Q2 2020 Orbital Energy Group Inc Earnings Call
dollars compared to a
That loss of two point three million dollars for the second quarter of 2019 the delay and reach solar project towards into the third quarter and higher sg&a expenses during the court specifically attributable to orbital power services and reach construction overhead costs negatively impacted the Q2 results day and will provide additional detail on our financial performance shortly despite covid-19 headwinds to our business. We are encouraged by the level of customer activity. We are seeing throughout most of our operations wage construction is in the early stages of constructing a 65 megawatt facility in Virginia that began in July with two additional projects starting this month and one more in September with several other projects under negotiation to begin construction. This year has stated earlier reaches awarded backlog to be executed. This year is approximately dead.
55 million dollars
according to a report published in June by the US solar Industries Association and Energy Research firm wood Mackenzie, the solar industry will install 18 gigawatts this year off and knocked the power more than three million homes that represents new US solar capacity growth of 33% in 2020. And we expect the solar Market to be very active for at least wage next five years and Beyond has renewable energy targets set by States and the lower cost of solar power continue to drive demand reach as well positioned to capitalize on Thursday industry momentum.
For Philip, our services are Greenfield operation continues to gain traction. This internally developed operation has grown into a full-service construction and maintenance service provider to the electric power industry providing distribution transmission sub-station renewable and emergency response services to customers throughout the southwestern Ranch in southeastern United States while this business has developed more slowly than we had originally anticipated due to the impact of covid-19. He continues to take advantage of new customer opportunities and is expected to be profitable by year-end this month over. The power was awarded in electric distribution Master service agreement for a customer in Georgia. It's changing its Geographic coverage Beyond Oklahoma and Texas. We have also dispatched dielectric cruise to the Eastern us to provide Emergency Restoration work to the electric power off.
System in response to Hurricane Jose Reyes. We are confident this group will continue to grow as we are in discussions with several other utilities to assist with their electric transmission and distribution Capital plans. We expect this Market to be robust for years to come as utility customers continue to replace existing infrastructure much of which is beyond its useful life as well as integrate renewable generation onto the transmission and distribution system as they move away from coal and nuclear power generation. Additionally, the electric power industry is dealing with an aging Workforce Dynamic which is creating a void inexperienced construction resources to meet utility customer needs.
gas
Systems product and integration operations were materially impacted by covid-19 related disruptions in the local market in the quarter orbital gas systems in North America wage has experienced most large petrochemical integration projects being placed on hold until next year smaller maintenance based projects are moving forward and we continue to bid and walk in our share of these projects. Also some petrochemical plants are beginning to allow contractors to return to their site to perform service activities. However, the overall impact of Performing large Project work this year will impact our Houston operations by approximately a 30% reduction in revenues compared to our expectations going into this year.
During this downturn we did identify and initiate a new service offering and are now providing analytical training classes for customers on site providing strange customers will not only create a new Revenue stream for the company, but also open the doors for more integration in service opportunities as we move forward.
Turning to our UK orbital gas system operations our site service work which was virtually shut down due to covid-19 has significantly recovered almost a prepaid package levels. We are now experiencing minimal impact on integration services including engineering design and project delivery a significant driver for our success during covid-19 was the expansion of the company's Business Development efforts earlier this year to pursue new markets as a result renewable project revenues comprised of approximately fifty percent of the revenues in the first half of 2020 which includes providing integration services from Mainland Europe first biomethane project. We anticipate the case of customer opportunities to continue at a nice Pace throughout the remainder of this year.
