ITEM
1. FINANCIAL STATEMENTS
ENGlobal
Corporation
Condensed
Consolidated Statements of Operations
(Unaudited)
(amounts
in thousands, except per share data)
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
|
|
September 24, 2016
|
|
|
September 26, 2015
|
|
|
September 24, 2016
|
|
|
September 26, 2015
|
|
Operating revenues
|
|
$
|
15,968
|
|
|
$
|
18,210
|
|
|
$
|
44,622
|
|
|
$
|
62,365
|
|
Operating costs
|
|
|
12,087
|
|
|
|
14,437
|
|
|
|
37,215
|
|
|
|
49,861
|
|
Gross profit
|
|
|
3,881
|
|
|
|
3,773
|
|
|
|
7,407
|
|
|
|
12,504
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
3,511
|
|
|
|
3,350
|
|
|
|
10,214
|
|
|
|
10,909
|
|
Operating income (loss)
|
|
|
370
|
|
|
|
423
|
|
|
|
(2,807
|
)
|
|
|
1,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
|
10
|
|
|
|
(4
|
)
|
|
|
17
|
|
|
|
641
|
|
Interest expense, net
|
|
|
(44
|
)
|
|
|
(32
|
)
|
|
|
(129
|
)
|
|
|
(98
|
)
|
Income (loss) from operations before income taxes
|
|
|
336
|
|
|
|
387
|
|
|
|
(2,919
|
)
|
|
|
2,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for federal and state income taxes
|
|
|
(153
|
)
|
|
|
67
|
|
|
|
(1,056
|
)
|
|
|
219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
489
|
|
|
$
|
320
|
|
|
$
|
(1,863
|
)
|
|
$
|
1,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted income (loss) per common share:
|
|
$
|
0.02
|
|
|
$
|
0.01
|
|
|
$
|
(0.07
|
)
|
|
$
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average shares used in computing earnings per share:
|
|
|
27,700
|
|
|
|
28,103
|
|
|
|
27,823
|
|
|
|
28,001
|
|
See
accompanying notes to unaudited interim condensed consolidated financial statements.
Table of Contents
ENGlobal
Corporation
Condensed
Consolidated Balance Sheets
(Unaudited)
(amounts
in thousands, except share amounts)
|
|
September 24, 2016
|
|
|
December 26, 2015
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
16,145
|
|
|
$
|
7,806
|
|
Trade receivables, net of allowances of $422 and $1,150
|
|
|
13,071
|
|
|
|
24,097
|
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
|
|
2,152
|
|
|
|
4,062
|
|
Other current assets
|
|
|
595
|
|
|
|
1,459
|
|
Total Current Assets
|
|
|
31,963
|
|
|
|
37,424
|
|
Property and equipment, net
|
|
|
1,451
|
|
|
|
2,145
|
|
Goodwill
|
|
|
2,806
|
|
|
|
2,806
|
|
Deferred tax asset
|
|
|
10,374
|
|
|
|
9,137
|
|
Other assets
|
|
|
620
|
|
|
|
688
|
|
Total Assets
|
|
$
|
47,214
|
|
|
$
|
52,200
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
3,458
|
|
|
$
|
3,182
|
|
Accrued compensation and benefits
|
|
|
2,644
|
|
|
|
3,086
|
|
Billings in excess of costs and estimated earnings on uncompleted contracts
|
|
|
2,136
|
|
|
|
3,912
|
|
Other current liabilities
|
|
|
1,423
|
|
|
|
1,690
|
|
Total Current Liabilities
|
|
|
9,661
|
|
|
|
11,870
|
|
Long Term Leases
|
|
|
137
|
|
|
|
318
|
|
Total Liabilities
|
|
|
9,798
|
|
|
|
12,188
|
|
Commitments and Contingencies (Note 7)
|
|
|
|
|
|
|
|
|
Stockholders’ Equity:
|
|
|
|
|
|
|
|
|
Common stock - $0.001 par value;
75,000,000 shares authorized; 27,421,281 and 28,058,513 shares issued and outstanding at September 24, 2016 and December 26, 2015, respectively
|
|
|
28
|
|
|
|
28
|
|
Additional paid-in capital
|
|
|
36,452
|
|
|
|
37,185
|
|
Accumulated earnings
|
|
|
936
|
|
|
|
2,799
|
|
Total Stockholders’ Equity
|
|
|
37,416
|
|
|
|
40,012
|
|
Total Liabilities and Stockholders’ Equity
|
|
$
|
47,214
|
|
|
$
|
52,200
|
|
See
accompanying notes to unaudited interim condensed consolidated financial statements.
Table of Contents
ENGlobal
Corporation
Condensed
Consolidated Statements of Cash Flows
(Unaudited)
(amounts
in thousands)
|
|
For the Nine Months Ended
|
|
|
|
September 24, 2016
|
|
|
September 26, 2015
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(1,863
|
)
|
|
$
|
1,919
|
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
868
|
|
|
|
1,110
|
|
Share-based compensation expense
|
|
|
367
|
|
|
|
374
|
|
Loss on disposal of fixed assets
|
|
|
1
|
|
|
|
—
|
|
Non cash change in note receivable
|
|
|
—
|
|
|
|
(635
|
)
|
Deferred income tax benefit
|
|
|
(1,237
|
)
|
|
|
—
|
|
Changes in current assets and liabilities:
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
|
|
11,026
|
|
|
|
5,411
|
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
|
|
1,910
|
|
|
|
1,159
|
|
Other current assets
|
|
|
832
|
|
|
|
532
|
|
Accounts payable
|
|
|
276
|
|
|
|
(3,135
|
)
|
Accrued compensation and benefits
|
|
|
(442
|
)
|
|
|
(140
|
)
|
Billings in excess of costs and estimated earnings on uncompleted contracts
|
|
|
(1,776
|
)
|
|
|
(4,393
|
)
|
Income taxes payable
|
|
|
(237
|
)
|
|
|
(299
|
)
|
Other current liabilities, net
|
|
|
33
|
|
|
|
(954
|
)
|
Net cash provided by operating activities
|
|
$
|
9,758
|
|
|
$
|
949
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Property and equipment acquired
|
|
|
(84
|
)
|
|
|
(873
|
)
|
Proceeds from notes receivable
|
|
|
30
|
|
|
|
6,083
|
|
Net cash (used in) provided by investing activities
|
|
$
|
(54
|
)
|
|
$
|
5,210
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Debt issuance costs
|
|
|
(20
|
)
|
|
|
(7
|
)
|
Purchase of treasury stock
|
|
|
(1,100
|
)
|
|
|
(11
|
)
|
Payments on capitalized leases
|
|
|
(245
|
)
|
|
|
(476
|
)
|
Net cash used in financing activities
|
|
$
|
(1,365
|
)
|
|
$
|
(494
|
)
|
Net change in cash
|
|
|
8,339
|
|
|
|
5,665
|
|
Cash and cash equivalents, at beginning of period
|
|
|
7,806
|
|
|
|
6,213
|
|
Cash and cash equivalents, at end of period
|
|
$
|
16,145
|
|
|
$
|
11,878
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid during the period for interest
|
|
$
|
131
|
|
|
$
|
134
|
|
Cash paid during the period for income taxes (net of refunds)
|
|
$
|
428
|
|
|
$
|
517
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of noncash investing activities:
|
|
|
|
|
|
|
|
|
Property and equipment purchased through capital lease assignment
|
|
$
|
—
|
|
|
$
|
304
|
|
See
accompanying notes to unaudited interim condensed consolidated financial statements.
