Williams Industrial Services Group Inc.

Thank you, and good morning, everyone. We certainly appreciate your time today and your interest in Global Power.

On the call with me are our President and CEO, Tracy Pagliara; and Chief Financial Officer, Erin Gonzalez. We will begin with our prepared comments and then open this call for questions.

We released after the close of market yesterday our fourth quarter and full year 2017 financial results and filed with the Securities Exchange Commission our 2017 Form 10-K. You can find these documents on our website at www.globalpower.com.

You will also find on our website the slides that will accompany today's conversation.

If you open the slide deck, I will review the safe harbor regarding forward-looking statements. As you are aware, we may make some forward-looking statements during the formal discussions as well as during the Q&A session.

These statements apply to future events, which are subject to risks and uncertainties as well as other factors that could cause actual results to differ materially from what is stated here today.

These risks and uncertainties and other factors are provided in the earnings release as well as with other documents filed with the Securities and Exchange Commission. You can find those documents on our website or at sec.gov.

During today's call, we will also discuss some non-GAAP financial measures. We believe these will be useful in evaluating our performance.

You should not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAP. When applicable, we have provided a reconciliation of the non-GAAP measures to comparable GAAP measures in the tables that accompany yesterday's release and slides for your information.

With that, I will now turn the call over to Tracy to begin. Tracy?

Thanks, Deb, and good morning, everyone. A lot has happened here at Global Power since we last reported at the end of January.

As noted in our 12b-25 filing, some of these developments resulted in our filing later than planned. However, with that extension, we are still within the allowed time frame for timely filing.

So we are now current with the SEC after 3 long years.

We have initiated a number of significant changes to transition from a holding company structure into an operating business. Most recently, Craig Holmes voluntarily resigned in his positions as co-President, co-CEO and a member of our board as part of our plan to significantly reduce corporate overhead costs.

Craig's knowledge and experience helped us get through some very trying situations. I appreciate the opportunity to work with him in our cooperative roles these last 9 months and with him as CFO since he joined us in September 2015.

In addition, 6 independent members of our board also elected to voluntarily resign ahead of our next shareholder meeting, reducing the board to 5 members. We believe that the size of our board is now more appropriate for our company that is consistent with our previously announced plans.

We certainly appreciate the contributions each of our board members have made.

We have several items of positive news to report as well. First, we recently received notification from the SEC Enforcement Staff that they have completed their investigation and they do not intend to recommend an enforcement action by the SEC against the company at this time.

Second, we resolved the contingent liability for performance-related liquidated damages for work performed under an agreement with the partner in connection with the power plant equipment installation project. As a result, we released to revenue in 2017 a $4.4 million contingent liability reserve, which we had carried on our books since 2015.

Third, we negotiated the settlement of certain disputed unsigned change orders. To maintain these long-standing customer relationships, we agreed to settle, which resulted in us recognizing $2.8 million of revenue.

And fourth, we sold the building in The Netherlands for net proceeds of $300,000.

one is direct contracts with the plant's operator; second, we have a 25% membership interest in a limited liability company, or LLC, that supplies craft labor and supervision. This is our joint venture with Bechtel.

And finally, we have contracts between us and the LLC under which we provide certain employee services to support the joint venture.

Moving into 2018, backlog grew 9% to $150 million at the end of March compared with the end of December 2017. We are excited about the strong pipeline of opportunities that we are pursuing.

With the momentum we are building, the board has concluded that this is a good time to evaluate strategic alternatives for Global Power. We expect to evaluate many options, which could run the spectrum from recapitalizing our balance sheet opportunity, including the sale of Global Power.

Finally, we arranged a $3 million incremental loan commitment with Centre Lane. Although we do not anticipate needing to draw on it, this is a backstop, which can provide us emergency funds in the event we need them.

Erin will discuss this in greater detail.

With that, let me turn the call to Erin.

Thank you, Tracy, and good morning, everyone. During today's conference call, we will cover our 2017 financial results in detail and will generally follow the presentation slides provided.

Towards end of the call, I will provide an update on our progress with our financing. We are presenting both our Mechanical Solutions and Electrical Solutions segment as discontinued operations in our 2017 Form 10-K as a result of the sale of the Mechanical Solutions business and our decision to sell the Electrical Solutions business in the fourth quarter.

