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-K on 14-Mar-2014All Recent SEC Filings

Show all filings for ENGLOBAL CORP

Form 10-K for ENGLOBAL CORP


14-Mar-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion is qualified in its entirety by, and should be read in conjunction with, our Consolidated Financial Statements and Notes thereto, included elsewhere in this Annual Report on Form 10-K.

Overview

During 2012, the substantial losses we incurred and the resulting defaults under our credit facilities raised substantial doubt about our ability to continue as a going concern. While we experienced a difficult 2012 and a number of challenges in 2013, we were able to divest our least attractive businesses and sell enough of our core business to pay off our debt (and cure all defaults). As of the date of this Report, we believe that we are in the strongest financial position in recent years. We are now focused on building our core business segments, Engineering, Procurement and Construction Management ("EPCM") and Automation. In this regard, we have reduced our expenses by reducing employee headcount, closing offices and creating an enhanced operational focus on cost controls. In addition, we saw an increase in capital project spending in limited markets in 2013. As a result, we were able to generate positive cash flow from operations in 2013 and had operating profits after the sale of the Gulf Coast engineering and construction and in-plant operations in August of 2013.


Table of Contents

Our return to positive cash flow from operations began on October 11, 2012, when we announced that our Board of Directors had initiated a process to explore and consider possible strategic alternatives for enhancing shareholder value and supporting the Company's long-term financial strength. We took actions to streamline our operations, including the divestiture of our Field Solutions segment, the sale of our Gulf Coast engineering and construction and in-plant operations and the implementation of project execution and expense reduction initiatives. After paying off our credit facilities and curing all defaults, we allowed the Ex-Im Credit Facility to expire and amended our PNC Credit Facility, which has availability of up to $10 million. As a result of these actions, we have positioned the Company for future growth. Our balance sheet is stronger, our cash flow is positive and, more recently, we have been generating operating income on a monthly basis.

Despite the relative increase in capital project spending in certain limited markets, we believe that overall client spending continues to be limited, although we believe the overall economy is improving. Pricing continues to be very competitive. However, we have an ongoing, extremely focused marketing effort and we have seen an increase in proposal activity, as well as an increase in backlog. In particular, we are focused on significant projects located inside of the United States.

Amounts reported as continuing operations in 2013 and 2012 are reported for the two segments that we continue to operate (EPCM and Automation). Results reported as discontinued operations (Electrical Services and Field Solutions) are the result of management's decision to divest from these operations. In addition, we have provided results related to the sale of our Gulf Coast engineering and construction and in-plant operations, which were considered continuing operations as of the date of sale, August 30, 2013.

Results of Continuing Operations

The Company's revenue from continuing operations is composed of EPCM services revenue and the sale of assembled engineered automation systems. The Company recognizes service revenue as soon as the services are performed. The majority of the Company's engineering services have historically been provided through time-and-material contracts whereas a majority of the Company's engineered automation system sales are earned on fixed-price contracts.

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. 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.

Segment 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. Corporate 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 the years ended December 28, 2013 and December 29, 2012

The following table set forth below, for the years ended December 28, 2013 and
December 29, 2012, provides financial data that is derived from our consolidated
statements of operations (dollars in thousands, except per share data). Please
note that the Gulf Coast engineering and construction and in-plant operations
are included for all of 2012 and the eight months ended August 30, 2013. See
"Disposal of Continuing Operations" below.

Year ended December 28,
          2013                EPCM         Automation       Corporate       Consolidated
Revenues                   $  123,740     $     45,223     $         -     $      168,963
Gross profit                   12,406            8,896               -             21,302            12.6 %
SG&A                            7,106            3,042          11,932             22,080            13.1 %
Goodwill impairment                 -                -               -                  -             0.0 %
Operating income (loss)         5,300            5,854         (11,932 )             (778 )          (0.5 )%
Other income (expense)                                                                975             0.6 %
Interest income
(expense)                                                                          (2,042 )          (0.9 )%
Tax provision                                                                        (428 )          (0.6 )%
Net loss from continuing
operations                                                                 $       (2,273 )          (1.3 )%

Loss per share from continuing operations $ (0.08 )

