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 Six Months Ended
|
|
|
|
July
1, 2017
|
|
|
June
25, 2016
|
|
|
July
1, 2017
|
|
|
June
25, 2016
|
|
Operating
revenues
|
|
$
|
15,966
|
|
|
$
|
13,842
|
|
|
$
|
28,440
|
|
|
$
|
28,654
|
|
Operating
costs
|
|
|
13,453
|
|
|
|
11,989
|
|
|
|
24,196
|
|
|
|
25,128
|
|
Gross
profit
|
|
|
2,513
|
|
|
|
1,853
|
|
|
|
4,244
|
|
|
|
3,526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
3,057
|
|
|
|
3,313
|
|
|
|
6,462
|
|
|
|
6,703
|
|
Operating
loss
|
|
|
(544
|
)
|
|
|
(1,460
|
)
|
|
|
(2,218
|
)
|
|
|
(3,177
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income , net
|
|
|
52
|
|
|
|
1
|
|
|
|
55
|
|
|
|
7
|
|
Interest
expense, net
|
|
|
(11
|
)
|
|
|
(49
|
)
|
|
|
(76
|
)
|
|
|
(85
|
)
|
Loss
from operations before income taxes
|
|
|
(503
|
)
|
|
|
(1,508
|
)
|
|
|
(2,239
|
)
|
|
|
(3,255
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
(benefit) for federal and state income taxes
|
|
|
392
|
|
|
|
95
|
|
|
|
(467
|
)
|
|
|
(903
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(895
|
)
|
|
$
|
(1,603
|
)
|
|
$
|
(1,772
|
)
|
|
$
|
(2,352
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per common share:
|
|
$
|
(0.03
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.08
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted weighted average shares used in computing earnings (loss) per share:
|
|
|
27,135
|
|
|
|
27,831
|
|
|
|
27,162
|
|
|
|
27,884
|
|
See
accompanying notes to unaudited interim condensed consolidated financial statements.
ENGlobal
Corporation
Condensed
Consolidated Balance Sheets
(Unaudited)
(amounts
in thousands, except share amounts)
|
|
July
1, 2017
|
|
|
December
31, 2016
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash,
cash equivalents and restricted cash
|
|
$
|
11,172
|
|
|
$
|
15,687
|
|
Trade receivables,
net of allowances of $302 and $422
|
|
|
11,464
|
|
|
|
10,455
|
|
Prepaid expenses
and other current assets
|
|
|
653
|
|
|
|
1,240
|
|
Costs
and estimated earnings in excess of billings on uncompleted contracts
|
|
|
4,418
|
|
|
|
2,434
|
|
Total
Current Assets
|
|
|
27,707
|
|
|
|
29,816
|
|
Property and equipment,
net
|
|
|
1,231
|
|
|
|
1,194
|
|
Goodwill
|
|
|
2,806
|
|
|
|
2,806
|
|
Deferred tax asset
|
|
|
10,689
|
|
|
|
10,208
|
|
Other
assets
|
|
|
262
|
|
|
|
412
|
|
Total
Assets
|
|
$
|
42,695
|
|
|
$
|
44,436
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,166
|
|
|
$
|
2,876
|
|
Accrued compensation
and benefits
|
|
|
1,926
|
|
|
|
2,099
|
|
Billings in excess
of costs and estimated earnings on uncompleted contracts
|
|
|
2,520
|
|
|
|
1,371
|
|
Other
current liabilities
|
|
|
899
|
|
|
|
1,270
|
|
Total Current Liabilities
|
|
|
7,511
|
|
|
|
7,616
|
|
Long
Term Leases
|
|
|
63
|
|
|
|
14
|
|
Total Liabilities
|
|
|
7,574
|
|
|
|
7,630
|
|
Commitments and Contingencies
(Note 8)
|
|
|
|
|
|
|
|
|
Stockholders’
Equity:
|
|
|
|
|
|
|
|
|
Common
stock - $0.001 par value;
75,000,000 shares authorized; 27,210,074 and 27,190,082 shares issued and outstanding at July
1, 2017 and December 31, 2016, respectively
|
|
|
27
|
|
|
|
27
|
|
Additional paid-in
capital
|
|
|
36,409
|
|
|
|
36,322
|
|
Accumulated
(deficit) earnings
|
|
|
(1,315
|
)
|
|
|
457
|
|
Total
Stockholders’ Equity
|
|
|
35,121
|
|
|
|
36,806
|
|
Total
Liabilities and Stockholders’ Equity
|
|
$
|
42,695
|
|
|
$
|
44,436
|
|
See
accompanying notes to unaudited interim condensed consolidated financial statements.