Table of Contents
ENGLOBAL
CORPORATION AND SUBSIDIARIES
NOTES
TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 – BASIS OF PRESENTATION
The
accompanying unaudited condensed consolidated financial statements of ENGlobal Corporation (which may be referred to as “ENGlobal,”
the “Company,” “we,” “us,” or “our”) were prepared in accordance with accounting
principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and
the rules and regulations of the Securities and Exchange Commission. Accordingly, these condensed financial statements do not
include all of the information or note disclosures normally included in annual financial statements prepared in accordance with
U.S. GAAP. Therefore these condensed financial statements should be read in conjunction with the audited financial statements
for the year ended December 26, 2015, included in the Company’s 2015 Annual Report on Form 10-K filed with the Securities
and Exchange Commission.
The
condensed financial statements included herein are unaudited for the three and nine month periods ended September 24, 2016 and
September 26, 2015, and in the case of the condensed balance sheet as of December 26, 2015, have been derived from the audited
financial statements of the Company. These financial statements reflect all adjustments (consisting of normal recurring adjustments),
which are, in the opinion of management, necessary to fairly present the results for the periods presented.
The
Company has assessed subsequent events through the date of filing of these condensed financial statements with the Securities
and Exchange Commission and believes that the disclosures made herein are adequate to make the information presented herein not
misleading.
As
we had no items of other comprehensive income in any period presented, no other components of comprehensive income or comprehensive
income are presented.
The
Company’s accounting policies are in accordance with U.S. GAAP. A summary of our critical accounting policies is disclosed
in Note 2 to the consolidated financial statements included in our 2015 Annual Report on Form 10-K.
In
the second quarter of 2016, the Company corrected the presentation of the proceeds of the Notes Receivable that affected the second,
third and fourth quarters of 2015. Proceeds from Notes Receivable of $6.1 million were classified as a component of Cash Flows
from Financing Activities when the proper classification should have been as a component of Cash Flows from Investing Activities.
Management has evaluated the reclassification from both a quantitative and qualitative impact and has determined that this reclassification
was not material to previously released financial statements. This reclassification had no impact on income or loss from operations,
the balance sheet or the net cash generated or used for any period.
Each
of our quarters is comprised of 13 weeks, which includes two 4-week months and one 5-week month (4-5-4 calendar quarter).
Table of Contents
ENGLOBAL
CORPORATION AND SUBSIDIARIES
NOTES
TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Changes
in Accounting
In
April 2015, the Financial Standards Accounting Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2015-03,
Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.
This amendment requires debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct
deduction from the carrying amount of that debt liability, consistent with the treatment of debt discounts. This pronouncement
is effective for interim and annual financial statements issued for fiscal years beginning after December 15, 2015. We adopted
this pronouncement in the first quarter of fiscal 2016 and because the Company did not have any debt outstanding at fiscal year-end
2015 or any interim reporting period to date in 2016, this pronouncement did not have an impact on the Company’s financial
statements or related disclosures.
In
August 2015, the FASB issued ASU No. 2015-15,
Interest-Imputation of Interest (Topic 835-30): Presentation and Subsequent Measurement
of Debt Issuance Costs Associated with Line-of-Credit Arrangements.
This amendment allows for the deferral and presentation
of debt issuance costs as an asset to be ratably amortized over the term of the line-of-credit arrangement, regardless of whether
there are any outstanding borrowings on the line-of-credit arrangement. The Company has historically accounted for its debt issuance
costs related to revolving credit agreements in accordance with this amendment and therefore this pronouncement did not have an
impact on the Company’s financial statements or related disclosures.
New
Accounting Pronouncements Not Yet Adopted
In
May 2014, the FASB issued ASU No. 2014-09,
Revenue From Contracts with Customers (Topic 606),
that will supersede most
of the existing revenue recognition requirements in U.S. GAAP and will require entities to recognize revenue at an amount that
reflects the consideration to which we expect to be entitled in exchange for transferring goods or services to a customer. This
new standard also requires significantly expanded disclosures regarding the qualitative and quantitative information of an entity’s
nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. In May 2016, the FASB
issued ASU No. 2016-12 to clarify certain narrow aspects of Topic 606 such as assessing the collectability criterion, presentation
of sales taxes and other similar taxes collected from customers, non-cash consideration, contract modifications at transition,
completed contracts at transition, and other technical corrections. This new accounting standard, as updated, is effective for
interim and annual reporting periods beginning after December 15, 2017. We are currently evaluating the impact this pronouncement
will have on our financial statements and related disclosures.
In
February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
, that will amend the accounting standards for leases.
This new standard retains a distinction between finance leases and operating leases but the primary change is the recognition
of lease assets and lease liabilities by lessees for those leases classified as operating leases on the lessee’s balance
sheet and certain aspects of lease accounting have been simplified. This new standard requires additional qualitative and quantitative
disclosures along with specific quantitative disclosures required by lessees and lessors to meet the objective of enabling users
of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. This pronouncement is
effective for interim and annual reporting periods beginning after December 15, 2018, with early application permitted. We are
currently evaluating the impact this pronouncement will have on our financial statements and related disclosures.
Table of Contents
ENGLOBAL
CORPORATION AND SUBSIDIARIES
NOTES
TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In
March 2016, the FASB issued ASU No. 2016-09,
Compensation – Stock Compensation (Topic 718): Improvements to Employee
Share-Based Payment Accounting
, to change several aspects of accounting for share-based payment transactions, including a
requirement to recognize all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement,
classification of awards as either equity or liabilities, and classification on the statement of cash flows. This pronouncement
is effective for interim and annual reporting periods beginning after December 31, 2016, with early adoption permitted. Varying
transition methods (modified retrospective, retrospective or prospective) are applied to different provisions of the standard.
We are currently evaluating the impact this pronouncement will have on our financial statements and related disclosures.
In
August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts
and Cash Payments.
This amendment addresses how certain specified cash receipts and cash payments are presented in the statement
of cash flows. This guidance becomes effective for interim and annual reporting periods beginning after December 15, 2017. We
are currently evaluating the impact the pronouncement will have on our consolidated financial statements and related disclosures.
