ENGlobal Corporation (NASDAQ:ENG) is a leading provider of innovative, delivered project solutions primarily to the energy industry. The company has a long history of delivering project solutions and can provide complete project execution, with a focus on engineering, automation, and government services.
Business Overview and History
ENGlobal was incorporated in the State of Nevada in June 1994 and has since established itself as a vertically-integrated engineering and professional project execution services provider. The company's strategy and positioning have allowed it to pursue larger scopes of work centered around various types of modularized engineered systems.
In its early years, ENGlobal focused on providing engineering, procurement, and construction management services, as well as fabricated products, to downstream refineries, petrochemical facilities, and midstream pipeline and transportation companies. The company differentiated itself by leveraging its expertise in automation and systems integration, offering a vertically-integrated service model that set it apart from competitors.
As part of its growth strategy, ENGlobal expanded its capabilities to include government services. This diversification involved providing engineering, design, installation, and maintenance of automated fuel handling and tank gauging systems for the U.S. military on a global scale. This move into the government sector proved beneficial, helping the company navigate downturns in the commercial energy market.
Despite these strategic moves, ENGlobal has faced significant challenges in recent years. In 2022 and 2023, the company struggled with legacy projects and high overhead costs, necessitating a realignment of its organizational structure. These challenges led to substantial reductions in headcount across all business segments to better align the company's cost structure with its current workload.
Adding to its difficulties, ENGlobal faced issues with meeting Nasdaq's continued listing requirements due to its failure to maintain a minimum stockholders' equity level. Although the company was granted an extension by Nasdaq and eventually regained compliance, these operational and financial hurdles raised substantial doubts about ENGlobal's ability to continue as a going concern.
Over the years, ENGlobal has made significant strides in its business. In 2020, the company reported total revenue of $64.45 million and a net loss of $625,000. In 2021, revenue increased to $36.41 million, but the company faced a net loss of $5.69 million. 2022 brought further challenges, with revenue declining to $40.19 million and a net loss of $18.51 million.
The company's struggles continued into 2023, with revenue declining to $39.04 million and a net loss of $15.15 million. However, ENGlobal has been actively working to reposition its business and address the challenges it has faced.
One of the key challenges ENGlobal has encountered is the need to make significant reductions in its overhead structure as part of an internal business reorganization. These cost reductions have primarily focused on headcount across all segments to better align the number of administrative staff with the current volume of work and reorganize the corporate structure.
Despite these challenges, ENGlobal has remained committed to its core competencies in engineering, automation, and government services. The company has a strong track record of delivering innovative, high-quality project solutions to its clients in the energy industry.
Financial Performance and Liquidity
In terms of financial performance, ENGlobal has faced some significant hurdles. The company's net income has been negative for the past three years, with net losses of $15.15 million in 2023, $18.51 million in 2022, and $5.69 million in 2021.
The company's liquidity position has also been a concern. As of December 30, 2023, ENGlobal had $615,000 in cash and cash equivalents, down from $3.46 million at the end of 2022. The company's working capital deficit stood at $2.22 million as of the end of 2023, compared to a surplus of $7.11 million at the end of 2022.
To address its liquidity challenges, ENGlobal entered into a Credit Agreement with Alliance 2000, Ltd. in June 2023, which provided the company with up to $1.25 million in term loans. In April 2024, the company amended and restated this Credit Agreement, extending the maturity date and reducing the interest rate.
The most recent fiscal year (2023) results show: - Revenue: $39.04 million - Net Income: -$15.15 million - Operating Cash Flow (OCF): -$4.83 million - Free Cash Flow (FCF): -$5.01 million
For the most recent quarter (Q3 2024), the company reported: - Revenue: $5.68 million - Net Income: -$0.50 million - Operating Cash Flow (OCF): $0.99 million - Free Cash Flow (FCF): $0.99 million
Year-over-year revenue decreased 39.9% primarily due to the company's decision to stop self-performing fabrication, construction and field services, partially offset by new project awards.
As of September 28, 2024, ENGlobal's liquidity position was as follows: - Debt/Equity Ratio: -0.52 - Cash: $1.23 million - Available Credit Line: The company does not have any available borrowing capacity under its $1 million revolving credit facility - Current Ratio: 0.61 - Quick Ratio: 0.61
Risks and Uncertainties
ENGlobal's business is not without its risks and uncertainties. The company operates in the highly competitive energy industry, which can be subject to significant volatility and unpredictability. The company's reliance on a limited number of large customers also presents a potential risk, as the loss of a significant customer could have a material impact on its financial performance.
