The US Patent and Trademark Office has awarded ENGlobal Corporation a patent (#7,419,061) for developing the “Integrated Rack System”. Usually, a person represents a patent claim for a corporation throughout the process. James Dorsey, Vice President of Business Development for ENGlobal Automation Group (EAG) did this and was a co-inventor with Olan Weeks, who was then the CEO of ENGlobal Systems. EAG, Systems segment has been working hard on this for years with James continuing its intermediate and final development. James first showed me the system over 3 years ago. I covered it in my Annual Report to ENGlobal Investors. Here is what I said in 2005:
“James showed me a new patent pending Instrument Integrated Rack System that is used in the RIBs [Remote Instrument Buildings]. The design permits shorter wiring and cable lengths of up to 95% less. This represents a fantastic all around savings for ENGlobal and the customer. This makes for a simpler, faster build with less “system” to possibly fail.”
To summarize, the Integrated Rack System provides an average of 80-90% wire reduction. This reduces the material and labor costs from $150K – $300K per unit. Additionally, there is less fire/smoke detection and fire suppression concerns; along with this are less air conditioning needed and an overall energy savings. I remember a one million dollar unit that saved $288k on manufacturing costs. This is quite a marketing advantage. Moreover, anyone using this efficient system for any kind of instrument-controls-sensor-computer interface will have to obtain a license from ENGlobal.
You can see the patent filing here:
http://patft.uspto.gov/netacgi/nph-Parser?Sect1=PTO2&Sect2=HITOFF&p=1&u=%2Fnetahtml%2FPTO%2Fsearch-bool.html&r=1&f=G&l=50&co1=AND&d=PTXT&s1=dorsey.INNM.&OS=IN/dorsey&RS=IN/dorsey
You can see the Patent Award announcement here:
http://www.uspto.gov/web/patents/patog/week36/OG/patentee/alphaD.htm
You can see the Integrated Rack System diagram here:
http://www.uspto.gov/web/patents/patog/week36/OG/html/1334-1/US07419061-20080902.html
Here are some ENGlobal comments from an article in 2005:
In March 2005, ENGlobal Systems, Inc., a subsidiary of ENGlobal Corporation ("ESI"), announced the development of a unique, patent-pending design system called "Integrated Rack(TM)." ENGlobal anticipates that this patent-pending Integrated Rack will allow it to install and maintain control, communication, and analytical equipment, either alone or in combination, in a more efficient manner than existing design systems permit. ENGlobal's new design system provides coordinated, cohesive and efficient support to both communication systems and power and environmental conditioning systems that otherwise would require a distributed signal. As a result of the launch of the patent-pending Integrated Rack, ENGlobal believes that it can provide its clients with an improved process for equipment installation and decrease required maintenance time and expense. ENGlobal expects that its clients' use of the patent-pending Integrated Rack will also result in lower energy consumption, reduction in the need for computer flooring, and better safety conditions.
Myron C. Glidewell, P.E., [Former] President of ESI, said, "The patent-pending Integrated Rack design system provides an advantageous design that we expect will give ENGlobal recognition in the marketplace and provide a clear differentiator to the fabrication techniques used by our competitors."
http://www.b2i.us/profiles/investor/ResLibraryView.asp?ResLibraryID=9034&GoTopage=6&BzID=702&Category=64&a=
Congratulations to ENGlobal, James Dorsey and Olan Weeks. This proves ENGlobal is innovative and deserves their motto: Global Thinking ~ Global Solutions. Good luck to everyone.
28 September 2008
24 September 2008
4Q and Beyond Boost to Earnings
4Q and Beyond Boost
The damages caused by Hurricane Ike are tremendous and will take months to assess. Business operations, refineries, chemical plants and manufacturing operations are turning to companies like ENGlobal for repair and staffing to resume normal operations. This will take months, possibly years to recover as with Hurricanes Katrina and Rita. Some companies needing repair throw in expansion plans on top of return to operation efforts because restoration and construction services are not only at a premium they are just plain hard to attain when damages are widespread. Here is an example of thousands of damaged operations:
http://www.marketwatch.com/news/story/pliant-corporation-announces-product-allocations/story.aspx?guid=%7B36A3F14F-8F95-4F5B-8B09-40BFC345D030%7D&dist=hppr
I recently addressed 2Q & 3Q in a blog post:
http://t38pilot8202.blogspot.com/2008/09/englobal-2q-and-3q-analysis.html
Looking ahead to 4Q and beyond expect a major boost to ENGlobal’s top and bottom lines. This happened after Hurricanes Katrina and Rita if you examine continuing operation. You have to be a good analyst and factor out the write down problems they had during this period. However, enough information was given and some analysts were keen on this and commented during conference calls on the growth for continuing operations.
