UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ------ EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2009
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ------ EXCHANGE ACT OF 1934
X | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | |
For the quarterly period ended March 31, 2010 |
| | |
| | |
| | |
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File No. 001-14217
ENGlobal Corporation
--------------------
(Exact
(Exact name of registrant as specified in its charter)
Nevada
------
(State
(State or other jurisdiction of
incorporation or organization)
88-0322261
----------
(I.R.S
(I.R.S Employer Identification No.)
654 N. Sam Houston Parkway E., Suite 400, Houston, TX 77073-6033
- ----------------------------------------------------- ----------
(Address of principal executive offices) (Zip code)
654 N. Sam Houston Parkway E., Suite 400, Houston, TX | 77060-5914 |
(Address of principal executive offices) | (Zip code) |
(281) 878-1000
--------------
(Registrant's
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shortened period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes No
----- -----
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large“large accelerated filer," "accelerated” “accelerated filer,"” and smaller reporting company in Rule 12b-2 of the Exchange Act. (check one):
Large Accelerated Filer Accelerated Filer X
--- ---
Non-Accelerated Filer Smaller Reporting Company
--- ---
(Do not check if a smaller reporting company)
Large Accelerated Filer | | | | Accelerated Filer | X | |
Non-Accelerated Filer | | ( (Do not check if a smaller reporting company) | | Smaller Reporting Company | | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes No X
----- -----
|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the close of business of May 7, 2009.
$0.001 Par Value Common Stock 27,294,852 shares outstanding of each of the issuer’s classes of common stock as of the close of business of May 3, 2010. |
$0.001 Par Value Common Stock | 27,444,659 shares |
|
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2010
TABLE OF CONTENTS
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2009
TABLE OF CONTENTS | | | Page |
| | | Number
------
|
| | | |
Part I. | Financial Information
Item | | |
| | | |
Item 1. | | | |
| | | |
| Condensed Consolidated Statements of IncomeOperations for the Three Months Ended | | |
| March 31, 20092010 and March 31, 2008 2009 | | 4 |
| | | |
| Condensed Consolidated Balance Sheets at March 31, 20092010 and December 31, 2008 2009 | | 5 |
| | | |
| Condensed Consolidated Statements of Cash Flows for the Three Months Ended | | |
| March 31, 20092010 and March 31, 2008 2009 | | 6 |
| | | |
| Notes to Condensed Consolidated Financial Statements 7-13
| | 7-14 |
| | | |
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations 14-29
| | 15-31 |
| | | |
| Engineering Segment Results 22
| | 24 |
| Construction Segment Results 24
| | 26 |
| Automation Segment Results 26
| | 28 |
| Land Segment Results 28
| | 30 |
| | | |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk 30
| | 32 |
| | | |
Item 4. | Controls and Procedures 30
| | 32 |
| | | |
Part II. | Other Information | | |
| | | |
Item 1. | Legal Proceedings 31 | | 33 |
| | | |
Item 1A. | Risk Factors 31
| | 33 |
| | | |
Item 6. Exhibits 32
Signatures 33
3
PART I. - FINANCIAL INFORMATION
-------------------------------
ITEM 1. FINANCIAL STATEMENTS
- -----------------------------
ENGlobal Corporation
Condensed Consolidated Statements2. | Unregistered Sales of Income
(Unaudited)
(Dollars in Thousands)
For the Three Months Ended
March 31,
----------------------------------------
2009 2008
------------- -------------
Revenues $ 93,489 $ 98,166
Operating costs 83,005 83,820
------------- -------------
Gross profit 10,484 14,346
Selling, general and administrative 7,062 7,226
------------- -------------
Operating income 3,422 7,120
Other income (expense):
Other income 219 26
Interest income (expense), net (211) (483)
------------- -------------
Income before income taxes 3,430 6,663
Provision for federal and state income taxes 1,417 2,660
------------- -------------
Net income $ 2,013 $ 4,003
============= =============
Net income per common share:
Basic $ 0.07 $ 0.15
Diluted $ 0.07 $ 0.15
Weighted average shares used in computing net income
per share (in thousands):
Basic 27,295 27,060
Diluted 27,498 27,527
4
ENGlobal Corporation
Condensed Consolidated Balance Sheets
(Unaudited)
(Dollars in Thousands)
ASSETS
------
March 31, December 31,
2009 2008
--------- ---------
Current Assets:
Cash $ 4,187 $ 1,000
Trade receivables, net 75,273 96,023
Prepaid expenses and other current assets 2,213 2,392
Current portion of notes receivable 59 59
Costs and estimated earnings in excess of billings on uncompleted contracts 7,198 6,913
Deferred tax asset 4,281 4,281
--------- ---------
Total Current Assets $ 93,211 $ 110,668
Property and equipment, net 6,664 5,744
Goodwill 21,453 21,457
Other intangible assets, net 4,616 5,000
Long term notes receivable, net of current portion 8,620 8,636
Deferred tax asset, non-current 153 153
Other assets 878 1,047
--------- ---------
Total Assets $ 135,595 $ 152,705
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable $ 12,048 $ 18,830
Accrued compensation and benefits 15,247 24,432
Notes payable 506 1,058
Current portion of long-term debt and leases 1,736 1,861
Deferred rent 429 416
Billings and estimated earnings in excess of costs on uncompleted contracts 1,592 208
Federal and state income taxes payable 1,320 2,472
Other current liabilities 2,689 2,805
--------- ---------
Total Current Liabilities $ 35,567 $ 52,082
Long-Term Debt and Lease, net of current portion 21,141 23,857
--------- ---------
Total Liabilities $ 56,708 $ 75,939
--------- ---------
Commitments and Contingencies (Note 9)
Stockholders' Equity:
Common stock - $0.001 par value; 75,000,000 shares authorized;
27,294,852 and 27,294,852 shares issued and outstanding at
March 31, 2009 and December 31, 2008, respectively $ 27 $ 27
Additional paid-in capital 36,524 36,415
Retained earnings 42,452 40,439
Accumulated other comprehensive income (loss) (116) (115)
--------- ---------
Total Stockholders' Equity $ 78,887 $ 76,766
--------- ---------
Total Liabilities and Stockholders' Equity $ 135,595 $ 152,705
========= =========
5
ENGlobal Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in Thousands)
For the Three Months Ended
March 31,
-------------------------
2009 2008
------------------------
Cash Flows from Operating Activities:
Net income $ 2,013 $ 4,003
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 1,236 1,111
Share-based compensation expense 148 387
(Gain)/loss on disposal of property, plant and equipment 45 (1)
Deferred income taxes -- (90)
Changes in current assets and liabilities, net of acquisitions:
Trade receivables 20,749 (3,044)
Costs and estimated earnings in excess of billings on uncompleted contracts (284) 230
Prepaid expenses and other assets 203 298
Accounts payable (6,782) (2,851)
Accrued compensation and benefits (9,185) (913)
Billings in excess of costs and estimated earnings 1,384 (41)
Other liabilities (138) (903)
Income taxes receivable/payable (1,152) 2,210
-------- --------
Net cash provided by operating activities $ 8,237 $ 396
-------- --------
Cash Flows from Investing Activities:
Property and equipment acquired (1,673) (445)
Proceeds from note receivable -- 46
Proceeds from sale of other assets 3 1
-------- --------
Net cash used in investing activities $ (1,670) $ (398)
-------- --------
Cash Flows from Financing Activities:
Net borrowings (payments) on line of credit (2,530) 1,843
Proceeds from issuance of common stock -- 23
Borrowing under capital lease 14 --
Long-term debt repayments (863) (705)
-------- --------
Net cash (used in) provided by financing activities $ (3,379) $ 1,161
-------- --------
Effect of Exchange Rate Changes on Cash (1) (48)
-------- --------
Net change in cash 3,187 1,111
Cash, at beginning of period 1,000 908
-------- --------
Cash, at end of period $ 4,187 $ 2,019
======== ========
6
NOTE 1 - BASIS OF PRESENTATION
Our condensed consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United States of
America. Our Company consolidates all of its wholly-owned subsidiaries and
all significant inter-company accounts and transactions have been
eliminated in the consolidation.
The condensed consolidated financial statements of ENGlobal Corporation
(which may be referred to as "ENGlobal," the "Company," "we," "us," or
"our") included herein are unaudited for the three months ended March 31,
2009 and 2008, and have been prepared from the books and records of the
Company pursuant to the rules and regulations of the Securities and Exchange Commission, and in the caseUse of the condensed balance sheet as of
December 31, 2008, have been derived from the audited financial statements.
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. Certain
information and note disclosures, normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America, have been condensed or omitted pursuant to rules
and regulations of theProceeds | | 33 |
| | | |
Item 3. | Defaults Upon Senior Securities and Exchange Commission. It is suggested
that these condensed financial statements be read in conjunction with the
Company's audited financial statements for the year ended December 31,
2008, included in the Company's Annual Report on Form 10-K filed with the
Securities and Exchange Commission. The Company believes that the
disclosures made herein are adequate to make the information presented not
misleading.
NOTE 2 - CRITICAL ACCOUNTING POLICIES
A summary of critical accounting policies is disclosed in Note 2 to the
consolidated financial statements included in our 2008 Annual Report on
Form 10-K. Our critical accounting policies are further described under the
caption "Critical Accounting Policies" in Management's Discussion and
Analysis of Financial Condition and Results of Operation in our 2008 Annual
Report on Form 10-K.
NOTE 3 - SHARE-BASED COMPENSATION
The Company's 1998 incentive plan ("Option Plan") that provided for the
issuance of options to acquire up to 3,250,000 shares of common stock,
expired in June 2008. The Option Plan provided for grants of non-statutory
options, incentive stock options, restricted stock awards and stock
appreciation rights. All stock option grants were for a ten-year term.