NOTE
2 – CONTRACTS
Costs,
estimated earnings and billings on uncompleted contracts consisted of the following at September 24, 2016 and December 26, 2015
(amounts in thousands):
|
|
September 24, 2016
|
|
|
December 26, 2015
|
|
Costs incurred on uncompleted contracts
|
|
$
|
56,512
|
|
|
$
|
67,488
|
|
Estimated earnings on uncompleted contracts
|
|
|
23,853
|
|
|
|
27,492
|
|
Earned revenues
|
|
|
80,365
|
|
|
|
94,980
|
|
Less: billings to date
|
|
|
80,349
|
|
|
|
94,830
|
|
Net costs and estimated earnings in excess of billings on uncompleted contracts
|
|
$
|
16
|
|
|
$
|
150
|
|
|
|
|
|
|
|
|
|
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
|
$
|
2,152
|
|
|
$
|
4,062
|
|
Billings in excess of costs and estimated earnings on uncompleted contracts
|
|
|
(2,136
|
)
|
|
|
(3,912
|
)
|
Net costs and estimated earnings in excess of billings on uncompleted contracts
|
|
$
|
16
|
|
|
$
|
150
|
|
Revenue
on fixed-price contracts is recorded primarily using the percentage-of-completion (cost-to-cost) method. 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.
We currently have $0.6 million in contingency amounts as of September 24, 2016 compared to $2.4 million as of December 26, 2015.
Losses on contracts are recorded in full as they are identified. Fixed price contracts generally include retainage provisions
under which a percentage of the contract price is withheld until the project is complete and has been accepted by our customer.
We currently have $3.5 million in retainage as of September 24, 2016 compared to $6.9 million as of December 26, 2015.
Table of Contents
ENGLOBAL
CORPORATION AND SUBSIDIARIES
NOTES
TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
We
recognize 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 defer revenue recognition until we receive either written
authorization or payment. We currently have $0.1 million in deferred revenue recognition as of September 24, 2016 compared to
$0.1 million as of December 26, 2015. This deferred revenue represents work on not–to-exceed contracts that has been performed
but has not been billed or booked as revenue due to our revenue recognition policies as the work was performed outside the contracted
amount without obtaining proper work order changes. It is uncertain as to whether these revenues will eventually be recognized
by us or the proceeds collected. The costs associated with these billings have been expensed as incurred.
NOTE
3 – LINE OF CREDIT AND LETTER OF CREDIT FACILITIES
Line
of Credit Facility
On
September 16, 2014, we entered into a three year Loan and Security Agreement (“Loan Agreement”) with Regions Bank
(“Lender”) pursuant to which the Lender agreed to extend credit to us in the form of revolving loans of up to the
lesser of $10.0 million (the “Commitment”) or the Borrowing Base (as defined in the Loan Agreement). The Loan Agreement
includes a sub-facility for standby and / or trade letters of credit up to an amount not to exceed $2.5 million. There were no
loans outstanding under the Loan Agreement as of September 24, 2016 or December 26, 2015. On June 16, 2016, but effective May
29, 2016, we entered into the Second Amendment to the Loan Agreement (“Second Amendment”) with the Lender pursuant
to which the Company is not required to comply with the fixed charge coverage ratio financial covenant from the fiscal month ending
April 30, 2016 through the fiscal month ending December 31, 2016, provided that the Company is not permitted to have any obligations
or borrowings related to working capital outstanding and the Company is required to retain a cash balance of at least $5.0 million
in collection accounts with the Lender. In effect, this prohibits the Company from borrowing any material amount under the Loan
Agreement until the Company is able to comply with the fixed charge coverage ratio.
Borrowing
Base:
The Borrowing Base is an amount equal to the sum of (a) 85% of the total amount of Eligible Approved Cost Plus Contract
Amounts, plus (b) the lesser of (i) 85% of the total amount of Eligible Approved Fixed Price Contract Accounts or (ii) $2,500,000,
plus (c) the lesser of (i) 85% of the total amount of Eligible Approved Government Contract Accounts or (ii) $1,000,000, plus
(d) the lesser of (i) 75% of the total amount of Eligible Unbilled Accounts or (ii) total revenues from all Accounts over the
preceding 30-day period, provided that to the extent that any Eligible Unbilled Accounts consist of Accounts that would be Eligible
Approved Government Contracts and be included in provision (c) above if billed there shall be a limitation in eligibility thereof
under this provision (d) of $800,000, plus (e) 75% of the total amount of Eligible Costs in Excess of Billings, and minus (f)
such amounts as may be required by Lender to be reserved at any time and from time to time.
Interest:
Any loans will bear interest at a rate per annum equal to the LIBOR Index Rate plus 2.25%. If the loan is converted to
a Base Rate Loan, then such loan will bear interest at a rate per annum equal to the Base Rate (defined as a rate per annum equal
to the greatest of (a) the Federal Funds Rate in effect on such day plus 0.50%, (b) the Prime Rate in effect on such day, or (c)
a per annum rate equal to LIBOR determined with respect to an interest period of one month plus 1.00%) plus 1.25%.
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).
Table of Contents
ENGLOBAL
CORPORATION AND SUBSIDIARIES
NOTES
TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Term
:
All loans and all other obligations outstanding under the Loan Agreement shall be payable in full on September 14, 2017, unless
otherwise terminated pursuant to the terms of the Loan Agreement.
Material
Covenants:
The Loan Agreement requires the Company to comply with various financial, affirmative and negative covenants
affecting its businesses and operations, including:
|
●
|
The
Company will not be a party to mergers, acquisitions, consolidations, reorganizations or similar transactions.
|
|
|
|
|
●
|
The
Company will not sell, lease, transfer or otherwise dispose of any of its properties or assets (subject to certain exceptions
set forth in the Loan Agreement).
|
|
|
|
|
●
|
The
Company will not declare, pay or make any dividend or distribution on any shares of common or preferred stock or make any
cash payment to repurchase or otherwise retire any common or preferred stock, provided that the Company may repurchase up
to $2.0 million of its common stock pursuant to its announced stock repurchase plan, subject to certain conditions.
|
|
|
|
|
●
|
The
fixed charge coverage ratio must not be less than 1.10 to 1.00.
|
|
|
|
|
●
|
The
Company will not permit capital expenditures during any fiscal year to exceed $3.5 million.
|
The
Company was in compliance with all of the material covenants of the Loan Agreement as of September 24, 2016 other than the fixed
charge coverage ratio, for which compliance is not required from the fiscal month ending April 30, 2016 through the fiscal month
ending December 31, 2016, as described above.
