proposals currently, exceeds $500 million. We won, of course, when all of these jobs were optimistic, we will win our fair share of them. And then our rate of success will improve as activity in the green energy market increases as all the signs we are seeing point to this direction. In summary, therefore, we believe there are many excellent opportunities for ENGlobal to achieve significant growth going forward. But again, we live in uncertain times, so the extent to which we can achieve this goal maybe constrained by a host of future pandemic-related developments as these effects cannot be known at the current time. At this point, I'd like to turn over the discussion to our CFO, Mark Hess, who will provide greater details on our second quarter financial performance. Mark?

[Mark Hess:]

Thanks Bill. As you mentioned, our revenues in the second quarter of 2020 increased by 31% to $17.9 million, a $4.3 million improvement on revenues of $13.6 million in the second quarter of last year. This increase is due to a 41% increase in revenue from our Automation segment, which contributed $11.3 million in revenue compared to $8 million in the second quarter of 2019. In addition, this segment increased its gross profit margin to over 16% compared to 14% in Q2 last year. Revenue from our Engineering and Procurement and Construction Management segment increased approximately $970,000 to $6.6 million for the second quarter of 2020 with the gross profit margin of 10% compared to 15% for this segment in the second quarter of 2019. We continue to keep tight control over our SG&A cost, which decreased by $136,000 in Q2 2020 compared to Q2 a year-ago. As a result, our bottom line had nearly a $595,000 positive swing from last year's second quarter to this year's second quarter. For the first six months of 2020, our revenues increased by 44% to $37.1 million, an $11.3 million improvement on revenues of $25.8 million in the first half of last year. This increase is primarily due to a 75% increase in revenue from our Automation segment, which contributed $25.4 million in revenue compared to $14.5 million in the first six months of 2019. This segment increase its gross profit margin to 19% compared to 12% in the first half of last year. Our overall gross profit margin for the first six months of 2020 increased to 15% from 13% in the same period a year-ago. Our SG&A expenses for the first half of 2020 decreased by $308,000 compared to the first half of 2019. This decrease was produced by reductions in facilities costs, legal services and travel costs. Our bottom line had nearly $2.7 million positive swing from last year's first half to this year's first half. We ended the second quarter of 2020 with $14.4 million in cash. Our working capital as of the end of Q2 2020 was $16.1 million versus $11.3 million as of the end of 2019. In April, we applied for and were granted a loan under the CARES Act, which commonly referred to as PPP loan in the amount of $4.9 million. These funds were used precisely as they were intended to keep our employees working at a close to normal levels as well as to provide added financial stability to our company during this uncertain global economic period. And [indiscernible] to improve further liquidity, we entered into a revolving credit facility with California-based Pacific Western Bank on May 21, 2020 for an aggregate sum of up to $6 million. We believe the availability under this credit facility, which was $3.5 million at the end of June, together with our cash and other components of working capital, including the funds provided by the PPP loan will provide us with enough liquidity to fund our current operations for the foreseeable future. However, we continue to experience certain business inefficiencies, including diminished ability of our business development personnel to sell new business to customers and replacing our backlog as we convert it to revenue is a major factor in our future profitability. At this point, I'd like to turn the discussion back to Bill and afterwards, we'd be happy to take your questions.

[William Coskey:]

Thanks Mark. As mentioned, we do believe that ENGlobal is well positioned to benefit from both our nation’s accelerating dependence on green renewable energy and also the many factors that drive automation. We further expect that the strategic relationships we've built over the recent past will continue to mature and provide us with good opportunities for new business. These alliances with leading process technology firms, original equipment manufacturers and end users should continue to provide ENGlobal with an expanding volume of business in the quarters and years to come. In closing, I'd like to thank each of you for your support. Mark and I hope you and your families are healthy and staying safe as we navigate together through this time. With that, we're happy to take your questions.

[Operator:]

Thank you. The floor is now open for questions. [Operator Instructions] Our first question comes from [indiscernible]. Please state your question.

[Unidentified Analyst:]

Hey, guys. Good morning. Can you talk a little bit about reasoning behind the need for an expanded line in light of receiving the PPP money? It seems like that's – you beefed up your working capital fair amount and what's the reason for it?

[Mark Hess:]

Good morning, Mike. This is Mark. I guess the real reason for that is because there's a lot of uncertainty out there and as we go through the effects of this pandemic, some of which we've already felt and some of which we anticipate coming through. We want to make sure that we have a balance sheet that's strong enough to weather that. We also anticipate growth in the future. As Bill mentioned, we have quite a few opportunities out there. Some of these opportunities are fairly large, and would require working capital in order to execute them, and so we're trying to get prepared for that eventuality.

[Unidentified Analyst:]

Can you guys talk a little bit more about the types of opportunities that you're seeing on the near-term? That $500 million proposal number is kind of vague in that, it includes jobs that are in process with customers, and it also includes potential jobs that are still in the early stages. If you could talk about some of the things that are more advanced and maybe breakdown that number a little bit into those that are more advanced and those that are still in RFP status.

[William Coskey:]

I'll be happy to handle that when – I'm not going to be able on this call to breakdown that number. I just don't have that information in front of me. But the $500 million is opportunities. We have active conversations going on with potential customers and also together with outstanding proposals, and I'm sorry, I just don't have the breakdown in front of me. They're largely driven by renewable diesel and also the production of hydrogen. Hydrogen, both as a fuel and hydrogen, which is used in the hydrotreating process to make renewable diesel. And what's driving all of that is just the value that these operators – if you build a renewable diesel plant, you get a lot of value out of the RIMs and out of the low-carbon fuel standards and out of the biofuels blenders tax credits. And so an operator can get up to $4.69 a gallon by producing renewable diesel compared to maybe $1.25 a gallon for refining it in a traditional refinery, so there's a lot of benefit for producing renewable diesel. That's what's driving the economics. We've stated before that we're partnered with what we believe is the leading technology with [indiscernible]. They have both hydrogen and renewable diesel technology and that is attractive. And so outside of that, we're looking for alliances on the automation side and often these are with original equipment manufacturers and we're partnering with them on a worldwide basis to soften the analytical work process, analytical design and integration. We believe that's what's going to drive future business to our company on the automation side as partnering with OEMs.

[Unidentified Analyst:]

Thank you.

[William Coskey:]

You're welcome.

[Operator:]

[Operator Instructions] Okay. And it doesn't look like we have any further questions.

[William Coskey:]

Well, we thank you again for joining us on today's call. Please note, we're always here to answer your questions, which you can direct to me or Mark at [e-mail]. Thanks. Stay well and have a great day. Good-bye.

[Operator:]

Thank you. This concludes today's conference call. Thank you for your participation. You may disconnect your lines at this time and have a great day.