ENGlobal Corporation (ENG) Earnings Call Transcript & Summary

Good morning, and welcome to the ENGlobal Third Quarter 2020 Financial Results Conference Call. Your host for this morning are 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 38422. This replay will be available shortly after the completion of this event through 9:00 a.m. Eastern Time on November 12, 2020. [Operator Instructions] At this point, I would like to turn the call over to Rick Eisenberg, Media Relations Director with Eisenberg Communications. Sir, the floor is yours.

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's CEO, Bill Coskey, will present an analysis of the company's performance in the third quarter of 2020 and provide some outlook for the rest of the year. Bill?

Thanks, Rick. Good morning, everyone, and thank you for joining this call. First, given the current events in our country and the world, Mark and I would like to start this call by expressing our best wishes to you and your family, especially for your good health and well-being during this time. As for our third quarter results, you may have read in our press release this morning, ENGlobal had somewhat mixed results for this period. Although we managed to grow revenue 13% over the third quarter of last year, due to COVID-related project delays and project nonrenewals, we experienced a small increase in our net loss to $0.04 a share compared to $0.03 a share for the third quarter in 2019. For our first 9 months of 2020, we improved revenue 33% to $52.9 million and achieved a modest profit of $59,000 compared to a net loss of over $2.2 million in the same period last year. In a few minutes, our Chief Financial Officer, Mark Hess, will provide more detail on these results, but I can tell you now that unfortunately, the ongoing COVID pandemic did significantly impede our ability to operate at peak efficiency. This impact has been experienced in several ways. We've encountered a number of project delays and project nonrenewals, and we've experienced temporary facility closures as well as longer-than-expected delays by our customers in making decisions on new project awards. In addition, as in the second quarter of this year, the pandemic also reduced our ability to make in-person business development contacts, which in turn affected our ability to land new project awards. Despite these headwinds, however, I'm proud to say that today, ENGlobal has more promising opportunities for significant new business that at any time in our company's history. I say this because several years ago, we wisely placed a major focus on the green and renewable energy sector, the very sector that today is fortunately not fully subject to the economic contractions caused by the current COVID pandemic or lower price of underlying energy commodities. On the contrary, the green and renewable energy sector is driven by a different set of project economics, the majority of which play directly to our core strengths and capabilities. For example, with our Engineering, Procurement and Construction Management, our EPCM business, we've been seeing tremendous opportunities for us to supply modular engineered process plants and renewable fuel facilities, mainly for hydrogen, renewable diesel and related products. We're also seeing opportunity for ENGlobal to supply hydrogen applications for both hydro-treating of biomass feedstocks as well as to supply the fuel-grade hydrogen easily required for use in fuel cell applications. We greatly value the excellent strategic relationships that have been built during the pursuit of these opportunities, and we're equally proud of the green energy expertise ENGlobal continues to build. We therefore remain optimistic that this important combination of strategic relationships and targeted expertise, combined with our strategy of pursuing larger-value modular process plant projects valued from $10 million to $200 million each will continue to bear fruit. Near term, we believe the most likely opportunities to be finalized next will be projects similar to the $25 million agreement we signed last November for the design and fabrication of a complete modular hydrogen plant. Looking further, we believe that ENGlobal's renewable fuels project opportunities, including active projects plus proposals outstanding, currently exceeds $320 million for active prospects plus proposals outstanding. As for our Automation business, I'm happy to report that we recently submitted a proposal to completely build and integrate large quantities of utility-scale energy storage battery backup systems. As you may know, these type of applications are quickly emerging as a means to store an increasing amount of wind, solar and other forms of renewable energy and as a tool for more safely and efficiently managing load on the electric utility grid. For ENGlobal's Automation business, the steadily growing opportunities will give our company in an excellent way to play an important role in the growth of renewable energy projects while at the same time continuing to support our heritage business. At this point, I'd like to turn over the discussion to our CFO, Mark Hess, who will provide greater details on our third quarter financial performance. Mark?