As of June 30th 2020 October backlog under contract which is not include awarded projects not yet under contract or discontinued operations was forty six point four million dollars compared to nine point five million dollars at March 31st of 2020 this reflects the inclusion of reach and the growth of orbital power services in 20 off and closing despite recent headwinds from covid-19 and delays in the construction of utility-scale solar projects to the back half of this year. We continue to make progress during the quarter with that transformational strategy to become a diversified energy infrastructure services company, we successfully completed our platform acquisition of reach connection group and we'll see meaningful backlog translate into revenues in the second half of this year. The reach acquisition is a forward-looking story that will play out over the next several years. Yep.
fertilizing on the companies industry
relationships meaningful backlog for this year and a pipeline of significant utility scale project opportunities, which we are well-positioned to be awarded open up our services continues to grow as capabilities geographically and we'll continue this strength throughout this year and Beyond
At the same time we expanded our business development efforts and our Legacy businesses in both Houston and the UK be on the gas Network Market into the renewable gas market, which is start tangible results for several new project wins.
On a Consolidated basis we expect to be ebitda and cash flow positive going into next year. This concludes my opening remarks and I will pass the call on June 4th who will review our financial results, Dan.
Thank you, Jim and good afternoon. Everyone today. I will review our second quarter 2020 gaap Financial results. I'd like to remind everyone that I will focus my remarks today on the company's continuing operations off of note with the acquisition of reached Construction Group in April 2020. The company has revised its segment structure a new segment named the electric power and solar infrastructure segment was formed now includes reach Construction Group and orbital power Services previously orbital power Services, which commenced operations in the first quarter of 2020 was included as part of the energy segment. The phone number G segment has been renamed as the integrated energy infrastructure Solutions and services segment and includes orbital gas systems Limited in the UK and orbital gas systems North America off the former power and electromechanical segment is presented in discontinued operations as the electrical mechanical business was disposed of during Q3 of last year while the remainder of the domestic power business was divested during Q4 to age.
19 with COI Canada and see why Japan remaining as held-for-sale at this time and also presented as discontinued operations. We reported total revenues of 7.8 million volt the second quarter of 2020 compared to 6.3 million dollars for the second quarter of 2019. These reflect lower revenues from the oil gas Systems Operations during the quarter you the UK off the face headwinds surrounding covid-19.
As Jim discussed earlier, we expect integration revenues and our operations as well as orbital power and reached operations will improve during the second half of 2020. We've already been experiencing generally across most of our business segments that began in the latter part of June and has continued into both July and August. We expect this to translate into increased revenues as we begin our work on our significant 2012's from our backlog.
gross
Profit was 1 million dollars for the second quarter of 2020 compared to one point seven million dollars for the second quarter of 2019 gross margin was 13.4% for the second quarter of 2020 compared to 25.5% for the second quarter of 2019. The integrated energy infrastructure Solutions and services segment had gross profit margin of 37.7% during the quarter. The margin decrease order was attributed to the electric power and solar infrastructure segment related to closeout cost on research projects that had little Marjorie remaining after q1 and start-up cost at our new orbital power Services. Birth. These costs are largely behind us and we expect margins to improve during the third quarter and remained or 2020 as overpower Services gain greater operating efficiencies.
And higher-margin and increased Revenue projects from reach comments and companies throughout the world continue to adapt to the new operating environment created by covid-19 increase sales of higher-margin products a better mix of integration projects increase service revenues throughout our energy Focus operations, and the significant backlog of solar projects for each Construction Group are expected to drive continued Improvement to a profit.
During the three months ended June 30th, 2020 sg&a increase 2.3 million dollars compared to the prior to your comparative. The increase in sg&a for the quarter was related to one point six million dollars of sg&a for reach construction and overpower services and increased corporate costs largely due to strategic initiatives which included increased professional fees related perspective Acquisitions offset by a $480,000 reduction in sg&a in the orbital gas Systems Operations continuing loss from operations was seven point two million dollars for the second quarter of 2020 compared to three point two million dollars in the prior-year. Due to the items previously mentioned.
