Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
ENG > SEC Filings for ENG > Form 10-Q on 8-Nov-2013All Recent SEC Filings

Show all filings for ENGLOBAL CORP | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for ENGLOBAL CORP


8-Nov-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 have improved margins and reduced selling, general and administrative expenses ("SG&A") in our core businesses in 2013. We have reported income from continuing operations in the first nine months of 2013 of $0.3 million, primarily as a result of gains recorded on the sale of our Inspection division and of our Gulf Coast E&C and In-plant operations. 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 margin 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. 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 $11.5 million in the first nine months of 2012 to $9.5 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 nine months of 2013, we repaid all our debt obligations. This was accomplished by liquidating the working capital of the divisions that we sold in late 2012 and 2013, removing the restrictions from $6.1 in cash collateral via the expiration of letters of credit and using the proceeds from the sale of our Gulf Coast E&C and in-plant operations during the third quarter to repay the remaining advances under the PNC Credit Facility. Upon repaying these advances, together with the Limited Consent and Waiver contained within the Amended PNC Credit Facility, the Company is no longer in default on any debt obligation or credit facility, has access to working capital sufficient to conduct its remaining operations and we believe that concerns over our ability to continue as a going concern are no longer applicable.

Our remaining primary businesses are our Automation segment and our mid-continent E&C segment. Our principal operations are located in Denver, CO, Tulsa, OK, Houston, TX, Chicago, IL and Mobile, AL.

Results of Continuing Operations

Amounts reported as continuing operations for the three and nine months ended September 28, 2013 and the three and nine months ended September 29, 2012 are reported for the two segments that we continue to operate. These reported amounts include the Company's Gulf Coast E&C and in-plant operations that were sold on August 30, 2013. 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.


Table of Contents

Comparison of continuing operations for the three months ended September 28, 2013 versus September 29, 2012

The following table set forth below, for the three months ended September 28, 2013 (including the disposed continuing operations for the two months ended August 30, 2013) versus the three months ended September 29, 2012 (including the disposed continuing operations), provides relevant financial data that is derived from our consolidated statements of operations (amounts in thousands except per share data).

Operations Data:                E&C          Automation       Corporate       Consolidated
Three months ended
September 28, 2013:
Revenue                      $   31,901     $     11,397     $         -     $       43,298        100.0 %
Gross profit                      3,022            2,182               -              5,204         12.0 %
SG&A                              1,794              695           2,714              5,203         12.0 %
Operating income (loss)           1,228            1,487          (2,714 )                1          0.0 %
Gain on sale of assets                                                                  487          1.1 %
Other income                                                                              7          0.0 %
Interest expense, net                                                                  (510 )       (1.2 )%
Tax expense                                                                             (35 )       (0.1 )%
Net loss from continuing
operations                                                                   $          (50 )       (0.1 )%
Diluted loss from
continuing operations per
share                                                                        $        (0.00 )

Three months ended
September 29, 2012:
Revenue                      $   40,779     $     16,703     $         -     $       57,482        100.0 %
Gross profit                      2,638            2,734          (2,102 )            3,270          5.7 %
SG&A                              2,055            1,096           3,011              6,162         10.7 %
Goodwill impairment              14,568                -               -             14,568         25.3 %
Operating income (loss)         (13,985 )          1,638          (5,113 )          (17,460 )      (30.4 )%
Gain on sale of assets                                                                    -            -
Other expense                                                                           (98 )       (0.2 )%
Interest expense, net                                                                  (643 )       (1.1 )%
Tax expense                                                                            (412 )       (0.7 )%
Net loss from continuing
operations                                                                   $      (18,613 )      (32.4 )%
Diluted loss from
continuing operations per
share                                                                        $        (0.69 )

Increase (Decrease) in
Operating Results:
Revenue                      $   (8,878 )   $     (5,306 )   $         -     $      (14,184 )      (24.7 )%
Gross profit (loss)                 384             (552 )         2,102              1,934          3.4 %
SG&A                               (261 )           (401 )          (297 )             (959 )       (1.7 )%
Goodwill impairment             (14,568 )              -               -            (14,568 )       25.3 %
Operating income (loss)          15,213             (151 )         2,399             17,461         30.4 %
Gain on sale of assets                                                                  487          1.1 %
Other income (expense)                                                                  105          0.2 %
Interest expense, net                                                                   133          0.2 %
Tax expense                                                                             377          0.7 %
Net loss from continuing
operations                                                                   $       18,563         32.3 %
Diluted loss from
continuing operations per
share                                                                        $         0.70

