ENGlobal Corporation (NASDAQ:ENG) is a leading provider of innovative, delivered project solutions primarily to the energy industry. The company delivers these solutions by combining its vertically-integrated engineering and professional project execution services with its automation and systems integration expertise. ENGlobal's strategy and positioning have allowed it to pursue larger scopes of work centered around many different types of modularized engineered systems.

Financials

In the first quarter of 2024, ENGlobal reported revenue of $6.5 million, a significant decrease from $13.2 million in the same period of the prior year. This decline was primarily due to the company's decision to stop self-performing fabrication, construction, and field services in its Commercial segment. Despite the revenue drop, ENGlobal's gross profit margin improved significantly, increasing from (13.8)% in Q1 2023 to 7.1% in Q1 2024. This improvement was largely attributable to a $1.4 million reduction in indirect costs and the aforementioned strategic shift away from lower-margin self-performed work.

Selling, general, and administrative (SG&A) expenses decreased by $2.4 million year-over-year, driven by $0.8 million in labor savings, $0.1 million in rent savings, and the absence of $1.1 million in bad debt expense recorded in the prior-year period. These cost reductions, combined with the improved gross margin, helped ENGlobal narrow its net loss from $6.3 million in Q1 2023 to $1.4 million in Q1 2024.

Liquidity

ENGlobal's liquidity position remains a concern, as the company reported negative working capital of $2.1 million as of March 30, 2024. The company's recurring losses, negative cash flows from operations, and need for additional financing raise substantial doubt about its ability to continue as a going concern. ENGlobal had limited cash on hand of $1.1 million at the end of the first quarter and will require additional working capital to fund its planned operations.

To address its liquidity challenges, ENGlobal entered into a Credit Agreement with Alliance 2000, Ltd. in June 2023, which provided up to $1.25 million in term loans. In April 2024, the company amended and restated this agreement, extending the maturity date to July 2025 and reducing the interest rate to 8.0%. The amended agreement also provides a revolving credit facility of up to the lesser of $1.0 million or the borrowing base, which is based on eligible receivables.

Recent Developments

Despite the company's liquidity concerns, ENGlobal's management remains focused on executing its strategic plan. The company has made significant progress in its three key areas of focus: investment in decarbonization and energy security projects, control of operating and capital expenses, and the development of renewable hydrogen infrastructure.

In the first quarter of 2024, ENGlobal increased its stake in the Hanseatic Energy Hub consortium in Germany to 15% and reached a final investment decision to build the first LNG land terminal in Germany, where ENGlobal will be the terminal operator. The company also made significant advancements in its renewable hydrogen initiatives, including being designated as the provisional manager of the backbone hydrogen network in Spain and having several of its hydrogen infrastructure projects designated as Projects of Common Interest by the European Union.

Outlook

Looking ahead, ENGlobal expects to maintain its focus on cost control, with a commitment to keep core recurrent operating expenses from rising more than 1% annually between 2022 and 2026. The company also anticipates investing approximately $170 million in 2024, with the majority (80%) directed towards its core operations and the remainder allocated to new business initiatives and international projects.

Conclusion

While ENGlobal faces significant liquidity challenges, the company's strategic initiatives in the areas of decarbonization, energy security, and renewable hydrogen infrastructure development demonstrate its commitment to positioning itself for long-term success in the evolving energy landscape. Investors will closely monitor the company's ability to secure additional financing and execute its strategic plan to overcome its current obstacles and return to profitability.