Has Jim noted net loss for the quarter was 9.3 million dollars compared to a net loss of two point three million dollars for the second quarter of 2019. The significant reconstruction contracts are expected to divorce 2020 beginning in Q3 at which point we expect to see the earnings of reach construction begin to positively impact the group over to power Services continues to increase its business and is expected to achieve wage stability later this year given the reach solar project delay in Q3 along with higher sg&a expenses during the quarter specifically, it should be able to auto power services and reach construction overhead cam the Q2 results were negatively impacted. We believe this is a short-term matter with the increase in reach and oral power Services activities expected in the second half of the Year based on existing backlog.
The net loss was due primarily to nine point nine million dollars from continuing operations net of income taxes consisting of operating losses at reach construction and overpower Services during the quarter of a million dollars. The overall gas systems group of one point, six million dollars and corporate costs of two point six million dollars along with a four point four million dollar loss recognized on the virtual Power Systems took a method investment. These were offset by income tax benefit of one point six million dollars in addition to company recognized income from discontinued operations of $570,000 during the quarter off.
As I just noted.
For the second quarter the company record a four point four million dollar loss on it's like we met investment in Virtual Power Systems compared with a point four million dollar loss in the 3 months ended June 30th, 2019 wage increase in the loss on Equity investment included three and half million dollar impairment recognized following an updated evaluation the company continues to believe the VPS investment May provide significant returns. However, I must execute on its opportunity Jim shared that our backlog was forty six point four million dollars as of June 30th, 2020 up significantly from March Thirty One 2020 backlog of 9.5 million dollars do the inclusion of reaches backlog and growth from over the power at June Thirty to forty six point four million dollar backlog consists of thirty seven point five million dollars from the electric power and solar infrastructure segment, six and eight point nine million dollars from the integrated energy infrastructure Solutions and services segment.
Despite any near-term difficulties we encountered from this pandemic. We continue to see the long-term benefits from the reach acquisition and expect to add substantial revenues and positive net earnings to overall Energy Group home. Well, someone reaches projects have pushed into next year as previously mentioned. We are already seeing some other projects coming back online. That's because we just project pipeline is based on its proven repeatable processes to provide customers with safe high-quality predictable results in a cost-effective manner.
One additional item I'd like to mention is regarding the transaction as you may recall. We close this transaction at very attractive terms with a purchase price of approximately $37 via the issuance of two thousand shares of our common stock any Assumption of thirty-five million dollars in Cellars that the acquisition includes an earn-out component allowing the seller turn up to an additional $30 upon hitting significant Milestones off as a result of recent business conditions related to covid-19. Justin's to reach his financial statements at acquisition and the need for more initial working capital than previously expected. We have Revisited these terms in order to fully realize reaches long-term potential the acquisition included. They working capital requirement which results in an adjustment to the purchase price. The adjusted purchase price for reach was eleven point four million dollars a pack consisting of the two million shares of equity issued six point five million dollars in Cellars notes the three million dollar funded to reach in q1 and the contingent turnout present valued at $720,000.
We continue to take steps to bolster our short-term liquidity including disciplined management of both working capital and expenses at the end of the second quarter. We hold cash and cash equivalents of four point, four million dollars and restricted cash of three point six million dollars from a cash utilization standpoint. The company significantly reduced its cash outflows during the second quarter compared to the first quarter of 2020 during Thursday to cash use and operating activities was one point three million dollars compared with seven point seven million dollars used during the first quarter of 2020 cash used in investing activities during Q2 was $186,000 compared with seven point four million dollars are in q1, which included the $3 note receivable with reach construction's that it acquisition was allocated to the purchase.
financing
Activities provided one point six million dollars or in the quarter versus a q1 use of $429,000. This is primarily attributable to the PPP funding received during the quarter partially offset by payment of wages payable some of the more significant items pertaining to cast usage during the six-month period include two point seven million dollars for funding operating activities and 1.3 million dollars of fixed assets for the overall power surge is Greenfield operation has no Tamara, today, we expect this group to turn to generating cash flow during the second half of the year and going forward the cash used during the first half of the year was more significant and see to its early-stage startup costs and investment in the necessary equipment discontinued operations used 1.9 million dollars primarily for increases to a our inventory and decreases in liabilities. That group is expected to generate positive cash flow for the full year based on the back of based on the backlog of orders to be delivered other significant uses include the one-time 2.8 million dollar payment in q1 of the work log.