From 2Q & 3Q analysis one can see ENGlobal is hitting on all cylinders now with expected improvement in all divisions. Incremental improvement is expected in Engineering. Moderate improvement is expected in the Land Group. This group is moving into electrical transmission right of ways! Bill Coskey, ENGlobal’s CEO, predicts substantial growth in Construction and Automation. These are high margin groups. A general announcement was made for multiple contracts for Automation Group. What all this means is more profit for ENGlobal. They are operating at full capacity.
This begs a question. How do you meet the stepped up demand while operating at full capacity? Full capacity is a moving target for a growth company. ENGlobal has been very successful at it by adding employees better than its competitors. I just sent ENGlobal an employee this week for the Automation Group. You also meet demand with overtime. If you are a corporation that needs to get back to operations you are willing to pay time and a half. Think what that does for ENGlobal. You don’t have to log a whole lot of it before overtime hits the bottom line. Based on the past there looks to be plenty of it coming. Good luck to everyone.
The damages caused by Hurricane Ike are tremendous and will take months to assess. Business operations, refineries, chemical plants and manufacturing operations are turning to companies like ENGlobal for repair and staffing to resume normal operations. This will take months, possibly years to recover as with Hurricanes Katrina and Rita. Some companies needing repair throw in expansion plans on top of return to operation efforts because restoration and construction services are not only at a premium they are just plain hard to attain when damages are widespread. Here is an example of thousands of damaged operations:
http://www.marketwatch.com/news/story/pliant-corporation-announces-product-allocations/story.aspx?guid=%7B36A3F14F-8F95-4F5B-8B09-40BFC345D030%7D&dist=hppr
I recently addressed 2Q & 3Q in a blog post:
http://t38pilot8202.blogspot.com/2008/09/englobal-2q-and-3q-analysis.html
Looking ahead to 4Q and beyond expect a major boost to ENGlobal’s top and bottom lines. This happened after Hurricanes Katrina and Rita if you examine continuing operation. You have to be a good analyst and factor out the write down problems they had during this period. However, enough information was given and some analysts were keen on this and commented during conference calls on the growth for continuing operations.
From 2Q & 3Q analysis one can see ENGlobal is hitting on all cylinders now with expected improvement in all divisions. Incremental improvement is expected in Engineering. Moderate improvement is expected in the Land Group. This group is moving into electrical transmission right of ways! Bill Coskey, ENGlobal’s CEO, predicts substantial growth in Construction and Automation. These are high margin groups. A general announcement was made for multiple contracts for Automation Group. What all this means is more profit for ENGlobal. They are operating at full capacity.
This begs a question. How do you meet the stepped up demand while operating at full capacity? Full capacity is a moving target for a growth company. ENGlobal has been very successful at it by adding employees better than its competitors. I just sent ENGlobal an employee this week for the Automation Group. You also meet demand with overtime. If you are a corporation that needs to get back to operations you are willing to pay time and a half. Think what that does for ENGlobal. You don’t have to log a whole lot of it before overtime hits the bottom line. Based on the past there looks to be plenty of it coming. Good luck to everyone.
17 September 2008
ENGlobal 2Q and 3Q Analysis
ENGlobal 2Q and 3Q Analysis
ENGlobal Reports Record Second Quarter Results
The second quarter CC transcript has been posted so some analysis is in order. First, let me alert you that the transcript contains many errors; some of these errors change the intended meaning. I discovered this when what I was reading did not match my memory. I have the correct language in what I have written by reading the transcript and listening to the actual recording. To get accurate information on the CC I suggest you NOT rely on the transcript but listen to the audio recording available at ENGlobal's website instead.
In ENGlobal's tradition the 2008 2Q report was a record as predicted with the past three-year's second quarter headlines. With the present 2Q report and in conjunction with the conference call (CC) you can extrapolate some very good expectations, progress and continued growth. As far as what to expect in 3Q there were direct bullish statements, some very interesting clues and good news buried within. 2Q earnings were reported at .24 cents, which represents a huge increase over 2Q 2007 of .14 cents (diluted) and a 50% surprise over analyst's expectations. ENGlobal has had a history of keeping their slate clean. Excluding reserves taken in 2Q ENGlobal would have earned approximately .27 cents! This better reflects continuing operations.
