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ENG > SEC Filings for ENG > Form 10-Q on 9-Aug-2013All Recent SEC Filings

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Form 10-Q for ENGLOBAL CORP


9-Aug-2013

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, 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 29, 2012, 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 29, 2012 .

Overview

While ENGlobal experienced a difficult 2012, we continue to improve margins and reduce selling, general and administrative expenses ("SG&A") in our core businesses in 2013. While we posted a loss from continuing operations in the first six months of 2013 of $2.6 million, several factors should be considered when comparing our 2013 performance with 2012. We began implementing a profit enhancement plan in the fourth quarter of 2012. As a part of this plan, we have been reducing the amount of risk we are willing to accept in the work we are currently performing, which has resulted in less Engineering Construction Management and the associated procurement. This reduction in procurement has impacted our revenue in 2013 as compared to 2012, but has had a positive impact on our gross profit as procurement services are typically provided at lower mark-ups. We continue to work hard to prove ourselves as a reliable, high quality service provider to our customers and have been able to replace our backlog in 2013, keeping it at a level slightly above that at year end 2012.

During the fourth quarter of 2012, we began reducing our overhead costs primarily through staff reductions and reductions in purchased services. As a result, our corporate overhead has decreased from $8.3 million in the first six months of 2012 to $6.8 million for the same period in 2013. Overhead as a percent of revenue has decreased slightly year over year, and is now positioned to support higher revenue levels. We continue to look for ways to reduce our overhead while maintaining a high level of service.

During the first six months of 2013, we have made substantial progress in paying down our debt obligations. We liquidated the working capital of the divisions that we sold and received $6.1 in cash collateral from the expiration of letters of credit, which were used to pay down our PNC Credit Facility by over $12 million by June 29, 2013. Further, we anticipate we will receive $18.0 million in net proceeds from the sale of substantially all of our Gulf Coast in-plant and engineering operations prior to the end of the third quarter and be able to repay the remaining advances under the PNC Credit Facility. Upon repaying these advances, the Company will no longer be in default on any debt obligation or credit facility and expects to have working capital sufficient to conduct its remaining operations.

The Company expects that this transaction will substantially complete its review of strategic alternatives, which included selling a portion of the Company's assets, restructuring its operations and resolving its defaults under its credit facilities. Moving forward, we plan to be a smaller scale operation with the focus on maintaining a healthy balance sheet. Our primary business will be our Automation segment and our mid-continent E&C segment. Our principal operations will be located in Denver, CO, Tulsa, OK, Houston, TX and Mobile, AL. Based on the proforma financial information included in Note 10 to the Financial Statements above and other analysis performed by Company management, we believe that a healthy company will emerge upon completion of the sale to Furmanite and the entry into on an amended revolving credit facility.


Table of Contents

Results of Continuing Operations

Amounts reported as continuing operations for the three and six months ended June 29, 2013 and the three and six months ended June 30, 2012 are reported for the two segments that we continue to operate before the proposed sale of substantially all of our Gulf Coast in-plant and engineering operations. The Company's revenue from continuing operations is composed of engineering, procurement and construction management (EPCM) services revenue and the sale of fabricated engineered automation systems. The Company recognizes service revenue as soon as the services are performed. In the course of providing our services, we routinely provide materials and equipment and may provide construction or construction management services on a subcontractor basis. Generally, these materials, equipment and subcontractor costs are passed through to our clients and reimbursed, along with handling fees, which in total are at margins lower than those of our normal core business. Operating SG&A expense includes management, business development and staff compensation, office costs such as rents and utilities, depreciation, amortization, travel, bad debt and other expenses generally unrelated to specific client contracts, but directly related to the support of a segment's operations. Other SG&A expenses includes investor relations/governance, finance, accounting, health/safety/environmental, human resources, legal and information technology which are unrelated to specific projects but which are incurred to support corporate activities.

Comparison of the three months ended June 29, 2013 versus the three months ended June 30, 2012

The following table set forth below, for the three months ended June 29, 2013 versus the three months ended June 30, 2012, provides relevant financial data that is derived from our consolidated statements of operations (amounts in thousands except per share data).

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