Stock options issued to executives and management generally vest over a
four-year period, one-fifth at grant date and one-fifth at December 31 of
each subsequent year until they are fully vested. Stock options issued to
directors vested quarterly over a one-year period.
Total share-based compensation expense in the amount of $148,000 and
$387,000 was recognized in the three months ended March 31, 2009, and March
31, 2008, respectively, all of which was recorded in selling, general and
administrative expense. We did not have an income tax benefit recognized in
the condensed consolidated statements of income for the share-based
arrangements for the three months ended March 31, 2009, but $90,000 was
recognized for the three months ended March 31, 2008.
Compensation expense related to outstanding non-vested stock option awards
under the Plan of $591,000 had not been recognized at March 31, 2009. This
compensation expense is expected to be recognized over a weighted-average
period of approximately 24 months.
7
The following table summarizes stock option activity for the first quarter
of 2009:
Weighted Weighted Average
Average Remaining Aggregate
Number of Exercise Contractual Intrinsic
Options Price Term (Years) Value (000's)*
------------- ----------- ----------------- -------------
Balance at December 31, 2008 1,173,206 $ 6.82 5.4 $ 626
Granted -- -- -- --
Exercised -- -- -- --
Canceled or expired (17,102) 8.89 -- --
---------- -------- ----- ----------
Balance at March 31, 2009 1,156,104 $ 6.79 6.2 $ 623
========== ======== ===== ==========
Exercisable at March 31, 2009 1,045,504 $ 6.42 6.0 $ 623
========== ======== ===== ==========
*Based on average stock price for the first quarter of 2009 of $3.49 per share.
The average stock price for the same period in 2008 was $9.26 per share. The
total fair value of vested options outstanding as of March 31, 2009 and 2008 was
$0.6 million and $4.6 million, respectively.
The total intrinsic value of options exercised was $86,000 for the three months
ended March 31, 2008. There were no options exercised during the three months
ended March 31, 2009.
Restricted Stock Unit Awards
On August 8, 2008, the Company issued restricted stock units equivalent to 6,420
shares of common stock to each of its three non-employee directors. These
restricted stock units, issued outside of the Option Plan, were intended to
compensate and retain the directors over the one-year service period commencing
July 1, 2008. The fair value of the awards was $93,411 per director based on the
market price of $14.55 per share of the Company's stock on the date the award
was granted. Upon vesting, the units are convertible into cash based on the fair
value of the Company's shares at the vesting date or, if shareholder approval is
obtained, the Company may elect to settle the Units either in cash or in common
stock. The units vest in equal quarterly installments beginning on September 30,
2008, so long as the grantee continues to serve as an independent director of
the Company. Recognition of compensation expense related to the restricted stock
units commenced in the third quarter of 2008. At the end of the fourth quarter
2008, the compensation value of the vested units was measured again and the
amount to be settled in cash was classified as a liability. The units that
vested in 2008 were settled on March 15, 2009. At the end of the first quarter
2009, the compensation value of the outstanding vested units was measured again
and the amount to be settled in cash was classified as a liability. The
remaining units are required to be settled by March 15, 2010.
8
NOTE 4 - FIXED FEE CONTRACTS
Costs, estimated earnings and billings on uncompleted contracts consisted
of the following at March 31, 2009 and December 31, 2008:
March 31, December 31,
2009 2008
-----------------------------
(Dollars in Thousands)
----------------------------
Costs incurred on uncompleted contracts $ 23,254 $ 24,893
Estimated earnings (losses) on uncompleted contracts 4,520 5,280
-------- --------
Earned revenues 27,774 30,173
Less: billings to date 22,168 23,468
-------- --------
Net costs and estimated earnings in excess of billings
on uncompleted contracts $ 5,606 $ 6,705
======== ========
Costs and estimated earnings in excess of billings on uncompleted contracts $ 7,198 $ 6,913
Billings and estimated earnings in excess of cost on uncompleted contracts (1,592) (208)
-------- --------
Net costs and estimated earnings in excess of billings
on uncompleted contracts $ 5,606 $ 6,705
======== ========
NOTE 5 - LINE OF CREDIT AND DEBT
March 31, December 31,
2009 2008
------------------------
(Dollars in Thousands)
------------------------
Schedule of Long-Term Debt:
Comerica Credit Facility - Line of credit, prime (3.25% at March 31, 2009),
maturing in August 2010 $ 20,000 $ 22,530
Cleveland Inspection Services, Inc., CIS Technical Services and F.D. Curtis - Notes
payable, discounted at 5% interest, principal payments in installments of
$100,000 due quarterly, maturing in October 2009 197 293
ATI Technologies - Note payable, interest at 6%, principal payments in installments
of $30,422 including interest due monthly, matured in January 2009 -- 30
Michael Lee - Note payable, interest at 5%, principal payments in installments of
$150,000 plus interest due quarterly, maturing in July 2010 750 900
Watco Management, Inc. - Note payable, interest at 4%, principal payments in
installments of $137,745 including interest due annually, maturing in
October 2010 260 260
Frank H McIlwain, PC; James A Walters, PC; William M Bosarge, PC; Matthew R Burton,
PC - Notes payable, discounted at 2.38% interest, payments in installments of
$666,667 including interest due annually, maturing in December 2010 1,294 1,287
-------- --------
Total long-term debt 22,501 25,300
Less: current maturities of long-term debt (1,556) (1,686)
-------- --------
Long-term debt, net of current portion 20,945 23,614
Borrowings under capital leases 376 418
Less: current maturities of capital lease (180) (175)
-------- --------
Total long-term debt $ 21,141 $ 23,857
======== ========
9
NOTE 6 - SEGMENT INFORMATION
ENGlobal has four reportable segments: Engineering, Construction,
Automation and Land. Our segments are strategic business units that offer
different services and products and therefore require different marketing
and management strategies. Our segments have grown through strategic
acquisitions, which have also served to augment management expertise.
The Engineering segment provides consulting services relating to the
development, management and execution of projects requiring professional
engineering and related project services. Services provided by the
Engineering segment include feasibility studies, engineering, design,
procurement, and construction management. The Construction segment provides
construction management personnel and services in the areas of inspection,
mechanical integrity, vendor and turnaround surveillance, field support,
construction, quality assurance and plant asset management. The Automation
segment provides services related to the design, fabrication, and
implementation of process distributed control and analyzer systems,
advanced automation, and information technology projects. The Land segment
provides land management, right-of-way, environmental compliance, and
governmental regulatory compliance services primarily to pipeline, utility
and telecom companies and other owner/operators of infrastructure
facilities throughout the United States and Canada.
The accounting policies of each of the segments are the same as those
described in the summary of critical accounting policies referenced in Note
2 above. The Company evaluates performance based on profit or loss from
operations before interest, income taxes and other income or loss, but
after selling, general and administrative expenses attributable to the
reportable segments. Transactions between reportable segments are at market
rates comparable to terms available from unrelated parties.
(Dollars in Thousands) Engineering Construction Automation Land All | | 33 |
| | | |
Item 5. | Other Consolidated
For the three months ended
March 31, 2009
Revenue before eliminations $ 43,115 $ 22,550 $ 20,677 $ 9,086 $ -- $ 95,428
Inter-segment eliminations (540) (1,313) (86) -- -- (1,939)
-------- -------- -------- -------- -------- --------
Revenue 42,575 21,237 20,591 9,086 -- 93,489
Gross profit 4,616 1,640 2,857 1,371 -- 10,484
SG&A 1,326 476 1,240 637 3,383 7,062
-------- -------- -------- -------- -------- --------
Operating income 3,290 1,164 1,617 734 (3,383) 3,422
-------- -------- -------- -------- --------
Other income (expense) 8
Tax provision (1,417)
--------
Net income $ 2,013
========
(Dollars in Thousands)
For the three months ended
March 31, 2008
Revenue before eliminations $ 52,035 $ 27,017 $ 10,557 $ 8,835 $ -- $ 98,444
Inter-segment eliminations (6) (117) (155) -- -- (278)
-------- -------- -------- -------- -------- --------
Revenue 52,029 26,900 10,402 8,835 -- 98,166
Gross profit 9,882 2,028 1,044 1,392 -- 14,346
SG&A 1,295 703 632 677 3,919 7,226
-------- -------- -------- -------- -------- --------
Operating income 8,587 1,325 412 715 (3,919) 7,120
-------- -------- -------- -------- --------
Other income (expense) (457)
Tax provision (2,660)
--------
Net income $ 4,003
========
10
Financial information about geographic areas
--------------------------------------------
Revenue from the Company's non-U.S. operations is not material. Long-lived
assets (principally leasehold improvements and computer equipment) located
in Canada were recorded at $33,000 as of March 31, 2009, net of accumulated
depreciation, stated in U.S. dollars.