ENGlobal
Corporation
Condensed
Consolidated Statements of Cash Flows
(Unaudited)
(amounts
in thousands)
|
|
For
the Six Months Ended
|
|
|
|
July
1, 2017
|
|
|
June
25, 2016
|
|
Cash Flows from
Operating Activities:
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(1,772
|
)
|
|
$
|
(2,352
|
)
|
Adjustments to reconcile
net loss to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and
amortization
|
|
|
543
|
|
|
|
619
|
|
Share-based compensation
expense
|
|
|
292
|
|
|
|
242
|
|
Loss on disposal
of fixed assets
|
|
|
—
|
|
|
|
1
|
|
Deferred tax asset
|
|
|
(481
|
)
|
|
|
(1,063
|
)
|
Changes in current
assets and liabilities:
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
|
|
(1,010
|
)
|
|
|
9,823
|
|
Costs and estimated
earnings in excess of billings on uncompleted contracts
|
|
|
(1,984
|
)
|
|
|
414
|
|
Other current assets
|
|
|
534
|
|
|
|
662
|
|
Accounts payable
|
|
|
(823
|
)
|
|
|
444
|
|
Accrued compensation
and benefits
|
|
|
(173
|
)
|
|
|
(635
|
)
|
Billings in excess
of costs and estimated earnings on uncompleted contracts
|
|
|
1,149
|
|
|
|
(162
|
)
|
Income taxes payable
|
|
|
149
|
|
|
|
(257
|
)
|
Other
current liabilities, net
|
|
|
(264
|
)
|
|
|
(72
|
)
|
Net
cash provided by (used in) operating activities
|
|
$
|
(3,840
|
)
|
|
$
|
7,664
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing
Activities:
|
|
|
|
|
|
|
|
|
Proceeds from notes
receivable
|
|
|
40
|
|
|
|
29
|
|
Property
and equipment acquired
|
|
|
(520
|
)
|
|
|
(84
|
)
|
Net
cash used in investing activities
|
|
$
|
(480
|
)
|
|
$
|
(55
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing
Activities:
|
|
|
|
|
|
|
|
|
Purchase of treasury
stock
|
|
|
(91
|
)
|
|
|
(479
|
)
|
Debt issuance cost
|
|
|
—
|
|
|
|
(20
|
)
|
Payments
on capitalized leases
|
|
|
(104
|
)
|
|
|
(177
|
)
|
Net
cash used in financing activities
|
|
$
|
(195
|
)
|
|
$
|
(676
|
)
|
Net change in cash,
cash equivalents and restricted cash
|
|
|
(4,515
|
)
|
|
|
6,933
|
|
Cash,
cash equivalents and restricted cash, at beginning of period
|
|
|
15,687
|
|
|
|
7,806
|
|
Cash,
cash equivalents and restricted cash, at end of period
|
|
$
|
11,172
|
|
|
$
|
14,739
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure
of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid during
the period for interest
|
|
$
|
80
|
|
|
$
|
87
|
|
Cash paid (received)
during the period for income taxes (net of refunds)
|
|
$
|
(146
|
)
|
|
$
|
418
|
|
See
accompanying notes to unaudited interim condensed consolidated financial statements.
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. These condensed financial statements should be read in conjunction with the audited financial statements for the year
ended December 31, 2016, included in the Company’s 2016 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 six month periods ended July 1, 2017 and June 25,
2016, and in the case of the condensed balance sheet as of December 31, 2016, 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.
We
had no items of other comprehensive income in any period presented; therefore, no other components of comprehensive income or
comprehensive income are presented.
Each
of our quarters is comprised of 13 weeks.
Changes
in Accounting
In
March 2016, the Financial Statements Accounting Board (“FASB”) issued Accounting Standards Update (“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 adopted this pronouncement in the first
quarter of 2017 by electing to account for forfeitures in compensation costs as they occur and reflecting this change in accounting
policy on a modified retrospective basis through a non-material, cumulative-effect adjustment reducing accumulated earnings as
of the beginning of 2017. We recognized a benefit in stock compensation related to forfeitures of $.01 million in the six months
ended July 1, 2017.
In
November 2016, the FASB Issued Update 2016-18,
Statement of Cash flows (Topic 230): Restricted Cash (a consensus of the FASB
Emerging Issues Task Force)
. This update addresses the presentation of restricted cash or restricted cash equivalents in the
statement of cash flows. This pronouncement is effective for interim and annual reporting periods beginning after December 15,
2017, with early application permitted. We have adopted this pronouncement in the first quarter of 2017 and have reported restricted
cash as a component of ending cash, cash equivalents and restricted cash on the Statements of Cash Flows.
ENGLOBAL
CORPORATION AND SUBSIDIARIES
NOTES
TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 have begun the process of evaluating the principles
in the new standard following the five step approach and we are assessing its potential impact on our financial position, results
of operations, cash flows and related disclosures. Through our initial evaluation, we believe the impact to our financial statements
will be immaterial and we do not believe the implementation will have a material impact on our business practices.
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 provisions of this pronouncement and are assessing its potential impact on our financial position, results
of operations, cash flows and related disclosures. However we are currently unable to reasonably estimate 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 provisions of this pronouncement and are assessing its potential impact on our financial position,
results of operations, cash flows and related disclosures.
