ITEM 1. FINANCIAL
STATEMENTS
ENGlobal Corporation
Condensed Consolidated Statements of Operations
(Unaudited)
(amounts in thousands, except per share data)
|
|
For the Three
Months Ended
|
|
|
|
|
|
|
|
|
Operating
revenues
|
$17,882
|
$13,621
|
$37,142
|
$25,784
|
|
Operating
costs
|
15,429
|
11,679
|
31,429
|
22,504
|
|
Gross
profit
|
2,453
|
1,942
|
5,713
|
3,280
|
|
|
|
|
|
|
|
Selling, general
and administrative expenses
|
2,314
|
2,450
|
4,447
|
4,755
|
|
Operating
profit (loss)
|
139
|
(508)
|
1,266
|
(1,475)
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
Other income,
net
|
1
|
26
|
2
|
41
|
|
Interest expense,
net
|
(36)
|
(4)
|
(41)
|
(6)
|
|
Income
(loss) from operations before income taxes
|
104
|
(486)
|
1,227
|
(1,440)
|
|
|
|
|
|
|
|
Provision
for federal and state income taxes
|
36
|
31
|
58
|
51
|
|
|
|
|
|
|
|
Net
income (loss)
|
68
|
(517)
|
1,169
|
(1,491)
|
|
|
|
|
|
|
|
Basic
and diluted income (loss) per common share:
|
$0.00
|
$(0.02)
|
$0.04
|
$(0.05)
|
|
|
|
|
|
|
Basic
and diluted weighted average shares used in computing income (loss)
per share:
|
27,413
|
27,408
|
27,413
|
27,420
|
See
accompanying notes to unaudited interim condensed consolidated
financial statements.
ENGlobal Corporation
Condensed Consolidated Balance
Sheets
(Unaudited)
(amounts in thousands, except share amounts)
|
|
|
|
|
ASSETS
|
|
|
|
Current
Assets:
|
|
|
|
Cash
|
$14,401
|
$8,307
|
|
Trade receivables,
net of allowances of $270 and $236
|
9,866
|
11,435
|
|
Prepaid expenses
and other current assets
|
391
|
889
|
|
Contract
assets
|
5,118
|
3,862
|
|
Total Current
Assets
|
29,776
|
24,493
|
|
Property
and equipment, net
|
1,192
|
1,033
|
|
Goodwill
|
720
|
720
|
|
Other
assets
|
|
|
|
Right of use
asset
|
2,367
|
2,133
|
|
Deposits and other
assets
|
461
|
307
|
|
Total Other
Assets
|
2,828
|
2,440
|
|
Total
Assets
|
$34,516
|
$28,686
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
Accounts
payable
|
$3,095
|
$3,261
|
|
Accrued
compensation and benefits
|
3,760
|
2,783
|
|
Current portion of
leases
|
1,605
|
1,041
|
|
Contract
liabilities
|
2,329
|
5,438
|
|
Current portion of
note
|
2,212
|
—
|
|
Other current
liabilities
|
709
|
681
|
|
Total Current
Liabilities
|
13,710
|
13,204
|
|
Long-term
debt
|
4,158
|
—
|
|
Long-term
leases
|
1,323
|
1,458
|
|
Total
Liabilities
|
19,191
|
14,662
|
|
Commitments
and Contingencies (Note 8)
|
|
|
|
Stockholders’
Equity:
|
|
|
|
Common stock -
$0.001 par value; 75,000,000
shares authorized; 27,413,626 shares issued and outstanding at June
27, 2020 and December 28, 2019
|
27
|
27
|
|
Additional paid-in
capital
|
37,066
|
36,934
|
|
Accumulated
deficit
|
(21,768)
|
(22,937)
|
|
Total
Stockholders’ Equity
|
15,325
|
14,024
|
|
Total Liabilities
and Stockholders’ Equity
|
$34,516
|
$28,686
|
See
accompanying notes to unaudited interim condensed consolidated
financial statements.
ENGlobal Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(amounts in thousands)
|
|
|
|
|
|
|
|
Cash
Flows from Operating Activities:
|
|
|
|
Net income
(loss)
|
$1,169
|
$(1,491)
|
|
Adjustments to
reconcile net income (loss) to net cash provided by (used in)
operating activities:
|
|
|
|
Depreciation and
amortization
|
205
|
177
|
|
Share-based
compensation expense
|
132
|
32
|
|
Changes in current
assets and liabilities:
|
|
|
|
Trade accounts
receivable
|
1,569
|
2,022
|
|
Contract
assets
|
(1,256)
|
985
|
|
Prepaids and other
current assets
|
344
|
492
|
|
Accounts
payable
|
(166)
|
(16)
|
|
Accrued
compensation and benefits
|
977
|
192
|
|
Contract
liabilities
|
(3,109)
|
2,046
|
|
Income taxes
payable
|
219
|
(430)
|
|
Other current
liabilities, net
|
(192)
|
(44)
|
|
Net cash provided
by (used in) operating activities
|
$(108)
|
$3,965
|
|
|
|
|
|
Cash
Flows from Investing Activities:
|
|
|
|
Proceeds from notes
receivable
|
—
|
5
|
|
Property and
equipment acquired
|
(126)
|
(72)
|
|
Net cash used in
investing activities
|
$(126)
|
$(67)
|
|
|
|
|
|
Cash
Flows from Financing Activities:
|
|
|
|
Purchase of common
stock
|
—
|
(61)
|
|
Proceeds from PPP
loan
|
4,925
|
—
|
|
Proceeds from
revolving credit facility
|
1,445
|
—
|
|
Payments on finance
leases
|
(42)
|
(1)
|
|
Net cash provided
by (used in) financing activities
|
$6,328
|
$(62)
|
|
Net change in
cash
|
6,094
|
3,836
|
|
Cash
at beginning of period
|
8,307
|
6,060
|
|
Cash
at end of period
|
$14,401
|
$9,896
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
Cash paid during
the period for interest
|
$12
|
$9
|
|
Right of use assets
obtained in exchange for new operating lease liability
|
$1,182
|
$2,619
|
|
Cash paid during
the period for income taxes (net of refunds)
|
$86
|
$—
|
|
Debt issuance
costs
|
$131
|
$—
|
See
accompanying notes to unaudited interim condensed consolidated
financial statements.
