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ENG > SEC Filings for ENG > Form 10-Q on 10-Nov-2011All Recent SEC Filings

Show all filings for ENGLOBAL CORP

Form 10-Q for ENGLOBAL CORP


10-Nov-2011

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Forward-Looking Statements

Certain information contained in this Quarterly Report on Form 10-Q, the Company's Annual Report on Form 10-K, as well as other written and oral statements made or incorporated by reference from time to time by the Company and its representatives in other reports, filings with the Securities and Exchange Commission, press releases, conferences or otherwise, may be deemed to be forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. This information includes, without limitation, statements concerning the Company's future financial position and results of operations, planned capital expenditures, business strategy and other plans for future operations, the future mix of revenues and business, customer retention, project reversals, commitments and contingent liabilities, future demand and industry conditions. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Generally, the words "anticipate," "believe," "estimate," "expect," "may" and similar expressions, identify forward-looking statements, which generally are not historical in nature. Actual results could differ materially from the results described in the forward-looking statements due to the risks and uncertainties set forth in this Quarterly Report on Form 10-Q, the specific risk factors identified in the Company's Annual Report on Form 10-K for the year ended December 31, 2010, and those described from time to time in our future reports filed with the Securities and Exchange Commission.

The following discussion is qualified in its entirety by, and should be read in conjunction with, the Company's condensed consolidated financial statements, including the notes thereto, included in this Quarterly Report on Form 10-Q and the Company's Annual Report on Form 10-K for the year ended December 31, 2010.

MD&A Overview

During the first two quarters of 2010, the Company managed and reported through four business segments: Engineering, Construction, Automation and Land. In May 2010, the Company hired a new CEO. The CEO, as the Chief Operating Decision Maker, assessed the Company's business organization and management structure resulting in management changes, a new focus on specific types of work and reorganization of integrated functions within the Company. In response to these changes, we reevaluated our reportable segments. As a result, we elected to realign our reporting into three business segments: Engineering, Automation and Land. Our services that were offered under the previous Construction segment were merged into our current reporting segments. During the fourth quarter of 2010, we renamed our operating segments to Engineering and Construction, Automation and Field Solutions.

With the exception of reclassifications related to our discontinued operations (see below), the total amounts
reported for prior periods will remain the same, but amounts reported on a segment basis are reported in the three segments that the Company now operates in, rather than the four segments in which the Company previously operated and reported.

During the third quarter of 2011, as part of its strategic evaluation of operations, the Company determined that the future profitability of the Electrical Services group was not sufficient to support maintaining it as a viable business. As a result, effective July 1, 2011, the Company initiated a plan to sell the operations of its Electrical Services group. These assets and their related operations will be classified as discontinued operations and accordingly, are presented as discontinued operations in the Company's re-casted consolidated financial statements. The net assets and liabilities related to the discontinued operations are shown on the Consolidated Balance Sheet as Assets held for sale and Liabilities held for sale, respectively. The results of the discontinued operations are shown on the Consolidated Statements of Operations as a loss from discontinued operations, net of taxes.


Management's Discussion and Analysis (continued)

The following list sets forth a general overview of certain significant changes
in the Company's financial condition and results of operations for the
three-months and nine-months ended September 30, 2011, compared to the
corresponding periods in 2010.

                                    During the three months   During the nine months
                                    ended September 30, 2011 ended September 30, 2011
Revenues                                 Decreased 2.5%           Increased 0.4%
Gross profit                            Increased 33.1%          Increased 44.3%
Operating income                        Increased 102.6%         Increased 90.8%
SG&A expense                            Decreased 43.2%          Decreased 27.5%
Net loss from continuing operations     Decreased 95.5%          Decreased 83.4%


Selected Balance Sheet Comparisons              As of              As of               As of
                                            September 30,       December 31,       September 30,
                                                2011                2010               2010
                                                           (dollars in thousands)

Working capital                           $        29,629     $       30,200     $        27,688
Total assets*                             $       116,283     $      110,324     $       105,784
Long-term debt and capital leases, net of
current portion                           $             -     $          252     $         1,317
Stockholders' equity                      $        62,305     $       65,102     $        65,475
Days sales outstanding                                 70                 56                  55

*Includes $4.9 million , $5.7 million, and $3.7 million of assets held for sale from discontinued operations for September 30, 2011, December 31, 2010, and September 30, 2010, respectively.