Couple adjustments Bell fuse and the previously mentioned three million dollar investment and to reach during the quarter the company and subsidiaries entered into unsecured loans in the aggregate in the aggregate principal amount of approximately one thousand nine million dollars pursuing the paycheck Protection Program the loan and interest accrued there on is forgivable. Partially Orange full if certain conditions are met the company will continue to work to improve cash money and managing is working capitalism Works through the covid-19 to delays and the permitting delays related to the breach backlog of contracts that pushed into Q3.
Now that reach is starting to realize its contractual backlog and overpowers further long and growing rapidly. We expect our cash cash usage rate will continue to improve and we anticipate that we will begin to generate positive cash flow during 2020 in the short-term. We continue to diligently manage our working capital to preserve liquidity. We are actively exploring a number of options and look forward to seeing you in the near future on our progress in this area. Additionally, we anticipate additional cash and blows from the expected sailor remaining power and electromechanical operations, sui, Canada and see why Japan both of these entities remain help for sale and based on the suggestions today. We expect to complete both of those divestitures by the end of the year. I'll now turn the call back over to Jim to closing remarks.
Thank you Dan to summarize in the second quarter. We continue to pursue our strategy to develop a diversified energy infrastructure Services platform. This includes the successful acquisition have reached Construction Group and the continued development of both our Legacy energy businesses orbital gas systems and our newly launched orbital power Services Group. We have built a strong foundation with our energy infrastructure Services offerings and believe we are well-positioned to capitalize on the rapidly growing areas of alternative and renewable energy by continuing to follow this course, we will expand our presence in the energy infrastructure Services Market through both organic and acquired growth diversifying into other synergistic services and creating a long-term value for our shareholders before we go to Q&A. I'd like to talk about the current state of the covid-19 pandemic. How does impacted our business and our expectations go off?
for as we've stated
On prior calls over Energy Group and its subsidiaries have been designated as an essential critical infrastructure Workforce as a result. We have continued to operate in motion areas throughout this pandemic. So having said that as previously stated in April, we began experiencing a broader impact from the covid-19 pandemic on all aspects of our integration and product sales both domestically and in the UK integration projects, we've had previously been awarded were delayed indefinitely in the pipeline of future opportunities slow substantially. Additionally, the majority of our service work was put on hold as customers were not allowing contractors on their worksites as I mentioned earlier in late June. We started to see a Resurgence of business activity in our UK operations as economies have reopened and work began to resume in many areas. We are experiencing a retrenching in our Houston operation.
Due to the spikes and covid-19 cases. However, overall we're seeing business conditions that are improved from what we experience in April and May the health and safety of our employees wage is our top priority. We will continue to act in accordance with the guidelines provided by the CDC in the Department of Homeland Security. We continue to employ increase safety protocols Eddie survival locations. We have also implemented the utilization of talwar wherever it's feasible. Our team continues to monitor new developments on a daily basis and will continue to make operational changes as necessary to ensure the safety of our employees and their families. We remain confident that our long-term business fundamentals remain intact and look up to updating you on our progress in the near future that concludes our prepared remarks now would like to open the call for questions operator, please go ahead.
Thank you. Ladies and gentlemen. If you have a question, please press star one on your telephone to withdraw your question, press the pound key or just stand by while we compiled the Q&A roster.