ENGlobal Corporation
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
(amounts in thousands)
|
|
For the Three
Months Ended
|
|
|
|
|
|
Common
Stock
|
27
|
27
|
|
|
|
|
|
Additional
Paid-in Capital
|
|
|
|
Balance at
beginning of period
|
36,949
|
36,890
|
|
Share-based
compensation - employee
|
117
|
16
|
|
Balance at end of
period
|
37,066
|
36,906
|
|
|
|
|
|
Accumulated
Earnings (Deficit)
|
|
|
|
Balance at
beginning of period
|
(21,836)
|
(22,445)
|
|
Net income
(loss)
|
68
|
(517)
|
|
Balance at end of
period
|
(21,768)
|
(22,962)
|
|
|
|
|
Total
Stockholders’ Equity
|
$15,325
|
$13,971
|
|
|
|
|
|
|
|
|
Common
Stock
|
27
|
27
|
|
|
|
|
|
Additional
Paid-in Capital
|
|
|
|
Balance at
beginning of period
|
36,934
|
36,934
|
|
Share-based
compensation - employee
|
132
|
32
|
|
Treasury stock
retired
|
—
|
(60)
|
|
Balance at end of
period
|
37,066
|
36,906
|
|
|
|
|
|
Accumulated
Earnings (Deficit)
|
|
|
|
Balance at
beginning of period
|
(22,937)
|
(21,471)
|
|
Net income
(loss)
|
1,169
|
(1,491)
|
|
Balance at end of
period
|
(21,768)
|
(22,962)
|
|
|
|
|
|
Total
Stockholders’ Equity
|
$15,325
|
$13,971
|
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 28,
2019, included in the Company’s 2019 Annual Report on Form
10-K filed with the Securities and Exchange
Commission.
The
condensed financial statements included herein are unaudited for
the three month and six month periods ended June 27, 2020 and June
29, 2019, and in the case of the condensed balance sheet as of
December 28, 2019 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 are
presented.
Each of
our quarters is comprised of 13 weeks.
NOTE 2 – ACCOUNTING STANDARDS
Revenue
Recognition – Our
revenue is comprised of engineering, procurement and construction
management services and sales of fabricated systems and integrated
control systems that we design and assemble. The majority of our
services are provided under time-and-material contracts. Some
time-and-material contracts may have limits. Revenue is not
recognized over these limits until authorization by the client has
been received.
A
majority of sales of fabrication and assembled systems are under
fixed-price contracts. We account for a contract when it has
approval and commitment from both parties, the rights of the
parties are identified, payment terms are identified, the contract
has commercial substance and collectability of consideration is
probable.
We
generally recognize revenue over time as we perform because of
continuous transfer of control to the customer. Our customer
typically controls the work in process as evidenced either by
contractual termination clauses or by our rights to payment for
work performed to date plus a reasonable profit to deliver products
or services that do not have an alternative use to the Company. The
selection of the method to measure progress towards completion
requires judgment and is based on the nature of the products or
service to be provided, which measures the ratio of costs incurred
to date to the total estimated costs at completion of the
performance obligation. We generally use the cost-to-cost method on
the labor portion of a project for revenue recognition to measure
progress of our contracts because it best depicts the transfer of
control to the customer which occurs as we consume the materials on
the contracts. Therefore, revenues and estimated profits are
recorded proportionally as labor costs are incurred.
Under
the typical payment terms of our fixed-price contracts, the
customer pays us progress payments. These progress payments are
based on quantifiable measures of performance or on the achievement
of specified events or milestones. The customer may retain a small
portion of the contract price until completion of the contract.
Revenue recognized in excess of billings is recorded as a contract
asset on the balance sheet. Amounts billed and due from our
customers are classified as receivables on the balance sheet. The
portion of the payments retained by the customer until final
contract settlement is not considered a significant financing
component because the intent is to protect the customer should we
fail to adequately complete some or all of our obligations under
the contract. For some contracts we may receive advance payments
from the customer. We record a liability for these advance payments
in contract liabilities on the balance sheet. The advance payment
typically is not considered a significant financing component
because it is used to meet working capital demand that can be
higher in the early stages of a contract and to protect us from the
other party failing to adequately complete some or all of its
obligations under the contract.
To
determine proper revenue recognition for contracts, we evaluate
whether two or more contracts should be combined and accounted for
as one single performance obligation or whether a single contract
should be accounted for as more than one performance obligation.
This evaluation requires significant judgment and the decision to
combine a group of contracts or separate a single contract into
multiple performance obligations could change the amount of revenue
and profit recorded in a given period. For most of our contracts,
we provide a significant service of integrating a complex set of
tasks and components into a single project. Hence, the entire
contract is accounted for as one performance obligation. Less
commonly, we may provide distinct goods or services within a
contract in which case we separate the contract into more than one
performance obligation. If a contract is separated into more than
one performance obligation, we allocate the total transaction price
to each performance obligation in an amount based on the estimated
relative standalone selling price of the promised goods or services
underlying each performance obligation and use the expected cost
plus margin approach to estimate the standalone selling price of
each performance obligation. Due to the nature of the work required
to be performed on many of our performance obligations, the
estimation of total revenue and cost at completion is complex,
subject to variables and requires significant judgment. We estimate
variable consideration at the most likely amount to which we expect
to be entitled. We include estimated amounts in the transaction
price to the extent it is probable that a significant reversal of
cumulative revenue recognized will not occur when the uncertainty
associated with the variable consideration is resolved. Our
estimates of variable consideration and determination of whether to
include estimated amounts in the transaction price are based
largely on an assessment of our anticipated performance and all
information (historical, current and forecasted) that is reasonably
available to us.
Contracts
are often modified to account for changes in contract
specifications and requirements. We consider contract modifications
to exist when the modification either creates new or changes the
existing enforceable rights and obligations. Most of our contract
modifications are for goods or services that are not distinct from
the existing contract due to the significant integration service
provided in the context of the contract and are, therefore,
accounted for as if they were part of that existing contract. The
effect of a contract modification on the transaction price and our
measure of progress for the performance obligation to which it
relates, is recognized as an adjustment to revenue and cost (either
as an increase or a reduction) on a cumulative catch-up
basis.
We
have a standard, monthly process in which management reviews the
progress and execution of our performance obligations. As part of
this process, management reviews information including, but not
limited to, any outstanding key contract matters, progress towards
completion and the related program schedule, identified risks and
opportunities and the related changes in estimates of revenues and
costs. The risks and opportunities include management’s
judgment about the ability and cost to achieve the schedule,
technical requirements, and other contractual requirements.
Management must make assumptions and estimates regarding labor
productivity and availability, the complexity of the work to be
performed, the availability of materials, the length of time to
complete the performance obligation, execution by our
subcontractors, the availability and timing of funding from our
customer and overhead cost rates, among other
variables.