The Company manages its billing and client collection processes to reduce days sales outstanding to the extent practicable. We believe that our allowance for bad debt is adequate to cover any potential non-payment by our customers.

Total stockholders' equity decreased 4.3%, or $2.8 million, from $65.1 million as of December 31, 2010 to $62.3 million as of September 30, 2011. The decrease in stockholders' equity compared to September 30, 2010 was 4.8%, or $3.2 million.

After a period of declining revenues due to poor economic conditions, we are now experiencing increased project proposal activity, increased backlog and increased revenue generation when compared to the same periods last year. The increase in our revenues is attributable primarily to work we are performing for existing clients and alliance partners, successful cross-selling of our services under the "One ENGlobal" umbrella and international expansion. In particular, the Caspian Pipeline Consortium (CPC) project has been responsible for the bulk of the growth in our international business. We intend to continue to increase our efforts to build our business in both domestic and overseas markets and we are continuing to expand our business development activities. Although our revenues have increased, we are looking closely at our under-performing operations as well as those divisions that are not performing up to their potential and we are making modifications that we believe will create positive results. As a result of this process, we have made the decision to sell the operations of our Electrical Services group.

During 2010 and 2011, we have been faced with actively managing legacy projects (SLE, Alon USA, LP and Bigler, LP) and related legal issues which have resulted in approximately $9.8 million of write downs since the second quarter of 2010. In addition, we accrued approximately $0.6 million in the three months ended September 30, 2011 for the settlement of a legacy legal accrual. We believe most of the legacy issues are behind us, but we will continue the process of resolving any remaining legacy issues as a normal course of business.


Management's Discussion and Analysis (continued)

Improving our margins on our existing work is an important area of focus. During the recent period of industry-wide decline in demand for the types of services ENGlobal provides, we reduced our rates significantly, as was required to obtain and retain business. Although the level of demand has increased, pricing in certain geographical markets is still extremely competitive and we have not yet been able to increase our margins to prior levels.

The management team effected certain cutbacks and expense control efforts in March 2011, including a reduction in work force. This decision, which was necessitated by the adverse impact of industry conditions on the Company's operations, negatively affected employee morale, retention, and recruitment. To improve the situation, we evaluated, reinstated and revised certain employee benefits. The Company is continually recruiting additional highly skilled engineering personnel to complete available work. This continues to be a challenge in a highly competitive market where there is great demand for experienced engineering professionals.

Collection of receivables remains challenging as the economic sector we serve has continued to see only modest improvement. This is an area in which the Company is focusing significant effort. In addition, several risk management projects are underway, including improving, updating and providing training on Company policies pertaining to the collection receivables and confirming and updating regulatory compliance.

The Company recognizes service revenue as soon as the services are performed. For clients that we consider higher risk, due to past payment history or history of not providing written work authorizations, we have deferred revenue recognition until we receive either a written authorization or payment. The current amount of revenue deferred for these reasons is $0.2 million. We expect a majority of the deferred revenue amount to be realized by year end.

Revenue on fixed-price contracts is recorded primarily using the percentage-of-completion (cost-to-cost) method. Under this method, revenue on long-term contracts is recognized in the ratio that contract costs incurred bear to total estimated contract costs. Revenue and gross margin on fixed-price contracts are subject to revision throughout the lives of the contracts and any required adjustments are made in the period in which the revisions become known. To manage unknown risks, management may use contingency amounts to increase the estimated costs, therefore lowering the earned revenues until the risks are better identified and quantified or have been mitigated. Losses on contracts are recorded in full as they are identified.