NOTE 7 - FEDERAL AND STATE INCOME TAXES
Information | | 33 |
| | | |
Item 6. | | | 34 |
| | | |
| Signatures | | 35 |
| | | |
PART I. – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ENGlobal Corporation
Condensed Consolidated Statements of Operations
(Unaudited)
(dollars in thousands, except earnings per share)
| | For the Three Months Ended March 31, | |
| | 2010 | | | 2009 | |
Revenues | | $ | 67,984 | | | $ | 93,489 | |
Operating costs | | | 63,112 | | | | 83,005 | |
Gross profit | | | 4,872 | | | | 10,484 | |
| | | | | | | | |
Selling, general and administrative | | | 7,383 | | | | 7,107 | |
Operating income (loss) | | | (2,511 | ) | | | 3,377 | |
| | | | | | | | |
Other income (expense): | | | | | | | | |
Other income (expense) | | | (11 | ) | | | 264 | |
Interest income (expense), net | | | (76 | ) | | | (211 | ) |
Income (loss) before income taxes | | | (2,598 | ) | | | 3,430 | |
| | | | | | | | |
Provision for federal and state income taxes | | | (1,060 | ) | | | 1,417 | |
| | | | | | | | |
Net income (loss) | | $ | (1,538 | ) | | $ | 2,013 | |
| | | | | | | | |
Earnings (loss) per common share: | | | | | | | | |
Basic | | $ | (0.06 | ) | | $ | 0.07 | |
Diluted | | $ | (0.06 | ) | | $ | 0.07 | |
Weighted average shares used in computing earnings (loss) per share (in thousands): | | | | | | | | |
Basic | | | 27,434 | | | | 27,295 | |
Diluted | | | 27,434 | | | | 27,498 | |
See accompanying notes to interim condensed consolidated financial statements.
ENGlobal Corporation
Condensed Consolidated Balance Sheets
(Unaudited)
(dollars in thousands)
ASSETS |
| | March 31, 2010 | | | December 31, 2009 | |
Current Assets: | | | | | | |
Cash and cash equivalents | | $ | 337 | | | $ | 143 | |
Trade receivables, net of allowances of $1,524 and $1,868 | | | 42,328 | | | | 47,715 | |
Prepaid expenses and other current assets | | | 1,818 | | | | 2,182 | |
Current portion of notes receivable | | | - | | | | 15 | |
Costs and estimated earnings in excess of billings on uncompleted contracts | | | 4,457 | | | | 6,557 | |
Federal and state income taxes receivable | | | 3,243 | | | | 2,221 | |
Deferred tax asset | | | 3,250 | | | | 3,250 | |
Total Current Assets | | $ | 55,433 | | | $ | 62,083 | |
Property and equipment, net | | | 5,622 | | | | 5,983 | |
Goodwill | | | 22,390 | | | | 22,291 | |
Other intangible assets, net | | | 3,844 | | | | 4,238 | |
Long term trade and notes receivable, net of current portion and allowances | | | 14,563 | | | | 14,621 | |
Deferred tax asset, non-current | | | 607 | | | | 607 | |
Other assets | | | 783 | | | | 812 | |
Total Assets | | $ | 103,242 | | | $ | 110,635 | |
| | | | | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY |
| | | | | | | | |
Current Liabilities: | | | | | | | | |
Accounts payable | | $ | 8,470 | | | $ | 8,252 | |
Accrued compensation and benefits | | | 11,213 | | | | 11,511 | |
Current portion of long-term debt and leases | | | 1,068 | | | | 1,064 | |
Deferred rent | | | 800 | | | | 613 | |
Billings in excess of costs and estimated earnings on uncompleted contracts | | | 2,859 | | | | 3,601 | |
Other current liabilities | | | 1,446 | | | | 734 | |
Total Current Liabilities | | $ | 25,856 | | | $ | 25,775 | |
| | | | | | | | |
Long-Term Debt and Leases, net of current portion | | | 105 | | | | 6,149 | |
Total Liabilities | | $ | 25,961 | | | $ | 31,924 | |
Commitments and Contingencies (Note 9) | | | | | | | | |
Stockholders’ Equity: | | | | | | | | |
Common stock - $0.001 par value; 75,000,000 shares authorized; 27,444,659 and 27,407,159 shares issued and outstanding at March 31, 2010 and December 31, 2009, respectively | | $ | 27 | | | $ | 27 | |
Additional paid-in capital | | | 37,208 | | | | 37,108 | |
Retained earnings | | | 40,135 | | | | 41,672 | |
Accumulated other comprehensive income (loss) | | | (89 | ) | | | (96 | ) |
Total Stockholders’ Equity | | $ | 77,281 | | | $ | 78,711 | |
Total Liabilities and Stockholders’ Equity | | $ | 103,242 | | | $ | 110,635 | |
See accompanying notes to interim condensed consolidated financial statements.
ENGlobal Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(dollars in thousands)
| | For the Three Months Ended March 31, | |
| | 2010 | | | 2009 | |
Cash Flows from Operating Activities: | | | | | | |
Net income (loss) | | $ | (1,538 | ) | | $ | 2,013 | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | | | |
Depreciation and amortization | | | 1,050 | | | | 1,236 | |
Share-based compensation expense | | | 100 | | | | 148 | |
(Gain)/Loss on disposal of property, plant and equipment | | | (7 | ) | | | 45 | |
Changes in current assets and liabilities, net of acquisitions: | | | | | | | | |
Trade accounts and other receivables | | | 5,447 | | | | 20,749 | |
Costs and estimated earnings in excess of billings on uncompleted contracts | | | 2,101 | | | | (284 | ) |
Prepaid expenses and other assets | | | 354 | | | | 203 | |
Accounts payable | | | 219 | | | | (6,782 | ) |
Accrued compensation and benefits | | | (298 | ) | | | (9,185 | ) |
Billings in excess of costs and estimated earnings on uncompleted contracts | | | (743 | ) | | | 1,384 | |
Other liabilities | | | 800 | | | | (138 | ) |
Income taxes receivable/payable | | | (1,022 | ) | | | (1,152 | ) |
Net cash provided by operating activities | | $ | 6,463 | | | $ | 8,237 | |
Cash Flows from Investing Activities: | | | | | | | | |
Property and equipment acquired | | | (259 | ) | | | (1,673 | ) |
Proceeds from note receivable | | | 15 | | | | - | |
Proceeds from sale of other assets | | | 8 | | | | 3 | |
Net cash used in investing activities | | $ | (236 | ) | | $ | (1,670 | ) |
Cash Flows from Financing Activities: | | | | | | | | |
Net borrowings (payments) on line of credit | | | (6,000 | ) | | | (2,530 | ) |
Borrowing (repayments) under capital lease | | | (47 | ) | | | 14 | |
Other long-term debt repayments | | | 7 | | | | (863 | ) |
Net cash used in financing activities | | $ | (6,040 | ) | | $ | (3,379 | ) |
Effect of Exchange Rate Changes on Cash | | | 7 | | | | (1 | ) |
Net change in cash | | | 194 | | | | 3,187 | |
Cash, at beginning of period | | | 143 | | | | 1,000 | |
Cash, at end of period | | $ | 337 | | | $ | 4,187 | |
| | | | | | | | |
See accompanying notes to interim condensed consolidated financial statements.
Notes to Condensed Consolidated Financial Statements
NOTE 1 – BASIS OF PRESENTATION
Our condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The Company consolidates all of its subsidiaries and all significant inter-company accounts and transactions have been eliminated in the consolidation.
The condensed consolidated financial statements of ENGlobal Corporation (which may be referred to as “ENGlobal,” the “Company,” “we,” “us,” or “our”) included herein are unaudited for the three month periods ended March 31, 2010 and 2009, have been prepared from the books and records of the Company pursuant to the rules and regulations of the Securities and Exchange Commission, and in the case of the condensed balance sheet as of December 31, 2009, have been derived from the audited financial statements. 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. Certain information and note discl osures, normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission. It is suggested that these condensed financial statements be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2009, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission. The Company has assessed subsequent events through the date of filing these condensed consolidated financial statements with the Securities and Exchange Commission and believes that the disclosures made herein are adequate to make the information presented not misleading.
NOTE 2 – CRITICAL ACCOUNTING POLICIES AND NEW ACCOUNTING PRONOUNCEMENTS
A summary of critical accounting policies is disclosed in Note 2 to the consolidated financial statements included in our 2009 Annual Report on Form 10-K. Our critical accounting policies are further described under the caption “Critical Accounting Policies” in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2009 Annual Report on Form 10-K.
NOTE 3 – SHARE-BASED COMPENSATION
The Company’s 1998 Incentive Plan (“Option Plan”) that provided for the issuance of options to acquire up to 3,250,000 shares of common stock expired in June 2008. The Option Plan provided for grants of non-statutory options, incentive stock options, restricted stock awards and stock appreciation rights. All stock option grants were for a ten-year term. Stock options issued to executives and management generally vested over a four-year period, one-fifth at grant date and one-fifth at December 31 of each year until they are fully vested. Stock options issued to directors under the Option Plan vested quarterly over a one-year period. As of May 5, 2010, 1,090,158 shares of Common Stock remained subject to outstanding awards previously granted under the Option Plan.
In June 2009, the Company’s stockholders approved a new 2009 Equity Incentive Plan (“Equity Plan”) that provides for the issuance of up to 480,000 shares of common stock. The Equity Plan provides for grants of non-statutory options, incentive stock options, restricted stock awards, performance shares, performance units, restricted stock units and other stock-based awards. Grants to employees will generally vest over a four-year period, one-fourth at December 31 of each year until they are fully vested. Grants to non-employee directors will vest quarterly over a one-year period coinciding with their service term.
Total share-based compensation expense in the amount of $100,000 and $148,000 was recognized during the three months ended March 31, 2010 and 2009, respectively. Share-based compensation expense is reported in selling, general and administrative expense.
Stock Options
Compensation expense related to outstanding non-vested stock option awards under the Option Plan of $230,000 had not been recognized at March 31, 2010. This compensation expense is expected to be recognized over a weighted-average period of approximately 21 months.