Based
on this analysis, any adjustments to revenue, operating costs and
the related impact to operating income are recognized as necessary
in the period they become known. These adjustments may result from
positive performance and may result in an increase in operating
income during the performance of individual performance obligations
if we determine we will be successful in mitigating risks
surrounding the technical, schedule and cost aspects of those
performance obligations or realizing related opportunities. When
estimates of total costs to be incurred exceed total estimates to
be earned resulting in a loss on the performance obligation, a
provision for the entire loss is recognized in the period the loss
becomes known. Likewise, these adjustments may result in a decrease
in operating income if we determine we will not be successful in
mitigating these risks or realizing related opportunities. Changes
in estimates of net revenue, operating costs and the related impact
to operating income are recognized monthly on a cumulative catch-up
basis, which recognizes in the current period the cumulative effect
of the changes on current and prior periods based on a performance
obligation’s percentage of completion. A significant change
in one or more of these estimates could affect the profitability of
one or more of our performance obligations.
NOTE 3 – REVENUE RECOGNITION
Our
revenue by contract type was as follows (dollars in
thousands):
|
|
For the Three
Months Ended
|
|
|
|
|
|
|
|
|
Fixed-price
revenue
|
$10,022
|
$4,857
|
$17,922
|
$9,084
|
|
Time-and-material
revenue
|
7,860
|
8,764
|
19,220
|
16,700
|
|
|
17,882
|
13,621
|
37,142
|
25,784
|
NOTE 4 – CONTRACT ASSETS AND CONTRACT
LIABILITIES
Our
contract assets consist of unbilled amounts typically resulting
from sales under long-term contracts when the cost-to-cost method
of revenue recognition is utilized and revenue recognized exceeds
the amount billed to the customer. Our contract liabilities consist
of advance payments and billings in excess of costs
incurred.
Costs,
estimated earnings and billings on uncompleted contracts consisted
of the following at June 27, 2020 and December 28,
2019:
|
|
|
|
|
|
|
|
Costs incurred on
uncompleted contracts
|
$28,666
|
$23,846
|
|
Estimated earnings
on uncompleted contracts
|
3,404
|
5,188
|
|
Earned
revenues
|
32,070
|
29,034
|
|
Less: billings to
date
|
29,281
|
30,610
|
Net costs and
estimated earnings in excess of billings (billings in excess of
costs) on uncompleted contracts
|
$2,789
|
$(1,576)
|
|
|
|
|
|
Contract
assets
|
$5,118
|
$3,862
|
|
Contract
liabilities
|
(2,329)
|
(5,438)
|
|
Net contract
assets
|
$2,789
|
$(1,576)
|
NOTE 5 – DEBT
The
components of debt were as follows (dollars in
thousands):
|
|
|
|
|
PPP
Loan (1)
|
$4,925
|
$—
|
|
Revolving
Credit Facility (2)
|
1,445
|
—
|
|
Total
debt
|
6,370
|
—
|
|
Amount
due within one year
|
2,212
|
—
|
|
Total long-term
debt
|
$4,158
|
$—
|
(1)
On April 13, 2020, the Company was granted an
unsecured loan (the “PPP Loan”) from Origin Bank in the
aggregate principal amount of $4,915,800 pursuant to the Paycheck
Protection Program (the “PPP”) under Division A,
Title I of the Coronavirus Aid, Relief and Economic
Security Act (“CARES Act”). The PPP Loan is evidenced by a promissory note,
dated as of April 13, 2020 (the “Note”), by ENGlobal in
favor of Origin Bank, as lender.
Interest Rate:
The interest rate on the PPP Loan is
1% per year.
Potential PPP Loan
Forgiveness: Under the PPP, ENGlobal may apply for
forgiveness of the amount due on the PPP Loan in an amount equal to
the sum of the following costs incurred during the covered period
beginning on the date of the first disbursement of the PPP Loan:
(a) payroll costs, (b) any payment of interest on a covered
obligation (which shall not include any prepayment of or payment of
principal on a covered mortgage obligation), (c) any payment on a
covered rent obligation, and (d) any covered utility payment,
calculated in accordance with the terms of the CARES
Act.
We have
elected to utilize a 24-week covered period as allowed by the
Paycheck Protection Program Flexibility Act (“PPPFA”)
enacted on June 5, 2020. When applying for PPP Loan forgiveness, we
have the option to increase the repayment period for any unforgiven
portion of the PPP Loan to five years as permitted under the
PPPFA.
(2)
On May 21, 2020 (the “Closing Date”), the Company,
ENGlobal U.S., Inc. and ENGlobal Government Services, Inc.
(collectively, the “Borrowers”) entered into a Loan and
Security Agreement (the “Revolving Credit Facility”)
with Pacific Western Bank dba Pacific Western Business Finance, a
California state-chartered bank (the “Lender”),
pursuant to which the Lender agreed to extend credit to the
Borrowers in the form of revolving loans (each a “Loan”
and collectively, the “Loans”) in the aggregate amount
of up to $6.0 million (the “Maximum Credit
Limit”).
Set
forth below are certain of the material terms of the Revolving
Credit Facility:
Credit
Limit: The credit limit
is an amount equal to the lesser of (a) the Maximum Credit Limit
and (b) the sum of (i) 85% of the Borrowers’ Eligible
Accounts (as defined in the Revolving Credit Facility), plus
(ii) the lesser of (A) 75% of the Borrowers’
Eligible Unbilled Accounts (as defined in the Revolving Credit
Facility), or (B) $3,000,000 plus (iii) the lesser of
(A) 20% of Borrowers’ Eligible Fixed Price Accounts, or
(B) $250,000. As of June 27, 2020, the credit limit under the
Revolving Credit Facility was $3.5 million.
Interest: Any
Loans will bear interest at a rate per annum equal to the Prime
rate (defined as the rate announced as the “prime rate”
or “bank prime rate” in the Western Edition of the Wall
Street Journal) plus 2.0%; provided that interest will not be less
than $7,500 per month.
Collateral:
Lender receives a first priority lien on all assets of the
Borrowers, including accounts receivable, inventory, equipment,
deposit accounts, general intangibles and investment
property.
Maturity: The
maturity date is May 20, 2023 and shall be automatically extended
for additional periods of one-year each, if written notice of
termination is not given by one party to the other at least thirty
days prior to the maturity date.
Loan Fee: The Borrowers will pay to Lender a loan fee of
1.00% of the Maximum Credit Limit at the time of funding and
annually thereafter on the anniversary date of the initial
funding.
Termination
Fee: In the event the Borrowers
terminate the Revolving Credit Facility prior to the maturity date,
the Borrowers will pay to Lender a termination fee of (i) 2.00% of
the Maximum Credit Limit, if the termination occurs on or prior to
the first anniversary of the Closing Date, (ii) 1.00% of the
Maximum Credit Limit, if the termination occurs after the first
anniversary of the Closing Date and on or prior to the second
anniversary of the Closing Date and (iii) 0.05% of the Maximum
Credit Limit, if the termination occurs after the second
anniversary of the Closing Date.
