CEO Cindy Liu Annual Report Letter

Executive Portraits for ERRG

In 2012, ERRG demonstrated endurance in this challenging economic cycle by staying on course and not veering from our strategy. Despite uncertainty over our nation’s fiscal future, we successfully navigated our way to profitability.  By continuing to focus on our vision of being in the right markets, with the right people and services, we are positioned for the future when the economy improves.  I am confident that our strategy will work and ultimately grow our business.

In our current size of $50M in revenue with 250 employees, ERRG is able to offer a wide array of services to our clients, while also having flexibility to react quickly to client requests and changing economic conditions.  The basic principles of our success are:

  • Focusing on building relationships and providing outstanding service, which is what really matters in this highly competitive environment.  
  • Engaging our clients to accurately identify their needs and then mobilizing quickly to meet those needs. 
  • Investing in growth markets and industry leaders/expertise, while managing expenses to increase margins provides us the momentum that will carry us through to long term success.
  • Continuously analyzing resources and reorganizing management and processes to support future growth and improve current profitability.

Notable items of 2012

  • Our cash position improved through most of 2012 and remains a source of strength to support our growth. As of December 31, 2012 we had a zero balance in the line of credit for the first time in the last five years. This is attributable to a strong focus on managing cash at the project level to reduce the work to cash cycle. It also highlights the seasonality of our business with the end of the year typically having strong positive cash flow.
  • We have demonstrated throughout the years that we can carefully manage expenses, limiting non-essential discretionary spending. Our overhead and general administrative expense, excluding extraordinary items, has remained flat over the last several years.  We continue to implement belt-tightening measures to offset the lower margins in these leaner economic years.
  • We took our first foray into the mergers & acquisitions market with our attempted acquisition of a construction firm on Oahu, Hawaii.  While we ultimately declined to finalize the acquisition, the experience has laid the groundwork for successful acquisitions in the future that will strengthen us by diversifying our markets and regions.

Year in Review

We continue to operate in the western US primary markets – California, Washington, Oregon, Arizona and Hawaii, with more and more projects operating in several other states. Our reach expands far beyond our physical office locations with an ability to perform projects wherever the need arises.  Our signature projects have been in remote locations in difficult environments where we can really demonstrate our can-do attitude and expertise.  In 2012, we completed numerous projects in remote locations throughout the Pacific Rim, such as American Samoa and Wake Island, as well as performed complex mine tailing remediation projects in isolated areas maintained by the US Forest Service and Bureau of Land Management.

Although we thrive on challenging remote projects, at the core of our business in the Bay Area, we far exceeded our original revenue projections.  At Hunters Point just outside of San Francisco, we performed more than $6M in remediation services for both the US Navy and Pacific Gas and Electric.  For a high-profile remediation project for the Navy, our team implemented round-the-clock operations synchronizing the shoreline field work with the tides.  Additionally, ERRG continues to serve the California Department of Toxic Substances Control in addressing “orphan” sites throughout the greater Bay Area and southern California.  We are conducting multiple concurrent projects at highly-contaminated abandoned sites that present an imminent and substantial endangerment to the public and surrounding environment.

In the Pacific Northwest, our presence at the Fairchild Air Force Base has been reinforced having been awarded a follow-on contract to provide multi-faceted construction services.  We have made significant strides in the Portland area with task orders from the Portland Air National Guard and winning local public sector projects.

2012 was a significant growth year for our Munitions and Explosives of Concern Division.   The division far exceeded the revenue projections, outstripping the previous years’ revenue by 60 percent, performing more than $8M in remediation services at Marine Corps Air Station Yuma, former Lowry Bombing and Gunnery Range, and the former Concord Naval Weapons Station.

Looking to the Future

Going forward, we are pleased with the growth opportunities that appear to be just ahead of us once federal government sequestration issues are resolved. The pent-up demand in the federal sector should result in increasing backlog for us as the government gets back on a regular cycle of awarding contracts.

Unfortunately, though, there is still considerable uncertainty about our nation’s fiscal policy.  Much of the uncertainty that we faced in 2012 remains in early 2013, and is likely to remain until the environment we operate in becomes clearer.  Regardless of how the nation’s fiscal issues are resolved, we still expect to operate in a competitive low-margin environment for some period of time, and are prepared to do so by bolstering our cash position, minimizing discretionary expenses, and focusing on strengthening internal processes and systems.  We are also focused on broadening our client base to include more commercial clients to act as a buffer against the uncertainty of the federal marketplace.  Given that we are well-equipped to capture fast-growing markets, we believe that ERRG has tremendous upside when the economy ratchets up and demand increases.  In addition, when economic activity improves we expect gross revenue to increase along with associated profitability.

ERRG’s commitment to a Code of Ethics has been reinforced in 2012 and will continue to be a focal point in 2013, as we introduced a Statement of Commitment which now extends to subcontractors with whom we do business. Our continued success depends on us doing the right thing at all times and maintaining the highest ethical standards. Only in this way can we continue to earn the trust and confidence of our clients and community in which we live.

As we have done historically, we expect to continue to actively manage cash in a way that minimizes our reliance upon the line of credit. While our relationship with banking and bonding institutions remain strong, and grow stronger over time, we realize that the best strategy is one of minimizing reliance upon outside resources. We are proactively addressing the needs of ERRG as we grow to the next level. Our senior management team is realigning the firm’s resources and developing new systems to the support the firm more efficiently and effectively.

In closing, we believe we are ready for the road ahead, and have the right strategy in place to make a positive difference for our shareholders, clients and employees.