The following discussion is qualified in its entirety by, and should be read in
conjunction with, our Consolidated Financial Statements and Notes thereto,
included elsewhere in this Report.
Overview
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 five 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 five targeted market initiatives include:
(i) Renewables; (ii) Automation; (iii) Refining and Transportation; (iv)
Upstream and (v) Government Services. 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.
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, governmental authorities in the United States and around the world
have imposed various restrictions designed to slow the pace of the pandemic,
including restrictions on travel and other restrictions that prohibit employees
from going to work, 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 2020 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 $34.9 million from $59.2 million at December 28, 2019 to $24.3
million at December 26, 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 in the near term, 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.
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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."
Results of Operations
Our revenue is comprised of services revenue and the sale of engineered modular
solutions. We generally recognize service revenue as soon as the services are
performed. The majority of our engineering services have historically been
provided through time-and-material contracts whereas a majority of our
engineered modular solutions revenues are earned on fixed-price contracts.
During 2020, we worked on 323 projects ranging in size from $1 thousand to $26.7
million. The average size of the projects during 2020 was $518 thousand and we
recorded an average revenue of $200 thousand per project.
In the course of providing our services, we routinely provide materials and
equipment and may provide construction management or construction services on a
subcontractor basis. Generally, these materials, equipment and subcontractor
costs are passed through to our clients and reimbursed, along with handling
fees, which in total are at margins much lower than those of our services
business. In accordance with industry practice and generally accepted accounting
principles, all such costs and fees are included in revenue. The use of
subcontractor services can change significantly from project to project;
therefore, changes in revenue and gross profit, SG&A expense and operating
income as a percent of revenue may not be indicative of our core business
trends.
Segment operating SG&A expense includes management and staff compensation,
office costs such as rents and utilities, depreciation, amortization, travel,
bad debt and other expenses generally unrelated to specific client contracts,
but directly related to the support of a segment's operations. Corporate SG&A
expenses includes investor relations, business development, governance, finance,
accounting, health, safety, environmental, human resources, legal and
information technology which are unrelated to specific projects but which are
incurred to support corporate activities.
Reporting Segments
Our segments are strategic business units that offer different services and
products and therefore require different marketing and management strategies.
Separate operational leaders are in charge of our engineering offices and our
automation offices, including the office that contracts with government
agencies. The operating performance of our segments is regularly reviewed with
the operational leaders of the two segments, the CEO, CFO and others. This group
represents the CODM for ENGlobal.
Our corporate and other expenses that do not individually meet the criteria for
segment reporting are reported separately as Corporate expenses.
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Comparison of the years ended December 26, 2020 and December 28, 2019
The following table set forth below, for the years ended December 26, 2020 and
December 28, 2019, provides financial data that is derived from our consolidated
statements of operations (amounts in thousands, except per share data).
EPCM Automation Corporate Consolidated
Operations Data
For the Year Ended December 26, 2020:
Revenue $25,929 $38,520 $- $64,449 100.0%
Gross profit 2,358 6,093 - 8,451 13.1%
SG&A 2,427 1,569 4,838 8,834 13.7%
Operating income (loss) (69) 4,524 (4,838) (383) (0.6)%
Other income, net 14 0.1%
Interest expense, net (153) (0.2)%
Tax expense (103) (0.2)%
Net loss (625) (1.0)%
Loss per share $(0.02)
EPCM Automation Corporate Consolidated
For the Year Ended December 28, 2019:
Revenue $19,436 $37,010 $- $56,446 100.0%
Gross profit 1,631 6,285 - 7,916 14.0%
SG&A 2,461 1,690 5,166 9,317 16.5%
Operating income (loss) (830) 4,595 (5,166) (1,401) (2.5)%
Other income, net 49 0.1%
Interest expense, net (31) (0.1)%
Tax expense (83) (0.1)%
Net loss (1,466) (2.6)%
Loss per share $(0.05)
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EPCM Automation Corporate Consolidated
Year Over Year Increase (Decrease) in
Operating Results:
Revenue $6,493 $1,510 $- $8,003 14.2%
Gross profit 727 (192) - 535 6.8%
SG&A (34) (121) (328) (483) (5.2)%
Operating income (loss) 761 (71) 328 1,018 (72.7)%
Other income, net (35) (71.4)%
Interest expense, net (122) 393.5%
Tax expense (20) 24.1%
Net loss 841 (57.3)%
Loss per share $0.03
Revenue -Overall, our revenue for the year ended December 26, 2020, as compared
to the year ended December 28, 2019, increased $8.0 million, or 14.2%, to $64.5
million from $56.5 million. Revenue from the Automation segment increased $1.5
million, or 4.1%, to $38.5 million for the year ended December 26, 2020, as
compared to $37.0 million for the comparable period in 2019. Revenue from the
EPCM segment increased $6.5 million, or 33.5%, to $25.9 million for the year
ended December 26, 2020 as compared to $19.4 million for the comparable period
in 2019. Our 2020 revenue for the EPCM segment increased primarily due to the
progress of one large project during the year partially offset by the completion
of projects that were not renewed as our clients decreased activities in all
sectors of the energy industry due to COVID-19. The Automation segment benefited
from two projects that increased in scope during the first two quarters of 2020
partially offset by delays in government projects due to base closures and
travel restrictions imposed by the U.S. Government as a result of COVID-19 and
Automation projects that were not renewed or replaced due to the uncertainty
from the COVID-19 pandemic.