In
January 2017, the FASB issued ASU No. 2017-04,
Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill
Impairment
. This amendment removes the second step of the two-step goodwill impairment test. When adopted, an entity will
apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit’s carrying
amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. This pronouncement is
effective for the Company’s annual or any interim goodwill impairment tests in fiscal years beginning after December 15,
2019, with early adoption permitted. We are currently evaluating the provisions of this pronouncement and are assessing its potential
impact on our financial position, results of operations, cash flows and related disclosures.
NOTE
2 – CASH, CASH EQUIVALENTS AND RESTRICTED CASH
The
following table provides a reconciliation of Cash, cash equivalents and restricted cash reported within the consolidated financial
statements:
|
|
July
1, 2017
|
|
|
December
31, 2016
|
|
|
|
(dollars
in thousands)
|
|
Cash and cash equivalents
|
|
$
|
10,512
|
|
|
$
|
15,687
|
|
Restricted cash
|
|
|
660
|
|
|
|
—
|
|
Total cash, cash
equivalents and restricted cash
|
|
$
|
11,172
|
|
|
$
|
15,687
|
|
Amounts
included in restricted cash represent those required to be set aside to collateralize a letter of credit required by a customer.
This letter of credit will expire in December 2017.
ENGLOBAL
CORPORATION AND SUBSIDIARIES
NOTES
TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
3 - CONTRACTS
Costs,
estimated earnings and billings on uncompleted contracts consisted of the following at July 1, 2017 and December 31, 2016:
|
|
July
1, 2017
|
|
|
December
31, 2016
|
|
|
|
(dollars
in thousands)
|
|
Costs incurred on uncompleted
contracts
|
|
$
|
60,455
|
|
|
$
|
58,933
|
|
Estimated earnings
on uncompleted contracts
|
|
|
24,824
|
|
|
|
24,694
|
|
Earned revenues
|
|
|
85,279
|
|
|
|
83,627
|
|
Less: billings
to date
|
|
|
83,381
|
|
|
|
82,564
|
|
Net costs and
estimated earnings in excess of billings on uncompleted contracts
|
|
$
|
1,898
|
|
|
$
|
1,063
|
|
|
|
|
|
|
|
|
|
|
Costs and estimated earnings in excess
of billings on uncompleted contracts
|
|
$
|
4,418
|
|
|
$
|
2,434
|
|
Billings in excess
of costs and estimated earnings on uncompleted contracts
|
|
|
(2,520
|
)
|
|
|
(1,371
|
)
|
Net costs and
estimated earnings in excess of billings on uncompleted contracts
|
|
$
|
1,898
|
|
|
$
|
1,063
|
|
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 $0.5 million in contingency amounts as of July 1, 2017 compared to $0.9 million as of December 31, 2016. 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 $0.5 million in retainage as of July 1, 2017 compared to $1.4 million as of December 31, 2016.
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 have deferred revenue recognition until we receive either
a written authorization or a payment. We currently have $0.8 million in deferred revenue recognition as of July 1, 2017 compared
to $0.1 million as of December 31, 2016. 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.
ENGLOBAL
CORPORATION AND SUBSIDIARIES
NOTES
TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
4 – LINE OF CREDIT AND LETTER OF CREDIT FACILITIES
Line
of Credit Facility
On
March 31, 2017, the Company terminated its credit facility with Regions Bank. There were no loans outstanding under that facility
on that date. See “Note 6 - Credit Facilities” to our financial statements included in our 2016 Annual Report on Form
10-K for a description of the material terms of the Regions Bank credit facility. The facility was terminated because the Company
believes that its cash on hand, internally generated funds and other working capital are sufficient to fund its current operations
and near term growth. In addition, the elimination of the facility, which was scheduled to expire in September 2017, will significantly
reduce costs to the Company.
NOTE
5 – 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 and the fabrication operation.
The Automation segment provides services related to the design, integration and implementation of advanced automation, information
technology, process distributed control systems, analyzer systems, and electrical projects primarily to the upstream and downstream
sectors throughout the United States.