To view the CC in proper context lets review 2Q highlights from the news release.
Second Quarter 2008 Highlights Compared to Second Quarter 2007:
· Revenue increased 52% to a record $136 million.
· Net income increased 71% to $6.7 million.
· Operating profit margin improved to 8.5% from 7.7%.
· 100% of quarter-over-quarter revenue increase is attributable to organic or non-acquisition related growth.
· Bi-weekly billable hours averaged 235,000 hours, up 24%, compared to 189,000 hours.
· Employee count increased 17% to approximately 2,900.
More from the release:
Revenue increased $46.4 million!
On average, the day's sales outstanding decreased to 61 days at June 30, 2008, from 62 days at March 31, 2008 and from 70 days at June 30, 2007. During the second quarter of 2008, the Company produced positive cash from operations of $4.1 million, compared with $524,000 in the second quarter of 2007.
Long-term debt, net of current portion, decreased 9.6%. ENGlobal's interest expense during the second quarter was $413,000, a decreaseof approximately $287,000, or 41%, from the prior year period. The Company's overall utilization percentage, inclusive of overhead personnel, is approximately 93% for the second quarter 2008 compared to 91% for the comparable period of 2007.
This is Key: "Management's expectation for the second half of 2008 is that our Engineering, Construction, Automation and Land businesses will all continue on a similar strong track, with consolidated profits from continuing operations expected to meet or exceed those produced during the first half."
Now let's review the CC which has a plethora of information and guidance:
Bill Coskey started the presentation (I have abstracted key information):
"ENGlobal is benefiting from a healthy market for our services with our top line growing, at an exceptional rate, 52% in the latest quarter and all of this growth was internally generated which makes it even better. Operating margin increased to 8.5%, an increase from7.7%."
"Most of you have already known that ENGlobal has stated a compound annual revenue growth target of 25% together with an operating margin goal of 8.0% for the full year 2008. We are on track to either meet or exceed both of these targets this year."
"Our inspection operation where growth is directly related to the number of inspection personnel we now have working on pipeline construction sprints. It is a good indicator of the strong trends for domestic pipeline activity."
"Procurement subcontracting activity showed a $12 million increase.This is a cost plus activity at a low margin and sometimes referred to as procurement pass-through revenue. We expect this increased level of procurement pass-through activity to continue into the third quarter of 2008."
"On a pro forma basis and eliminating the procurement pass-through revenue and margin our consolidated gross profit margin on this basis would have increased from the 14.9% that we reported to approximately 16. 2%."
"Overall ENGlobal's headcount has exceeded expectations, reaching approximately 2900 employees in the second quarter of 2008. We added 300 employees in the second quarter alone, most of which were added to our pipeline inspection group."
"Charges related to bad debt and reserves from possible claims amounted to $1.3 million in the second quarter". [This reserve taken is a one time event, and subtracted ~3 cents from continuing operations. Therefore, add it back to reflect the true nature of 2Q and what will happen 3Q. Also, keep in mind that the sale of a building in Baton Rouge will add 1.4 million in 3Q.]
"Regarding external growth, we continue to target acquisitions that equate to roughly 10% additional revenue over the next year. We choose to do these transactions for two reasons, first of all, we have had good success from selling newly acquired capabilities to our existing clients and number two, we are seeking new locations to better serve our clients within North America. We do not expect to have to dilute our stockholders in order to carry up our external growth plan."
Mr. Coskey spoke about the future based on trend performance:
"I would like to close with a few comments about why I am still excited about ENGlobal's future. First of all, our engineering segment (our anchor business), I really like our consistent and predictable business model as our engineering work mainly consist of alliance relationships, the counted in-plant personnel and our performance on small to mid sized cost plus projects. Many of our projects are driven by ongoing maintenance issues, retro fits of existing facilities or government compliance mandates."[Translation: This accelerated project activity will continue. This was clearly stated at the Annual Meeting.]
"I believe our engineering operation is well managed and supported by a top-notch group of business development professionals and we also have several interesting internal growth initiatives currently underway. Second, is our construction segment, we have recently changed management at our inspection group. This should serve to drive some needed margin improvement." [Translation: More growth coming and look for better results in 3Q.]
"As inspection services has really grown it currently represents about 87% of our construction segment. The higher margin piece of our construction group, which specializes in managing EPC projects, plant turnarounds and commissioning new facilities, is a very aggressive group. Given their many current opportunities, my expectation is that our construction group will continue to be a fast growing business with improving profitability over time given a shift toward our higher margin capability." [Translation: Revenue from Construction will grow and increase the ENGlobal bottom line.]