Revenue - Our revenue is generally driven by the projects that we are currently working on. These projects vary significantly in size and quantity and primarily serve clients in the upstream, midstream and downstream sectors of the energy industry. Projects are bid and awarded based upon a large number of factors most of which are governed by our customers. Revenue for the three months ended September 28, 2013, as compared to the three months ended September 29, 2012 decreased approximately $14.2 million. The E&C and the Automation segments both experienced decreased revenues. The E&C segment decrease of $8.9 million was primarily due to the sale of the Gulf Coast E&C and in-plant operations on August 30, 2013 resulting in only two months of recorded revenue for the quarter ended September 28, 2013 and lower in-office project revenues due to the change in the Company's project risk profile which has significantly reduced its procurement activities. The Automation segment decrease of $5.3 million was due to a decrease in revenue from the fabrication division as a result of projects ending in Baton Rouge and Beaumont.


Table of Contents

Gross Profit - Gross profit increased for the three months ended September 28, 2013, as compared to the three months ended September 29, 2012. As a percentage of revenue, gross profit increased from 5.7% to 12.0% for the three months ended September 28, 2013, as compared to the three months ended September 29, 2012. Our gross profit margin increased primarily due to the implementation of our profit improvement strategy which reduced variable costs and improved efficiencies in our Automation Segment, resulting in higher profit margins.

Selling, General and Administrative - SG&A expenses decreased for the three months ended September 28, 2013 as compared to the three months ended September 29, 2012. As a percentage of revenue, however, SG&A expenses increased to 12.0% of revenues for the three months ended September 28, 2013 from 10.7% for the comparable prior year period. Our SG&A expenses decreased primarily due to included reduction in salaries and benefits related to the reduction of overhead at the corporate level.

Gain on sale of assets - On August 30, 2013, we recorded a $487,000 gain on the sale of our Gulf Coast E&C and in plant operations.

Interest Expense, net - Interest expense decreased for the three months ended September 28, 2013, as compared to the three months ended September 29, 2012, primarily due to the repayment of outstanding advances under of the PNC Credit Facility on August 30, 2013.

Comparison of continuing operations for the nine months ended September 28, 2013 versus September 29, 2012

The following table sets forth below, for the nine months ended September 28, 2013 (including the disposed continuing operations for the eight months ended August 30, 2013) versus the nine months ended September 29, 2012 (including the disposed continuing operations), provides relevant financial data that is derived from our consolidated statements of operations (amounts in thousands except per share data).

Operations Data:                E&C          Automation       Corporate       Consolidated
Nine months ended
September 28, 2013:
Revenue                      $  112,299     $     31,410     $         -     $      143,709        100.0 %
Gross profit                     10,782            5,733               -             16,515         11.5 %
SG&A                              5,783            2,475           9,524             17,782         12.4 %
Operating income (loss)           4,999            3,258          (9,524 )           (1,267 )       (0.9 )%
Gain on sale of assets                                                                  487          0.3 %
Other income (expense)                                                                  (82 )       (0.1 ) %
Interest expense, net                                                                (1,546 )       (1.1 )%
Tax benefit (expense)                                                                  (227 )       (0.2 )%
Net loss from continuing
operations                                                                   $       (2,635 )       (1.8 )%
Diluted loss from
continuing operations per
share                                                                        $        (0.10 )

Nine months ended
September 29, 2012:
Revenue                      $  131,161     $     44,644     $         -     $      175,805        100.0 %
Gross profit                      9,874            5,578          (2,102 )           13,350          7.6 %
SG&A                              6,684            3,186           9,431             19,301         11.0 %
Goodwill impairment              14,568                -               -             14,568          8.3 %
Operating income (loss)         (11,378 )          2,392         (11,533 )          (20,519 )      (11.7 )%
Gain on sale of assets                                                                    -            -
Other income (expense)                                                                 (100 )       (0.1 )%
Interest expense, net                                                                (1,320 )       (0.8 )%
Tax benefit (expense)                                                                (5,606 )       (3.2 )%
Net loss from continuing
operations                                                                   $      (27,545 )      (15.7 )%
Diluted loss from
continuing operations per
share                                                                        $        (1.03 )

Increase (Decrease) in
Operating Results:
Revenue                      $  (18,862 )   $    (13,234 )   $         -     $      (32,096 )      (18.3 )%
Gross profit (loss)                 908              155           2,102              3,165          1.8 %
SG&A                               (901 )           (711 )            93             (1,519 )       (0.9 )%
Goodwill Impairment             (14,568 )              -               -            (14,568 )       (8.3 )%
Operating income (loss)          16,377              866           2,009             19,252         11.0 %
Gain on sale of assets                                                                  487          0.3 %
Other income (expense)                                                                  (18 )       (0.0 ) %
Interest expense, net                                                                  (226 )       (0.1 )%
Tax benefit (expense)                                                                 5,379          3.1 %
Net loss from continuing
operations                                                                   $       24,910         14.2 %
Diluted loss from
continuing operations per
share                                                                        $         0.94