Your first question comes from the line of Eric Stein with Craig out my damn. Good afternoon. Good afternoon, So just wanted to start with reach I know back when you made that acquisition. I think at the time had a hundred million dollar backlog and I know I mean you've been pretty clear since then that I think the number of 50-plus for 2020, but just curious about the the remainder of that. I know it's likely pushed into 20-21. Is that a number that's still kind of holds true and then wage maybe some commentary on on the pipeline and what you see, I mean presumably most of that would be for 2021.
so the the 50
5 million is for projects that have been awarded three of them are under contract one is being negotiated. And the the completion dates have not been pushed out. So the construction schedules will be accelerated. So we're not seeing much if any of the 55 million right now being pushed into twenty thousand one because the customer does not want to move the completion date out further than where it is today, which means that we'll just have an accelerated construction schedule wage the pipeline the pipeline of opportunities in 2021. They are there are there opportunities that were currently working with customers on but we don't have anything under contract yet.
Okay, got it. And then of that original hundred million, I mean is it fair to say that I mean was that more of a pipeline number or is that kind of a firm number that you know when you think about twenty Twenty-One or is it really that's just not the way the business works. You don't necessarily have visibility Beyond, you know, maybe the next couple of quarters. Well, we had a hundred million in backlog when we close the deal 45 million of that which was two projects were pushed into next year due to Cove it customers wage. Typically rebid or re-look at those projects when they're pushed that far out. So we're not looking at those projects as being in backlog right now, but I'll tell you there are several hundred million dollars worth of opportunities out there that we feel good that we will execute on for 20 21, um dead.
This business is not a business that gives you a great deal of backlog Beyond Ugg a certain period of time. So in other words projects for 20 21 may not be signed probably until the fourth quarter of of this year is just not a lot of time between award in the sort of construction foul perspective. And so those two projects you just mentioned those those are our part of that hundred million dollar pipeline or a hundred million dollar plus pipe line for 20 21. That's correct. Okay. And maybe just turn into orbital power Services. I mean a great news on the MSA, you know, I know you're a few quarters in there and I know covid-19 Dove, you know, I'm impacted things in the roll out, you know, just curious what your if your opinion is changed at all as to the market opportunity, you know, I guess outside of timing.
That we feel real good about the market opportunity. Just some of the larger investor-owned utilities were ring-fencing there. There are areas and not allowing any new contractors off their system, uh due to the risk of spreading covert and but we're seeing some of that, uh, relax somewhat and that that led to the opportunity for us to to go to work and Georgia for this Electric Co-op and we're looking at several other opportunities. So we feel comfortable that there will be a uh, a nice cages of us having Cruise throughout this year and into next year as we build this business and we do expect over the power will be uh u v. Positive going to 2201. Okay, good. Maybe the last one just just on the acquisition plans of curious again. I know cold it's dead.
kind of caused the potentially
The timing to be impacted their but is it still the plan? You know one to two a year, I guess as you get into twenty Twenty-One, I mean is it one to two a year? And that would be the normal Cadence going forward with the normal case would probably be more than one to two year. We were saying wanted to a year this year because of the all of the Dynamics with folded but we we may actually we're looking at Acquisitions that we may pull the trigger on between now and the end of the year which which could be anywhere from 1 to 1 to 3 acquisition that we could make these companies are all Eva. Positive today and uh cash flow positive. So these are opportunities were looking at wage, uh, real time it potentially will will execute on it between now and and and the end of the year.
Okay. Thanks a lot.
Thank you. Thank you know next question comes from the line of good afternoon Jim. Good afternoon Dan off Hailey Hailey on the gross margins. I know they were down year-over-year, but it was a sort of an apples to oranges if I looked at the gross margin sequentially though. I'm understanding you bought reach into the fold. They improved was it the fact that orbital power began to do better or have you been at holding the integration business with expenses? But you know, how did you get that sequential step up? Yeah over the power Services contributed positively in q21. It did not provide much there and that had to do with the the volume of work and the efficiencies gained by the crews out in the field as they've ramped up their volume and then also, uh, the the integration
In your seat group, the orbital gas systems groups had margins approaching 38% this quarter so they had very good service and integrated projects that that came in during the quarter, um the way up the the overall margin improved and and as I noted in my comments, we expect the margin to continue to improve this year as the research projects pick up steam here in Q3 and for and then also has auto power-down services continues to rant. Okay, and on reach mentioned that there wasn't Legacy projects that were not profitable or attic access expenses. Can we think about going into the third quarter with reach operating more on a clean project basis or do you have anything to work out in the third quarter clean up? I mostly clean. So there's there's a few small pieces yet clean up, but for the most part the projects are in play right now that are all have margin have good job.