Revenues,
operating income, and identifiable assets for each segment are set forth in the following table. The amount identified as Corporate
includes those activities that are not allocated to the operating segments and includes 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 July 1, 2017 and June 25, 2016 is as follows (dollars in thousands):
For
the three months ended July 1, 2017:
|
|
EPCM
|
|
|
Automation
|
|
|
Corporate
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
10,095
|
|
|
$
|
5,871
|
|
|
$
|
—
|
|
|
$
|
15,966
|
|
Gross profit
|
|
|
1,777
|
|
|
|
736
|
|
|
|
—
|
|
|
|
2,513
|
|
SG&A
|
|
|
877
|
|
|
|
532
|
|
|
|
1,648
|
|
|
|
3,057
|
|
Operating income (loss)
|
|
|
900
|
|
|
|
204
|
|
|
|
(1,648
|
)
|
|
|
(544
|
)
|
Other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11
|
)
|
Tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
392
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(895
|
)
|
For
the three months ended June 25, 2016:
|
|
EPCM
|
|
|
Automation
|
|
|
Corporate
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
8,257
|
|
|
$
|
5,585
|
|
|
$
|
—
|
|
|
$
|
13,842
|
|
Gross profit
|
|
|
789
|
|
|
|
1,064
|
|
|
|
—
|
|
|
|
1,853
|
|
SG&A
|
|
|
754
|
|
|
|
775
|
|
|
|
1,784
|
|
|
|
3,313
|
|
Operating income (loss)
|
|
|
35
|
|
|
|
289
|
|
|
|
(1,784
|
)
|
|
|
(1,460
|
)
|
Other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(49
|
)
|
Tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(1,603
|
)
|
ENGLOBAL
CORPORATION AND SUBSIDIARIES
NOTES
TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Segment
information for the six months ended July 1, 2017 and June 25, 2016 is as follows (dollars in thousands):
For
the six months ended July 1, 2017:
|
|
EPCM
|
|
|
Automation
|
|
|
Corporate
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
18,260
|
|
|
$
|
10,180
|
|
|
$
|
—
|
|
|
$
|
28,440
|
|
Gross profit
|
|
|
2,719
|
|
|
|
1,525
|
|
|
|
—
|
|
|
|
4,244
|
|
SG&A
|
|
|
1,795
|
|
|
|
1,138
|
|
|
|
3,529
|
|
|
|
6,462
|
|
Operating income (loss)
|
|
|
924
|
|
|
|
387
|
|
|
|
(3,529
|
)
|
|
|
(2,218
|
)
|
Other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(76
|
)
|
Tax benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(467
|
)
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(1,772
|
)
|
For
the six months ended June 25, 2016:
|
|
EPCM
|
|
|
Automation
|
|
|
Corporate
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
16,784
|
|
|
$
|
11,870
|
|
|
$
|
—
|
|
|
$
|
28,654
|
|
Gross profit
|
|
|
1,423
|
|
|
|
2,103
|
|
|
|
—
|
|
|
|
3,526
|
|
SG&A
|
|
|
1,523
|
|
|
|
1,518
|
|
|
|
3,662
|
|
|
|
6,703
|
|
Operating income (loss)
|
|
|
(100
|
)
|
|
|
585
|
|
|
|
(3,662
|
)
|
|
|
(3,177
|
)
|
Other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(85
|
)
|
Tax benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(903
|
)
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(2,352
|
)
|
Total
Assets by Segment
|
|
As
of
July
1, 2017
|
|
|
As
of
December
31, 2016
|
|
|
|
(dollars
in thousands)
|
|
EPCM
|
|
$
|
8,183
|
|
|
$
|
6,530
|
|
Automation
|
|
|
11,876
|
|
|
|
10,296
|
|
Corporate
|
|
|
22,636
|
|
|
|
27,610
|
|
Consolidated
|
|
$
|
42,695
|
|
|
$
|
44,436
|
|
NOTE
6 – FEDERAL AND STATE INCOME TAXES
The
Company accounts for income taxes in accordance with FASB Accounting Standards Codification 740, “Income Taxes” (“ASC
740”). Under ASC 740, we estimate an annual effective tax rate based on year-to-date operating results and our projection
of operating results for the remainder of the year. We apply this annual effective tax rate to the year-to-date operating results.
If our actual results differ from the estimated annual projection, our estimated annual effective tax rate can change affecting
the tax expense for successive interim results as well as the estimated annual tax expense results. Certain states are not included
in the calculation of the estimated annual effective tax rate because the underlying basis for the tax is related to revenues
and not taxable income. Amounts for Texas margin taxes are reported as income tax expense.
The
Company applies a more likely than not recognition threshold for all tax uncertainties. The FASB guidance for uncertain tax positions
only allows the recognition of those tax benefits, based on their technical merits that have a greater than 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 2013
and Texas margins tax returns prior to 2013 are closed. Generally, the applicable statues of limitations are three to four years
from their filings.
The
Company recorded a $392 thousand income tax expense versus a $95 thousand income tax expense for the three months ended July 1,
2017, as compared to the three months ended June 25, 2016. The tax expense was principally due to stock options that expired during
the quarter which represented $391 thousand in tax expense and the change in the annual effective tax rate as calculated under
ASC 740-270.
ENGLOBAL
CORPORATION AND SUBSIDIARIES
NOTES
TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The
effective income tax benefit rate for the six months ended July 1, 2017 was 20.9%, as compared to 27.7% for the six months ended
June 25, 2016. The effective tax benefit rate differed from the federal statutory tax benefit rate of 35% primarily due to non-deductible
items and the expiration of non-qualified stock options, which represents tax expense of approximately 22% partially offset by
adjustments of state tax NOLs and foreign income taxes, which represents tax benefits of approximately 11%.