Table of Contents

Revenue - Revenue for the nine months ended September 28, 2013, as compared to the nine months ended September 29, 2012 decreased approximately $32.1 million. The E&C and the Automation segments both experienced decreased revenues. The E&C segment decrease of $18.9 million was primarily due to the sale of the Gulf Coast E&C and in-plant operations at the end of August 2013resulting in only eight months of revenue for the nine months ended September 28, 2013 and lower in-office project revenues and procurement work for most E&C regions. The Automation segment decrease of $13.2 million was due to a decrease in revenue as a result of projects ending in Baton Rouge and Beaumont, offset partially by an increase in the Caspian Pipeline Consortium Project ("CPC").

Gross Profit - Gross profit increased $3.2 million for the nine months ended September 28, 2013, as compared to the nine months ended September 29, 2012. As a percentage of revenue gross profit increased from 7.6% to 11.5% for the nine months ended September 28, 2013, as compared to the nine months ended September 29, 2012. Our gross profit margin increased primarily due to the implementation of our profit improvement plan, which reduced the risk profile of our profit mix.

Selling, General and Administrative - SG&A expenses decreased for the nine months ended September 28, 2013 as compared to the nine months ended September 29, 2012. As a percentage of revenue, however, SG&A expenses increased to 12.4% of revenues for the nine months ended September 28, 2013, versus 11% for the comparable prior year period. Our SG&A expenses decreased primarily due to the implementation of our profit improvement plan, which reduced overhead at the corporate level, primarily in personnel costs.

Gain on sale of assets - On August 30, 2013, we recorded a $487,000 gain on the sale of our Gulf Coast E&C and in plant operations.

Interest Expense, net - Interest expense increased for the nine months ended September 28, 2013, as compared to the nine months ended September 29, 2012, primarily due to an increase in the rate of interest and fees charged to us by our senior lender partially offset by the repayment of outstanding advances under of the PNC Credit Facility on August 30, 2013.

Tax Expense - Income tax expense for the nine months ended September 28, 2013, as compared to the nine months ended September 29, 2012, decreased by $5.3 million primarily due to the write-off of all existing deferred tax assets in the second quarter of 2012.

Liquidity and Capital Resources

Overview

The Company defines liquidity as its ability to pay liabilities as they become due, fund business operations and meet monetary contractual obligations. Our primary sources of liquidity are internally generated funds and borrowings under our senior revolving credit facility with PNC Bank (the "Amended PNC Credit Facility"), discussed under "Line of Credit Facility" below. There was $1.1 million outstanding balance under the facility as of September 28, 2013 and $567,000 as of November 8, 2013. Our working capital as of September 28, 2013 was $12.4 million versus $13.3 million as of December 29, 2012. We believe our current liquidity and working capital are sufficient to fund our ongoing operations.

Cash Flows from Operating Activities

Operations provided approximately $3.5 million in net cash during the nine months ended September 28, 2013, compared with net cash used in operations of $8.3 million during the comparable period in 2012.

The primary changes in working capital accounts during the nine months ended September 28, 2013 were the decrease in costs in excess of billings and in trade receivables which were primarily the result of the collection of the retained working capital related to the divested Field Solutions segment, the sale of our Gulf Coast E&C and In-plant operations and receivables related to the Caspian Pipeline Consortium, partially offset by applying a portion of the collected funds to reduce outstanding vendor payables.

Cash Flows from Investing Activities

Investing activities provided cash totaling $22.8 million for the period ended September 28, 2013, and used $3.9 million for the comparable period in the prior year. The primary reasons for the change were the result of restricted cash used to partially collateralize our letter of credit related to the Ex-Im Letter of Credit Facility being released in conjunction with its expiration in June 2013 and proceeds from the sale of the Inspection division of the Field Solutions segment in the first quarter of 2013 and sale of the Gulf Coast E&C and in-plant operations in the third quarter of 2013.

Future investing activities are anticipated to remain consistent with prior years, in principal, and include capital additions for leasehold improvements and technical applications. The Company uses vendor leasing programs as needed to keep technology up-to-date on its software and equipment, such as upgrades to computers. The Amended PNC Credit Facility limits our annual capital expenditures to $3.5 million.