As a result, our operating results are presented as one operating business that is comprised of our former Services segment, or Williams, and our corporate operations.

With that, I will recount some recent highlights of 2017. As previously reported, we've sold the Mechanical Solutions business and related facilities in Mexico for a total net proceeds of $44.5 million, of which we used $35.9 million to reduce debt.

We also elected in the fourth quarter to exit the Electrical Solutions business as we focused our resources on Williams and the opportunities it presented. As an example of the building momentum in our business was the announcement that we made in October that we have formed an LLC with Bechtel to supply craft labor and supervision for Vogtle 3 & 4, the only new nuclear reactors being constructed in the U.S.

We are a 25% member of that LLC. We are also working directly on the project.

Combined, we expect that this will be significant revenue for us over the next 4 to 5 years.

We collected $6.4 million of $8.7 million in receivables related to a customer bankruptcy. We are anticipating that we will receive an additional $2.1 million, which is still reported as a receivable.

Now I will review our operational results for the quarter and the year. As shown on Slide #4, revenue declined for both the 2017 fourth quarter and the year.

In both instances, almost half of the decline was related to the sale of Hetsco in January 2017. While we substantially completed work on the restart activities at a nuclear power plant and 2 multi-year fixed price nuclear projects in 2016, we did have $19.2 million of maintenance and modification work for a scheduled outage in 2017.

And as Tracy noted, we had $7.2 million in revenue related to the settling of some unsigned change order disputes and the release of a contingent fee reserve. For the fourth quarter, services revenue increased by almost 14% over the third quarter of 2017.

Please turn to Slide #5. Our gross profit declined primarily on lower revenue in 2017 for both the fourth quarter and the year.

In the quarter, while gross profit was down $1.5 million, gross margin improved by 190 basis points to 18%. The positive impact of $2.8 million of 100% margin revenue and improved project mix more than offset the negative impact of $1.8 million in zero margin revenue related to lost contracts.

Excluding these items, gross margin would have been approximately 13% for the fourth quarter of 2017 compared with 12% in the trailing third quarter. For the year, lost contracts weighed heavily on gross profit.

We believe that we have these challenges behind us and have improved our discipline in bidding future work and executing contract change orders.

Please turn to Slide #6. Our operating loss increased $900,000 to $1.3 million in the fourth quarter of 2017 as a result of the $1.5 million decrease in gross profit, which was partially offset by an $800,000 decrease in operating expenses resulting from the divestiture of our Hetsco business.

The cost reductions and expense management results we reported in the third quarter carried over into the fourth quarter as well. For the year, the operating loss increased $4.1 million to $22.1 million as cost reductions were not sufficient to overcome the $13.3 million reductions in gross profit.

Our restructured operations during 2017 drove our selling and marketing expenses down by $600,000, and general and administrative expenses were down $3.4 million due to the Hetsco divestiture. Additionally, restatement-related expenses decreased $3.6 million in 2017.

However, the significant decreases in expenses were partially offset by an $800,000 increase in severance expense during 2017.

The 2017 general and administrative expense run rate at 19.2% of revenue is not acceptable. The $36 million in general and administrative cost in 2017 included a $3.1 million restatement expense, $1.5 million in severance cost and another $1 million for asset disposition and other one-time costs, totaling just over $5.6 million in unusual costs.

Excluding the cost of restructuring, our plans called for the elimination of approximately $18 million to $20 million from the consolidation of IT, finance and accounting and some executive functions. We also expect to improve processes and workflows to operate more efficiently and with fewer people.

Slide #7 provides a summary of our adjusted EBITDA for the quarter and year. The reduction in adjusted EBITDA from continuing operations for both periods reflect 0 adjustments in the reported period.

Slide #8 provides detail regarding our cash and borrowings. As communicated on prior calls, we entered into a $45 million senior secured term loan with an affiliate of Centre Lane Partners.

The terms are shown here on the slide, and the term loan expires in December of 2021. In August, we amended that facility and added a $10 million first-out term loan, which expires in September of 2018.

The $10 million first-out term loan was fully paid in October 2017, with a portion of the proceeds from the Mechanical Solutions business divestiture. In 2017, our continuing operations used $29.2 million of cash.