Table of Contents
ENGLOBAL
CORPORATION AND SUBSIDIARIES
NOTES
TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
4 – SEGMENT INFORMATION
The
Engineering, Procurement and Construction Management (“EPCM”) segment provides services relating to the development,
management and execution of projects requiring professional engineering and related project services primarily to the energy industry
throughout the United States. The EPCM segment includes the government services group, which provides engineering, design, installation
and operation and maintenance of various government, public sector and international facilities. The Automation segment provides
services related to the design, fabrication and implementation of process distributed control and analyzer systems, advanced automation,
information technology and electrical projects primarily to the upstream and downstream sectors throughout the United States as
well as a specific project in Central Asia.
Revenues,
operating income, and identifiable assets for each segment are set forth in the following tables. The amount identified as Corporate
includes those activities that are not allocated to the operating segments and include costs related to business development,
executive functions, finance, accounting, safety, human resources and information technology that are not specifically identifiable
with the segments.
Segment
information for the three months ended September 24, 2016 and September 26, 2015 is as follows (amounts in thousands):
For the three months ended
September 24, 2016:
|
|
EPCM
|
|
|
Automation
|
|
|
Corporate
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
8,216
|
|
|
$
|
7,752
|
|
|
$
|
—
|
|
|
$
|
15,968
|
|
Gross profit
|
|
|
1,454
|
|
|
|
2,427
|
|
|
|
—
|
|
|
|
3,881
|
|
SG&A expense
|
|
|
909
|
|
|
|
685
|
|
|
|
1,917
|
|
|
|
3,511
|
|
Operating income (loss)
|
|
|
545
|
|
|
|
1,742
|
|
|
|
(1,917
|
)
|
|
|
370
|
|
Other income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(44
|
)
|
Income tax benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
153
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
489
|
|
For the three months ended
September 26, 2015:
|
|
EPCM
|
|
|
Automation
|
|
|
Corporate
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
11,945
|
|
|
$
|
6,265
|
|
|
$
|
—
|
|
|
$
|
18,210
|
|
Gross profit
|
|
|
1,720
|
|
|
|
2,053
|
|
|
|
—
|
|
|
|
3,773
|
|
SG&A expense
|
|
|
653
|
|
|
|
584
|
|
|
|
2,113
|
|
|
|
3,350
|
|
Operating income (loss)
|
|
|
1,067
|
|
|
|
1,469
|
|
|
|
(2,113
|
)
|
|
|
423
|
|
Other loss, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4
|
)
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32
|
)
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(67
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
320
|
|
Table of Contents
ENGLOBAL
CORPORATION AND SUBSIDIARIES
NOTES
TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
4 – SEGMENT INFORMATION (CONTINUED)
Segment
information for the nine months ended September 24, 2016 and September 26, 2015 is as follows (amounts in thousands):
For the nine months ended
September 24, 2016:
|
|
EPCM
|
|
|
Automation
|
|
|
Corporate
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
25,000
|
|
|
$
|
19,622
|
|
|
$
|
—
|
|
|
$
|
44,622
|
|
Gross profit
|
|
|
2,877
|
|
|
|
4,530
|
|
|
|
—
|
|
|
|
7,407
|
|
SG&A expense
|
|
|
2,432
|
|
|
|
2,203
|
|
|
|
5,579
|
|
|
|
10,214
|
|
Operating income (loss)
|
|
|
445
|
|
|
|
2,327
|
|
|
|
(5,579
|
)
|
|
|
(2,807
|
)
|
Other income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(129
|
)
|
Income tax benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,056
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(1,863
|
)
|
For the nine months ended
September 26, 2015:
|
|
EPCM
|
|
|
Automation
|
|
|
Corporate
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
38,174
|
|
|
$
|
24,191
|
|
|
$
|
—
|
|
|
$
|
62,365
|
|
Gross profit
|
|
|
5,852
|
|
|
|
6,652
|
|
|
|
—
|
|
|
|
12,504
|
|
SG&A expense
|
|
|
2,116
|
|
|
|
1,869
|
|
|
|
6,924
|
|
|
|
10,909
|
|
Operating income (loss)
|
|
|
3,736
|
|
|
|
4,783
|
|
|
|
(6,924
|
)
|
|
|
1,595
|
|
Other income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
641
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(98
|
)
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(219
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,919
|
|
Total Assets by Segment
|
|
As of
September 24, 2016
|
|
|
As of
December 26, 2015
|
|
|
|
(amounts in thousands)
|
|
EPCM
|
|
$
|
7,660
|
|
|
$
|
13,009
|
|
Automation
|
|
|
11,672
|
|
|
|
19,570
|
|
Corporate
|
|
|
27,882
|
|
|
|
19,621
|
|
Consolidated
|
|
$
|
47,214
|
|
|
$
|
52,200
|
|
Table of Contents
ENGLOBAL
CORPORATION AND SUBSIDIARIES
NOTES
TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
5 – FEDERAL AND STATE INCOME TAXES
The
Company accounts for income taxes in accordance with the FASB’s Accounting Standards Codification 740 (“ASC 740”)
for interim reporting periods. Under ASC 740-270, we estimate an annual effective income tax rate based on year-to-date operating
results and our projection of operating results for the remainder of the year. We apply this projected annual effective income
tax rate to the year-to-date operating results to accrue for income taxes. If actual operating results differ from the annual
projection, our estimated annual effective income tax rate can change affecting income tax expense for successive interim results
as well as the estimated annual income tax expense results. Certain state taxes are not included in the calculation of the estimated
annual effective income tax rate because the underlying basis for such state taxes is related to revenues and not taxable income.
Amounts related to Texas margin taxes are reported as income tax expense.
The
Company applies a more likely than not recognition threshold for all tax uncertainties. The accounting for uncertainty in income
taxes prescribes that tax benefits are only recognized when there is a greater than a 50 percent likelihood of being sustained
upon examination by the taxing authorities. Management has reviewed the Company’s tax positions and determined there are
no uncertain tax positions requiring recognition in the financial statements. U.S. federal tax returns prior to 2012 and Texas
margins tax returns prior to 2012 are closed. Generally, the applicable statutes of limitations are three to four years from their
filings.
The
Company recorded income tax benefits of $0.2 million and $1.1 million for the three and nine months ended September 24, 2016,
respectively, compared to income tax expense of $0.1 million and $0.2 million for the three and nine months ended September 26,
2015, respectively. The Company’s effective tax rate was (45.8)% and 36.2% for the three and nine months ended September
24, 2016, respectively, as compared to 17.3% and 10.2% for the three and nine months ended September 26, 2015, respectively. The
effective tax rate for the three and nine months ended September 24, 2016 differed from the federal statutory rate of 35% primarily
due a change in the operating results from net income to net loss, non-deductible items, foreign withholding tax expense, the
true-up of prior year income tax accruals to our filed returns and a change in our blended income state tax rate.
NOTE
6 – STOCK REPURCHASE PROGRAM
On
April 21, 2015, the Company announced that its Board of Directors authorized the repurchase of up to $2.0 million of the Company’s
common stock from time to time through open market or privately negotiated transactions, based on prevailing market conditions.