Year ended December 29,
          2012                EPCM         Automation       Corporate       Consolidated
Revenues                   $  168,930     $     58,986     $         -     $      227,916
Gross profit                   12,524            6,246             (50 )           18,720            8.2 %
SG&A                            8,877            4,257          12,105             25,239           11.1 %
Goodwill impairment            14,568                -               -             14,568            6.4 %
Operating income (loss)       (10,921 )          1,989         (12,155 )          (21,087 )         (9.3 )%
Other income (expense)                                                               (100 )            - %
Interest income
(expense)                                                                          (1,875 )          0.8 %
Tax provision                                                                      (7,001 )          3.1 %
Net loss from continuing
operations                                                                 $      (30,063 )         13.2 %

Loss per share from continuing operations $ (1.12 )

  Change in Operating
        Results               EPCM         Automation       Corporate       Consolidated
Revenues                   $  (45,190 )   $    (13,763 )   $         -     $      (58,953 )
Gross profit                     (118 )          2,650              50              2,582            4.3 %
SG&A                           (1,771 )         (1,215 )          (173 )           (3,159 )         (5.4 )%
Goodwill impairment           (14,568 )              -               -            (14,568 )        (24.7 )%
Operating income (loss)        16,221            3,865             223             20,309           34.4 %
Other income (expense)                                                              1,075            1.8 %
Interest income
(expense)                                                                            (167 )          0.5 %
Tax provision                                                                       6,573           11.1 %
Net loss from continuing
operations                                                                 $       27,790           47.1 %
Loss per share from continuing
operations                                                                 $         1.04

Revenues

The $59.0 million overall decrease in revenues for the year ended December 28, 2013, as compared to the comparable 2012 period, resulted from a decrease of $13.8 million in our Automation segment and $45.2 million in our EPCM segment. The decrease in Automation revenues was a result of no longer providing automation services in the Gulf Coast region due to the disposition of the Gulf Coast engineering and construction and in-plant operations and the completion of several contracts that have not been replaced. EPCM was most impacted by the sale of the Gulf Coast engineering and construction and in-plant operations, resulting in $36.7 million less revenue in 2013. In addition, EPCM revenues were impacted by completion of several projects that have not been replaced. Our clients are continuing to perform smaller maintenance projects but not new capital expansions. Competition for the project work continues to be intense.


Table of Contents

Gross Profit

The increase in gross profit as a percentage of revenues in 2013 relative to 2012 was caused by several factors including reduced material costs as a function of current project requirements and lower variable labor costs due to an operational focus on utilization, resulting in higher margins.

Selling, General and Administrative ("SG&A") Expenses

The decrease in operating SG&A expenses for the year ended December 28, 2013, as compared to the comparable 2012 period, is primarily the result of decreases of $4.1 million in salaries and employee related expenses and decreases of $1.2 million in professional services, offset by an increase of $2.3 million in other expenses. The decrease in salaries and employee related expenses was primarily due to the divestiture of the Field Solutions segment, the Gulf Coast engineering and construction and in-plant operations and the reduction of Corporate personnel supporting these divested operations. However, as a percentage of revenues, SG&A expenses increased to 13.1% for the year ended December 28, 2013, from 11.1% for the comparable 2012 period. We expect SG&A expenses to decrease as a percentage of revenues in 2014 as the reduction in Corporate personnel subsequent to the sale of the Gulf Coast engineering and construction and in-plant operations will impact results for all of 2014.

Goodwill Impairment

Because of deteriorating market conditions in 2012, our declining financial performance and the decision to sell several of our assets, we performed an interim assessment of the carrying value of our goodwill as of September 29, 2012. We reviewed a number of factors on a segment by segment basis, including market conditions, projected cash flows, cost of capital, growth rates and other factors that could significantly impact the reported value of our goodwill. As a result of this review, we recorded a goodwill impairment of approximately $16.9 million as of December 29, 2012. Of this amount, approximately $14.5 million related to continuing operations and approximately $2.4 million relating to discontinued operations. We reviewed our remaining goodwill as of December 28, 2013 and determined no impairment was necessary.