"In terms of automation: During 2008, we have landed two significant multi-year projects to upgrade control analyzer systems at large refineries. Automation's billable hours should increase and variable overhead should decrease over the balance of this year and next." [Translation: Automation is expected to contribute more to the bottom line from new contracts landed, plus, greater segment efficiency will contribute. This is management working on both sides of the bottom line formula.]
"Also promising [for Automation] is that there are several more significant automation proposals pending similar to the ones we have been awarded. I like the fact that our automation business is being driven by our client's need to replace obsolete electronic and pneumatic control system as well as analyzer equipment and this provides a recurring stream of work." [Translation: Automation Group is growing with more profit on the way.]
Writer's note: I would like to inject some thoughts about these types of contracts that Automation performs. First, there is the Systems segment. I reported seeing the shops at completely full capacity – The monies from these contracts have only begun to filter in, logically, from the state of finish I observed. Work was stacked in the parking lots. Secondly, the balance of work Automation performs, among its services, are DCS (Distribution Control Systems) retrofits. These retrofits took a priority behind basic Y2K computer/software upgrades years ago. The already old automation and control equipment needs replacement badly. I have been searching for information about the general size of these contracts online with various businesses. What I found is that these contracts are huge in values even for medium sized factories and refineries. Contracts range from 50-120 million dollars. A few contracts as we potentially anticipate from these comments could easily double ENGlobal's backlog!
Mr. Coskey continues: "And, finally our land group. Pretty simply, I see continued strong pipeline activity both for gathering and mainline projects that drives demand for new right of way. This together with emerging projects to build electric power transmission line should keep our land business busy for the foreseeable future."
Here are some key abstracted comments from Bob Raiford:
"A lot of the specific details of our second quarter results were disclosed in our press release this morning but I like to highlight some selected items. We expect these specific project reserves to be of a non reoccurring nature and fully expect that the reserves taken during the period will meet all material coverage deductibles, legal expenses and settlement levels."
"For this six month period just ended, our overall long-term commitments, net of current portion, decreased approximately 9%, approximately $2.5 million from $29.3 million as of December 31 of 2007. We do not expect our tax rate for 2008 to fairly change for approximately 40% effective tax rate for the first six month period of the current year."
"At this time, we expect our operations to remain in a positive cash flow position for the balance of the year. The July 24 payoff of the $1.4 million note receivable for the sale of our office building become a previously owned in Baton Rouge, Louisiana will positively impact cash requirements during the third quarter."
Q&A was especially revealing:
Craig Bell - SMH Capital: "It is a pretty impressive quarter. Since you are saying that a significant amount of the increase is related to pay raises and billing rates, does that sort of imply that maybe this level of revenue is sustainable going forward because in the past you had good solid increases quarter to quarter but it has been pretty consistent in this quarter such a significant jump up. I mean, you think you can maintain sort of that level?"
Bill Coskey: "Yes, I do not see anything over the near term taking us off the track we are currently on and I would not be surprised to see our third quarter meet or exceed what we did in the second quarter."
Graham Madison - Lazard Capital Markets: "This is quite a quarter. Congratulations. Just quickly, in the past you mentioned that looking at the quarters over the year, the 3Q tends to be better than 2Q. Is there anything that you think that wouldn't be the case this year? I mean was there any projects that moved to the second quarter which help boost the revenue in the performance?"
Bill Coskey: "I have always equated our second and third quarter and equated our first and fourth quarter. I would look for our third quarter to be similar to our second or our fourth quarter to be similar to our first. It is kind of the way our year goes."
Graham Madison: "And then just looking at some of the margin improvements in the other segments outside of engineering, what was driving that? Was that more would you say on broader scope that is more of an impact of better contracting terms that you are signing up or is it more results of the better management execution and operational execution that you talked about in prior quarters?"
Bill Coskey: "I think it is a little both. I think we are continually working on better contracts. The new business would bring in just provide better margins for our company. I think we have just made some efforts to improve our efficiencies, improve utilization. Bob, do you have anything to add to that? It is a lot of blocking and tackling. It is not any one magic bullet."
Graham Madison: "Well, there is nothing to think that some of these margins would not, as you had mentioned earlier, wouldn't be sustainable going forward?"
Bill Coskey: "No, I would see margins to be sustainable going forward especially after you back out the impact of these past two revenues." [This is a key statement here folks.]