Table of Contents

Cash Flows from Financing Activities

Financing activities used cash totaling $25.8 million during the nine months ended September 28, 2013 and provided cash totaling $12.8 million during the nine months ended September 29, 2012. Our primary financing mechanism was our line of credit under the PNC Credit Facility and its predecessor, the Wells Fargo Credit Facility. During the nine months ended September 28, 2013, our borrowings under the line of credit were $139.4 million in the aggregate and we repaid an aggregate of $165.1 million, aided by the release of collateral related to the Ex-Im Letter of Credit Facility, liquidation of the working capital related to divestiture of the Field Solutions segment and of substantially all of the Gulf Coast E&C and in-plant operations. During the nine months ended September 29, 2012, our borrowings under the line of credit were $149.9 million in the aggregate and we repaid an aggregate of $136.8 million.

Line of Credit Facility

On May 29, 2012, the Company entered into a credit facility with PNC Bank, National Association, as administrative agent ("PNC Credit Facility") for the lenders (the "Lenders") pursuant to which the Lenders agreed to extend credit to the Company in the form of loans (each a "Loan" and collectively, the "Loans") on a revolving basis of up to $35.0 million (the "Commitment"). From September 29, 2012 until August 31, 2013, the Company was not in compliance with the certain financial covenants of the PNC Credit Facility.

On August 30, 2013, the Company entered into an Amended Revolving Credit and Security Agreement and Limited Consent, (the "Amended PNC Credit Facility"). Under the terms of the Amended PNC Credit Facility, PNC consented to the disposal of operations discussed in Note 4, waived the existing events of default and ceased the charging of interest on outstanding indebtedness at the default rate. The Company also executed an Amended and Restated Revolving Credit Note with PNC which effectively reduced the maximum borrowing amount from $35.0 million to $10.0 million under the Amended PNC Credit Facility. Both agreements commenced on August 30, 2013 and will continue in full force and effect until September 30, 2014. Set forth below are certain of the material terms of the Amended PNC Credit Facility:

Revolving Advances: Each Lender, severally and not jointly, will make revolving advances to the Company in aggregate amounts outstanding at any time equal to such Lender's Commitment Percentage of the lesser of (a) $10.0 million less the maximum undrawn amount on all outstanding letters of credit, or (b) an amount equal to the sum of: (i) up to 85% of Eligible Receivables, plus (ii) up to the lesser of (x) up to 85% of Eligible Extended Term Receivables or (y) $1.5 million, plus (iii) up to the lesser of (x) up to 85% of Eligible Government Receivables or (y) $800,000, plus (iv) up to the lesser of (x) 75% of Eligible Unbilled Receivables or (y) $4.0 million; provided, however, that no more than $800,000 of the amount resulting from the calculation of this part (iv) may be attributable to Eligible Unbilled Receivables owed by Government Customers, plus
(v) up to the lesser of (x) up to 50% of Eligible Costs in Excess of Billings or
(y) $4.0 million, minus (vi) the Maximum Undrawn Amount of all outstanding letters of credit, minus (vii) such reserves as Agent may deem proper and necessary in the exercise of its discretion. Certain of the percentages and dollar amounts discussed above may be increased or decreased by Agent at any time, so long as such increase or decrease is reasonable and done in good faith.

Interest: Any Loans will bear interest at (a) the sum of the Alternate Base Rate (defined as a fluctuating rate equal to the highest of (x) the commercial lending rate of Agent as publicly announced and in effect on such day, (y) the daily federal funds open rate as quoted by ICAP North America, Inc. in effect on such day plus 1/2 of 1%, and (z) the Daily Libor Rate plus 1% with the Daily LIBOR Rate determined by taking the LIBOR rate published in the Wall Street Journal and dividing it by a number equal to 1 minus the reserve percentage on that day as determined by the Board of Governors of the Federal Reserve), plus 2.75% for Domestic Rate Loans or (b) the sum of the Eurodollar Rate (defined as a fluctuating rate determined by Agent by dividing the quoted LIBOR rate by a number equal to 1 minus the reserve percentage on that day as determined by the Board of Governors of the Federal Reserve), plus 3.75%.

Collateral: All obligations of the Company under the loan agreement are secured by a first priority perfected lien against any and all personal property assets of the Company (other than certain excluded property.

Term: All Loans and all other obligations outstanding under the loan agreement shall be payable in full on September 30, 2014, unless otherwise terminated pursuant to the terms of the loan agreement.


Table of Contents

. . .

  Add ENG to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for ENG - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial      Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.