Thanks, Bill. As you mentioned, our revenues in the third quarter of 2020 increased by 13% to $15.7 million, a $1.7 million improvement over revenues of $14 million in the third quarter of last year. This increase was due to a $3.8 million or 88% improvement in revenue in our EPCM segment, which was offset partly by a decrease of -- in revenue of $2 million or 21% from our Automation segment. The company recorded a net loss in Q3 of 2020 of $1.1 million or $0.04 a share compared to a net loss of $0.7 million or $0.03 a share in the like year-ago quarter. This increased net loss was primarily the result of the mix of projects that we worked on this year compared to last year, and maintaining our staffing levels at near capacity as required by the PPP loan program in order to receive full loan forgiveness. For the first 9 months of 2020, ENGlobal achieved revenue of $52.9 million, a 33% improvement on revenue of $39.8 million recorded in the first 9 months of 2019. This gain was due to an $8.9 million or 37% increase in revenue in the company's Automation segment and a $4.2 million or 27% increase in revenue from the EPCM segment. The company had net income for the first 9 months of 2020 of $59,000 compared to a net loss of $2.2 million or $0.08 a share in the comparable year-ago period. This improvement can be attributable to several factors: the increase in the company's revenue, I mentioned; an increase in the utilization of our staff leading into the COVID-19-related shutdowns; a 7% decrease in overall SG&A expense; and a 1.6 percentage point improvement in gross profit from the Automation segment. We continue to keep a tight control over our SG&A costs, which decreased by $197,000 in Q3 of 2020 compared to Q3 a year ago. Our overall gross profit margin was slightly lower at 7.3% in Q3 2020 compared to 12% in the third quarter of 2019. This again is due to the mix of projects that we worked on in 2020 compared to 2019. We entered the third quarter of 2020 with $12.7 million in cash. Our working capital as of the end of Q3 2020 was $15.1 million versus $11.3 million at the end of 2019. As you may recall, in April of 2020, we applied for and were granted a PPP loan in the amount of $4.9 million. These funds were used precisely as they were intended, to keep our employees working at close to normal levels as well as to provide additional financial stability to our company during these uncertain times. As a result of our strict adherence to these guidelines, we expect full forgiveness. As you may also recall, in order to improve our liquidity, in May of 2020, we entered into a $6 million revolving credit facility with Pacific Western Bank, with a borrowing limit based on a borrowing base. We believe the undrawn availability under this credit facility, which was $2.1 million at the end of September, together with the cash and other components of our working capital, including funds provided by the PPP loan, will provide us with enough liquidity to fund our current operations for the foreseeable future. In conclusion, we continue to experience certain business inefficiencies as a result of the ongoing pandemic. While we remain hopeful that these inefficiencies can be managed and perhaps improved upon, going forward, we are unable at this time to predict the full effect of these conditions -- what the full effect of these conditions will have on our future business. I'd now like to turn the discussion back to Bill, and afterwards, we'll be happy to take questions.

Thanks, Mark. To sum it up, although ENGlobal's performance in the third quarter was somewhat hampered by various limiting conditions and inefficiencies imposed by the COVID-19 pandemic, we nevertheless believe we are well positioned to benefit from our nation's accelerating dependence on green renewable energy and the continuing trend towards facility automation. We further expect that the strategic relationships we've built with leading process technology firms, original equipment manufacturers and end users will continue to provide us with multiple opportunities for new business and growth. In closing, I'd like to thank each of you for your support, and may you and your families remain healthy and safe as we navigate together through this time. With that, we're happy to take your questions.

[Operator Instructions] We'll take our first question from Philip Oppenheimer.

You guys have done an admirable job in a tough environment. I'm confused by your balance sheet. You show long-term debt of $3,371,000 and you show a current portion of a note of $3,042,000. Now is one of those the PPP?

Yes, sir, actually, there's a component in both of those that is the PPP loan. It's reflected on our balance sheet as if it is debt and it's not forgiven at this moment so it's still on the balance sheet.

So there's $6,400,000 roughly of debt at the moment, of which $4.9 million is forgivable?