NOTE
7 – STOCK REPURCHASE PROGRAM
On
April 21, 2015, the Company announced that its Board of Directors authorized the repurchase of up to $2 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 July 1, 2017, the Company had purchased and retired 1,191,050
shares for $1.5 million under this program of which 63,156 shares were purchased in the three months ended July 1, 2017 for $91
thousand. The stock repurchase program was suspended on May 16, 2017.
NOTE
8 – 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 effect
on our financial position, results of operations or liquidity.
We
carry 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. We also provide health insurance to our employees (including
vision and dental), and are partially self-funded for these claims. Provisions for expected future payments are accrued based
on our experience, and specific stop loss levels provide protection for the Company. We believe we have adequate reserves for
the self-funded portion of our insurance policies. We are 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.
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 31, 2016, and those described from time to time in our future reports filed with the Securities and Exchange
Commission.
The
following discussion is qualified in its entirety by, and should be read in conjunction with, the Company’s condensed consolidated
financial statements, including the notes thereto, included in this Quarterly Report on Form 10-Q and the Company’s Annual
Report on Form 10-K for the year ended December 31, 2016.
Results
of Operations
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”),
which includes fabrication, and Automation engineering and integrated products (“Automation”).
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 have been 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 vary 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, 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.
ENGLOBAL
CORPORATION AND SUBSIDIARIES
MANAGEMENT’S
DISCUSSION AND ANALYSIS
Comparison
of the three and six months ended July 1, 2017 versus the three and six months ended June 25, 2016
The
following table, for the three months ended July 1, 2017 versus the three months ended June 25, 2016, provides relevant financial
data that is derived from our consolidated statements of operations (amounts in thousands except per share data).
Operations
Data
|
|
EPCM
|
|
|
Automation
|
|
|
Corporate
|
|
|
Consolidated
|
|
|
|
|
Three months ended
July 1, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
10,095
|
|
|
$
|
5,871
|
|
|
$
|
—
|
|
|
$
|
15,966
|
|
|
|
100.0
|
%
|
Gross profit
|
|
|
1,777
|
|
|
|
736
|
|
|
|
—
|
|
|
|
2,513
|
|
|
|
15.7
|
%
|
SG&A
|
|
|
877
|
|
|
|
532
|
|
|
|
1,648
|
|
|
|
3,057
|
|
|
|
19.1
|
%
|
Operating income
(loss)
|
|
|
900
|
|
|
|
204
|
|
|
|
(1,648
|
)
|
|
|
(544
|
)
|
|
|
(3.4
|
)%
|
Other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52
|
|
|
|
|
|
Interest expense,
net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11
|
)
|
|
|
|
|
Tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
392
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(895
|
)
|
|
|
(5.6
|
)%
|
Diluted loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.03
|
)
|
|
|
|
|
Three months ended June 25, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
8,257
|
|
|
$
|
5,585
|
|
|
$
|
—
|
|
|
$
|
13,842
|
|
|
|
100.0
|
%
|
Gross profit
|
|
|
789
|
|
|
|
1,064
|
|
|
|
—
|
|
|
|
1,853
|
|
|
|
13.4
|
%
|
SG&A
|
|
|
754
|
|
|
|
775
|
|
|
|
1,784
|
|
|
|
3,313
|
|
|
|
23.9
|
%
|
Operating income
(loss)
|
|
|
35
|
|
|
|
289
|
|
|
|
(1,784
|
)
|
|
|
(1,460
|
)
|
|
|
(10.5
|
)%
|
Other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
Interest expense,
net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(49
|
)
|
|
|
|
|
Tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(1,603
|
)
|
|
|
(11.6
|
)%
|
Diluted loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.06
|
)
|
|
|
|
|
Increase
(Decrease) in Operating Results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
1,838
|
|
|
$
|
286
|
|
|
$
|
—
|
|
|
$
|
2,124
|
|
|
|
15.3
|
%
|
Gross profit (loss)
|
|
|
988
|
|
|
|
(328
|
)
|
|
|
—
|
|
|
|
660
|
|
|
|
35.6
|
%
|
SG&A
|
|
|
123
|
|
|
|
(243
|
)
|
|
|
(136
|
)
|
|
|
(256
|
)
|
|
|
(7.7
|
)%
|
Operating income
(loss)
|
|
|
865
|
|
|
|
(85
|
)
|
|
|
136
|
|
|
|
916
|
|
|
|
62.7
|
%
|
Other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51
|
|
|
|
|
|
Interest expense,
net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38
|
|
|
|
|
|
Tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
297
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(708
|
)
|
|
|
(44.