The Company is not obligated to repurchase any dollar amount or specific number of shares of common stock under the repurchase
program, which may be suspended or discontinued at any time. As of September 24, 2016, the Company had purchased 950,911 shares
for $1.2 million under the repurchase program. During the three and nine months ended September 24, 2016, we purchased and retired
451,567 shares and 897,167 shares, respectively, at a cost of $0.6 million and $1.1 million, respectively, under this program.
Table of Contents
ENGLOBAL
CORPORATION AND SUBSIDIARIES
NOTES
TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
7 – COMMITMENTS AND CONTINGENCIES
From
time to time, ENGlobal or one or more of its subsidiaries is involved in various legal proceedings or is subject to claims that
arise in the ordinary course of business alleging, among other things, claims of breach of contract or negligence in connection
with the performance or delivery of goods and/or services. The outcome of any such claims or proceedings cannot be predicted with
certainty. Management is not aware of any pending or threatened lawsuits or proceedings that are expected to have a material adverse
effect on the Company’s financial position, results of operations or liquidity.
The
Company carries a broad range of insurance coverage, including general and business automobile liability, commercial property,
professional errors and omissions, workers’ compensation insurance, directors’ and officers’ liability insurance
and a general umbrella policy, all with standard self-insured retentions/deductibles. The Company also provides health insurance
to its employees (including vision and dental), and is partially self-funded for these claims. Provisions for expected future
payments are accrued based on the Company’s experience, and specific stop loss levels provide protection for the Company.
The Company believes it has adequate reserves for the self-funded portion of its insurance policies. The Company is not aware
of any material litigation or claims that are not covered by these policies or which are likely to materially exceed the Company’s
insurance limits.
Table of Contents
ENGLOBAL CORPORATION
AND SUBSIDIARIES
MANAGEMENT’S
DISCUSSION AND ANALYSIS
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 26,
2015, 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 26, 2015.
Overview
ENGlobal Corporation (which
may be referred to as “ENGlobal,” the “Company,” “we,” “us” or “our”),
incorporated in the State of Nevada in June 1994, is a leading provider of engineering and professional services principally to
the energy industry through two segments: Engineering, Procurement and Construction Management (“EPCM”) and Automation
Engineering and Integrated Products (“Automation”). The Company has recently expanded its service offerings to include
the fabrication of certain components that it engineers at a 31 acre fabrication facility located in Henderson, Texas. While this
additional service will allow the Company to potentially capture more project scope in the near term, the primary purpose for adding
this service, in addition to our current engineering, automation and integration services, is to provide a differentiated, lower
cost alternative for highly engineered modularized systems and thereby providing higher value to our clients.
Results of Operations
The majority of the Company’s
EPCM services have historically been provided through time-and-material contracts and a majority of the Company’s engineered
automation system revenues are provided through 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 general 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 percentage
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 include finance, accounting, human resources, legal and information technology which are
unrelated to specific projects but which are incurred to support corporate activities.
Table of Contents
ENGLOBAL CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS
Comparison of the three and nine months
ended September 24, 2016 versus the three and nine months ended September 26, 2015
The following table, which
compares our results for the three months ended September 24, 2016 to our results for the three months ended September 26, 2015,
provides relevant financial data that is derived from our condensed consolidated statements of operations (amounts in thousands,
except per share data).
Operations Data
|
|
EPCM
|
|
|
Automation
|
|
|
Corporate
|
|
|
Consolidated
|
|
|
|
|
Three months ended September 24, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
8,216
|
|
|
$
|
7,752
|
|
|
$
|
—
|
|
|
$
|
15,968
|
|
|
|
100.0
|
%
|
Gross profit
|
|
|
1,454
|
|
|
|
2,427
|
|
|
|
—
|
|
|
|
3,881
|
|
|
|
24.3
|
%
|
SG&A expense
|
|
|
909
|
|
|
|
685
|
|
|
|
1,917
|
|
|
|
3,511
|
|
|
|
22.0
|
%
|
Operating income (loss)
|
|
|
545
|
|
|
|
1,742
|
|
|
|
(1,917
|
)
|
|
|
370
|
|
|
|
2.3
|
%
|
Other income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(44
|
)
|
|
|
|
|
Income tax benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
153
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
489
|
|
|
|
3.1
|
%
|
Diluted income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 26, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
11,945
|
|
|
$
|
6,265
|
|
|
$
|
—
|
|
|
$
|
18,210
|
|
|
|
100.0
|
%
|
Gross profit
|
|
|
1,720
|
|
|
|
2,053
|
|
|
|
—
|
|
|
|
3,773
|
|
|
|
20.7
|
%
|
SG&A expense
|
|
|
653
|
|
|
|
584
|
|
|
|
2,113
|
|
|
|
3,350
|
|
|
|
18.4
|
%
|
Operating income (loss)
|
|
|
1,067
|
|
|
|
1,469
|
|
|
|
(2,113
|
)
|
|
|
423
|
|
|
|
2.3
|
%
|
Other income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4
|
)
|
|
|
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32
|
)
|
|
|
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(67
|
)
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
320
|
|
|
|
1.8
|
%
|
Diluted income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) in Operating Results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
(3,729
|
)
|
|
$
|
1,487
|
|
|
$
|
—
|
|
|
$
|
(2,242
|
)
|
|
|
(12.3
|
)%
|
Gross profit (loss)
|
|
|
(266
|
)
|
|
|
374
|
|
|
|
—
|
|
|
|
108
|
|
|
|
2.9
|
%
|
SG&A expense
|
|
|
256
|
|
|
|
101
|
|
|
|
(196
|
)
|
|
|
161
|
|
|
|
4.8
|
%
|
Operating income (loss)
|
|
|
(522
|
)
|
|
|
273
|
|
|
|
196
|
|
|
|
(53
|
)
|
|
|
(12.5
|
)%
|
Other income (expense), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12
|
)
|
|
|
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
220
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
169
|
|
|
|
52.8
|
%
|
Diluted income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.01
|
|
|
|
|
|
Table of Contents
ENGLOBAL CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS
The following table, which
compares our results for the nine months ended September 24, 2016 to our results for the nine months ended September 26, 2015,
provides relevant financial data that is derived from our condensed consolidated statements of operations (amounts in thousands,
except per share data).