Covenants: The Revolving Credit Facility requires the
Borrowers to comply with certain customary affirmative covenants,
and negative covenants that, among other things, restrict, subject
to certain exceptions, the ability of the Borrowers to engage in
mergers, acquisitions or other transactions outside of the ordinary
course of business, make loans or investments, incur indebtedness,
pay dividends or repurchase stock, or engage in affiliate
transactions. The Revolving Credit Facility does not require the
Borrowers to comply with any financial
covenants.
The
future scheduled maturities of our debt are (in
thousands):
|
|
PPP Loan and
Revolving Credit Facility
|
Revolving Credit
Facility (1)
|
|
2020
|
$547
|
$—
|
|
2021
|
3,283
|
—
|
|
2022
|
1,095
|
—
|
|
2023
|
1,445
|
1,445
|
|
2024
|
—
|
—
|
|
Thereafter
|
—
|
—
|
|
|
$6,370
|
$1,445
|
(1)
If the PPP Loan is
entirely forgiven, only the Revolving Credit Facility would remain
as debt.
NOTE 6 – SEGMENT INFORMATION
Our
segments are strategic business units that offer different services
and products and therefore require different marketing and
management strategies. The operating performance of our segments is
regularly reviewed with operational leaders in charge of our
engineering offices and automation offices of these segments, the
chief executive officer (“CEO”), the chief financial
officer (“CFO”) and others. This group represents the
chief operating decision maker (“CODM”) for
ENGlobal.
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 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 of the energy industry throughout the United States. The
Automation 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.
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 June 27, 2020 and June 29,
2019 is as follows (dollars in thousands):
|
For the three
months ended June 27, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
$6,632
|
$11,250
|
$—
|
$17,882
|
|
Gross
profit
|
646
|
1,807
|
—
|
2,453
|
|
Gross Profit
Margin
|
9.7%
|
16.1%
|
|
13.7%
|
|
SG&A
|
612
|
369
|
1,333
|
2,314
|
|
Operating income
(loss)
|
34
|
1,438
|
(1,333)
|
139
|
|
Other income,
net
|
|
|
|
1
|
|
Interest expense,
net
|
|
|
|
(36)
|
|
Tax
expense
|
|
|
|
(36)
|
|
Net
income
|
|
|
|
$68
|
|
For the three
months ended June 29, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
$5,659
|
$7,962
|
$—
|
$13,621
|
|
Gross
profit
|
828
|
1,114
|
—
|
1,942
|
|
Gross Profit
Margin
|
14.6%
|
14.0%
|
|
14.3%
|
|
SG&A
|
589
|
390
|
1,471
|
2,450
|
|
Operating income
(loss)
|
239
|
724
|
(1,471)
|
(508)
|
|
Other income,
net
|
|
|
|
26
|
|
Interest expense,
net
|
|
|
|
(4)
|
|
Tax
expense
|
|
|
|
(31)
|
|
Net
loss
|
|
|
|
$(517)
|
Segment
information for the six months ended June 27, 2020 and June 29,
2019 is as follows (dollars in thousands):
|
For the six
months ended June 27, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
$11,755
|
$25,387
|
$—
|
$37,142
|
|
Gross
profit
|
923
|
4,790
|
—
|
5,713
|
|
Gross Profit
Margin
|
7.9%
|
18.9%
|
|
15.4%
|
|
SG&A
|
1,277
|
704
|
2,466
|
4,447
|
|
Operating income
(loss)
|
(354)
|
4,086
|
(2,466)
|
1,266
|
|
Other income,
net
|
|
|
|
2
|
|
Interest expense,
net
|
|
|
|
(41)
|
|
Tax
expense
|
|
|
|
(58)
|
|
Net
income
|
|
|
|
$1,169
|
|
For the six
months ended June 29, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
$11,292
|
$14,492
|
$—
|
$25,784
|
|
Gross
profit
|
1,499
|
1,781
|
—
|
3,280
|
|
Gross Profit
Margin
|
13.3%
|
12.3%
|
|
12.7%
|
|
SG&A
|
1,176
|
819
|
2,760
|
4,755
|
|
Operating income
(loss)
|
323
|
962
|
(2,760)
|
(1,475)
|
|
Other income,
net
|
|
|
|
41
|
|
Interest expense,
net
|
|
|
|
(6)
|
|
Tax
expense
|
|
|
|
(51)
|
|
Net
loss
|
|
|
|
$(1,491)
|
Total
assets by segment for the three months ended June 27, 2020 and
December 28, 2019 are as follows (dollars in
thousands):
|
Total Assets by
Segment
|
|
|
|
|
|
|
EPCM
|
$7,607
|
$6,253
|
|
Automation
|
12,241
|
13,603
|
|
Corporate
|
14,668
|
8,830
|
|
Consolidated
|
$34,516
|
$28,686
|
NOTE 7 – 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 740-270 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 are 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 2016 and Texas margins tax returns prior to 2016
are closed. Generally, the applicable statues of limitations are
three to four years from their filings.
On
March 27, 2020, the CARES Act
was enacted and signed into law and U.S. GAAP requires recognition
of the tax effects of new legislation during the reporting period
that includes the enactment date. The CARES Act includes
changes to the tax provisions that benefit business entities and
makes certain technical corrections to the Tax Cuts and Jobs Act
enacted in 2017. The tax relief measures for businesses include a
five-year net operating loss carryback, suspension of annual
deduction limitation of 80% of taxable income from net operating
losses generated in a tax year beginning after December 31, 2017,
changes in the deductibility of interest, acceleration of
alternative minimum tax credit refunds, payroll tax relief, and a
technical correction to allow accelerated deductions for qualified
improvement property. The CARES Act also provides other non-tax
benefits to assist those impacted by the pandemic. The Company
evaluated the impact of the CARES Act and determined that there was
no significant impact to the income tax provision for the
quarter.
The
Company recorded income tax expense of $36 thousand and $58
thousand for the three and six months ended June 27, 2020,
respectively, as compared to income tax expense of $31 thousand and
$51 thousand for the three and six months ended June 29, 2019,
respectively.
The
effective income tax rate for the three and six months ended June
27, 2020 was 34.6% and 4.7%, respectively, as compared to (2.06)%
and (0.20)% for the three and six months ended June 29, 2019,
respectively. The effective tax rate differed from the federal
statutory rate of 21% primarily due to the effect of the valuation
allowances related to the unrealized deferred tax asset generated
by the current year benefit.
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) which is 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.