In the course of providing our services, we routinely provide engineering, materials and equipment and may provide construction services on a direct hire or subcontractor basis. Generally, the materials, equipment and subcontractor costs are passed through to our clients and reimbursed, along with fees, which in total are at margins lower than those of our normal core business. In accordance with industry practice and generally accepted accounting principles, all such costs and fees are included in revenue. The use of subcontractor services can change significantly from project to project; therefore, changes in revenue and gross profit, SG&A expense and operating income as a percent of revenue may not be indicative of the Company's core business trends.

SG&A expense in the segments includes management and staff compensation, office costs such as rents and utilities, depreciation, amortization, travel, bad debt and other expenses generally unrelated to specific contracts, but directly related to the support of a segment's operations.

All other SG&A expense is comprised primarily of business development costs, as well as costs related to the executive, investor relations/governance, finance, corporate accounting, health/safety/environmental, human resources, legal and information technology departments and other costs generally unrelated to specific projects but which are incurred to support corporate activities and initiatives.


Management's Discussion and Analysis (continued)

            Consolidated Results of Operations for the Three Months
                       Ended September 30, 2011 and 2010
                                  (Unaudited)
  For the three months ended     Engineering and                        Field
      September 30, 2011          Construction        Automation      Solutions      All Other     Consolidated
    (dollars in thousands)

Revenue before eliminations    $       46,695        $    13,787     $  19,306     $       -       $     79,788
Inter-segment eliminations                  -                  -             -             -                  -
Revenue                                46,695             13,787        19,306             -             79,788      100.0  %
Gross profit                            4,659              2,117         1,685             -              8,461       10.6  %
SG&A                                    2,009              1,148         1,567         3,525              8,249       10.3  %
Operating income (loss)                 2,650                969           118        (3,525 )              212        0.3  %
Other expense                                                                                                (8 )      0.0  %
Interest expense                                                                                           (303 )     (0.4 )%
Tax expense                                                                                                (138 )     (0.2 )%
Net loss from continuing
operations                                                                                         $       (237 )     (0.3 )%
Diluted loss from continuing
operations per share                                                                               $      (0.05 )

  For the three months ended
      September 30, 2010
    (dollars in thousands)

Revenue before eliminations    $       44,737        $    11,259     $  26,024     $       -       $     82,020
Inter-segment eliminations                 (9 )             (201 )           -             -               (210 )
Revenue                                44,728             11,058        26,024             -             81,810      100.0  %
Gross profit (loss)                     4,672               (255 )       1,941             -              6,358        7.8  %
SG&A                                    9,051              1,037           951         3,492             14,531       17.8  %
Operating income (loss)                (4,379 )           (1,292 )         990        (3,492 )           (8,173 )    (10.0 )%
Other expense                                                                                               (34 )     (0.1 )%
Interest expense                                                                                           (101 )     (0.1 )%
Tax benefit                                                                                               3,045        3.7  %
Net loss from continuing
operations                                                                                         $     (5,263 )     (6.5 )%
Diluted loss from continuing
operations per share                                                                               $      (0.19 )

    Increase/(Decrease) in
      Operating Results
    (dollars in thousands)

Revenue before eliminations    $        1,958        $     2,528     $  (6,718 )   $       -       $     (2,232 )
Inter-segment eliminations                  9                201             -             -                210
Revenue                                 1,967              2,729        (6,718 )           -             (2,022 )     (2.5 )%
Gross profit (loss)                       (13 )            2,372          (256 )           -              2,103       33.1  %
SG&A                                   (7,042 )              111           616            33             (6,282 )    (43.2 )%
Operating income (loss)                 7,029              2,261          (872 )         (33 )            8,385      102.6  %
Other expense                                                                                                26       76.5  %
Interest expense                                                                                           (202 )   (200.0 )%
Tax expense (benefit)                                                                                    (3,183 )   (104.5 )%
Net loss from continuing
operations                                                                                         $      5,026       95.5  %
Diluted loss from continuing
operations per share                                                                               $       0.14