Notes to Condensed Consolidated Financial Statements
The following table summarizes stock option activity through the first quarter of 2010:
| | Number of Options | | | Weighted Average Exercise Price | | | Weighted Average Remaining Contractual Term (Years) | | | Aggregate Intrinsic Value (000’s)* | |
Balance at December 31, 2009 | | | 1,091,104 | | | $ | 7.12 | | | | 3.6 | | | $ | 737 | |
Granted | | | - | | | | - | | | | - | | | | - | |
Exercised | | | - | | | | - | | | | - | | | | - | |
Canceled or expired | | | (946 | ) | | | 0.96 | | | | - | | | | - | |
| | | | | | | | | | | | | | | | |
Balance at March 31, 2010 | | | 1,090,158 | | | $ | 7.12 | | | | 5.5 | | | $ | 344 | |
| | | | | | | | | | | | | | | | |
Exercisable at March 31, 2010 | | | 1,042,158 | | | $ | 7.01 | | | | 5.4 | | | $ | 344 | |
| | | | | | | | | | | | | | | | |
*Based on average stock price through the first quarter of 2010 of $3.04 per share. The average stock price for the same period in 2009 was $3.49 per share. The total fair value of vested options outstanding as of March 31, 2010 and 2009 was $0.3 million and $0.6 million, respectively.
There were no options exercised during the three months ended March 31, 2010 and 2009.
Restricted Stock Units
On August 8, 2008, the Company granted restricted stock units equivalent to 6,420 shares of common stock to each of its three non-employee directors. These restricted stock units, granted outside of the Option Plan, were intended to compensate and retain the directors over the one-year service period commencing July 1, 2008. The fair value of the award was $93,411 per director based on the market price of $14.55 per share on the date granted. Upon vesting, which was equally at quarterly intervals, the units became convertible into cash based on the then market price of the Company’s shares at each respective vesting date. Each director’s vested units were settled for the cash value of $41,698 on or before July 17, 2009.
Restricted Stock Awards
On June 18, 2009, the Company granted restricted stock awards of 15,625 shares of common stock to each of its three non-employee directors. These restricted stock awards are intended to compensate and retain the directors over the one-year service period commencing July 1, 2009. The fair value of the awards was $80,000 per director based on the market price of $5.12 per share of the Company’s stock on the date the awards were granted. The restricted stock awards vest in equal quarterly installments beginning on September 30, 2009, so long as the grantee continues to serve as a director of the Company. Recognition of compensation expense related to the restricted stock awards commenced during the three months ended September 30, 2009.
On January 27, 2010, the Company granted restricted stock awards of 37,500 shares of common stock to two of its employees. The fair value of the awards was $115,875 based on the market price of $3.09 per share of the Company’s stock on the date the awards were granted. The restricted stock awards will vest at the end of each year in four equal installments beginning December 31, 2010.
The amount of compensation expense related to all restricted stock awards that had not been recognized at March 31, 2010, totaled $169,000.
Notes to Condensed Consolidated Financial Statements
NOTE 4 – CONTRACTS
Costs, estimated earnings and billings on uncompleted contracts consisted of the following at March 31, 2010 and December 31, 2009:
| | March 31, 2010 | | | December 31, 2009 | |
| | | (dollars in thousands) | |
| | | | | | | | |
Costs incurred on uncompleted contracts | | $ | 39,632 | | | $ | 32,984 | |
Estimated earnings on uncompleted contracts | | | 6,860 | | | | 5,784 | |
Earned revenues | | | 46,492 | | | | 38,768 | |
Less: billings to date | | | 44,894 | | | | 35,812 | |
Net costs and estimated earnings in excess of billings on uncompleted contracts | | $ | 1,598 | | | $ | 2,956 | |
| | | | | | | | |
Costs and estimated earnings in excess of billings on uncompleted contracts | | $ | 4,457 | | | $ | 6,557 | |
Billings in excess of costs and estimated earnings on uncompleted contracts | | | (2,859 | ) | | | (3,601 | ) |
Net costs and estimated earnings in excess of billings on uncompleted contracts | | $ | 1,598 | | | $ | 2,956 | |
Revenue on fixed-price contracts is recorded primarily using the percentage-of-completion (cost-to-cost) method. Under this method, revenue on long-term contracts is recognized in the ratio that contract costs incurred bear to total estimated contract costs. Revenue and gross margin on fixed-price contracts are subject to revision throughout the lives of the contracts and any required adjustments are made in the period in which the revisions become known. To manage unknown risks, management may use contingency amounts to increase the estimated costs, therefore lowering the earned revenues until the risks are better identified and quantified or have been mitigated. We currently have $1.8 million in contingency for the period ended March 31, 2010 compared to $2.1 million for the period ended March 31, 2009. Losses on contracts are recorded in full as they are identified.
The Company recognizes service revenue as soon as the services are performed. For clients that we consider higher risk, due to past payment history or history of not providing written work authorizations, we have deferred revenue recognition until either a written authorization or payment is received. The current amount of revenue deferred for these reasons is $0.8 million for the period ended March 31, 2010 compared to $0.6 million for the period ended March 31, 2009.
NOTE 5 – LINE OF CREDIT AND DEBT
| | March 31, 2010 | | | December 31, 2009 | |
| | | (dollars in thousands) | |
Schedule of Long-Term Debt and Leases: | | | | | | | | |
Wells Fargo Credit Facility | | $ | - | | | $ | 6,000 | |
Watco Management, Inc. | | | 132 | | | | 132 | |
FH McIlwain, PC; JA Walters, PC; WM Bosarge, PC; MR Burton, PC | | | 655 | | | | 651 | |
ICP Transco, Inc. | | | 190 | | | | 187 | |
Total long-term debt | | | 977 | | | | 6,970 | |
Less: current maturities of long-term debt | | | (872 | ) | | | (872 | ) |
Long-term debt, net of current portion | | | 105 | | | | 6,098 | |
Borrowings under capital lease | | | 196 | | | | 243 | |
Less: current maturities of capital lease | | | (196 | ) | | | (192 | ) |
Total long-term debt and leases, net of current portion | | $ | 105 | | | $ | 6,149 | |
Notes to Condensed Consolidated Financial Statements
NOTE 6 – SEGMENT INFORMATION
ENGlobal has four reportable segments: Engineering, Construction, Automation and Land. Our segments are strategic business units that offer different services and products and therefore require different marketing and management strategies.
The Engineering segment provides consulting services relating to the development, management and execution of projects requiring professional engineering and related project services to the midstream and downstream sectors. Services provided by the Engineering segment include feasibility studies, engineering, design, procurement, and construction management.
Serving primarily the midstream and upstream sectors, the Construction segment provides construction management personnel and services primarily in the area of inspection but also in the areas of construction, construction management, vendor and turnaround management, plant asset management, commissioning and start-up, instrumentation and electrical, mechanical integrity, field support and quality assurance.
The Automation segment provides services related to the design, fabrication and implementation of process distributed control and analyzer systems, advanced automation, information technology and heat tracing projects primarily to the upstream and downstream sectors.
The Land segment provides land management, right-of-way, environmental compliance, legislative affairs support and governmental regulatory compliance services primarily to the midstream sector, including pipeline, utility and telecom companies and other owner/operators of infrastructure facilities throughout the United States and Canada.
The accounting policies of each of the segments are the same as those described in the summary of critical accounting policies referenced in Note 2 above. The Company evaluates performance based on profit or loss from operations before interest, income taxes and other income or loss, but after selling, general and administrative expenses attributable to the reportable segments. Transactions between reportable segments are at market rates comparable to terms available from unrelated parties.
Notes to Condensed Consolidated Financial Statements
For the three months ended March 31, 2010 (dollars in thousands) | | Engineering | | | Construction | | | Automation | | | Land | | | All Other | | | Consolidated | |
| | | | | | | | | | | | | | | | | | |
Revenue before eliminations | | $ | 29,428 | | | $ | 17,179 | | | $ | 15,217 | | | $ | 6,270 | | | $ | - | | | $ | 68,094 | |
Inter-segment eliminations | | | - | | | | (110 | ) | | | - | | | | - | | | | - | | | | (110 | ) |
Revenue | | | 29,428 | | | | 17,069 | | | | 15,217 | | | | 6,270 | | | | - | | | | 67,984 | |
Gross profit | | | 1,913 | | | | 760 | | | | 1,382 | | | | 817 | | | | - | | | | 4,872 | |
SG&A | | | 2,394 | | | | 389 | | | | 1,137 | | | | 447 | | | | 3,016 | | | | 7,383 | |
Operating income (loss) | | | (481 | ) | | | 371 | | | | 245 | | | | 370 | | | | (3,016 | ) | | | (2,511 | ) |
Other income (expense) | | | | | | | | | | | | | | | | | | | | | | | (11 | ) |
Interest income (expense) | | | | | | | | | | | | | | | | | | | | | | | (76 | ) |
Tax provision | | | | | | | | | | | | | | | | | | | | | | | 1,060 | |
Net loss | | | | | | | | | | | | | | | | | | | | | | $ | (1,538 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
For the three months ended March 31, 2009 (dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Revenue before eliminations | | $ | 43,115 | | | $ | 22,550 | | | $ | 20,677 | | | $ | 9,086 | | | $ | - | | | $ | 95,428 | |
Inter-segment eliminations | | | (540 | ) | | | (1,313 | ) | | | (86 | ) | | | - | | | | - | | | | (1,939 | ) |
Revenue | | | 42,575 | | | | 21,237 | | | | 20,591 | | | | 9,086 | | | | - | | | | 93,489 | |
Gross profit | | | 4,616 | | | | 1,640 | | | | 2,857 | | | | 1,371 | | | | - | | | | 10,484 | |
SG&A | | | 1,326 | | | | 476 | | | | 1,574 | | | | 637 | | | | 3,094 | | | | 7,107 | |
Operating income (loss) | | | 3,290 | | | | 1,164 | | | | 1,283 | | | | 734 | | | | (3,094 | ) | | | 3,377 | |
Other income (expense) | | | | | | | | | | | | | | | | | | | | | | | 264 | |
Interest income (expense) | | | | | | | | | | | | | | | | | | | | | | | (211 | ) |
Tax provision | | | | | | | | | | | | | | | | | | | | | | | (1,417 | ) |
Net income | | | | | | | | | | | | | | | | | | | | | | $ | 2,013 | |
Financial information about geographic areas
Revenue from the Company’s non-U.S. operations is not material. Long-lived assets (principally leasehold improvements and computer equipment) located in Canada were valued at $8,000 as of March 31, 2010, net of accumulated depreciation, stated in U.S. dollars.