Furthermore, the company's recurring losses, negative cash flows from operating activities, and need for additional financing raise substantial doubt about its ability to continue as a going concern. ENGlobal has stated that it intends to raise funds through various potential sources, such as equity or debt financings, but there is no assurance that such financing will be available on acceptable terms, or at all.
The company is also facing legal challenges. On March 12, 2024, ENGlobal U.S. Inc. was served with a lawsuit by VEnergy Industrial Park I, LLC seeking $1.3 million in damages for a breach of lease. The company disagrees with the plaintiff's claims and expects to petition the court with affirmative defenses. Additionally, on August 1, 2024, ENGlobal U.S. Inc. was served with a lawsuit by 5V Leasing, LLC and Hector Venegas seeking $250,000 in damages for a breach of lease. The company disagrees with the plaintiffs' claims and expects to petition the court with affirmative defenses.
Business Segments
ENGlobal Corporation operates in three main business segments: Automation, Engineering, and Government Services.
The Automation group provides the design and programming of automated control systems as well as designs, fabricates, integrates and commissions modular systems that include remote instrumentation control stations, on-line process analytical data, continuous emission monitoring, and electric power distribution. These packaged systems are often housed in a fabricated metal enclosure, modular building or freestanding metal rack, which are commonly included in the scope of work. The Automation group provides engineering, procurement, fabrication, systems integration, programming and on-site commissioning services to clients for both new and existing facilities.
The Engineering group focuses on providing engineering, procurement, construction, and automation services as well as fabricated products to downstream refineries and petrochemical facilities as well as midstream pipeline, storage and other transportation related companies. These services are often applied to small capital improvement and maintenance projects within refineries and petrochemical facilities. For transportation clients, the Engineering group works on facilities that include pumping, compression, gas processing, metering, storage terminals, product loading and blending systems. This group also provides engineering, fabrication and automation services to clients who have operations in the U.S. oil and gas exploration and development markets, usually associated with the completion, purification, storage and transmission of oil and gas from the wellhead to the terminal or pipeline destination.
The Government Services group provides services related to the engineering, design, installation and maintenance of automated fuel handling and tank gauging systems for the U.S. military across the globe.
For reporting purposes, the Automation and Engineering groups are combined into the Commercial segment. For the three months ended September 28, 2024, the Commercial segment generated revenue of $4.29 million with a gross profit margin of 12.5%. The Government Services segment generated revenue of $1.39 million with a gross profit margin of 4.5%. Overall, the company reported consolidated revenue of $5.68 million for the quarter, with a consolidated gross profit margin of 8.4%.
For the nine months ended September 28, 2024, the Commercial segment generated revenue of $13.29 million with a gross profit margin of 13.4%. The Government Services segment generated revenue of $5.06 million with a gross profit margin of 1.8%. The company reported consolidated revenue of $18.35 million for the nine-month period, with a consolidated gross profit margin of 9.2%.
The financial performance across the segments was impacted by factors such as the company's decision to stop self-performing fabrication, construction and field services, as well as the completion of large projects in the Government Services segment. The company continues to focus on providing engineering, automation and modular systems integration services to its energy and government clients.
Outlook and Recent Developments
In its most recent 10-Q filing for the quarter ended September 28, 2024, ENGlobal reported revenues of $5.7 million, compared to $9.5 million in the same period of 2023. The company's net loss for the quarter improved to $0.5 million, compared to a net loss of $0.7 million in the prior-year period.
The company's focus on cost reduction and margin improvement has continued to be a priority, as evidenced by the improvement in its quarterly financial results. However, the company's long-term viability remains a concern, and it will need to find ways to consistently generate positive cash flows and improve its financial position.
ENGlobal's Board of Directors is currently reviewing strategic transactions, which could include acquisitions, mergers, or the sale of specific assets, among other potential actions aimed at increasing shareholder value. The company has stated that it does not intend to disclose any developments related to this review until the Board has approved a specific transaction or determined that further disclosure is appropriate.
Conclusion
ENGlobal Corporation is a company with a long history in the energy industry, but it has faced significant challenges in recent years. The company's focus on cost reduction and margin improvement is a positive step, but its recurring losses, negative cash flows, and need for additional financing raise substantial concerns about its ability to continue as a going concern.
As the company navigates these challenges and explores strategic options, investors will need to closely monitor ENGlobal's progress and its ability to consistently generate positive financial results. The outcome of the Board's strategic review will be a crucial factor in determining the company's future direction and prospects.