Operating Income (Loss)

We generated operating loss for the year ended December 28, 2013 of $0.8 million, as compared to an operating loss of $21.1 million for the year ended December 29, 2012, an improvement of $20.3 million. In 2013, we improved our gross profit margin by $2.6 million, and we reduced our SG&A expenses by $3.2 million. In 2012, we recorded an impairment of goodwill in the EPCM segment of $14.5 million compared to no impairment in 2013.

Interest Income (Expense)

Interest expense increased between 2013 and 2012 due to increased interest rates in 2013, as compared to 2012, partially offset by decreased borrowings in 2013. As a result of defaults under the PNC Credit Facility, the interest rate applicable to the borrowings under the PNC Credit Facility increased from 4% to 7% from June 2012 until August 30, 2013. In addition, the Company paid additional fees and expenses associated with the default in 2013.

(Provision) benefit for federal and state income taxes

The provision for federal income taxes decreased $6.6 million for the year ended December 28, 2013 versus the year ended December 29, 2012. In 2012, the Company reversed a previously recorded deferred tax benefit of $6.8 million.

Net Income (Loss)

As a result of changes detailed above, our net loss from continuing operations decreased $27.8 million to a loss of $2.3 million in 2013 from a loss of $30.1 million in 2012, decreasing as a percentage of total revenue to (1.35)% in 2013 from (13.2)% in 2012.


Table of Contents

Disposal of Continuing Operations

On August 30, 2013, we completed the sale of substantially all of our Gulf Coast engineering and construction and in-plant operations to a subsidiary of Furmanite Corporation. The total value of the transaction to ENGlobal was $17 million, consisting primarily of $15 million of cash and a $3.0 million promissory note issued at 4% interest with a Furmanite Corporation guarantee. The transaction resulted in a $721,000 gain on the sale of these operations. ENGlobal used most of the net proceeds from this transaction to repay advances and cure defaults under the PNC Credit Facility. As a result of this transaction, approximately 900 employees transferred from ENGlobal to Furmanite. In conjunction with this sale, the Company reduced its corporate selling, general and administrative expenses to support ongoing continuing operations. The impact of the sale of these operations are summarized as follows (dollars in thousands):

                                  Year Ended          Disposed             Ongoing
        2013 Continuing          December 28,        Continuing          Continuing
    Operations:                      2013            Operations          Operations
    Operating revenues           $     168,963     $        79,768     $        89,195
        Operating costs                147,661              72,954              74,707
    Gross profit                        21,302               6,814              14,488
        Selling, general and
    administrative expenses             22,080               2,748              19,332
    Operating income (loss)      $        (778 )   $         4,066     $        (4,844 )



                                   Year Ended          Disposed           Ongoing
       2012 Continuing            December 29,        Continuing         Continuing
     Operations:                      2012            Operations         Operations
     Operating revenues           $     227,916     $      116,498     $      111,418
        Operating costs                 209,196            109,603             99,593
     Gross profit                        18,720              6,895             11,825
        Selling, general and
     administrative expenses             25,239              3,867             21,372
     Operating income (loss)      $      (6,519 )   $        3,028     $       (9,547 )

Ongoing continuing operations revenues decreased by $22.2 million in 2013 versus 2012. This decrease was attributable to a decrease in Automation revenues of $13.8 million and a decrease in EPCM revenues of $8.5 million (net of the impact of the sale of the Gulf Coast engineering and construction and in-plant operations). (See "Results of Continuing Operations"). We expect ongoing SG&A expenses to decrease in 2014 because of reductions in staff and other Corporate SG&A expenses resulting from the sale of the Gulf Coast engineering and construction and in-plant operations during the last four months of 2013.

Discontinued Operations

During the third quarter of 2011, the Company determined that the expected 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. The Company was unable to sell the Electrical Services group as planned and decided to dispose of substantially all of the group's remaining assets. During the third quarter of 2012, the Company completed the disposal of the group's remaining assets concurrent with the completion of the last remaining lump sum project.