NOTE 9 – LEASES
The
Company leases land, office space and equipment. Arrangements are
assessed at inception to determine if a lease exists and, with the
adoption of ASC 842, “Leases,” right-of-use
(“ROU”) assets and lease liabilities are recognized
based on the present value of lease payments over the lease term.
Because the Company’s leases do not provide an implicit rate
of return, the Company uses its incremental borrowing rate at the
inception of a lease to calculate the present value of lease
payments. The Company has elected to apply the short-term lease
exception for all asset classes, excluding lease liabilities from
the balance sheet and recognizing the lease payments in the period
they are incurred.
The
components of lease expense were as follows (dollars in
thousands):
|
|
|
|
|
|
|
Financial
Statement Classification
|
|
|
|
|
|
Finance
leases:
|
|
|
|
|
|
|
Amortization
expense
|
SG&A
Expense
|
$19
|
$—
|
$38
|
$—
|
|
Interest
expense
|
Interest expense,
net
|
5
|
—
|
10
|
—
|
|
Total finance lease
expense
|
|
24
|
—
|
48
|
|
|
|
|
|
|
|
|
Operating
leases:
|
|
|
|
|
|
|
Operating
costs
|
Operating
costs
|
152
|
205
|
371
|
418
|
|
Selling, general
and administrative expenses
|
SG&A
Expense
|
467
|
435
|
905
|
922
|
|
Total operating
lease expense
|
|
619
|
640
|
1,276
|
1,340
|
|
|
|
|
|
|
|
Short-term
leases:
|
|
|
|
|
|
|
Operating
costs
|
Operating
costs
|
—
|
—
|
—
|
—
|
|
Selling, general
and administrative expenses
|
SG&A
Expense
|
—
|
136
|
—
|
255
|
|
Total short-term
lease expense
|
|
—
|
136
|
—
|
255
|
|
Total lease
expense
|
|
$643
|
$776
|
$1,324
|
$1,595
|
Supplemental
balance sheet information related to leases was as follows (dollars
in thousands):
|
|
Financial
Statement Classification
|
|
|
|
ROU
Assets:
|
|
|
|
|
Operating
leases
|
Right of Use
asset
|
$2,367
|
$2,133
|
|
Finance
leases
|
Property and
equipment, net
|
494
|
318
|
|
|
|
$2,861
|
$2,451
|
|
|
|
|
|
Lease
liabilities:
|
|
|
|
|
Current
liabilities
|
|
|
|
|
Operating
leases
|
Current portion of
leases
|
$1,487
|
$961
|
|
Finance
leases
|
Current portion of
leases
|
118
|
80
|
|
Noncurrent
Liabilities:
|
|
|
|
|
Operating
leases
|
Long-term
leases
|
947
|
1,220
|
|
Finance
leases
|
Long-term
leases
|
376
|
238
|
|
Total lease
liabilities
|
|
$2,928
|
$2,499
|
The
weighted average remaining lease term and weighted average discount
rate were as follows:
|
|
|
|
Weighted average
remaining lease term (years)
|
|
|
Operating
leases
|
1.7
|
|
Finance
leases
|
4.6
|
|
Weighted average
discount rate
|
|
|
Operating
leases
|
2.3%
|
|
Finance
leases
|
6.6%
|
Maturities of lease
liabilities as of June 27, 2020 are as follows (dollars in
thousands):
|
Years
ending:
|
|
|
|
|
2020 (remaining
months)
|
754
|
66
|
820
|
|
2021
|
1,448
|
133
|
1,581
|
|
2022
|
289
|
112
|
401
|
|
2023
|
—
|
92
|
92
|
|
2024
|
—
|
72
|
72
|
|
2025
|
—
|
37
|
37
|
|
2026
|
—
|
18
|
18
|
|
Total lease
payments
|
2,491
|
530
|
3,021
|
|
Less: imputed
interest
|
(57)
|
(36)
|
(93)
|
|
Total lease
liabilities
|
$2,434
|
$494
|
$2,928
|
NOTE 10 – SUBSEQUENT EVENTS
On June
27, 2020, we temporarily closed one of our operational facilities
and sponsored COVID-19 testing for employees in response to a
potential COVID-19 exposure. During the closure, we cleaned and
sanitized the facility, and we reopened the facility after one
week. Employees and visitors were allowed to return to the facility
only after negative test results were received or after a fourteen
day quarantine period. Although the closure was only for one week,
the disruption to our operations was longer as testing results were
received slower than expected and project progress was
delayed.
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 (the “SEC”), 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
(the “Exchange Act”). 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 under
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” “Risk
Factors” and elsewhere in this Quarterly Report on Form 10-Q,
the specific risk factors identified under Part I, Item 1A.
“Risk Factors” in the Company’s Annual Report on
Form 10-K for the year ended December 28, 2019, and those described
from time to time in our future reports filed with the
SEC.
The
following discussion is qualified in its entirety by, and should be
read in conjunction with, the Company’s 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 28, 2019.
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 engineered modular solutions to the
energy industry. We deliver these solutions to our clients by
combining our vertically integrated engineering and professional
project execution services with our automation and systems
integration expertise and mechanical fabrication capabilities. We
believe our vertically integrated strategy allows us to
differentiate our company from most of our competitors as a full
service provider, thereby reducing our clients’ dependency on
and coordination of multiple vendors and improving control over
their project schedules. Our strategy and positioning has also
allowed the Company to pursue larger scopes of work centered around
many different types of modularized engineered
systems.
We have
identified modular project execution offerings as the opportunity
to which our capabilities are best applied, focused our business
development team on communicating these offerings to specific
clients and realigned our internal reporting structure to better
facilitate complete modular project execution. We have identified
six strategic market initiatives where we have a history of
delivering project solutions and can provide complete project
execution that includes engineering, design, fabrication and
integration of automated control systems as a complete packaged
solution for our clients, preferably in a modular form. This
“design it once – build it many times” concept
has many merits including a single vendor interface, better control
of costs, better control of schedule and lower safety risk. These
six targeted market initiatives include: (1) natural gas and crude
oil and renewable energy production systems; (2) control systems
implementation; (3) continuous emission monitoring systems; (4)
pipeline pump, compression, metering, loading and blending systems;
(5) adding customer relationships in specific markets for
automation; and (6) expanding government services beyond our
heritage contracts. We have identified specific individuals within
the Company to lead the efforts for each market initiative -
“a champion” - while coordinating with the other sales
leaders.
We
continue to be mindful of our overhead structure. While we continue
to make investments in key individuals, product developments and
new facilities and equipment, which may negatively impact our
selling, general and administrative expense
(“SG&A”), we have been able to offset those
increases with decreases in other areas and, overall, our SG&A
costs have continued to decrease year over year. We recognize that
the level of our SG&A is greater than it could be for a company
our size; however, we have maintained our overhead structure in
anticipation of higher operating levels.