Rich Wesolowski - Sidoti & Company: "Can you give us maybe a gross margin for each segment that you would consider to be strong and realistic performance in today's environment?"
Bill Coskey: "I think what I would say as far as engineering segment is going to be right around that same area on an ongoing basis, possibly ticking up very incrementally. I would expect to see some pretty good improvement in our automation and construction group just based on project awards, especially in the construction group where we have this huge mix of inspections, pipeline inspection revenue which by nature is low margin and as we tend to change that mix over the sum of our higher value services like managing EPC projects or managing turn around projects, my belief is that over time that mix will change from 8713 to much more favorable on high margin side."
"I believe our land groups should be pretty steady going forward and it is kind of "it is what it is" today if we may take some incremental improvements. So engineering and land talking about the same slightly improving but we have the opportunity to make some pretty significant improvements in automation and construction." [Translation: ENGlobal is going to do even better on the bottom line 3Q and beyond.]
Rich Wesolowski: "Okay, you mentioned that the 300 headcount that you add in the quarter, most of that was in pipeline inspection. Can you reconcile that with the expectation that the other part of construction is going to be going up as the percentage of that revenue?"
Bill Coskey: "It was based on my knowledge and some opportunities they have and also based on my knowledge of efforts that are being made to raise margins within the inspection group itself after the change in management. I believe we are going on to two things. We are going to improve the inspection margins plus we are going to change the mix. It is just based on some opportunities we have here. [Translation: Performance will be better - more money.]
Graham Madison - Lazard Capital Markets: "Hey guys just to follow upon the inspection and construction margins. Now that you have made the personnel changes, did we see any of the margin improvement or the benefit from that personnel change in this quarter or will that be something we will see in coming quarters more?
Bill Coskey: "I think that is something you should look forward incoming quarters. That is a fairly recent change and I do not believe that any of that impact hit the second quarter. [Translation: Pretty obvious, margin benefit will be experienced in 3Q onward, so future results should be higher than 2Q.]
Graham Madison: "Okay great and then on the land group, I mean would it be fair to say that we could see revenue growth sort of consistently drive up with the increase in pipeline work that's going on out there?"
Bill Coskey: "There are limiting factors to the ability to access right of way for the projects. I think they are more limited by the ability to add staff than anything. I think there is more project than staff but, yes, there are many, many opportunities especially with this emerging build out on electric power transmission that we could participate in. That is another area." [Translation: Land will grow.]
Conclusion
PE Ratios and other possibilities: As stated ENGlobal earned .39 cents so far in 2008 and earnings from continuing operations for the year are expected by analysts to be ~. 82 cents. 3Q estimate is .23cents. Based on the conference call comments I think ENG will surprise upward in both earnings and revenue. 3Q sales growth varies by site and formulas used, however, all indicate growth is huge with most measuring at significant levels of over 35%. Overall growth for
ENGlobal in 2008 is listed at 82.2%! The five-analyst average forEPS in 2009 is $1.01.
Fair value of a growth company is based on a conservative forward PEof 20-30. Higher PE, closer to 30 in a good economy and less in apoor one, like at present. It appears the economy is improving slowly so I will use 24. Calculating a fair price using the current year at .82 cents yields a price of $19.68, but this would be a combination of trailing earnings and near-term expectations. Again, I think those expectations will be beat. Growth companies are best valued on forward PE. At $1.03 this yields a price of $24.72, if you add any of the reserves taken the price goes up. If you sold ENGlobal with a 20% premium this yields a price range of $23.62-29.67. A merger event would get you a better exchange for your stock in that scenario.
I have spoken with Mike Burrow, ENGlobal's former CEO. He thinks the company is strong and is easily a $20-25 stock. With his approval, I will relay he is buying ENGlobal now. I am buying ENG now also. Regardless of any potential scenario the data indicates that ENGlobal is earning money and growing in a bad economy. Who wouldn't want to own a stock that is growing profits when you hear consistent bad news in a poor economy? ENGlobal is exactly what you want for safety and to increase your investment value. Good luck to everyone.
ENGlobal Reports Record Second Quarter Results
The second quarter CC transcript has been posted so some analysis is in order. First, let me alert you that the transcript contains many errors; some of these errors change the intended meaning. I discovered this when what I was reading did not match my memory. I have the correct language in what I have written by reading the transcript and listening to the actual recording. To get accurate information on the CC I suggest you NOT rely on the transcript but listen to the audio recording available at ENGlobal's website instead.