Gross Profit -Gross profit for the year ended December 26, 2020 was $8.4
million, an increase of $0.5 million, or 6.8%, from $7.9 million for the
comparable period in 2019. Gross profit margin was 13.1% for the year ended
December 26, 2020, a decrease from the 14.0% gross profit margin for the year
ended December 28, 2019.
Gross profit in our EPCM segment increased $0.7 million, or 44.6%, to $2.4
million for a gross profit margin of 9.1% for the year ended December 26, 2020
as compared to $1.6 million for a gross profit margin of 8.4% for the year ended
December 28, 2019. The increase in gross profit margin is primarily attributable
to one large project that began in 2020 and that is expected to be completed in
2021, partially offset by costs associated with underutilized staffing at one of
our locations as projects were completed without subsequent renewals during
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 in the Automation segment decreased $0.2 million, or 3.1%, to $6.1
million for a gross profit margin of 15.8% for the year ended December 26, 2020
as compared to $6.3 million with a gross profit margin of 17.0% for the year
ended December 28, 2019. The decrease in gross profit is primarily due to
inefficiencies on one of our large projects in addition to delays caused from
COVID-19 restrictions prompting employees to work remotely, supply purchases for
our employees to adhere to COVID-19 safe work practices, and delays in
government projects due to base closures and travel restrictions imposed by the
U.S. Government as a result of COVID-19.
Selling, General and Administrative - Overall, our SG&A expenses decreased by
$0.5 million for the year ended December 26, 2020 as compared to the year ended
December 28, 2019. This decrease in SG&A is driven by reductions in travel costs
due to COVID-19 restrictions of $0.1 million, facility costs of $0.1 million,
legal fees of $0.1 million, and $0.2 in computer software costs. We continue to
look for ways to streamline our processes and delay expenditures while we
continue to invest in our business development activities.
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Other income,net - Other income, net of expense, decreased $35 thousand for the
year ended December 26, 2020 as compared to the year ended December 28, 2019
primarily due to rental income received in 2019 with no comparable occurrence in
2020.
Tax expense -Tax expense was $0.1 million for the year ended December 26, 2020
and December 28, 2019.
Net Income (Loss) - Net loss for the year ended December 26, 2020 was $0.6
million compared to a net loss of $1.5 million for the year ended December 28,
2019, primarily as a result of our increase in revenue and higher margin
projects from our EPCM segment and decrease in SG&A expense year-over-year,
partially offset by project delays and inefficiencies due to the COVID-19
pandemic.
Liquidity and Capital Resources
Overview
We define liquidity as our 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, internally generated funds, and
borrowings under the PPP Loan and the Revolving Credit Facility. Our cash
increased to $13.7 million at December 26, 2020 from $8.3 million at December
28, 2019, as our operating activities used approximately $0.5 million in net
cash during the year ended December 26, 2020 primarily due to decreased contract
assets net of contract liabilities, decreased accounts payable, and operating
losses, partially offset by a decrease in trade receivables, depreciation and
cash provided by other components of working capital. Our working capital as of
December 26, 2020 was $14.0 million as compared to $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 December 26, 2020, the credit
limit under the Revolving Credit Facility was $2.4 million and outstanding
borrowings were $1.5 million, which yields enough interest to cover our minimum
monthly interest charge. As of December 26, 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 Part
II, Item 8, Note 7 - Debt -.
In addition, on January 29, 2021, we filed a shelf registration statement on
Form S-3 (the "Registration Statement") with the SEC, pursuant to which we may
offer and sell, at our option, securities having an aggregate offering price of
up to $100 million. On the same date, we entered into an at market issuance
sales agreement with B. Riley Securities, Inc. pursuant to which we may offer
and sell shares of our common stock having an aggregate offering price of up to
$25 million to or through B. Riley, as sales agent, from time to time, in an "at
the market offering". The Company is not obligated to make any sales under the
agreement and any determination by the Company to do so will be dependent, among
other things, on market conditions and the Company's capital raising needs. The
Registration Statement has not yet become effective and these securities may not
be sold nor may offers to buy be accepted prior to the time the Registration
Statement becomes effective.
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 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 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 unable
to reverse our use of cash to fund losses. If any such event occurs, we would be
forced to consider alternative financing options.