COVID-19 Update
On
March 11, 2020, the World Health Organization declared that the
worldwide spread and severity of a new coronavirus, referred to as
COVID-19, was severe enough to be characterized as a pandemic. In
response to the continued spread of COVID-19 in the United States,
federal, state and local governments imposed various restrictions
designed to slow the pace of the pandemic, including stay at home
mandates, in cities where we have offices, employees, and customers
causing severe disruptions in the worldwide economy, including the
global demand for oil and natural gas. In response, companies
within the energy industry (including many of our customers) have
announced capital spending cuts which, in turn, may result in a
decrease in new project awards or adjustments, reductions,
suspensions, cancellations or payment defaults with respect to
existing project awards. We have been fortunate that we entered the
year with a robust backlog and that the larger projects in our
backlog have not been cancelled or postponed. This has allowed us
to keep a significant portion of our workforce productive. However,
we have not been successful in replacing our backlog as quickly as
it has been converted to revenues. As a result, our backlog has
decreased by approximately $17.2 million from $59.2 million at
December 28, 2019 to $42.0 million at June 27, 2020. While we have
many potential opportunities in our sales pipeline that could
replace a significant portion of this backlog reduction,
inefficiencies and complications resulting from many of our
clients’ remote working conditions combined with the
uncertainty of new project necessity and funding caused by COVID-19
related disruptions have largely contributed to delays in project
awards and our inability to replace our backlog as quickly as it
has been converted to revenue. While we believe our backlog is
sufficient to keep a significant portion of our workforce
productive for the balance of this year, it may not be at our
current operating levels. The extent to which the disruption of
COVID-19 may impact our business, financial condition and results
of operations will depend on future developments, which are highly
uncertain and cannot be predicted at this time. The duration and
intensity of these impacts and resulting disruption to our
business, financial condition and results of operations is
uncertain and we will continue to monitor the situation and assess
the operational and financial impact on our business.
As a
result of these current and future uncertainties, we felt it
necessary to utilize all avenues of available assistance as they
may not be available in the future when needed. On April 13, 2020,
we obtained a $4.9 million loan (the “PPP Loan”)
pursuant to the Paycheck Protection Program (the “PPP”)
under Division A, Title I of the Coronavirus Aid, Relief, and
Economic Security Act (“CARES Act”), which we expect to
be forgiven. We are also utilizing relief for employees impacted by
COVID-19 under the Families First Coronavirus Response Act in order
to minimize the impact to both our employees and our business.
Further, we are utilizing some of the tax payment deferral
opportunities and federal refund acceleration opportunities
provided by the IRS and the CARES Act.
On May
21, 2020, in order to provide additional liquidity, the Company and
its subsidiaries (collectively, the “Borrowers”)
entered into a Loan and Security Agreement (the “Revolving
Credit Facility”) with Pacific Western Bank dba Pacific
Western Business Finance, a California state-chartered bank (the
“Lender”), pursuant to which the Lender agreed to
extend credit to the Borrowers in the form of revolving loans in
the aggregate amount of up to $6.0 million, subject to a credit
limit. For additional information, see “Liquidity and Capital
Resources.” As we continue to monitor the situation and
assess the operational and financial impact on our business, we may
determine to take further actions in response.
On June
27, 2020, we temporarily closed one of our operational facilities
and sponsored COVID-19 testing for employees in response to a
potential COVID-19 exposure. During the closure, we cleaned and
sanitized the facility, and we reopened the facility after one
week. Employees and visitors were allowed to return to the facility
only after negative test results were received or after a fourteen
day quarantine period. Although the closure was only for one week,
the disruption to our operations was longer as testing results were
received slower than expected and project progress was
delayed.
Because
the severity, magnitude and duration of the COVID-19 pandemic and
its economic consequences are uncertain, rapidly changing and
difficult to predict, the impact on our business, financial
condition and results of operations remains uncertain and difficult
to predict. If COVID–19 continues to spread or if the
response to contain the COVID-19 pandemic is unsuccessful, we could
experience a material adverse effect on our business, financial
condition, and results of operations. For additional information,
see Part II. Item 1A “Risk Factors.”
Critical Accounting Policies Update
A
summary of our critical accounting policies is described under the
caption “Critical Accounting Policies” in
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” in our 2019 Annual
Report on Form 10-K. Our critical accounting policies are further
disclosed in Note 2 to the consolidated financial statements
included in our 2019 Annual Report on Form 10-K.
Results of Operations
In the
course of providing our time-and-material services, we routinely
provide materials and equipment and may provide 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 material purchases and 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 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, business
development, legal and information technology which are unrelated
to specific projects or segments but which are incurred to support
the Company’s activities.
Comparison of the three months ended June 27, 2020 versus the three
months ended June 29, 2019
The
following table, for the three months ended June 27, 2020 versus
the three months ended June 29, 2019, provides relevant financial
data that is derived from our consolidated statements of operations
(amounts in thousands except per share data).
|
Operations
Data
|
|
|
|
|
|
|
Three
months ended June 27, 2020:
|
|
|
|
|
|
|
Revenue
|
$6,632
|
$11,250
|
$—
|
$17,882
|
100%
|
|
Gross
profit
|
646
|
1,807
|
—
|
2,453
|
|
|
Gross Profit Margin
|
9.7%
|
16.1%
|
|
13.7%
|
|
|
SG&A
|
612
|
369
|
1,333
|
2,314
|
12.9%
|
|
Operating income
(loss)
|
34
|
1,438
|
(1,333)
|
139
|
0.8%
|
|
Other income,
net
|
|
|
|
1
|
|
|
Interest expense,
net
|
|
|
|
(36)
|
|
|
Tax
expense
|
|
|
|
(36)
|
|
|
Net
income
|
|
|
|
$68
|
0.4%
|
|
Basic and diluted
income per share
|
|
|
|
$0.00
|
|
|
|
|
|
|
|
|
|
Three
months ended June 29, 2019:
|
|
|
|
|
|
|
Revenue
|
$5,659
|
$7,962
|
$—
|
$13,621
|
100%
|
|
Gross
profit
|
828
|
1,114
|
—
|
1,942
|
|
|
Gross Profit Margin
|
14.6%
|
14.0%
|
|
14.3%
|
|
|
SG&A
|
589
|
390
|
1,471
|
2,450
|
18.0%
|
|
Operating
income (loss)
|
239
|
724
|
(1,471)
|
(508)
|
(3.7)%
|
|
Other
income, net
|
|
|
|
26
|
|
|
Interest
expense, net
|
|
|
|
(4)
|
|
|
Tax
expense
|
|
|
|
(31)
|
|
|
Net
loss
|
|
|
|
$(517)
|
(3.8)%
|
|
Basic and diluted
loss per share
|
|
|
|
$(0.02)
|
|
|
|
|
|
|
|
|
|
Increase
(Decrease) in Operating Results:
|
|
|
|
|
|
|
Revenue
|
$973
|
$3,288
|
$—
|
$4,261
|
31.3%
|
|
Gross
profit
|
(182)
|
693
|
—
|
511
|
|
|
SG&A
|
23
|
(21)
|
(138)
|
(136)
|
(5.6)%
|
|
Operating
income (loss)
|
(205)
|
714
|
138
|
647
|
(127.4)%
|
|
Other
income, net
|
|
|
|
(25)
|
|
|
Interest
expense, net
|
|
|
|
(32)
|
|
|
Tax
expense
|
|
|
|
(5)
|
|
|
Net
income
|
|
|
|
$585
|
(113.2)%
|
|
Basic and diluted
income per share
|
|
|
|
$0.02
|
|
Comparison of the six months ended June 27, 2020 versus the six
months ended June 29, 2019
The
following table, for the six months ended June 27, 2020 versus the
six months ended June 29, 2019, provides relevant financial data
that is derived from our consolidated statements of operations
(amounts in thousands except per share data).