In ENGlobal's tradition the 2008 2Q report was a record as predicted with the past three-year's second quarter headlines. With the present 2Q report and in conjunction with the conference call (CC) you can extrapolate some very good expectations, progress and continued growth. As far as what to expect in 3Q there were direct bullish statements, some very interesting clues and good news buried within. 2Q earnings were reported at .24 cents, which represents a huge increase over 2Q 2007 of .14 cents (diluted) and a 50% surprise over analyst's expectations. ENGlobal has had a history of keeping their slate clean. Excluding reserves taken in 2Q ENGlobal would have earned approximately .27 cents! This better reflects continuing operations.
To view the CC in proper context lets review 2Q highlights from the news release.
Second Quarter 2008 Highlights Compared to Second Quarter 2007:
· Revenue increased 52% to a record $136 million.
· Net income increased 71% to $6.7 million.
· Operating profit margin improved to 8.5% from 7.7%.
· 100% of quarter-over-quarter revenue increase is attributable to organic or non-acquisition related growth.
· Bi-weekly billable hours averaged 235,000 hours, up 24%, compared to 189,000 hours.
· Employee count increased 17% to approximately 2,900.
More from the release:
Revenue increased $46.4 million!
On average, the day's sales outstanding decreased to 61 days at June 30, 2008, from 62 days at March 31, 2008 and from 70 days at June 30, 2007. During the second quarter of 2008, the Company produced positive cash from operations of $4.1 million, compared with $524,000 in the second quarter of 2007.
Long-term debt, net of current portion, decreased 9.6%. ENGlobal's interest expense during the second quarter was $413,000, a decreaseof approximately $287,000, or 41%, from the prior year period. The Company's overall utilization percentage, inclusive of overhead personnel, is approximately 93% for the second quarter 2008 compared to 91% for the comparable period of 2007.
This is Key: "Management's expectation for the second half of 2008 is that our Engineering, Construction, Automation and Land businesses will all continue on a similar strong track, with consolidated profits from continuing operations expected to meet or exceed those produced during the first half."
Now let's review the CC which has a plethora of information and guidance:
Bill Coskey started the presentation (I have abstracted key information):
"ENGlobal is benefiting from a healthy market for our services with our top line growing, at an exceptional rate, 52% in the latest quarter and all of this growth was internally generated which makes it even better. Operating margin increased to 8.5%, an increase from7.7%."
"Most of you have already known that ENGlobal has stated a compound annual revenue growth target of 25% together with an operating margin goal of 8.0% for the full year 2008. We are on track to either meet or exceed both of these targets this year."
"Our inspection operation where growth is directly related to the number of inspection personnel we now have working on pipeline construction sprints. It is a good indicator of the strong trends for domestic pipeline activity."
"Procurement subcontracting activity showed a $12 million increase.This is a cost plus activity at a low margin and sometimes referred to as procurement pass-through revenue. We expect this increased level of procurement pass-through activity to continue into the third quarter of 2008."
"On a pro forma basis and eliminating the procurement pass-through revenue and margin our consolidated gross profit margin on this basis would have increased from the 14.9% that we reported to approximately 16. 2%."
"Overall ENGlobal's headcount has exceeded expectations, reaching approximately 2900 employees in the second quarter of 2008. We added 300 employees in the second quarter alone, most of which were added to our pipeline inspection group."
"Charges related to bad debt and reserves from possible claims amounted to $1.3 million in the second quarter". [This reserve taken is a one time event, and subtracted ~3 cents from continuing operations. Therefore, add it back to reflect the true nature of 2Q and what will happen 3Q. Also, keep in mind that the sale of a building in Baton Rouge will add 1.4 million in 3Q.]
"Regarding external growth, we continue to target acquisitions that equate to roughly 10% additional revenue over the next year. We choose to do these transactions for two reasons, first of all, we have had good success from selling newly acquired capabilities to our existing clients and number two, we are seeking new locations to better serve our clients within North America. We do not expect to have to dilute our stockholders in order to carry up our external growth plan."
Mr. Coskey spoke about the future based on trend performance:
"I would like to close with a few comments about why I am still excited about ENGlobal's future. First of all, our engineering segment (our anchor business), I really like our consistent and predictable business model as our engineering work mainly consist of alliance relationships, the counted in-plant personnel and our performance on small to mid sized cost plus projects. Many of our projects are driven by ongoing maintenance issues, retro fits of existing facilities or government compliance mandates."[Translation: This accelerated project activity will continue. This was clearly stated at the Annual Meeting.]