Operations Data
|
|
EPCM
|
|
|
Automation
|
|
|
Corporate
|
|
|
Consolidated
|
|
|
|
|
Nine months ended September 24, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
25,000
|
|
|
$
|
19,622
|
|
|
$
|
—
|
|
|
$
|
44,622
|
|
|
|
100.0
|
%
|
Gross profit
|
|
|
2,877
|
|
|
|
4,530
|
|
|
|
—
|
|
|
|
7,407
|
|
|
|
16.6
|
%
|
SG&A expense
|
|
|
2,432
|
|
|
|
2,203
|
|
|
|
5,579
|
|
|
|
10,214
|
|
|
|
22.9
|
%
|
Operating income (loss)
|
|
|
445
|
|
|
|
2,327
|
|
|
|
(5,579
|
)
|
|
|
(2,807
|
)
|
|
|
(6.3
|
)%
|
Other income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
|
|
|
|
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(129
|
)
|
|
|
|
|
Income tax benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,056
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(1,863
|
)
|
|
|
(4.2
|
)%
|
Diluted loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.07
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 26, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
38,174
|
|
|
|
24,191
|
|
|
$
|
—
|
|
|
$
|
62,365
|
|
|
|
100.0
|
%
|
Gross profit
|
|
|
5,852
|
|
|
|
6,652
|
|
|
|
—
|
|
|
|
12,504
|
|
|
|
20.0
|
%
|
SG&A expense
|
|
|
2,116
|
|
|
|
1,869
|
|
|
|
6,924
|
|
|
|
10,909
|
|
|
|
17.5
|
%
|
Operating income (loss)
|
|
|
3,736
|
|
|
|
4,783
|
|
|
|
(6,924
|
)
|
|
|
1,595
|
|
|
|
2.6
|
%
|
Other income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
641
|
|
|
|
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(98
|
)
|
|
|
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(219
|
)
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,919
|
|
|
|
3.1
|
%
|
Diluted income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) in Operating Results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
(13,174
|
)
|
|
$
|
(4,569
|
)
|
|
$
|
—
|
|
|
$
|
(17,743
|
)
|
|
|
(28.5
|
)%
|
Gross profit
|
|
|
(2,975
|
)
|
|
|
(2,122
|
)
|
|
|
—
|
|
|
|
(5,097
|
)
|
|
|
(40.8
|
)%
|
SG&A expense
|
|
|
316
|
|
|
|
334
|
|
|
|
(1,345
|
)
|
|
|
(695
|
)
|
|
|
(6.4
|
)%
|
Operating income (loss)
|
|
|
(3,291
|
)
|
|
|
(2,456
|
)
|
|
|
1,345
|
|
|
|
(4,402
|
)
|
|
|
(276.0
|
)%
|
Other income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(624
|
)
|
|
|
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31
|
)
|
|
|
|
|
Income tax benefit (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,275
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(3,782
|
)
|
|
|
(197.1
|
)%
|
Diluted loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.14
|
)
|
|
|
|
|
Table of Contents
ENGLOBAL CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS
Revenue –
Revenues
decreased $2.2 million for the three months ended September 24, 2016 as compared to the three ended September 26, 2015. EPCM segment
revenues decreased $3.7 million for the current quarterly period as compared to the prior year quarterly period largely due to
the completion of projects and the decline in our clients’ activities which has reduced the number of new projects. Automation
segment revenues increased $1.5 million for the current quarterly period as compared to the prior year quarterly period driven
largely by an increased volume of higher valued fixed-price projects.
Revenues decreased $17.7
million for the nine months ended September 24, 2016 as compared to the nine months ended September 26, 2015. Year to date revenues
for both the EPCM and Automation segments have been negatively impacted by the sustained reduction in oil and gas prices and the
resulting drop in our clients’ activities in the upstream, midstream and downstream sectors of the energy industry. EPCM
segment revenues decreased $13.2 million for the nine months ended September 24, 2016 as compared to the comparable prior
year period primarily due to the completion of projects and the decline in our clients’ activities which has reduced the
number of new projects. Automation segment revenues decreased $4.5 million for the nine months ended September 24, 2016
as compared to the comparable prior year period primarily due to $3.1 million of revenue from the oil and gas upstream sector for
the comparable prior year period that did not repeat this year and the decline in our clients’ activities.
Recognizing the implications
of declining oil prices in 2015, we have taken steps to mitigate and reverse the declining revenue trends. In the latter half of
2015, we hired three seasoned business development professionals and another in the first quarter of 2016. While it will require
time for these efforts to generate revenue, our proposal activity has increased and our backlog has remained steady even though
the time from proposal to award has increased. While the cost of these initiatives is immediately reflected in increased SG&A
expense, we expect to recognize the benefits of these efforts over time subject to the overall level of spending in the energy
sectors in which we provide services.
Gross Profit
–
Gross profit increased $0.1 million for the
three months ended September 24, 2016 as compared to the three months ended September 26, 2015 comprised of a $0.4 million increase
in the Automation segment’s gross profit partially offset by a $0.3 million decrease in the EPCM segment’s gross profit.
During the lives of fixed-priced contracts, we may maintian certain contingency amounts to manage the unknown risks on the
related projects. These amounts may be removed as risks are better identified and quantified or mitigated. We removed $0.8 million
of contingency amounts from fixed price contracts during the three months ended September 24, 2016 compared to $0.5 million during
the three months ended September 26, 2015. Gross profit margins for the current quarterly period improved to 24.3% of revenues
as compared to 20.7% of revenues for the prior year quarterly period primarily due to the removal of contingency amounts
on fixed-priced projects during the three months ended September 24, 2016 and lower variable labor operating costs in both
the EPCM and Automation segments. Lower variable labor operating costs were primarily due to higher manpower utilization, which
decreased the Company’s variable labor operating costs to 4.4% of revenues for the current quarterly period from 7.4% of
revenues for the prior year quarterly period. In the second quarter, we initiated cost savings measures by introducing a furlough
program and reducing our payroll burden. We have also taken additional steps in the third quarter by limiting hours spent on indirect
activities. We expect these measures to positively impact our gross profit margins for future periods. Additionally, we intend
to monitor labor utilization for both the EPCM and the Automation segments with the goal of improving gross profit margins while
remaining positioned for a potential rebound and growth in future periods.
Table of Contents
ENGLOBAL CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS
Gross profit decreased
$5.1 million for the nine months ended September 24, 2016 as compared to the comparable prior year period due to a $3.0 million
decrease and a $2.1 million decrease in the EPCM and Automation segments’ gross profit, respectively. During the lives
of fixed-priced contracts, we may maintain certain contingency amounts to manage the unknown risks on the related projects. These
amounts may be removed as risks are better identified and quantified or mitigated. We removed $0.8 million of contingency amounts
from fixed-priced contracts during the nine months ended September 24, 2016 compared to $0.6 million during the nine months ended
September 26, 2015. Gross profit margins declined to 16.6% for the nine months ended September 24, 2016 from 20.0% in the
comparable prior year period due to higher variable labor operating costs and the decline in our clients’ activities which
has reduced the number of new projects, partially offset by the removal of contingency amounts on fixed-priced projects
during the nine months ended September 24, 2016. We incurred higher variable labor operating costs in both the EPCM and Automation
segments due to lower manpower utilization which increased the Company’s variable labor operating costs to 8.0% of revenues
for the nine months ended September 24, 2016 compared to 6.3% of revenues for the comparable prior year period due to the completion
of projects and the decline in the number of new projects. As discussed previously, in the second and third quarters we have initiated
cost saving measures and other actions with the goal of improving gross profit margins while remaining positioned for a potential
rebound and growth in future periods.