NOTE 7 – FEDERAL AND STATE INCOME TAXES
| The components of income tax expense (benefit) for the three months ended March 31, 20092010 and 20082009 were as follows:
For the Three Months Ended
March 31,
-----------------------
2009 2008
-----------------------
(Dollars in thousands)
Current $ 1,381 $ 2,750
Deferred 36 (90)
------- -------
Total tax provision $ 1,417 $ 2,660
======= =======
Effective tax rate 41.3% 39.9%
------- -------
The estimated effective tax rates are based on estimates using historical
rates adjusted by recurring and non-recurring book to tax differences.
Estimates at March 31, 2009, are based on results of the 2008 year end and
adjusted for estimates of non-recurring differences from the prior year, as
well as anticipated book to tax differences for 2009.
|
| | Three Months Ended March 31, | |
| | 2010 | | | 2009 | |
| | | (dollars in thousands) | |
Current | | $ | 180 | | | $ | 1,381 | |
Deferred | | | (1,240 | ) | | | 36 |
Total tax provision (benefit) | | $ | (1,060 | ) | | $ | 1,417 |
Effective tax rate | | | 40.8 | % | | | 41.3 | % |
As required by ASC 740 the Company makes its interim tax allocation by applying estimated fiscal year effective tax rates to estimated fiscal year ordinary income together with unusual or infrequently occurring activity for the year-to-date period.
Notes to Condensed Consolidated Financial Statements
NOTE 8 -– EARNINGS PER SHARE
The following table reconciles the number of shares used to compute basic
earnings per share to the number of shares used to compute diluted earnings
per share ("EPS").
For the Three Months Ended
March 31,
----------------------
2009 2008
----------------------
(Shares in thousands)
Weighted average shares
outstanding used to
compute basic EPS 27,295 27,060
Effect of share-based plan 203 467
------ ------
Shares used to compute
diluted EPS 27,498 27,527
====== ======
NOTE 9 -COMMITMENTS AND CONTINGENCIES
Employment Agreements
The Company has employment agreements with certain of its executive
officers and other officers. Such agreements provide for minimum salary
levels. Generally, if the Company terminates the employment of the employee
for any reason other than (1) for cause, as defined in the employment
agreement, (2) voluntary resignation, or (3) the employee's death, the
Company is obligated to provide a severance benefit equal up to twelve
months of the employee's salary, and, at its option, an additional six
months at 50% to 100% of the employee's salary in exchange for an extension
of the employee's agreement not to engage in certain competitive
activities. These agreements are renewable for one year at the Company's
option.
Long-term Note Receivable
In the first quarter of 2007, ENGlobal Engineering, Inc. ("EEI") and South
Louisiana Ethanol, LLC ("SLE") executed an agreement for engineering,
procurement and construction (EPC) services relating to the retro-fit of an
ethanol plant in southern Louisiana. In October 2007, SLE executed a
promissory note, or "Hand Note," payable to the Company and having a
principal balance of approximately $12.3 million, constituting amounts then
due to the Company for its work in connection with the project. The history
of the SLE project (the "SLE Project") is described in Note 9 to the
Company's condensed consolidated financial statements included in its
Quarterly Report on Form 10-Q for the quarter ended March 31, 2008, and is
discussed further in the Company's Annual Report on Form 10-K for the year
ended December 31, 2007, under Litigation, below, and in Part II, "Item 1 -
Legal Proceedings" of this Quarterly Report on Form 10-Q.
11
Accounts Receivable
On March 13, 2009, the Company entered into a letter agreement (the "letter
agreement") with a significant client resolving the payment of presently
due and past due Accounts Receivable invoices in the amount of $6.8
million. The principle terms of the letter agreement include the recovery
of interest in monthly payments beginning in March 2009 and ending with
final payment due in December 2009. Included in the $6.8 million payment
plan is $4.6 million in sub-contractor obligations which are a part of our
Accounts Payable balances and are scheduled to be paid on a pro-rata basis
similar to the terms of the letter agreement.
Litigation Claims
Due to past due payments on Accounts Receivable invoices for services
provided to Bigler, LP ("Bigler") in the amount of $3,169,000, the Company
exercised its statutory right to file a materialman's and mechanic's lien.
In response, Bigler filed a petition in Harris County Court asking for
relief claiming lack of delivery of notice with respect to the Lien, and
requesting declaratory relief from the Court clearing title of the lien,
and for unspecified monetary damages for breach of contract. ENGlobal
Engineering filed its answer and counterclaim for collection of the fees
due, and for foreclosure on the real property and improvements for which
the services were performed on April 27, 2009. We believe the invoices are
collectible.
In 2007, ENGlobal Engineering, Inc. ("EEI") entered into an Engineering,
Procurement & Construction agreement with South Louisiana Ethanol, LLC
("SLE") to refurbish and upgrade SLE's ethanol facility in Belle Chase, LA.
EEI commenced work in March 2007 but SLE shut down the project in September
2007 after failing to secure permanent financing for the project. Due to
SLE's continued failure to obtain permanent financing, on May 30, 2008, the
Company filed suit in the United States District Court for the Eastern
District of Louisiana, Cause Number 08-3601, seeking damages of $15.8
million and to foreclose on the acquired mechanics liens of its
subcontractors. An independent appraisal, dated March 17, 2008, from the
SLE's bridge lending bank's appraiser, Revpro and Associates, indicated a
fair market value of SLE's assets of $35.8 million, an orderly liquidation
value of $25.3 million, and a forced liquidation value of $20.0 million.
While the Company believes that in the event the collateral is liquidated,
SLE's obligations to the Company would be paid in full pursuant to the
Collateral Mortgage in favor of the Company, collectability is not assured
at this time. However, at this time the Company believes that the ultimate
disposition of the SLE collateral will not materially adversely affect our
liquidity or overall financial position.
From time to time, the Company is involved in various legal proceedings
arising in the ordinary course of business alleging, among other things,
breach of contract or tort in connection with the performance of
professional services, the outcome of which cannot be predicted with
certainty. As of the date of this filing, we are party to several legal
proceedings that we believe have been reserved for or are covered by
insurance, or that, if determined adversely to us individually or in the
aggregate, would not have a material adverse effect on our results of
operations or financial position.
Insurance
The Company carries 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. The Company is not aware
of any claims in excess of insurance recoveries. ENGlobal is partially
self-funded for health insurance claims. Provisions for expected future
payments are accrued based on the Company's experience.
12
NOTE 10 - ACQUISITIONS
The Company had no acquisitions during the three months ended March 31,
2009.
13
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,
the Company's Annual Report on Form 10-K, as well as other written and
oral statements made or incorporated by reference from time to time by
the Company and its representatives in other reports, filings with the
Securities and Exchange Commission, press releases, conferences, or
otherwise, may be deemed to be forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934. This
information includes, without limitation, statements concerning the
Company's future financial position and results of operations; planned
capital expenditures; business strategy and other plans for future
operations; the future mix of revenue and business sources; customer
retention; project reversals; commitments and contingent liabilities;
and future demand and industry conditions. Although the Company
believes that the expectations reflected in such forward-looking
statements are reasonable, it can give no assurance that such
expectations will prove to have been correct. We undertake no
obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise.
Generally, the words "anticipate," "believe," "estimate," "expect,"
"may," and similar expressions, identify forward-looking statements,
which generally are not historical in nature. Actual results could
differ materially from the results described in the forward-looking
statements due to the risks and uncertainties set forth in this
Quarterly Report on Form 10-Q, the specific risk factors identified in
the Company's Annual Report on Form 10-K for the year ended December
31, 2008, and those described from time to time in our future reports
filed with the Securities and Exchange Commission.
The following discussion is qualified in its entirety by, and should be
read in conjunction with, the Company's condensed consolidated
financial statements, including the notes thereto, included in this
Quarterly Report on Form 10-Q and the Company's Annual Report on Form
10-K for the year ended December 31, 2008.
MD&A Overview
-------------
The following list sets forth a general overview of certain significant
changes in the Company's financial condition and results of operations
for the three months ended March 31, 2009, compared to the
corresponding period in 2008. |
The following table reconciles the number of shares used to compute basic earnings per share to the number of shares used to compute diluted earnings per share (“EPS”).
| | Three Months Ended March 31, | |
| | 2010 | | | 2009 | |
| | (shares in thousands) | |
Weighted average shares outstanding used to compute basic EPS | | | 27,434 | | | | 27,295 | |
Effect of share-based compensation plans | | | - | | | | 203 | |
Shares used to compute diluted EPS | | | 27,434 | | | | 27,498 | |
The Company excluded potentially issuable shares of 788,000 from the computation of diluted EPS, as the effect of including the shares would have been anti-dilutive for both three month periods ended March 31, 2010 and 2009.