"I believe our engineering operation is well managed and supported by a top-notch group of business development professionals and we also have several interesting internal growth initiatives currently underway. Second, is our construction segment, we have recently changed management at our inspection group. This should serve to drive some needed margin improvement." [Translation: More growth coming and look for better results in 3Q.]
"As inspection services has really grown it currently represents about 87% of our construction segment. The higher margin piece of our construction group, which specializes in managing EPC projects, plant turnarounds and commissioning new facilities, is a very aggressive group. Given their many current opportunities, my expectation is that our construction group will continue to be a fast growing business with improving profitability over time given a shift toward our higher margin capability." [Translation: Revenue from Construction will grow and increase the ENGlobal bottom line.]
"In terms of automation: During 2008, we have landed two significant multi-year projects to upgrade control analyzer systems at large refineries. Automation's billable hours should increase and variable overhead should decrease over the balance of this year and next." [Translation: Automation is expected to contribute more to the bottom line from new contracts landed, plus, greater segment efficiency will contribute. This is management working on both sides of the bottom line formula.]
"Also promising [for Automation] is that there are several more significant automation proposals pending similar to the ones we have been awarded. I like the fact that our automation business is being driven by our client's need to replace obsolete electronic and pneumatic control system as well as analyzer equipment and this provides a recurring stream of work." [Translation: Automation Group is growing with more profit on the way.]
Writer's note: I would like to inject some thoughts about these types of contracts that Automation performs. First, there is the Systems segment. I reported seeing the shops at completely full capacity – The monies from these contracts have only begun to filter in, logically, from the state of finish I observed. Work was stacked in the parking lots. Secondly, the balance of work Automation performs, among its services, are DCS (Distribution Control Systems) retrofits. These retrofits took a priority behind basic Y2K computer/software upgrades years ago. The already old automation and control equipment needs replacement badly. I have been searching for information about the general size of these contracts online with various businesses. What I found is that these contracts are huge in values even for medium sized factories and refineries. Contracts range from 50-120 million dollars. A few contracts as we potentially anticipate from these comments could easily double ENGlobal's backlog!
Mr. Coskey continues: "And, finally our land group. Pretty simply, I see continued strong pipeline activity both for gathering and mainline projects that drives demand for new right of way. This together with emerging projects to build electric power transmission line should keep our land business busy for the foreseeable future."
Here are some key abstracted comments from Bob Raiford:
"A lot of the specific details of our second quarter results were disclosed in our press release this morning but I like to highlight some selected items. We expect these specific project reserves to be of a non reoccurring nature and fully expect that the reserves taken during the period will meet all material coverage deductibles, legal expenses and settlement levels."
"For this six month period just ended, our overall long-term commitments, net of current portion, decreased approximately 9%, approximately $2.5 million from $29.3 million as of December 31 of 2007. We do not expect our tax rate for 2008 to fairly change for approximately 40% effective tax rate for the first six month period of the current year."
"At this time, we expect our operations to remain in a positive cash flow position for the balance of the year. The July 24 payoff of the $1.4 million note receivable for the sale of our office building become a previously owned in Baton Rouge, Louisiana will positively impact cash requirements during the third quarter."
Q&A was especially revealing:
Craig Bell - SMH Capital: "It is a pretty impressive quarter. Since you are saying that a significant amount of the increase is related to pay raises and billing rates, does that sort of imply that maybe this level of revenue is sustainable going forward because in the past you had good solid increases quarter to quarter but it has been pretty consistent in this quarter such a significant jump up. I mean, you think you can maintain sort of that level?"
Bill Coskey: "Yes, I do not see anything over the near term taking us off the track we are currently on and I would not be surprised to see our third quarter meet or exceed what we did in the second quarter."
Graham Madison - Lazard Capital Markets: "This is quite a quarter. Congratulations. Just quickly, in the past you mentioned that looking at the quarters over the year, the 3Q tends to be better than 2Q. Is there anything that you think that wouldn't be the case this year? I mean was there any projects that moved to the second quarter which help boost the revenue in the performance?"
Bill Coskey: "I have always equated our second and third quarter and equated our first and fourth quarter. I would look for our third quarter to be similar to our second or our fourth quarter to be similar to our first. It is kind of the way our year goes."
Graham Madison: "And then just looking at some of the margin improvements in the other segments outside of engineering, what was driving that? Was that more would you say on broader scope that is more of an impact of better contracting terms that you are signing up or is it more results of the better management execution and operational execution that you talked about in prior quarters?"