On September 10, 2012, the Company entered into a definitive agreement to sell its Field Solutions segment. The Field Solutions segment included the Land and Right-of-Way and Inspection divisions, primarily serving pipeline and electric power companies. On November 2, 2012, the Company completed the divestiture of its Land and Right-of-Way division of its Field Solutions segment effective October 26, 2012. The transaction was valued at approximately $7.5 million, consisting of approximately $4.5 million in retained working capital and a $3.0 million promissory note payable to the Company over four years. We have reserved the full amount of the $3.0 million promissory note due to collectability being in doubt.

Effective January 3, 2013, the Company completed the divestiture of the Inspection division. The transaction was valued at approximately $7.9 million, consisting of $1.0 million cash at closing, $5.0 million in retained working capital and a $1.9 million promissory note payable to the Company over four years.


Table of Contents

The operations of the Electrical Services group and the Field Solutions segment have been classified as discontinued operations and accordingly, are presented as discontinued operations in the Company's re-cast consolidated financial statements. The results of the discontinued operations are shown on the Consolidated Statements of Operations as "Loss from discontinued operations, net of taxes". Summarized financial information for the discontinued operations is shown below (dollars in thousands):

                                                     Year Ended
                                           December 28,       December 29,
          Statement of Operations Data:        2013               2012
          Revenues                        $            -     $       60,822
          Operating costs                              -             62,076
          Goodwill impairment                          -             (2,397 )
             Operating loss                            -             (3,651 )
          Gain (loss) on sale                       (716 )              113
             Net loss                     $         (716 )   $       (3,538 )

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 up to $10 million of availability under the amended PNC Credit Facility discussed under "Line of Credit Facility" below. There were no borrowings outstanding under the facility as of December 28, 2013 and March 13, 2014 and we had cash of approximately $4.0 million and $4.9 million at December 28, 2013 and March 13, 2014, respectively. Our working capital as of December 28, 2013 was $13.2 million versus $13.3 million as of December 29, 2012. We believe our current cash on hand, availability under our credit facility and our other working capital are sufficient to fund our ongoing operations.

Cash and the availability of cash could be materially restricted if (1) outstanding invoices billed are not collected or are not collected in a timely manner, (2) circumstances prevent the timely internal processing of invoices,
(3) we lose one or more of our major customers, or (4) we are unable to win new projects that we can perform on a profitable basis.

In the third quarter of 2012 we initiated a process to explore and consider possible strategic alternatives for enhancing shareholder value and supporting the Company's long-term financial strength. We streamlined our operations, divested of our Field Solutions segment, sold our Gulf Coast engineering and construction and in-plant operations, implemented project execution and expense reduction initiatives, retired the Ex-IM Bank Facility, cured all defaults and amended the PNC Credit Facility. As a result, our liquidity and access to working capital were significantly strengthened during 2013.

Cash Flows from Operating Activities

Operating activities provided approximately $10.7 million in net cash during the year ended December 28, 2013, compared with net cash used in operations of $5.0 million during the comparable period in 2012. The primary changes in working capital accounts during the year ended December 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 engineering and construction 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 $19.4 million for the year ended December 28, 2013, and used $3.7 million for the comparable period in 2012. 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 engineering and construction 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 approximately $26.8 million during the year ended December 28, 2013 and provided cash totaling $9.5 million during the year ended December 29, 2012. Our primary financing mechanism was our line of credit under the PNC Credit Facility and our predecessor facility, the Wells Fargo Credit Facility. During the year ended December 28, 2013, our borrowings under the line of credit were $178.2 million in the aggregate and we repaid an aggregate of $205.1 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 the sale of substantially all of the Gulf Coast engineering and construction and in-plant operations. During the year ended December 29, 2012, our borrowings under the line of credit were $205.3 million in the aggregate and we repaid an aggregate of $194.8 million.

Line of Credit Facility

On May 29, 2012, the Company entered into the PNC Credit Facility with PNC Bank, National Association, as administrative agent 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 30, 2013, the Company was not in compliance with the certain financial covenants of the PNC Credit Facility.

On August 30, 2013, the Company amended the PNC Credit Facility. Under the terms of the amended PNC Credit Facility, PNC consented to the disposal of the Gulf Coast engineering and construction and in-plant operations, waived the existing events of default and ceased the charging of interest on outstanding indebtedness at the default rate of 7%. 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. The amended PNC Credit Facility will mature on 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 . . .

  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
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.