NOTE 9 –COMMITMENTS AND CONTINGENCIES
Employment Agreements
The Company has employment agreements with certain of its executive and other officers, the terms of which expire on or before December 2010, with the severance terms ranging from six to twelve months. Such agreements provide for minimum salary levels. If employment is terminated for any reason other than (1) termination for cause, (2) voluntary resignation or (3) the employee’s death, the Company is obligated to provide a severance benefit equal to between six and twelve months of the employee’s salary, and, at its option, an additional six months at 50% to 100% of the employee’s salary in exchange for an extension of a non-competition agreement. These agreements are renewable for an additional one-year at the Company’s option. No liability is recorded for the C ompany’s obligations under employment agreements as the amounts that will ultimately be paid cannot be reasonably estimated, if any.
Long-term Trade and Notes Receivable
In the first quarter of 2007, ENGlobal Engineering, Inc. (“EEI”) and South Louisiana Ethanol, LLC (“SLE”) executed an agreement for engineering, procurement and construction (“EPC”) services relating to the retro-fit of an ethanol plant in southern Louisiana (the “SLE project”). In October 2007, SLE executed a promissory note, or “Hand Note,” payable to the Company and having a principal balance of approximately $12.3 million, constituting amounts then due to the Company for its work performed in connection with the project. The history of the SLE Project is described in Note 12 to the Company’s condensed consolidated financial statements included in its Quarterly Report on Form 10-Q for the quarter ended September 30, 2007, and is discussed further in the Company’s Annual Reports on Form 10-K for years ended December 31, 2007, 2008 and 2009, under Litigation, below, of this Quarterly Report on Form 10-Q.
On March 13, 2009, the Company entered into a letter agreement (the “letter agreement”) with Alon USA, LP (“Alon”) resolving the payment of due and past due accounts receivable invoices in the aggregate amount of $6.8 million. The principal terms of the letter agreement include the recovery of amounts due in monthly payments beginning in March 2009 and ending with final payment in December 2009. The $6.8 million payment plan included $4.6 million in subcontractor obligations which are included in our Accounts Payable balances. As of September 30, 2009, receipts against the note and payments of subcontractor obligations were current with balances remaining of $3.1 million and $2.1 million respectively. However, the Company did not receive the full amount of the scheduled $800,000 monthly payment due on October 20, 2009. Instead, Alon notified the Company that it had a claim against the Company relating to a separate, completed project, in the amount of the balance due under the letter agreement and further, that it was offsetting the amount of its claim against the amount it owed the Company under the letter agreement. During the fourth quarter of 2009, the Company reclassified the notes receivable to a long-term notes receivable. At this time, the note balance following the partial payment is approximately $3.0 million. The Company had previously filed a materialman’s and mechanic’s lien on February 13, 2009 and from the facts determinable at present, we believe all amounts are collectible.
Notes to Condensed Consolidated Financial Statements
The Company has reclassified the accounts receivable balance of $3.0 million related to the Bigler, L.P. litigation and subsequent bankruptcy filing to a long term claims receivable. The Company believes its lien position is favorable and that there is sufficient collateral to cover all amounts due to the Company. However, full collection is not assured and the Company continues to assess its lien priorities and other matters related to the distribution of assets. A failure to collect a material portion of this claim could have a material financial impact, but should not impact the Company’s liquidity position as charge-backs would be non-cash in nature. The Company plans to closely monitor the bankruptcy claims and will continue to pursue all available remedies to recover the entire amount due on its claims. At this time, the Company considers the claim to be collectible and the company has not recorded a reserve against the account balance but has created a reserve to cover its anticipated legal expenses.
Litigation
Due to past due payments on accounts receivable invoices for services provided to Bigler, LP (“Bigler”) in the amount of $3.0 million, the Company filed a materialman’s and mechanic’s lien on the property on which the services were performed. In response, Bigler filed a petition entitled Bigler, L.P. f/k/a Bigler Trading Company, Inc. and Bigler Land, LLC vs. ENGlobal Engineering, Inc. in the 234th District Court of Harris County, Case Number 2009-15676, asking for declaratory relief clearing title of the lien and seeking unspecified monetary damages. ENGlobal has filed a counterclaim for collection of the fees due, and foreclosure of its lien. The court has denied Bigler’s pre-trial motion to vacate the lien, preserving ENGlobal’s secured status. On October 30, 2009, Bigler filed a petition in U.S. Bankruptcy Court for the Southern District of Texas (Houston), Bankruptcy Petition #09-38188. The bankruptcy has stayed ENGlobal’s collection proceedings. ENGlobal has been listed as a disputed, un-liquidated secured creditor. All the other lien claimants have been listed by Bigler as disputed.
In June 2008, ENGlobal filed an action in the United States District Court for the Eastern District of Louisiana; Case Number 08-3601, against South Louisiana Ethanol LLC (“SLE”) entitled ENGlobal Engineering, Inc. and ENGlobal Construction Resources, Inc. vs. South Louisiana Ethanol, LLC. The lawsuit seeks to enforce collection of $15.8 million owed to ENGlobal and its affiliates for services performed on an ethanol plant in Louisiana. In August 2009, SLE filed for Chapter 11 protection in the United States Bankruptcy Court for the Eastern District of Louisiana, Case number 09-12676.
In November 2009, the Company filed a petition entitled ENGlobal Engineering, Inc. vs. Alon USA, L.P., Alon USA GP, LLC and Alon USA Refining, Inc. in the 162nd District Court of Dallas County, Case Number 09-15915-I. The lawsuit seeks to enforce the collection of the $3.0 million owed to ENGlobal for services performed for a refinery rebuild project that is remaining as amounts due on a letter payment agreement between ENGlobal and Alon USA, LP (“Alon”) and to foreclose on its lien. The Company had previously filed a materialman’s and mechanic’s lien on February 13, 2009. 160;In Alon’s answer, Alon has pled that the Company is not entitled to any recovery because it committed a prior material breach, has not given offsets for deficient work, has billed for work that it did not perform or was not authorized to perform and its obligated to furnish Alon a recoupment of previous monies paid in offset of the current debt and is discussed further below under Note 11 - Subsequent Events.
ENGlobal was named as a defendant in a lawsuit entitled Ecoproduct Solutions, L.P. vs. ENGlobal Engineering and Swenson Technology, Inc. The lawsuit was filed on October 8, 2009 in the 270th Judicial District Court of Harris County, Texas, Case Number 2009-64881, and was based on a contract for engineering services performed between November 2004 and August 2005 and for which ENGlobal received approximately $700,000. EcoProduct claimed that it incurred actual damages of $45 million and sought to recover actual, consequential and punitive damages. On January 28, 2010, the court granted ENGlobal’s Motion for Summary Judgment and dismissed with prejudice EcoProduct’s claims against ENGlobal in their entirety. This judgment is subject to appeal and, if appealed, the Company intends to vigorously defend the claim.
As of the date of these interim financial statements, we are party to several legal proceedings arising in the ordinary course of business that we believe have been reserved for, are covered by insurance or if determined adversely to us, whether individually or in the aggregate, would not have a material adverse effect on our results of operations or financial position. However, we cannot predict the ultimate outcomes of these matters with certainty. In addition, the Company has filed suit against a number of its clients for payment of accounts receivable. Although the Company believes it will receive favorable judgments in these collection matters, due to impact of the downturn of the business and credit climate on its clients’ businesses, it may not be able to fully collect on judgments it rece ives.
Notes to Condensed Consolidated Financial Statements
Insurance
The Company carries a broad range of insurance coverage, including general and business automobile liability, commercial property, professional errors and omissions, workers’ compensation insurance, director’s and officer’s liability insurance and a general umbrella policy. The Company is not aware of any claims in excess of insurance recoveries. ENGlobal is partially self-funded for health insurance claims. Provisions for expected future payments are accrued based on the Company’s experience. Specific stop loss levels provide protection for the Company with $200,000 per occurrence and approximately $15.7 million in the aggregate for each policy year being covered by a separate insurance policy. The self-insurance liability, which is included in the Accrued Compensation and Benefits line of the balance sheet, was $1.1 million as of March 31, 2010 and $0.9 million as of December 31, 2009.
NOTE 10 – ACQUISITIONS
The Company had no acquisitions during the three months ended March 31, 2010.
NOTE 11 – SUBSEQUENT EVENTS
On April 1, 2010, the Company, through an immaterial business combination, acquired selected assets of Control Dynamics International, LP (“CDI”), a privately-held automation firm based in Houston, Texas. Consideration approximated $1.9 million in cash and $0.5 million in the form of a note. Additional consideration of up to $1.5 million could be awarded based on reaching specific revenue goals within a twelve month period and specific sales goals within a three year period. CDI designs and manufactures industrial automation control systems primarily for the upstream energy industry. CDI complements the services currently performed by the Automation segment and will allow ENGlobal to expand further into the upstream market. Under the terms of the agreement, ENGl obal will not assume any CDI debt, nor will it be required to issue any stock as consideration for the acquired assets. A certain key member of CDI’s management team has entered into an employment agreement with the Company.
As of the filing of this report, the Company is in the process of finalizing its valuations necessary to complete the accounting of this transaction. Disclosures of the amounts of goodwill, identifiable assets and liabilities and contingent liabilities are not practical because they require the determination of the fair value associated with these items.
On April 6, 2010, the Company was notified that defendants Alon USA, L.P., Alon USA GP, LLC and Alon USA Refining, Inc. filed an Original Counterclaim to the Company’s petition entitled ENGlobal Engineering, Inc. vs. Alon USA, L.P., Alon USA GP, LLC and Alon USA Refining, Inc. in the 162nd District Court of Dallas County, Case Number 09-15915. The counterclaim seeks damages in an amount totaling more than $3.0 million due to gross negligence in professional malpractice related to services provided for the ULSG Project at Alon’s Big Spring, Texas refinery. The Company has filed a motion for summary judgment on its breach of contract claim and a motion for partial summary judgment seeking to dispose of Alon& #8217;s affirmative defenses to the breach of contract claim.