As of April 9, 2018, the outstanding balance on our Centre Lane term debt was $25.9 million. Our cash on hand as of the same date was $18.9 million, which included $10.4 million of restricted cash to cover our cash collateralized letters of credit and escrow related to the divestiture of Hetsco.

We have been managing our cash position very carefully. The delay in our closing on the asset-based revolver was due in part to the lender's hesitation regarding several reported contingencies, which has now been resolved.

With this behind us, we are reinitiating our efforts with various vendors to secure an asset-based revolver. But given the number of positive outcomes we have had of late, our building backlog and the favorable opportunities in front of us, even if we were unable to successfully secure an asset-based revolver, I believe we can pursue other financing alternatives.

We did arrange an incremental loan commitment of $3 million with our current lender, although we will only use it in the event of an emergency. Our recently executed amendment also extended our first required date for us to satisfy the total leverage and fixed charge coverage ratios to September 30, 2019, and waive the requirement to prepay $3.6 million of extraordinary cash received to include $300,000 in cash proceeds from the sale of our office in The Netherlands.

These were -- there were costs to the amendment including a $500,000 exit fee and a 1% unused line fee on the incremental loan.

Now let me turn the call back to Tracy.

Thanks, Erin. The process to evaluate strategic alternatives for Koontz-Wagner remains active, and we're diligently pursuing a favorable outcome even though it has progressed slower than we had originally anticipated.

The sale of Koontz-Wagner has gone slower than planned as a result of the challenges we have faced in our Houston plant, which we believe are behind us now as we complete the existing project work in that facility. We are in the process of relaunching our efforts to sell Koontz-Wagner.

We have retained an additional investment banker. Our new banker is going to help us reposition Koontz-Wagner for sale to additional prospective new owners with alternative potential deal structures.

Our goal is to complete this process by June 30, 2018.

Our work on Vogtle 3 & 4 is evident in our fourth quarter results and our backlog. There are more opportunities that we expect will be associated with various stages of construction and other work, such as facility management that can last the entire construction period.

The plants are expected to be completed by 2022.

As previously discussed, our backlog is growing and we are bidding on new opportunities in various markets. We continue to be encouraged with the traction we are gaining in the decommissioning area.

Our objective there is to be a lead subcontractor for the largest EPC's next phase. We have one additional work beyond our first project.

This is a long-term vision to establish a foothold in this industry. Keep in mind that a reactor going offline has 3 years of planning an interior and even before they begin to remove the fuel.

What we are actively seeking now is work that likely won't be performed until 2020 and beyond.

Our cost reduction plan is being executed. With the reduction in the board and the change in executive management, plus the additional headcount reductions and cost efficiencies we will be implementing, we expect our corporate cost will be reduced to a $5 million to $7 million annual run rate by the end of the year.

If properly executed, we expect to be in annualized general and administrative expense level more appropriate for this business, which should be approximately 7% to 9% of revenue.

These cost reductions, combined with the improvement in operations and pipeline of opportunities, promise a much improved 2018. We expect revenue to grow in the low single-digit percentages and operating margins to be more in line with our historic Services business by the end of the year.

And we believe we will be positioned for an even stronger 2019.

As to our review of strategic alternatives, we are still in the early stages and have all options on the table. Our objectives are to advance the best interest of our shareholders and provide improved long-term prospects for our customers and employees.

Operator, we can open the line for questions.

It looks like you're making solid progress, but I was curious about a couple of things. One of which was, I think, Erin said savings of $18 million to $20 million when we consolidate functions and so forth.

It wasn't clear how that ties in with the reduction in corporate overhead. Can you add some color there in terms of what those savings are and where are they, whether corporate or operating?

Absolutely. So what those savings tie into are [indiscernible] restatement expenses.

So obviously, we're wrapping up that process and we don't expect to have much in restatement expenses going forward. We will have cost reductions in SG&A.

For one, in IT, we're going to streamline our IT processes, create efficiencies at the corporate back-office, eliminate redundant positions since we're going from a holding company structure to an operating company structure. And the goal is to get our corporate expenses at a run rate, at the end of the day, to the $4 million to $6 million range, and now we believe at the end of 2018, we will be in an annual run rate around $5 million to $7 million, with the opportunity in early 2019 to get it down to where we need to be for a single operating company.

Okay. And I think you said that will be in the 7% to 9% of revenue's range.