1
|
)%
|
Diluted loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.03
|
)
|
|
|
|
|
ENGLOBAL
CORPORATION AND SUBSIDIARIES
MANAGEMENT’S
DISCUSSION AND ANALYSIS
The
following table, for the six months ended July 1, 2017 versus the six months ended June 25, 2016, provides relevant financial
data that is derived from our consolidated statements of operations (amounts in thousands except per share data).
Operations
Data
|
|
EPCM
|
|
|
Automation
|
|
|
Corporate
|
|
|
Consolidated
|
|
|
|
|
Six months ended July 1, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
18,260
|
|
|
$
|
10,180
|
|
|
$
|
—
|
|
|
$
|
28,440
|
|
|
|
100.0
|
%
|
Gross profit
|
|
|
2,719
|
|
|
|
1,525
|
|
|
|
—
|
|
|
|
4,244
|
|
|
|
14.9
|
%
|
SG&A
|
|
|
1,795
|
|
|
|
1,138
|
|
|
|
3,529
|
|
|
|
6,462
|
|
|
|
22.7
|
%
|
Operating income
(loss)
|
|
|
924
|
|
|
|
387
|
|
|
|
(3,529
|
)
|
|
|
(2,218
|
)
|
|
|
(6.2
|
)%
|
Other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55
|
|
|
|
|
|
Interest expense,
net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(76
|
)
|
|
|
|
|
Tax benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(467
|
)
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(1,772
|
)
|
|
|
(2.7
|
)%
|
Diluted loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.07
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 25, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
16,784
|
|
|
$
|
11,870
|
|
|
$
|
—
|
|
|
$
|
28,654
|
|
|
|
100.0
|
%
|
Gross profit
|
|
|
1,423
|
|
|
|
2,103
|
|
|
|
—
|
|
|
|
3,526
|
|
|
|
12.3
|
%
|
SG&A
|
|
|
1,523
|
|
|
|
1,518
|
|
|
|
3,662
|
|
|
|
6,703
|
|
|
|
23.4
|
%
|
Operating income
(loss)
|
|
|
(100
|
)
|
|
|
585
|
|
|
|
(3,662
|
)
|
|
|
(3,177
|
)
|
|
|
(11.1
|
)%
|
Other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
Interest expense,
net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(85
|
)
|
|
|
|
|
Tax benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(903
|
)
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(2,352
|
)
|
|
|
(8.2
|
)%
|
Diluted loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.08
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease)
in Operating Results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
1,476
|
|
|
$
|
(1,690
|
)
|
|
$
|
—
|
|
|
$
|
(214
|
)
|
|
|
(0.7
|
)%
|
Gross profit (loss)
|
|
|
1,296
|
|
|
|
(578
|
)
|
|
|
—
|
|
|
|
718
|
|
|
|
20.4
|
%
|
SG&A
|
|
|
272
|
|
|
|
(380
|
)
|
|
|
(133
|
)
|
|
|
(241
|
)
|
|
|
(3.6
|
)%
|
Operating income
(loss)
|
|
|
1,024
|
|
|
|
(198
|
)
|
|
|
133
|
|
|
|
959
|
|
|
|
30.2
|
%
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48
|
|
|
|
|
|
Interest expense,
net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
Tax benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(436
|
)
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(579
|
)
|
|
|
(24.6
|
)%
|
Diluted loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.01
|
)
|
|
|
|
|
Revenue
–
Revenue increased $2.1 million to $16.0 million from $13.9 million, or an increase of 15.3%, for the three months
ended July 1, 2017, as compared to the three months ended June 25, 2016. Revenue from the EPCM segment increased $1.8 million
to $10.1 million from $8.3 million, or an increase of 22.3%, for the three months ended July 1, 2017, as compared to the three
months ended June 25, 2016. This increase was driven largely by increased awards to our government services group. Revenue from
the Automation segment increased $0.3 million to $5.9 million from $5.6 million, or an increase of 5.1%, for the three months
ended July 1, 2017, as compared to the three months ended June 25, 2016. This increase was driven by a mixture of new awards within
our integration group that were offset by the closure of our Mobile, Alabama facility in 2016 and reduced revenues from our CPC
project that is scheduled to be completed in the third quarter of 2017.
Revenue
decreased $0.2 million to $28.4 million from $28.7 million, or a decline of 0.7%, for the six months ended July 1, 2017, as compared
to the six months ended June 25, 2016. Revenue from the EPCM segment increased $1.5 million to $18.3 million from $16.8 million,
or an increase of 8.8%, for the six months ended July 1, 2017, as compared to the six months ended June 25, 2016. This increase
was driven largely by increased awards to our government services group. Revenue from the Automation segment decreased $1.7 million
to $10.2 million from $11.9 million, or a decline of 14.2%, for the six months ended July 1, 2017, as compared to the six months
ended June 25, 2016. This decline is due largely to the closure of our Mobile, Alabama facility in 2016.