On April 23, 2010, ENGlobal filed an action in the United States District Court for the Southern District of Texas, Case Number 4:10-cv-10352 entitled ENGlobal Engineering, Inc. and ENGlobal Construction Resources, Inc. vs. Kennett F. Stewart, John Paul, and William A. Hurst. The lawsuit seeks to enforce collection of $18.75 million owed to ENGlobal and its affiliates for services performed on an ethanol plant in Louisiana, and allege fraud and personal liability by owners of South Louisiana Ethanol, LLC.
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, the Company’s Annual Report on Form 10-K, as well as other written and oral statements made or incorporated by reference from time to time by the Company and its representatives in other reports, filings with the Securities and Exchange Commission, press releases, conferences or otherwise, may be deemed to be forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. This information includes, without limitation, statements concerning the Company’s future financial position and results of operations, planned capital expenditures, business strategy and other plans for future operations, the future mix of revenues and business, customer retention, project reversals, commitments and contingent liabili ties and future demand and industry conditions. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Generally, the words “anticipate,” “believe,” “estimate,” “expect,” “may” and similar expressions, identify forward-looking statements, which generally are not historical in nature. Actual results could differ materially from the results described in the forward-looking statements due to the risks and uncertainties set forth in this Quarterly Report on Form 10-Q, the specific risk factors identified in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, and those described from time to time in our future reports filed with the Securities and Exchange Commission.
The following discussion is qualified in its entirety by, and should be read in conjunction with, the Company’s condensed consolidated financial statements, including the notes thereto, included in this Quarterly Report on Form 10-Q and the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.
MD&A Overview
The following list sets forth a general overview of certain significant changes in the Company’s financial condition and results of operations for the three months ended March 31, 2010, compared to the corresponding period in 2009.
| | During the three months ended March 31, 2009
------------------------------
2010 |
| Revenues | Decreased 4.8%
27.3% |
| Gross profit | Decreased 26.6%
53.5% |
| Operating income | Decreased 52.1%
174.4% |
| SG&A expense Decreased 1.4%
| Increased 3.9% |
| Net income | Decreased 50.0%
14
Management's Discussion and Analysis (continued)
- ------------------------------------------------
As of As of As of
Selected Balance Sheet Comparisons March 31, December 31, March 31,
- ---------------------------------- --------- ------------ ---------
2009 2008 2008
-------- -------- --------
(Dollars in Thousands)
------------------------------------
Working capital $ 57,644 $ 58,585 $ 49,317
176.4% |
Management's Discussion and Analysis (continued)
Selected Balance Sheet Comparisons | | As of March 31, | | | As of December 31, | | | As of March 31, | |
| | 2010 | | | 2009 | | | 2009 | |
| | (dollars in thousands) | |
| | | | | | | | | |
Working capital | | $ | 29,577 | | | $ | 36,308 | | | $ | 57,644 | |
| | | | | | | | | | | | |
Total assets | | $ | 103,242 | | | $ | 110,635 | | | $ | 135,595 | |
| | | | | | | | | | | | |
Long-term debt and capital leases, net of current portion | | $ | 105 | | | $ | 6,149 | | | $ | 21,141 | |
| | | | | | | | | | | | |
Stockholders’ equity | | $ | 77,281 | | | $ | 78,711 | | | $ | 78,887 | |
| | | | | | | | | | | | |
Days sales outstanding | | | 60 | | | | 55 | | | | 72 | |
Long-term debt and capital leases, net of current portion, decreased 98.4%, or $6.0 million, from $6.1 million at December 31, 2009 to $0.1 million at March 31, 2010. As a percentage of stockholders’ equity, long-term debt decreased to 0.1% from 7.8% over this three month period due primarily to a $6.0 million pay down on our line of credit. The past due payments on Accounts Receivable invoices for services provided to Bigler negatively impacted our average days sales outstanding for the three month period ended March 31, 2010 by four days. The Company manages its billing and client collection processes toward reducing days sales outstanding to the extent practicable. We believe that our allowance for bad debt is adequate to cover any potential non-payment by our customers.
| Total assets $135,595 $152,705 $122,715
Long-term debt and capital leases, net of current portion $ 21,141 $ 23,857 $ 30,884
Stockholders'stockholders’ equity $ 78,887 $ 76,766 $ 60,162
Long-term debt and capital leases, net of current portion, decreased 11.7%1.8%, or $2.8 million, to $21.1 million at March 31, 2009 from $23.9
million at December 31, 2008. As a percentage of stockholders' equity,
long-term debt decreased to 26.8% from 31.1% at these dates. The
decrease in long-term debt primarily relates to a $2.5 million pay down
on our line of credit. On average, our days sales outstanding increased
to 72 days for the three-month period ended March 31, 2009 from 64 days
for the twelve-month period ended December 31, 2008 and 62 days for the
three-month period ended March 31, 2008. Past due account balances
totaling $11.9 million for three significant clients contributed 11
days to our days sales outstanding for the three-month period ended
March 31, 2009. The Company manages its billing and client collection
processes toward reducing days of sales outstanding to the extent
practicable. We believe that our allowance for bad debt is adequate to
cover any potential non-payment by our customers.
Total stockholders' equity increased 2.7%, or $2.1$1.4 million, from $76.8$78.7 million as of December 31, 20082009 to $78.9$77.3 million as of March 31, 2009.
15
Management's Discussion and Analysis (continued)
- ------------------------------------------------
Consolidated Results of Operations for the Three Months
Ended March 31, 2009 and 2008
(Unaudited)
For the three months ended
March 31, 2009
(Dollars2010. The decrease in Thousands) Engineering Construction Automation Land All Other Consolidated
Revenue before eliminations $ 43,115 $ 22,550 $ 20,677 $ 9,086 $ -- $ 95,428
Inter-segment eliminations (540) (1,313) (86) -- -- (1,939)
-------- -------- -------- -------- -------- --------
Revenue 42,575 21,237 20,591 9,086 -- 93,489
Gross profit 4,616 1,640 2,857 1,371 -- 10,484
SG&A 1,326 476 1,240 637 3,383 7,062
-------- -------- -------- -------- -------- --------
Operating income 3,290 1,164 1,617 734 (3,383) 3,422
-------- -------- -------- -------- --------
Other income (expense) 8
Tax provision (1,417)
--------
Net income $ 2,013
========
For the three months ended
March 31, 2008
(Dollars in Thousands)
Revenue before eliminations $ 52,035 $ 27,017 $ 10,557 $ 8,835 $ -- $ 98,444
Inter-segment eliminations (6) (117) (155) -- -- (278)
-------- -------- -------- -------- -------- --------
Revenue 52,029 26,900 10,402 8,835 -- 98,166
Gross profit 9,882 2,028 1,044 1,392 -- 14,346
SG&A 1,295 703 632 677 3,919 7,226
-------- -------- -------- -------- -------- --------
Operating income 8,587 1,325 412 715 (3,919) 7,120
-------- -------- -------- -------- --------
Other income (expense) (457)
Tax provision (2,660)
--------
Net income $ 4,003
========
16
Management's Discussion and Analysis (continued)
- ------------------------------------------------
We recorded net income of $2.0 million, or $0.07 per diluted share, for the
three months ended March 31, 2009,stockholders’ equity compared to net income of $4.0 million, or
$0.15 per diluted share, for the corresponding period last year.
The decline in net income during the three months ended March 31, 2009 was due in part to lower energy commodity prices, lower oil and gas processing
margins, and the generally weak economy. These factors have led our clients
to spend less through the deferral2.0%, or cancellation of both capital and
maintenance projects. Competition has increased greatly for the amount of
project work on the market, putting pressure on our billing rate structures
and profit margins. In response to the economic pressures, we have also
increased our sales efforts, therefore increasing costs, to focus on
winning new work and expanding into new markets and increasing our client
base.
The Company recognizes service revenue as soon as the services are
performed. The majority of the Company's service revenue historically has
been provided through cost-plus contracts, whereas a majority of our
fabrication and turnkey EPC projects revenue has been earned on fixed-price
contracts.
Revenue on fixed-price contracts is recorded primarily using the
percentage-of-completion (cost-to-cost) method. Under this method, revenue
on long-term contracts is recognized in the ratio that contract costs
incurred bear to total estimated contract costs. Revenue and gross margin
on fixed-price contracts are subject to revision throughout the lives of
the contracts and any required adjustments are made in the period in which
the revisions become known. Losses on contracts are recorded in full as
they are identified.
In the course of providing our services, we routinely provide engineering,
materials, and equipment and may provide construction services on a direct
hire or subcontractor basis. Generally, the materials, equipment and
subcontractor costs are passed through to our clients and reimbursed, along
with fees, which in total 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 reported
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 the Company's core business trends.
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 contracts, but directly
related to the support of a segment's operations.
All other SG&A expense is comprised primarily of business development
costs, as well as costs related to the executive, investor
relations/governance, finance, accounting, safety, human resources, project
controls, legal and information technology departments, and other costs
generally unrelated to specific projects, but which are incurred to support
corporate activities and initiatives.