Management's Discussion and Analysis (continued)

For the three months ended September 30, 2011

Revenue:
Of the overall decrease in revenue for the three months ended September 30, 2011, as compared to the comparable 2010 period, approximately $6.7 million was attributable to the completion and downsizing of projects in our Field Solutions segment, offset by increases of $2.7 million attributable to an increase in project awards in the Automation segment and $2.0 million attributable to an increase in Government projects in our Engineering and Construction segment.

Gross Profit:
Gross profit for the three months ended September 30, 2011, as compared to the comparable 2010 period, increased by approximately $2.1 million. As a percentage of revenue, gross profit increased from 7.8% to 10.6% for the three months ended September 30, 2011, as compared to the same period in 2010.

Our gross profit and gross profit margin increased primarily due to reduced variable costs and improved efficiencies in our Automation Segment, resulting in higher profit margins. However, we are still affected by the intense competition and pricing pressures. As a result, in many cases, we are working under contracts at lower margins in order to obtain and retain work due to the current market pressure.

Selling, General, and Administrative:
The $6.3 million decrease in SG&A expense for the three months ended September 30, 2011, as compared to the comparable 2010 period, primarily consisted of decreases of $7.0 million in bad debt expense mainly attributable to the SLE write-off in 2010 and $0.5 million in facilities expenses, offset by increases of $1.0 million in professional services expense mainly attributable to a legal accrual and $0.2 million in salaries and employee related expenses mainly attributable to an incentive accrual. As a percentage of revenue, SG&A expense decreased to 10.3% for the three months ended September 30, 2011, from 17.8% for the comparable prior year period.

Interest Expense, net:
Interest expense increased for the three months ended September 30, 2011, as compared to the comparable 2010 period, due to the higher levels of borrowing under the Credit Facility.

Tax Expense:
Income tax expense for the three months ended September 30, 2011, as compared to the comparable 2010 period, increased due to the increase in operating income.


Management's Discussion and Analysis (continued)

             Consolidated Results of Operations for the Nine Months
                       Ended September 30, 2011 and 2010
                                  (Unaudited)
   For the nine months ended      Engineering and                         Field
      September 30, 2011            Construction        Automation      Solutions      All Other       Consolidated
     (dollars in thousands)

Revenue before eliminations     $       128,240        $    34,949     $  59,018     $        -       $     222,207
Inter-segment eliminations                   (1 )             (227 )           -              -                (228 )
Revenue                                 128,239             34,722        59,018              -             221,979      100.0  %
Gross profit                             12,240              4,954         4,552              -              21,746        9.8  %
SG&A                                      5,702              3,083         4,612          9,931              23,328       10.5  %
Operating income (loss)                   6,538              1,871           (60 )       (9,931 )            (1,582 )     (0.7 )%
Other expense                                                                                                   (68 )      0.0  %
Interest expense                                                                                               (711 )     (0.3 )%
Tax benefit                                                                                                     460        0.2  %
Net loss from continuing
operations                                                                                            $      (1,901 )     (0.9 )%
Diluted loss from continuing
operations per share                                                                                  $       (0.12 )

   For the nine months ended
      September 30, 2010
     (dollars in thousands)