Selling, General
and Administrative Expense –
Overall our SG&A expense increased by $0.2 million and decreased by $0.7 million
for the three and nine months ended September 24, 2016, respectively, as compared to last year’s periods. While we have made
a significant investment in strategic business development resources this year, totaling approximately $0.3 million and $0.7 million
for the three and nine months ended September 24, 2016, respectively, we have more than offset this investment by reducing our
IT, facility, contract services and depreciation and amortization costs, and we continue to look for ways to streamline our processes
and delay expenditures while we continue to invest in our business development activities.
Other Income (Expense),
net
– Other income decreased by $0.6 million for the nine months ended September 24, 2016, as compared to the nine
months ended September 26, 2015 primarily because the prior year period benefitted from the collection and recognition of a $0.6
million gain on a notes receivable that had been fully reserved for.
Interest Expense,
net –
Our interest expense was less than $0.1 million for the three and nine months ended September 24, 2016, and
for the three and nine months ended September 26, 2015. Our interest expense consists primarily of interest on our capital leases,
amortization of the cost of entering into the Loan Agreement and commitment fees and other fees associated with the Loan Agreement.
We currently have no loans outstanding under our Loan Agreement.
Tax Expense –
The Company recorded income tax benefits of $0.2 million and $1.1 million for the three and nine months ended September 24, 2016,
respectively, compared to income tax expense of $0.1 million and $0.2 million for the three and nine months ended September
26, 2015, respectively. The Company’s effective tax rate was (45.8)% and 36.2% for the three and nine months ended September
24, 2016, respectively, as compared to 17.3% and 10.2% for the three and nine months ended September 26, 2015, respectively. The
effective tax rate for the three and nine months ended September 24, 2016 differed from the federal statutory rate of 35% primarily
due a change in the operating results from net income to net loss, non-deductible items, foreign withholding tax expense, the true-up
of prior year income tax accruals to our filed returns and a change in our blended income state tax rate.
Net Income –
Net income increased $0.2 million for the three months ended September 24, 2016, as compared to the three months ended September
26, 2015 primarily as a result of lower operating costs and SG&A expenses resulting from our cost saving measures partially
offset by lower revenues and income tax benefits. The Company’s net loss increased $3.8 million for the nine months ended
September 24, 2016, as compared to the nine months ended September 26, 2015 as a result of lower revenues and gross profit,
partially offset by lower SG&A expenses.
Table of Contents
ENGLOBAL CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS
Liquidity and
Capital Resources Overview
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 as our Loan Agreement with Regions Bank does not presently provide us with
any meaningful availability. We had cash of approximately $16.1 million at September 24, 2016, and $7.8 million as of December
26, 2015. Our working capital as of September 24, 2016 was $22.2 million as compared to $25.6 million at December 26, 2015. We
believe our current cash on hand and 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. Actions outside of our control may hinder or preclude
the collection of these receivables.
Cash Flows from Operating
Activities
Operating activities generated
$9.8 million in cash for the nine months ended September 24, 2016, as compared to $1.0 million for the nine months ended September
26, 2015. The primary drivers of our increase in cash provided by operations for the nine months ended September 24, 2016 were
increases in collections of trade receivables, cost in excess of billings and prepaid expenses and other current assets offset
by a net loss of $1.9 million and decreases in billings in excess of costs.
Cash Flows from Investing
Activities
Investing activities used
cash of $0.1 million for the nine months ended September 24, 2016, as compared to generating cash of $5.2 million for the nine
months ended September 26, 2015. Collections from notes receivable generated $6.1 million in proceeds in the nine months ended
September 26, 2015. Expenditures for property and equipment were $0.1 million for the nine months ended September 24, 2016, as
compared to $0.9 million for the nine months ended September 26, 2015. Expenditures for property and equipment for full year 2016
are budgeted to be approximately $0.5 million. Our Loan Agreement limits our annual capital expenditures to $3.5 million.
Cash Flows from Financing
Activities
Financing activities used
cash totaling approximately $1.4 million for the nine months ended September 24, 2016, as compared to $0.5 million for the nine
months ended September 26, 2015. The primary uses of cash during the nine months ended September 24, 2016 were $1.1 million for
the repurchase of common stock pursuant to the Company’s stock repurchase program and $0.2 million for payment of obligations
under capital leases during the nine months ended September 24, 2016 as compared to $0.5 million for payment of obligations under
capital leases during the nine months ended September 26, 2015.
Table of Contents
ENGLOBAL CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS
Line of Credit Facility
On September 16, 2014,
we entered into a three year Loan and Security Agreement (“Loan Agreement”) with Regions Bank (“Lender”)
pursuant to which the Lender agreed to extend credit to us in the form of revolving loans of up to the lesser of $10.0 million
(the “Commitment”) or the Borrowing Base (as defined in the Loan Agreement). The Loan Agreement includes a sub-facility
for standby and / or trade letters of credit up to an amount not to exceed $2.5 million. There were no loans outstanding under
the Loan Agreement as of September 24, 2016 or December 26, 2015. On June 16, 2016, but effective May 29, 2016, we entered into
the Second Amendment to the Loan Agreement (“Second Amendment”) with the Lender pursuant to which the Company is not
required to comply with the fixed charge coverage ratio financial covenant from the fiscal month ending April 30, 2016 through
the fiscal month ending December 31, 2016, provided that the Company is not permitted to have any obligations or borrowings related
to working capital outstanding and the Company is required to retain a cash balance of at least $5.0 million in collection accounts
with the Lender. In effect, this prohibits the Company from borrowing any material amount under the Loan Agreement until after
the fiscal month ended December 31, 2016 and the Company is able to comply with the fixed charge coverage ratio.
Borrowing Base:
The Borrowing Base is an amount equal to the sum of (a) 85% of the total amount of Eligible Approved Cost Plus Contract Amounts,
plus (b) the lesser of (i) 85% of the total amount of Eligible Approved Fixed Price Contract Accounts or (ii) $2,500,000, plus
(c) the lesser of (i) 85% of the total amount of Eligible Approved Government Contract Accounts or (ii) $1,000,000, plus (d) the
lesser of (i) 75% of the total amount of Eligible Unbilled Accounts or (ii) total revenues from all Accounts over the preceding
30-day period, provided that to the extent that any Eligible Unbilled Accounts consist of Accounts that would be Eligible Approved
Government Contracts and be included in provision (c) above if billed there shall be a limitation in eligibility thereof under
this provision (d) of $800,000, plus (e) 75% of the total amount of Eligible Costs in Excess of Billings, and minus (f) such amounts
as may be required by Lender to be reserved at any time and from time to time.