okay, so if
Looking at gross margins in the third quarter and then I mean second Court, excuse me going into the third quarter. We could expect I mean normal contribution from all three of the businesses.
That is our plan. Yes. Okay. Great. Thank you. The only business that we're struggling with right now is the Houston operations. The rest of the businesses have a positive trajectory from a standpoint of where they were in the second quarter to where they will be at the end of the year. Okay. Thanks Jim.
Thank you. Next question comes from the line of Rob Brown with Lake Street Capital.
Good afternoon. Hey Rob. I just want to loop back to the the power Services business and it kind of gets your view on the growth opportunity there. You've got an initial start. But but how did you see that developing? It's all organic at this point. What's the kind of opportunity there in your mind over sort of three three two to three years. Well, I think we should be able to log in if we grow this business at a at a very nice clip. I would say twenty to thirty percent growth a year at least organically and there are in addition to Thursday. We're looking at Acquisitions in the T&D space as well. So, you know, we expect it to be a meaningful contributor to the company here in the short-term and certainly in to 20 21.
Okay, great. Give it to the UK size business picked up and started to normalize. You know, is that really just a return to covid-19?
In the UK what the recovery is primarily because we expanded our business development efforts to where we're not only pursuing the traditional and natural gas projects. But what page we're Noble General generation projects as well. And that's probably going to be upwards of close to 30% of the business as we get into the second half of the year. So we're expanding our business development efforts was was the end of the day, you know a good thing for us to do with the natural gas customers slowing down. So I would say natural gas customers have slowed but it's been replaced by renewal gas opportunities that we're seeing in the UK.
Okay. Okay. Great. Thank you.
Thank you, Rob.
Thank you as a reminder. Ladies and gentlemen. If you have a question, please press star one on your telephone.
Next question comes from the line of Geoff Bernstein with coward. Hi gentlemen, just follow up on that question regarding your life. It does look like they're having sort of a a green New Deal approach to coming out of covid-19. And I'm just wondering you know what you guys see in terms of snap or on G coming back and and you know some of the larger contracts that you were anticipating out of UK grid and and related entities. Yeah right now, they're still delayed. We're not seeing anything out of snam unfortunately and the same thing with the UK the UK is our testing some of our devices that have been implemented in Sheffield and and those tests are ongoing right now, and we expect to hopefully hear something about the results and moving forward with the next phase by the end of the year, but nothing yet dead.
Do these deals?
AJ out or or is it really just a case of they come back when these countries turn back on?
I think it's the latter. I think the opportunities are still out there, but at least had the code prices as well as as the government changes and it just it just creates their job. They can't make a decision. So we've got significant amount of units deployed already out in Italy and certainly prepared to deploy more when they're ready.
Gotcha. Okay, and then any any update on on the Samsung relationship is is that kind of punked out or or is there still potentially life there as things get back to normal wage Samsung is still a uh, uh distributor for us, and we we enjoy the relationship we have with them, and there's certainly future opportunities to work with them on other other projects off. Okay. Thank you. Thank you.
Thank you. I will now turn the conference back over to Jim O'Neill for any closing remarks.
Okay, I would like to thank everyone again for joining us today on our call and for your continued interest in overall Energy Group. We look forward to having follow-up conversations with many of you and updating you on our progress as we moved throughout the year. Thank you and have a great evening ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect service.
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