That's correct.

For corporate overhead, okay. Got it.

Yes, that's total overhead.

Total operating...

Yes, that's correct.

Okay. And corporate will be $5 million to $7 million by the end of this year.

That's correct. That's the annual run rate that it will be.

Right, right, right. Okay.

All right.

That there will be restructuring costs to get there for the severance.

Okay, you're right. Okay.

What's left to collect on all of the items that you went through in 2017? Are there any remaining balances left to collect?

Are you referring to...

You collected $6.4 million of the $8.7 million regarding the customer's bankruptcy. Is that still on the table?

Yes. We, right now, have $2.3 million of receivables.

We have reserved about $200,000 of that, so we expect to collect $2.1 million this year.

Okay. Any other items that -- regarding change or the disputes or anything like that, that remain to be collected?

No. We've resolved those with our customers and our balance sheet is clean, going forward, from that perspective.

Okay, so just the $2.3 million. Okay, great.

Regarding the strategic alternatives, has a banker -- for the company as a whole, has a banker been hired? And what's the status of that at this point?

Yes, we've hired a banker. It's an international investment banking firm.

We have begun the process of evaluating all the different alternatives. We have prepared marketing materials for Global Power, including Williams, and are exploring many potential market interests.

But we're still early in the process.

Okay. So you've got one set of bankers, marketing the Koontz-Wagner and the other bankers marketing the company as a whole, including Williams?

Correct.

Okay. All right, good.

Why do you think Koontz-Wagner will be concluded by June 30?

Well, we're going to be back in the market this week. We've retained the new banker.

We feel that we're repositioning the sale in a way that we limit the impact of Houston. We tended to look at that business in the entirety, as with all the different facilities, as one business and we're back in the market.

We're going to offer prospective buyers an opportunity to bid on different facilities within the portfolio of Koontz-Wagner, the Koontz-Wagner business. We think, with the banker we have selected, with the strategy that we're pursuing, that we won't need that long to ferret out prospective bidders and move forward on an accelerated basis.

Bear in mind, we've done a lot of work to date, so we feel good about where we're at. It's just a matter of going back out for this one limited Phase 2 marketing process, which will involve another 25 to 50 different potential bidders.

But the firm we have, while it's a new firm, is very experienced with our business and has done deals with us before. So we think all the stars are aligned properly for us to move quickly from here.

Okay. So you think you could reach another 20 to 25 new bidders?

At least...

At least. All right, that's encouraging.

Good. I guess the only other question is now that you're back current with the SEC, do you anticipate your first quarter 10-Q filing to be timely?

Yes, we do.

And when do you anticipate that happening?

We will be filing around May 15.

May 15, okay. With earnings release around that time as well?

Exactly.

This is John Walthausen. I wouldn't call myself a private investor.

We were [ around the front desk for ] significant holders. But okay, let's talk a little bit about Koontz-Wagner.

Again, it sounds like things have developed at Houston in a way that you didn't anticipate. I think, and I haven't gone in depth into my notes, but can you expect that the problem contracts to then shift before now?

Can we talk about the status there and then your strategy of perhaps marketing the different facilities separately? Is that facility a facility that can be bankrupted if need be to avoid future liability?

Thank you. Well, let me start by saying that the issue we have in Phase 1 of the marketing Koontz-Wagner was the instability in our Houston facility.

We have shipped in the fourth quarter and into January and February, we shipped -- the problem orders, those are behind us. And we have stabilized that facility at this point.

We're working through our existing projects and have, what we believe, is a much better handle on our cost structure there. In terms of the approach to the sales process going forward, there's real value in the South Bend and Caldwell businesses.

They're projected to have good years this year, they've historically been good performing businesses. So we're going to pursue the opportunity with prospective bidders to have them look at those businesses separately as opposed to bidding on Koontz-Wagner as a whole.

And we feel confident in our ability to have a successful outcome. And at this point, we're not really considering a bankruptcy alternative.

I think that would be difficult to pursue if you have a successful sale of even part of the business, there's complications with that. But we'll -- obviously, we're going to keep all of our alternatives and options open, but we're, at this point, focused on having a successful sale process for Koontz-Wagner completed by the end of June.

Okay, that's helpful. But from that, I construct that Houston is a continuing cash drag and will be at least through the balance of this year.