Revenue before eliminations     $       113,870        $    39,790     $  67,612     $        -       $     221,272
Inter-segment eliminations                  (48 )             (215 )           -              -                (263 )
Revenue                                 113,822             39,575        67,612              -             221,009      100.0  %
Gross profit                              8,270              1,676         5,120              -              15,066        6.8  %
SG&A                                     16,392              3,362         2,558          9,875              32,187       14.6  %
Operating income (loss)                  (8,122 )           (1,686 )       2,562         (9,875 )           (17,121 )     (7.7 )%
Other income                                                                                                    114        0.1  %
Interest expense                                                                                               (255 )     (0.1 )%
Tax benefit                                                                                                   5,822        2.6  %
Net loss from continuing
operations                                                                                            $     (11,440 )     (5.2 )%
Diluted loss from continuing
operations per share                                                                                  $       (0.41 )

    Increase/(Decrease) in
       Operating Results
     (dollars in thousands)

Revenue before eliminations     $        14,370        $    (4,841 )   $  (8,594 )   $        -       $         935
Inter-segment eliminations                   47                (12 )           -              -                  35
Revenue                                  14,417             (4,853 )      (8,594 )            -                 970        0.4  %
Gross profit                              3,970              3,278          (568 )            -               6,680       44.3  %
SG&A                                    (10,690 )             (279 )       2,054             56              (8,859 )    (27.5 )%
Operating income (loss)                  14,660              3,557        (2,622 )          (56 )            15,539       90.8  %
Other income (expense)                                                                                         (182 )   (159.6 )%
Interest expense                                                                                               (456 )   (178.8 )%
Tax benefit                                                                                                  (5,362 )    (92.1 )%
Net loss from continuing
operations                                                                                            $       9,539       83.4  %
Diluted loss from continuing
operations per share                                                                                  $        0.29


Management's Discussion and Analysis (continued)

For the nine months ended September 30, 2011

Revenue:
Of the overall increase in revenue for the nine-months ended September 30, 2011, as compared to the comparable 2010 period, approximately $14.4 million was attributable to our Engineering and Construction segment, offset by decreases of $4.8 million attributable to our Automation segment and $8.6 million attributable to our Field Solutions segment.

The increase in Engineering and Construction segment revenue is primarily due to increases in Government Services, in particular, three large projects, as well as increased revenue from existing maintenance contracts. The decrease in revenue in our Automation segment revenue is related to the completion of two large projects in the second quarter of 2010, while a decrease in Field Solution revenue is attributable to the completion and downsizing of existing projects.

Gross Profit:
The overall $6.7 million increase in gross profit for the nine-months ended September 30, 2011, as compared to the comparable 2010 period, was primarily attributable to decreased costs in the Engineering and Construction and Automation segments. As a percentage of revenue, gross profit increased from 6.8% to 9.8% for the nine-months ended September 30, 2011, as compared to the same period in 2010.

Our gross profit and gross profit margin have increased due to the increase in revenue in our Engineering and Construction segment due to increased project awards and decreases in costs in our Engineering and Construction and Automation segments, resulting from improved pricing power and reduced variable costs. However, we are still affected by the intense competition and pricing pressures. As a result, in many cases, we are working under contracts at lower margins in order to obtain and retain work due to the current market pressure.

Selling, General, and Administrative:
The $8.9 million decrease in SG&A expense for the nine-months ended September 30, 2011, as compared to the comparable 2010 period, primarily consisted of decreases of $9.8 million in bad debt expense mainly attributable to the SLE and Bigler write-offs in 2010, $1.2 million in facilities expenses and $0.4 million in depreciation expense, offset by increases of $1.5 million in professional services expense mainly attributable to a legal accrual and $1.0 million in salaries and employee related expenses. As a percentage of revenue, SG&A expense decreased to 10.5% for the nine-months ended September 30, 2011, from 14.6% for the comparable prior year period.

Other Expense, net:
The decrease in other expense for the nine-months ended September 30, 2011, as compared to the same period in 2010, was primarily due to a decrease of $150,000 for a legal settlement in the 2010 period.

Interest Expense, net:
Interest expense increased for the nine-months ended September 30, 2011, as compared to the comparable 2010 period, due to the higher levels of borrowing under the Credit Facility.

Tax Benefit: . . .

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