ENGLOBAL
CORPORATION AND SUBSIDIARIES
MANAGEMENT’S
DISCUSSION AND ANALYSIS
When
energy commodity prices began falling at the end of 2014, our clients had a large amount of capital projects in some stage of
either planning, execution or completion. Throughout 2015 and 2016, a large majority of these projects were either completed or
cancelled, and new projects have been much slower to develop. Although the Company is performing a certain base load of maintenance
related and smaller capital projects, revenue for both the EPCM and Automation segments continues to be negatively impacted by
the sustained period of low crude oil and natural gas prices and the corresponding significant decline in our clients’ activities.
During
this period of reduced activity, we have taken the opportunity to expand our capabilities and refocus our business on providing
engineered, repeatable and modularized solutions for our clients. These complete package solutions are typically larger in scope
and include procured material and fabrication in addition to the consulting services we have traditionally performed. To that
end, we have opened a fabrication facility to accommodate the expected additional project scope. With this addition, we are now
vertically integrated from engineering and design to fabrication and integration. One result of this process is the development
of a patent pending, modularized approach to well site oil and gas production systems that, in addition to other benefits, is
intended to reduce well completion time and overall costs for certain clients. This methodology can be duplicated for other processes
that our clients perform repeatedly. The addition of our fabrication facility is allowing us to capture additional scope on projects
and self-perform work that we historically have outsourced allowing us to be more competitive in the market place.
Gross
Profit –
Gross profit margin increased to 15.7% from 13.4% for the three months ended July 1, 2017, as compared
to the three months ended June 25, 2016. Gross profit for the EPCM segment increased $1.0 million to $1.8 million from $0.8 million
and its gross profit margin increased to 17.6% from 9.6% for the three months ended July 1, 2017, as compared to the three months
ended June 25, 2016. The increase in gross profit was driven largely by the increased awards to our government services group.
Gross profit for the Automation segment decreased $0.3 million to $0.7 million from $1.0 million and its gross profit margin declined
to 12.5% from 19.1% for the three months ended July 1, 2017, as compared to the three months ended June 25, 2016, largely due
to the decline in the volume of the CPC project that is scheduled to be completed in the third quarter of 2017. Gross profit margin
for both the EPCM segment and the Automation segment were positively impacted by improved utilization of our employees. We intend
to continue monitoring labor utilization for both the EPCM and the Automation segments with the goal of improving gross profit
margins while maintaining our ability to perform our anticipated work load.
Gross
profit margin increased to 14.9% from 12.3% for the six months ended July 1, 2017, as compared to the six months ended June 25,
2016. Gross profit for the EPCM segment increased $1.3 million to $2.7 million from $1.4 million and its gross profit margin increased
to 14.9% from 8.5% for the six months ended July 1, 2017, as compared to the six months ended June 25, 2016. The increase in gross
profit was driven largely by the increased awards to our government services group. Gross profit for the Automation segment decreased
$0.6 million to $1.5 million from $2.1 million and its gross profit margin declined to 15.0% from 17.7% for the six months ended
July 1, 2017, as compared to the six months ended June 25, 2016.
Selling,
General and Administrative –
Overall our SG&A expenses declined by $0.2 million for both the three and six months
ended July 1, 2017, as compared to the three and six months ended June 25, 2016. We have funded the operations of our newly opened
fabrication facility in the amount of $0.2 million for the six months ended July 1, 2017 in addition to recent strategic hires
in the key areas of business development and project management by reducing cost in other support functions.
Interest
Expense, net -
Interest expense was essentially unchanged and was less than $0.1 million for both the three and six months
ended July 1, 2017 and the three and six months ended June 25, 2016. Our interest expense consists of interest on our capital
leases, amortization of the cost of entering into the Loan Agreement with Regions Bank, and commitment and other fees associated
with the Loan Agreement through March 31, 2017.
Tax
Expense –
The Company recorded a $392 thousand income tax expense versus a $95 thousand income tax expense for the
three months ended July 1, 2017, as compared to the three months ended June 25, 2016. The difference between the tax benefit at
the statutory rate and the tax expense was principally due to stock options that expired during the quarter, which represented
$391 thousand in tax expense, and the impact of the change in the expected annual income tax rate as calculated under ASC 740-270.
ENGLOBAL
CORPORATION AND SUBSIDIARIES
MANAGEMENT’S
DISCUSSION AND ANALYSIS
The
effective income tax benefit rate for the six months ended July 1, 2017 was 20.9%, as compared to 27.7% for the six months ended
June 25, 2016. The effective tax benefit rate differed from the federal statutory tax benefit rate of 35% primarily due to non-deductible
items and the expiration of non-qualified stock options, which represent tax expense of approximately 22% partially offset by
adjustments of state tax NOLs and foreign income taxes, which represents tax benefits of approximately 11%.
Net
Loss –
Net loss for the three months ended July 1, 2017 was $0.9 million, or a $0.7 million decrease from a net
loss of $1.6 million for the three months ended June 25, 2016, as a result of higher gross profit combined with reductions in
SG&A partially offset by an increase to tax expense.