|
Operations
Data
|
|
|
|
|
|
|
Six
months ended June 27, 2020:
|
|
|
|
|
|
|
Revenue
|
$11,755
|
$25,387
|
$—
|
$37,142
|
100%
|
|
Gross
profit
|
923
|
4,790
|
—
|
5,713
|
|
|
Gross Profit Margin
|
7.9%
|
18.9%
|
|
15.4%
|
|
|
SG&A
|
1,277
|
704
|
2,466
|
4,447
|
12.0%
|
|
Operating income
(loss)
|
(354)
|
4,086
|
(2,466)
|
1,266
|
3.4%
|
|
Other income,
net
|
|
|
|
2
|
|
|
Interest expense,
net
|
|
|
|
(41)
|
|
|
Tax
expense
|
|
|
|
(58)
|
|
|
Net
income
|
|
|
|
$1,169
|
3.1%
|
|
Basic and diluted
income per share
|
|
|
|
$0.04
|
|
|
|
|
|
|
|
|
|
Six
months ended June 29, 2019:
|
|
|
|
|
|
|
Revenue
|
$11,292
|
$14,492
|
$—
|
$25,784
|
100%
|
|
Gross
profit
|
1,499
|
1,781
|
—
|
3,280
|
|
|
Gross Profit Margin
|
13.3%
|
12.3%
|
|
12.7%
|
|
|
SG&A
|
1,176
|
819
|
2,760
|
4,755
|
18.4%
|
|
Operating
income (loss)
|
323
|
962
|
(2,760)
|
(1,475)
|
(5.7)%
|
|
Other
income, net
|
|
|
|
41
|
|
|
Interest
expense, net
|
|
|
|
(6)
|
|
|
Tax
expense
|
|
|
|
(51)
|
|
|
Net
loss
|
|
|
|
$(1,491)
|
(5.8)%
|
|
Basic and diluted
loss per share
|
|
|
|
$(0.05)
|
|
|
|
|
|
|
|
|
|
Increase
(Decrease) in
Operating
Results:
|
|
|
|
|
|
|
Revenue
|
$463
|
$10,895
|
$—
|
$11,358
|
44.1%
|
|
Gross
profit
|
(576)
|
3,009
|
—
|
2,433
|
|
|
SG&A
|
101
|
(115)
|
(294)
|
(308)
|
(6.5)%
|
|
Operating
income (loss)
|
(677)
|
3,124
|
294
|
2,741
|
(185.8)%
|
|
Other
income, net
|
|
|
|
(39)
|
|
|
Interest
expense, net
|
|
|
|
(35)
|
|
|
Tax
expense
|
|
|
|
(7)
|
|
|
Net
income
|
|
|
|
$2,660
|
(178.4)%
|
|
Basic and diluted
income per share
|
|
|
|
$0.09
|
|
Revenue –
Revenue increased $4.3 million to $17.9 million from $13.6 million,
or an increase of 31.3%, for the three months ended June 27, 2020
as compared to the three months ended June 29, 2019. Revenue from
the EPCM segment increased $1.0 million to $6.6 million from $5.6
million, or an increase of 17.2%, for the three months ended June
27, 2020 as compared to the three months ended June 29, 2019. The
increase is primarily due to the progress on a large project during
the second quarter of 2020 partially offset by the completion of
several projects in 2019 with no subsequent renewal into 2020
including a project cancellation due to COVID-19. Revenue from the
Automation segment increased $3.3 million to $11.3 million from
$8.0 million, or an increase of 41.3%, for the three months ended
June 27, 2020 as compared to the three months ended June 29, 2019.
This increase is primarily due to two projects that have increased
in scope in 2020 partially offset by Government Service projects
that had delays due to COVID-19 worksite closures.
Revenue
increased $11.3 million to $37.1 million from $25.8 million, or an
increase of 44.1%, for the six months ended June 27, 2020 as
compared to the six months ended June 29, 2019. Revenue from the
EPCM segment increased $0.5 million to $11.8 million from $11.3
million, or an increase of 4.1%, for the six months ended June 27,
2020 as compared to the six months ended June 29, 2019. The
increase is primarily due to the progress on a large project during
the first half of 2020 partially offset by the completion of
several projects in 2019 that were not extended into the current
year. Revenue from the Automation segment increased $10.9 million
to $25.4 million from $14.5 million, or an increase of 75.2%, for
the six months ended June 27, 2020 as compared to the six months
ended June 29, 2019. This increase is primarily due to two projects
that have increased in scope during the first half of 2020
partially offset by Government Service projects that had delays due
to COVID-19 worksite closures and 2019 projects that were not
renewed in 2020.
Gross Profit –
Gross profit margin decreased 0.6% to 13.7% from 14.3% for the
three months ended June 27, 2020 as compared to the three months
ended June 29, 2019. Gross profit for the EPCM segment decreased
$0.2 million to $0.6 million from $0.8 million and its gross profit
margin decreased 4.9% to 9.7% from 14.6% for the three months ended
June 27, 2020 as compared to the three months ended June 29, 2019.