Our Board of Directors continues to review strategic transactions, which could
include strategic mergers, reverse mergers, the issuance or buyback of public
shares, or the purchase or sale of specific assets, in addition to other
potential actions aimed at increasing shareholder value. The Company does not
intend to disclose or comment on developments related to its review unless and
until the Board has approved a specific transaction or otherwise determined that
further disclosure is appropriate. There can be no assurance that the Board's
strategic review will result in any transaction, or any assurance as to its
outcome or timing.
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Cash Flows from Operating Activities
Operating activities used approximately $0.5 million in net cash during the year
ended December 26, 2020, compared with net cash provided by operating activities
of $2.7 million during the comparable period in 2019. The primary driver of the
cash used by operations for the year ended December 26, 2020 was a decrease of
$4.4 million in contract assets net of contract liabilities, a decrease of $1.1
million in trade payables, and our $0.6 million operating loss, partially offset
by cash provided from decreases of $3.7 million in trade receivables, $0.5
million in deprecation, $0.2 million in share-based compensation, an increase of
$1.3 million in accrued compensation and benefits, and a decrease of $0.1
million in other components of working capital. For the year ended December 28,
2019, cash provided by operations was primarily related to an increase of $4.2
million from contract assets net of contract liabilities and $1.2 million in
cash provided by other working capital items, offset by our net loss of $1.5
million and an increase in trade receivables of $1.2 million.
Cash Flows from Investing Activities
Investing activities used cash of $0.4 million during the year ended December
26, 2020 and used cash of $0.3 million during the year ended December 28, 2019
primarily related to the purchase of equipment used to outfit our fabrication
facility and to upgrade our accounting and purchasing system.
Cash Flows from Financing Activities
Financing activities provided cash of $6.3 million during the year ended
December 26, 2020 primarily due to the proceeds from the PPP Loan and Revolving
Credit Facility partially offset by payments on our finance leases. Financing
activities used cash of $0.1 million during the year ended December 28, 2019 for
the repurchase of our common stock and payments on finance leases.
Stock Repurchase Program
On April 21, 2015, the Company announced that our Board of Directors had
authorized the repurchase of up to $2.0 million of our common stock from time to
time through open market or privately negotiated transactions, based on
prevailing market conditions. We were not obligated to repurchase any dollar
amount or specific number of shares of common stock under the repurchase
program, which may be suspended, discontinued or reinstated at any time. From
April 2015 through December 2017, the Company purchased and retired 1,191,050
shares at a cost of $1.5 million. The stock repurchase program was suspended on
May 16, 2017 and was reinstated on December 19, 2018. During the year ended
December 28, 2019, we purchased and retired 77,687 shares at a cost of $61
thousand. During the year ended December 26, 2020, no shares were repurchased.
Management does not intend to repurchase any shares in the near future.
Accounts Receivable
We typically sell our products and services on short-term credit and seek to
minimize our credit risk by performing credit checks and conducting our own
collection efforts. Our trade accounts receivable decreased $3.6 million, or
31.6%, to $7.8 million as of December 26, 2020 compared to $11.4 million as of
December 28, 2019. We had bad debt expense of $0.1 million for the year ended
December 26, 2020 and no bad debt expense for the year ended December 28, 2019.
Our allowance for uncollectible accounts was $0.4 million as of December 26,
2020 and $0.2 million as of December 28, 2019 and increased as a percentage of
trade accounts receivable to 5.0% for 2020 from 2.1% for 2019. We continue to
manage this portion of our business very carefully.
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Risk Management
In performing services for our clients, we could potentially face liability for
breach of contract, personal injury, property damage or negligence, including
professional errors and omissions. We often agree to indemnify our clients for
losses and expenses incurred as a result of our negligence and, in certain
cases, the sole or concurrent negligence of our clients. Our quality control and
assurance program includes a control function to establish standards and
procedures for performance and for documentation of project tasks, and an
assurance function to audit and to monitor compliance with procedures and
quality standards. We maintain liability insurance for bodily injury and third
party property damage, professional errors and omissions, and workers'
compensation coverage, which we consider sufficient to insure against these
risks, subject to self-insured amounts.
Seasonality
Our revenues are generated by services, and therefore holidays and employee
vacations during our fourth quarter negatively impact revenues for that quarter,
which is only partially offset by the year-end efforts on the part of many
clients to spend any remaining funds budgeted for services and capital
expenditures during the year. Our clients' annual budget process is normally
completed in the first quarter, which can slow the award of new work at the
beginning of the year. Principally due to these factors, our first and fourth
quarters are typically less robust than our second and third quarters.
Critical Accounting Policies
Please see Part II, Item 8, Note 2 - Accounting Policies and New Accounting
Pronouncements for additional information regarding our critical accounting
policies.
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