Bill Coskey: "I think it is a little both. I think we are continually working on better contracts. The new business would bring in just provide better margins for our company. I think we have just made some efforts to improve our efficiencies, improve utilization. Bob, do you have anything to add to that? It is a lot of blocking and tackling. It is not any one magic bullet."
Graham Madison: "Well, there is nothing to think that some of these margins would not, as you had mentioned earlier, wouldn't be sustainable going forward?"
Bill Coskey: "No, I would see margins to be sustainable going forward especially after you back out the impact of these past two revenues." [This is a key statement here folks.]
Rich Wesolowski - Sidoti & Company: "Can you give us maybe a gross margin for each segment that you would consider to be strong and realistic performance in today's environment?"
Bill Coskey: "I think what I would say as far as engineering segment is going to be right around that same area on an ongoing basis, possibly ticking up very incrementally. I would expect to see some pretty good improvement in our automation and construction group just based on project awards, especially in the construction group where we have this huge mix of inspections, pipeline inspection revenue which by nature is low margin and as we tend to change that mix over the sum of our higher value services like managing EPC projects or managing turn around projects, my belief is that over time that mix will change from 8713 to much more favorable on high margin side."
"I believe our land groups should be pretty steady going forward and it is kind of "it is what it is" today if we may take some incremental improvements. So engineering and land talking about the same slightly improving but we have the opportunity to make some pretty significant improvements in automation and construction." [Translation: ENGlobal is going to do even better on the bottom line 3Q and beyond.]
Rich Wesolowski: "Okay, you mentioned that the 300 headcount that you add in the quarter, most of that was in pipeline inspection. Can you reconcile that with the expectation that the other part of construction is going to be going up as the percentage of that revenue?"
Bill Coskey: "It was based on my knowledge and some opportunities they have and also based on my knowledge of efforts that are being made to raise margins within the inspection group itself after the change in management. I believe we are going on to two things. We are going to improve the inspection margins plus we are going to change the mix. It is just based on some opportunities we have here. [Translation: Performance will be better - more money.]
Graham Madison - Lazard Capital Markets: "Hey guys just to follow upon the inspection and construction margins. Now that you have made the personnel changes, did we see any of the margin improvement or the benefit from that personnel change in this quarter or will that be something we will see in coming quarters more?
Bill Coskey: "I think that is something you should look forward incoming quarters. That is a fairly recent change and I do not believe that any of that impact hit the second quarter. [Translation: Pretty obvious, margin benefit will be experienced in 3Q onward, so future results should be higher than 2Q.]
Graham Madison: "Okay great and then on the land group, I mean would it be fair to say that we could see revenue growth sort of consistently drive up with the increase in pipeline work that's going on out there?"
Bill Coskey: "There are limiting factors to the ability to access right of way for the projects. I think they are more limited by the ability to add staff than anything. I think there is more project than staff but, yes, there are many, many opportunities especially with this emerging build out on electric power transmission that we could participate in. That is another area." [Translation: Land will grow.]
Conclusion
PE Ratios and other possibilities: As stated ENGlobal earned .39 cents so far in 2008 and earnings from continuing operations for the year are expected by analysts to be ~. 82 cents. 3Q estimate is .23cents. Based on the conference call comments I think ENG will surprise upward in both earnings and revenue. 3Q sales growth varies by site and formulas used, however, all indicate growth is huge with most measuring at significant levels of over 35%. Overall growth for
ENGlobal in 2008 is listed at 82.2%! The five-analyst average forEPS in 2009 is $1.01.
Fair value of a growth company is based on a conservative forward PEof 20-30. Higher PE, closer to 30 in a good economy and less in apoor one, like at present. It appears the economy is improving slowly so I will use 24. Calculating a fair price using the current year at .82 cents yields a price of $19.68, but this would be a combination of trailing earnings and near-term expectations. Again, I think those expectations will be beat. Growth companies are best valued on forward PE. At $1.03 this yields a price of $24.72, if you add any of the reserves taken the price goes up. If you sold ENGlobal with a 20% premium this yields a price range of $23.62-29.67. A merger event would get you a better exchange for your stock in that scenario.
I have spoken with Mike Burrow, ENGlobal's former CEO. He thinks the company is strong and is easily a $20-25 stock. With his approval, I will relay he is buying ENGlobal now. I am buying ENG now also. Regardless of any potential scenario the data indicates that ENGlobal is earning money and growing in a bad economy. Who wouldn't want to own a stock that is growing profits when you hear consistent bad news in a poor economy? ENGlobal is exactly what you want for safety and to increase your investment value. Good luck to everyone.
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