The decrease in gross profit margin is primarily attributable to
the cost associated with underutilized staffing at one of our
locations as projects were completed without subsequent renewals
during the second quarter of 2020 including a project cancellation
due to COVID-19 and supply purchases for our employees to adhere to
COVID-19 safe work practices. Gross profit margin for the
Automation segment increased 2.1% to 16.1% from 14.0% for the three
months ended June 27, 2020 as compared to the three months ended
June 29, 2019, primarily due to increase in production on project
awards that began in 2019 and have continued into 2020 partially
offset by inefficiencies on one of our large projects in addition
to delays caused from COVID-19 restrictions prompting employees to
work remotely and supply purchases for our employees to adhere to
COVID-19 safe work practices.
Gross
profit margin increased 2.7% to 15.4% from 12.7% for the six months
ended June 27, 2020 as compared to the six months ended June 27,
2019. Gross profit for the EPCM segment decreased $0.6 million to
$0.9 million from $1.5 million and its gross profit margin
decreased 5.4% to 7.9% from 13.3% for the six months ended June 27,
2020 as compared to the six months ended June 29, 2019. The
decrease in gross profit margin is primarily attributable to the
cost associated with underutilized staffing at one of our locations
as projects were completed without subsequent renewals during the
first half of 2020. Gross profit margin for the Automation segment
increased 6.6% to 18.9% from 12.3% for the six months ended June
27, 2020 as compared to the six months ended June 29, 2019,
primarily due to increased utilization of personnel and projects
awards that began in 2019 and have continued into
2020.
Selling, General and
Administrative Expense – SG&A expenses decreased
by $0.1 million for the three months ended June 27, 2020 as
compared to the three months ended June 29, 2019 primarily due to
the reduction of legal services by $0.1 million.
SG&A expenses
decreased by $0.3 million for the six months ended June 27, 2020 as
compared to the six months ended June 29, 2019 primarily due to
decreases in facilities costs, legal services, and travel costs due
to COVID-19 travel restrictions, each, by $0.1
million.
Other Income (Expense), Net
– Other income, net of expense, decreased $25 thousand
for the three months ended June 27, 2020 as compared to the three
months ended June 29, 2019 and $39 thousand for the six months
ended June 27, 2020 as compared to the six months ended June 29,
2019 primarily due to rental income received in 2019 with no
comparable occurrence in 2020.
Interest Expense, net
– Interest expense is incurred primarily in connection
with the Revolving Credit Facility and on the PPP Loan. Our
interest expense increased to $36 thousand for the three months
ended June 27, 2020 from $4 thousand for the three months ended
June 29, 2019.
Our
interest expense increased to $41 thousand for the six months ended
June 27, 2020 from $6 thousand for the six months ended June 29,
2019.
Tax Expense –
We recorded income tax expense of $36 thousand for the three months
ended June 27, 2020 as compared to income tax expense of $31
thousand for the three months ended June 29, 2019.
We
recorded income tax expense of $58 thousand for the six months
ended June 27, 2020 as compared to income tax expense of $51
thousand for the six months ended June 29, 2019.
Net Income (Loss)
– Net income for the three months ended June 27, 2020
was $0.1 million, or a $0.6 million increase from a net loss of
$0.5 million for the three months ended June 29, 2019, primarily as
a result of our increase in revenue and higher margin projects from
our Automation segment partially offset by project delays due to
the COVID-19 pandemic.
Net
income for the six months ended June 27, 2020 was $1.2 million, or
a $2.7 million increase from a net loss of $1.5 million for the six
months ended June 29, 2019, primarily as a result of our increase
in revenue and higher margin projects from our Automation segment
partially offset by project delays due to the COVID-19
pandemic.
Liquidity and Capital Resources
Overview
The
Company defines liquidity as its ability to pay its liabilities as
they become due, fund business operations and meet monetary
contractual obligations. Our primary sources of liquidity are cash
on hand, internally generated funds, and borrowings under the PPP
Loan and the Revolving Credit Facility. We had cash of
approximately $14.4 million at June 27, 2020 and $8.3 million at
December 28, 2019. Our working capital as of June 27, 2020 was
$16.1 million versus $11.3 million as of December 28, 2019.
On April
13, 2020, we obtained the PPP Loan, which was a significant cash injection for us.
In addition, on May 21, 2020, we entered into the Revolving Credit
Facility pursuant to which the Lender agreed to extend credit of up
to $6.0 million, subject to a credit limit. As of June 27, 2020,
the credit limit under the Revolving Credit Facility was $3.5
million and outstanding borrowings were $1.5 million, which yields
enough interest to cover our minimum monthly interest charge. As of
June 27, 2020, we were in compliance with all of the covenants
under the PPP Loan and Revolving Credit Facility. For additional
information on the PPP Loan and Revolving Credit Facility, see
“Note 5 – Debt” to our financial statements
included in Part I of this Form 10-Q. We believe our cash on
hand, internally generated funds and availability under the
Revolving Credit Facility along with other working capital will be
sufficient to fund our current operations and expected activity for
the next twelve months.
Cash
and the availability of cash could be materially restricted if (1)
outstanding invoices 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 our major customers significantly reduce the amount of
work requested from us, (4) we are unable to win new projects that
we can perform on a profitable basis, or (5) we are awarded
projects that require a significant amount of cash to fund other
components of working capital. If any such event occurs, we would
be forced to consider alternative financing options.
Cash Flows from Operating Activities
Operating
activities used $0.1 million of cash for the six months ended June 27, 2020 and
generated $4.0 million of cash for the six months ended June 29,
2019. The primary drivers of our cash used by operations for the
six months ended June 27, 2020 were an increase in contract assets
net of contract liabilities of $4.3 million and a decrease in trade
payables of $0.2 million, partially offset by our operating income
of $1.2 million, cash provided by a decrease in trade receivables
of $1.6 million, an increase in accrued compensation liability of
$1.0 million, a decrease in other current assets of $0.3 million,
an increase in income taxes payable of $0.2 million, and $0.1
million of cash provided by other components of working
capital.
The
primary drivers of our cash provided by operations for the six
months ended June 29, 2019 were decreases of contract assets net of
contract liabilities of $2.0 million, and a decrease in trade
receivables of $2.0 million, offset by our operating loss before
non-cash expenses of $1.5 million, and cash provided by an increase
in other components of working capital of $1.5
million.
Cash Flows from Investing Activities
Investing
activities used cash of $126 thousand for the six months ended June
27, 2020 and $67 thousand for the six months ended June 27, 2019
primarily for the purchase of property and equipment.
Cash Flows from Financing Activities
Financing
activities provided cash of $6.3 million for the six months ended
June 27, 2020 primarily due to the proceeds from the PPP Loan and
Revolving Credit Facility partially offset by the interest incurred
on our finance leases.
Financing
activities used cash of $62 thousand for the six months ended June
29, 2019 primarily for the purchase of common stock, which used $61
thousand.