Net
loss for the six months ended July 1, 2017 was $1.8 million or a $0.6 million decrease from a net loss of $2.4 million for the
six months ended June 25, 2016, as a result of higher gross profit combined with reductions in SG&A offset by an increase
to tax expense.
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 cash on hand and internally generated funds. We had cash and restricted cash
of approximately $11.2 million at July 1, 2017 and $15.7 million as of December 31, 2016. Our working capital as of July 1, 2017
was $20.2 million versus $22.2 million as of December 31, 2016. We believe our cash on hand, internally generated funds and other
working capital are sufficient to fund our ongoing operations and provide us with the funds to grow.
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 used $3.8 million of cash versus providing $7.7 million of cash for the six months ended July 1, 2017, as compared
to the six months ended June 25, 2016. The primary drivers of our increase in cash used in operations for the six months ended
July 1, 2017 were a net operating loss of $1.8 million, reductions in collections of retainage of $1.0 million, costs in excess
of billings net of billings in excess of costs of $0.8 million and accounts payable of $0.8 million.
Cash
Flows from Investing Activities
Investing
activities used cash of $0.5 million for the six months ended July 1, 2017 primarily due to expenditures for property and equipment
related to our new fabrication facility. Investing activities used cash of $0.1 million for the six months ended June 25, 2016
primarily due to expenditures for property and equipment.
Cash
Flows from Financing Activities
The
use of cash during the six months ended July 1, 2017 and the six months ended June 25, 2016 were for the repurchase of common
stock pursuant to the Company’s stock repurchase program in addition to the payment of obligations under capital leases.
ENGLOBAL
CORPORATION AND SUBSIDIARIES
MANAGEMENT’S
DISCUSSION AND ANALYSIS
Line
of Credit Facility
On
March 31, 2017, the Company terminated its credit facility with Regions Bank. There were no loans outstanding under that facility
on that date. See “Note 6 - Credit Facilities” to our financial statements included in our 2016 Annual Report on Form
10-K for a description of the material terms of the Regions Bank credit facility. The facility was terminated because the Company
believes that its cash on hand, internally generated funds and other working capital are sufficient to fund its current operations
and near term growth. In addition, the elimination of the facility, which was scheduled to expire in September 2017, will significantly
reduce costs to the Company.
Stock
Repurchase Program
On
April 21, 2015, the Company announced that its Board of Directors authorized the repurchase of up to $2 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 July 1, 2017, the Company had purchased and retired 1,191,050
shares for $1.5 million under this program of which 63,156 shares were purchased in the three months ended July 1, 2017 for $91
thousand. The stock repurchase program was suspended on May 16, 2017.
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 2016 Annual Report on Form 10-K. Our critical
accounting policies are further disclosed in Note 2 to the consolidated financial statements included in our 2016 Annual Report
on Form 10-K.
Changes
in Accounting
In
March 2016, the Financial Statements Accounting Board (“FASB”) issued Accounting Standards Update (“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 have adopted this pronouncement in the first
quarter of 2017 by electing to account for forfeitures in compensation costs as they occur and reflecting this change in accounting
policy on a modified retrospective basis through a non-material, cumulative-effect adjustment reducing accumulated earnings as
of the beginning of 2017. We recognized a benefit of $.01 million in the six months ended July 1, 2017.
In
November 2016, the FASB Issued Update 2016-18,
Statement of Cash flows (Topic 230): Restricted Cash (a consensus of the FASB
Emerging Issues Task Force)
. This update addresses the presentation of restricted cash or restricted cash equivalents in the
statement of cash flows. This pronouncement is effective for interim and annual reporting periods beginning after December 15,
2017, with early application permitted. We adopted this pronouncement in the first quarter of 2017 and have reported restricted
cash as a component of ending cash, cash equivalents and restricted cash on the Statements of Cash Flows.
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 have begun the process of evaluating the principles
in the new standard following the five step approach and we are assessing its potential impact on our financial position, results
of operations, cash flows and related disclosures. Through our initial evaluation, we believe the impact to our financial statements
will be immaterial and we do not believe the implementation will have a material impact on our business practices.
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 provisions of this pronouncement and are assessing its potential impact on our financial position, results
of operations, cash flows and related disclosures. However we are currently unable to reasonably estimate 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 provisions of this pronouncement and are assessing its potential impact on our financial position,
results of operations, cash flows and related disclosures.
In
January 2017, the FASB issued ASU No. 2017-04,
Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill
Impairment
. This amendment removes the second step of the two-step goodwill impairment test. When adopted, an entity will
apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit’s carrying
amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. This pronouncement is
effective for the Company’s annual or any interim goodwill impairment tests in fiscal years beginning after December 15,
2019, with early adoption permitted. We are currently evaluating the provisions of this pronouncement and are assessing its potential
impact on our financial position, results of operations, cash flows and related disclosures.