It's certainly -- I wouldn't say it's a cash drag in the sense that it was for '17. We still have some challenges there, but certainly nowhere near the magnitude of the problems we had in '17 and into the first couple of months of '18.

Our hope is that as we go through the sale process, we'll find a buyer that's interested still in buying the whole business, including Houston. But we are going to be realistic about that.

And if a buyer comes along, who wants to buy 1 of the 3 facilities or 2 of the 3 facilities, we're going to be flexible about that.

Right. Assuming that all goes well and we closed it at the end of the second quarter, closed the sale of it, between the numbers that we're looking at the year-end numbers and then, what's the level of cash drain that the Koontz-Wagner is going to have?

We think it will be breakeven for the year. So we're not looking at having our cash drain, if you will.

So it should be net neutral, that's our expectation.

Okay, good. Switching to the Williams part of the business, you talked about -- hoping to plan to get back to normal margins.

As I looked back at my earnings models, Williams, when things are going well, has a gross margin between 13% and 14%. Is that what we should be anticipating?

Or is there [ abnormals ] that's not obvious in the short term that I can look at it?

So normally, Williams run their gross margins in the mid-teens, usually between 13% and 17%, and we expect that in 2018 and beyond that we will be in that range.

And to get towards the middle or upper end, is that a volume issue, or there are operational issues that can be addressed?

It's not necessarily a volume issue. It's a project mix issue.

And so that's what we need to focus on is -- getting projects that can provide value and to get the margins to where we need them to be in that range.

As you move towards the higher margin potential, does that evolve once we're -- there is greater responsibility -- performance responsibility and, hence, sort of more at risk in the margin? Or help me understand where that richer part would be.

I believe that, again...

Let me answer that. This is Deb.

Yes, you're right, in that on average, we tend to be more towards that 13% to 15%, but you have seen some quarters where we can peak up, and it usually is related to some bonus awards that we can get for safety. And if we operate extremely well and there were some extra built in there for insurances that we don't have to cover, et cetera, that's how you can kind of get a little peak in there.

But it wouldn't be a standard run rate for the business.

Okay, okay. That's good.

And then in terms of getting the corporate overhead down towards the target level, you alluded to -- there would probably be some unusual charges and there are extraordinary charges. Can you quantify what the scope of that may be?

Certainly. So we expect somewhere in the $8 million to $12 million one-time costs, just the restructuring cost to get us down to the run rate that we talked about.

I take it that, that would mostly be severance costs there.

That's correct. And also wrapping up some IT cost as well.

Okay, okay. So terminating contracts and things like that, okay.

Could you describe your current net operating loss situation? And under what circumstances those NOLs could have some value for the shareholders?

Right now, our federal net operating losses are around $184 million.

Pardon, I missed that.

I'm sorry, I didn't hear your question.

I'm sorry, I missed the number. I heard 180...

Yes, our federal net operating losses are around $184 million and our state's net operating losses are around $233 million. And so obviously, to the extent we can carry those forward and when the company is profitable, we'll be able to use those.

We're closely monitoring our Internal Revenue Code Section 382 situation to make sure that we don't -- [indiscernible] change of control so that we can make sure that those net operating losses are available for us to use. So it will not begin to expire until 2026.

I'm sorry, Christina, I just saw we have John Deysher with Pinnacle queued back in.

Just a quick follow-up. You mentioned KW, you anticipate the breakeven cash flow for 2018.

How much did KW lose on a cash flow basis for 2017? In other words, what's the swing delta going to be?

Or what do you expect it to be?

Yes, their net loss for 2017 was around a little over $30 million. The cash flow would be under that.

Okay. But did the $30 million include restructuring or nonrecurring items?

Yes.

Okay. What would it have been without that?

Yes. So we think -- I'm sorry, I'll correct myself, it was more around $22 million, not $32 million.

And so when you take out some of those costs, I would say that net cash burn was somewhere between the $10 million to $15 million range.

Okay. So the swing is going to be $10 million to $15 million to get you to cash flow breakeven for 2018.

Yes.

Well, thanks, everyone, for participating in our earnings conference call. Appreciate the interest.

We're excited to have resolved several important issues and feel that the business is turning the corner. We still have a lot of work to do, but we're very confident that there will be good outcomes here for all of our stakeholders in the future.