Interest:
Any
loans will bear interest at a rate per annum equal to the LIBOR Index Rate plus 2.25%. If the loan is converted to a Base Rate
Loan, then such loan will bear interest at a rate per annum equal to the Base Rate (defined as a rate per annum equal to the greatest
of (a) the Federal Funds Rate in effect on such day plus 0.50%, (b) the Prime Rate in effect on such day, or (c) a per annum rate
equal to LIBOR determined with respect to an interest period of one month plus 1.00%) plus 1.25%.
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 14, 2017, unless otherwise
terminated pursuant to the terms of the Loan Agreement.
Table of Contents
ENGLOBAL CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS
Material Covenants:
The Loan Agreement requires the Company to comply with various financial, affirmative and negative covenants affecting its businesses
and operations, including:
|
●
|
The Company will not be a party to mergers, acquisitions, consolidations, reorganizations or similar transactions.
|
|
|
|
|
●
|
The Company will not sell, lease, transfer or otherwise dispose of any of its properties or assets (subject to certain exceptions set forth in the Loan Agreement).
|
|
|
|
|
●
|
The Company will not declare, pay or make any dividend or distribution on any shares of common or preferred stock or make any cash payment to repurchase or otherwise retire any common or preferred stock, provided that the Company may repurchase up to $2 million of its common stock pursuant to its announced stock repurchase plan, subject to certain conditions.
|
|
|
|
|
●
|
The fixed charge coverage ratio must not be less than 1.10 to 1.00.
|
|
|
|
|
●
|
The Company will not permit capital expenditures during any fiscal year to exceed $3.5 million.
|
The Company was in compliance
with all of the material covenants of the Loan Agreement as of September 24, 2016 other than the fixed charge coverage ratio, for
which compliance is not required from the fiscal month ending April 30, 2016 through the fiscal month ending December 31, 2016,
as described above.
Stock Repurchase
Program
On April 21, 2015, the Company announced that its Board of Directors had authorized the repurchase of up to $2.0
million of the Company’s common stock from time to time through open market or privately negotiated transactions, based on
prevailing market conditions. The Company is not obligated to repurchase any dollar amount or specific number of shares of common
stock under the repurchase program, which may be suspended or discontinued at any time. As of September 24, 2016, the Company had
purchased 950,911 shares for an aggregate amount of $1.2 million under the repurchase program.
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ENGLOBAL CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS
Critical Accounting
Policies
A summary of our critical
accounting policies are described under the caption “Critical Accounting Policies” in Management’s Discussion
and Analysis of Financial Condition and Results of Operations in our 2015 Annual Report on Form 10-K. Our critical accounting policies
are further disclosed in Note 2 to the consolidated financial statements included in our 2015 Annual Report on Form 10-K.
Changes in Accounting
In April 2015, the Financial
Standards Accounting Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-03,
Interest
- Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.
This amendment requires
debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying
amount of that debt liability, consistent with the treatment of debt discounts. This pronouncement is effective for interim and
annual financial statements issued for fiscal years beginning after December 15, 2015. We adopted this pronouncement in the first
quarter of fiscal 2016 and because the Company did not have any debt outstanding at fiscal year-end 2015 or any interim reporting
period to date in 2016, this pronouncement did not have an impact on the Company’s financial statements or related disclosures.
In August 2015, the FASB
issued ASU No. 2015-15,
Interest-Imputation of Interest (Topic 835-30): Presentation and Subsequent Measurement of Debt Issuance
Costs Associated with Line-of-Credit Arrangements.
This amendment allows for the deferral and presentation of debt issuance
costs as an asset to be ratably amortized over the term of the line-of-credit arrangement, regardless of whether there are any
outstanding borrowings on the line-of-credit arrangement. The Company has historically accounted for its debt issuance costs related
to revolving credit agreements in accordance with this amendment and therefore this pronouncement did not have an impact on the
Company’s financial statements or related disclosures.
New Accounting Pronouncements
Not Yet Adopted
In May 2014, the FASB issued
ASU No. 2014-09,
Revenue From Contracts with Customers (Topic 606),
that will supersede most of the existing revenue recognition
requirements in U.S. GAAP and will require entities to recognize revenue at an amount that reflects the consideration to which
we expect to be entitled in exchange for transferring goods or services to a customer. This new standard also requires significantly
expanded disclosures regarding the qualitative and quantitative information of an entity's nature, amount, timing, and uncertainty
of revenue and cash flows arising from contracts with customers. In May 2016, the FASB issued ASU No. 2016-12 to clarify certain
narrow aspects of Topic 606 such as assessing the collectability criterion, presentation of sales taxes and other similar taxes
collected from customers, non-cash consideration, contract modifications at transition, completed contracts at transition, and
other technical corrections. This new accounting standard, as updated, is effective for interim and annual reporting periods beginning
after December 15, 2017. We are currently evaluating the impact this pronouncement will have on our financial statements and related
disclosures.
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ENGLOBAL CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS
In February 2016, the FASB
issued ASU No. 2016-02,
Leases (Topic 842)
, that will amend the accounting standards for leases. This new standard retains
a distinction between finance leases and operating leases but the primary change is the recognition of lease assets and lease liabilities
by lessees for those leases classified as operating leases on the lessee’s balance sheet and certain aspects of lease accounting
have been simplified. This new standard requires additional qualitative and quantitative disclosures along with specific quantitative
disclosures required by lessees and lessors to meet the objective of enabling users of financial statements to assess the amount,
timing, and uncertainty of cash flows arising from leases. This pronouncement is effective for interim and annual reporting periods
beginning after December 15, 2018, with early application permitted. We are currently evaluating the impact this pronouncement
will have on our financial statements and related disclosures.
In March 2016, the FASB
issued ASU No. 2016-09,
Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
,
to changes several aspects of accounting for share-based payment transactions, including a requirement to recognize all excess
tax benefits and tax deficiencies as income tax expense or benefit in the income statement, classification of awards as either
equity or liabilities, and classification on the statement of cash flows. This pronouncement is effective for interim and annual
reporting periods beginning after December 31, 2016, with early adoption permitted. Varying transition methods (modified retrospective,
retrospective or prospective) are applied to different provisions of the standard. We are currently evaluating the impact this
pronouncement will have on our financial statements and related disclosures.
In August 2016, the FASB
issued ASU No. 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.
This
amendment addresses how certain specified cash receipts and cash payments are presented in the statement of cash flows. This guidance
becomes effective for interim and annual reporting periods beginning after December 15, 2017. We are currently evaluating the impact
the pronouncement will have on our consolidated financial statements and related disclosures.
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