Industry Overview:
In the past, many ENGlobal offices have benefited from significant capital
projects in the downstream refinery market, primarily related to increasing
capacity, utilizing heavy or sour crude oil, and rebuilding facilities
damaged by accidents or natural disasters. While some such projects are
currently underway, some refiners have now chosen to defer significant new
spending given the recent economic conditions, lower refining margins and
lower refinery utilization. The Company expects a continuation of
compliance-driven refining projects, such as EPA environmental initiatives,
DOT pipeline integrity requirements, and OSHA safety-related projects,
which may result from increased audits of U.S.-based refineries. Also, the
Company is seeing opportunities to upgrade obsolete automation and control
systems at existing refineries and to plan and manage turnaround projects.
The downstream petrochemical industry has historically been a good source
of projects for ENGlobal. While not currently as robust as the refining
market, we have seen$1.6 million. |
Management's Discussion and Analysis (continued)
Consolidated Results of Operations for the Three Months
Ended March 31, 2010 and 2009
(Unaudited)
For the three months ended March 31, 2010 (dollars in thousands) | | Engineering | | | Construction | | | Automation | | | Land | | | All Other | | | Consolidated | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Revenue before eliminations | | $ | 29,428 | | | $ | 17,179 | | | $ | 15,217 | | | $ | 6,270 | | | $ | - | | | $ | 68,094 | | | | |
Inter-segment eliminations | | | - | | | | (110 | ) | | | - | | | | - | | | | - | | | | (110 | ) | | | |
Revenue | | | 29,428 | | | | 17,069 | | | | 15,217 | | | | 6,270 | | | | - | | | | 67,984 | | | 100.0 | % |
Gross profit | | | 1,913 | | | | 760 | | | | 1,382 | | | | 817 | | | | - | | | | 4,872 | | | 7.2 | % |
SG&A | | | 2,394 | | | | 389 | | | | 1,137 | | | | 447 | | | | 3,016 | | | | 7,383 | | | 10.9 | % |
Operating income (loss) | | | (481 | ) | | | 371 | | | | 245 | | | | 370 | | | | (3,016 | ) | | | (2,511 | ) | | (3.7 | %) |
Other income (expense) | | | | | | | | | | | | | | | | | | | | | | | (11 | ) | | 0.0 | % |
Interest income (expense) | | | | | | | | | | | | | | | | | | | | | | | (76 | ) | | (0.1 | %) |
Tax provision | | | | | | | | | | | | | | | | | | | | | | | 1,060 | | | 1.5 | % |
Net income (loss) | | | | | | | | | | | | | | | | | | | | | | $ | (1,538 | ) | | (2.3 | %) |
Diluted earnings per share | | | | | | | | | | | | | | | | | | | | | | $ | (0.06 | ) | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
For the three months ended March 31, 2009 (dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Revenue before eliminations | | $ | 43,115 | | | $ | 22,550 | | | $ | 20,677 | | | $ | 9,086 | | | $ | - | | | $ | 95,428 | | | | |
Inter-segment eliminations | | | (540 | ) | | | (1,313 | ) | | | (86 | ) | | | - | | | | - | | | | (1,939 | ) | | | |
Revenue | | | 42,575 | | | | 21,237 | | | | 20,591 | | | | 9,086 | | | | - | | | | 93,489 | | | 100.0 | % |
Gross profit | | | 4,616 | | | | 1,640 | | | | 2,857 | | | | 1,371 | | | | - | | | | 10,484 | | | 11.2 | % |
SG&A | | | 1,326 | | | | 476 | | | | 1,574 | | | | 637 | | | | 3,094 | | | | 7,107 | | | 7.6 | % |
Operating income (loss) | | | 3,290 | | | | 1,164 | | | | 1,283 | | | | 734 | | | | (3,094 | ) | | | 3,377 | | | 3.6 | % |
Other income (expense) | | | | | | | | | | | | | | | | | | | | | | | 264 | | | 0.3 | % |
Interest income (expense) | | | | | | | | | | | | | | | | | | | | | | | (211 | ) | | (0.2 | %) |
Tax provision | | | | | | | | | | | | | | | | | | | | | | | (1,417 | ) | | (1.5 | %) |
Net income (loss) | | | | | | | | | | | | | | | | | | | | | | $ | 2,013 | | | 2.2 | % |
Diluted earnings per share | | | | | | | | | | | | | | | | | | | | | | $ | 0.07 | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Increase/(Decrease) in Operating Results (dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Revenue before eliminations | | $ | (13,687 | ) | | $ | (5,371 | ) | | $ | (5,460 | ) | | $ | (2,816 | ) | | $ | - | | | $ | (27,334 | ) | | | |
Inter-segment eliminations | | | 540 | | | | 1,203 | | | | 86 | | | | - | | | | - | | | | 1,829 | | | | |
Revenue | | | (13,147 | ) | | | (4,168 | ) | | | (5,374 | ) | | | (2,816 | ) | | | - | | | | (25,505 | ) | | (27.3 | %) |
Gross profit | | | (2,703 | ) | | | (880 | ) | | | (1,475 | ) | | | (554 | ) | | | - | | | | (5,612 | ) | | (53.5 | %) |
SG&A | | | 1,068 | | | | (87 | ) | | | (437 | ) | | | (190 | ) | | | (78 | ) | | | 276 | | | 3.9 | % |
Operating income (loss) | | | (3,771 | ) | | | (793 | ) | | | (1,038 | ) | | | (364 | ) | | | 78 | | | | (5,888 | ) | | (174.4 | %) |
Other income (expense) | | | | | | | | | | | | | | | | | | | | | | | (275 | ) | | (104.2 | %) |
Interest income (expense) | | | | | | | | | | | | | | | | | | | | | | | 135 | | | 64.0 | % |
Tax provision | | | | | | | | | | | | | | | | | | | | | | | 2,477 | | | (174.8 | %) |
Net income (loss) | | | | | | | | | | | | | | | | | | | | | | $ | (3,551 | ) | | (176.4 | %) |
Diluted earnings per share | | | | | | | | | | | | | | | | | | | | | | $ | (0.13 | ) | | | |
Management's Discussion and Analysis (continued)
The decline in net income during the three months ended March 31, 2010 compared to the three months ended March 31, 2009 was due in part to the effect of lower oil and gas processing margins, the uncertainty created by proposed U.S. government regulation in the oil and gas industry, the unavailability of project financing and the generally weak economy. These factors have led our clients to spend less for our services through the deferral or cancellation of both capital and maintenance projects. Delays in down-sizing of staffing levels with declining backlog resulted in lower utilization rates and materially impacted gross profit margin. Competition has increased for the amount of project work on the market, putting pressure on our billing rate structures and profit margins. In response to the economic pressures, we have also increased our sales efforts, therefore increasing costs, to focus on winning new work, expanding into new markets and increasing our client base.
The Company recognizes service revenue as soon as the services are performed. For clients that we consider higher risk, due to past payment history or history of not providing written work authorizations, we have deferred revenue recognition until either a written authorization or payment is received. The current amount of revenue deferred for these reasons is $0.8 million. The majority of the Company’s service revenue historically has been provided through cost-plus contracts, whereas revenue from a majority of our fabrication and turnkey EPC projects has been earned on fixed-price contracts.
Revenue on fixed-price contracts is recorded primarily using the percentage-of-completion (cost-to-cost) method. Under this method, revenue on long-term contracts is recognized in the ratio that contract costs incurred bear to total estimated contract costs. Revenue and gross margin on fixed-price contracts are subject to revision throughout the lives of the contracts and any required adjustments are made in the period in which the revisions become known. To manage unknown risks, management may use contingency amounts to increase the estimated costs, therefore lowering the earned revenues until the risks are better identified and quantified or have been mitigated. We currently have $1.8 million in contingency. Losses on contracts are recorded in full as they are identified.
In the course of providing our services, we routinely provide engineering, materials, and equipment and may provide construction services on a direct hire or subcontractor basis. Generally, the materials, equipment and subcontractor costs are passed through to our clients and reimbursed, along with fees, which in total 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 reported 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 the Company’s core business trends.
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 contracts, but directly related to the support of a segment’s operations.
All other SG&A expense is comprised primarily of business development costs, as well as costs related to the executive, investor relations/governance, finance, accounting, safety, human resources, project controls, legal and information technology departments, and other costs generally unrelated to specific projects, but which are incurred to support corporate activities and initiatives.
Industry and Company Overview:
We believe that our year-to-date revenues have been adversely affected by macroeconomic and industry conditions and that our revenue for the remainder of fiscal year 2010 is not likely to increase unless these conditions improve significantly. For over a year, our domestic clients have been spending significantly less on both capital and maintenance energy-related projects in which we could participate. We have been encouraged in recent months by an increasing trend of client inquiries and proposal activity in some of the sectors we serve, as well as signing several new client Master Service Agreements. However, the extent to which the generally depressed level of client spending will persist and the resulting impact on our financial results is not clear and many industry experts believe that the depre ssed spending levels will continue through 2010.
Management's Discussion and Analysis (continued)
In the past, ENGlobal has benefited from significant capital projects in the downstream refinery market, primarily related to increasing capacity, utilizing heavy or sour crude oil, and rebuilding facilities damaged by accidents or natural disasters. Most domestic refiners have now chosen to defer significant new spending given the recent economic conditions, lower refining margins, lower refinery utilization and uncertainty created by proposed government regulation. The Company expects that once market conditions improve, there will be a continuation of compliance-driven refining projects, such as EPA environmental initiatives, DOT pipeline integrity requirements and OSHA safety-related projects. Also, the Company is seeing opportunities to participate in projects to upgrade obsolete automation and co ntrol systems at existing refineries and to plan and manage turnaround projects.
The downstream petrochemical industry has historically been a good source of projects for ENGlobal. We continue to see a fairly steady level of both maintenance and small capital projects from this industry. However, we believe that major grassroots petrochemical projects will continue to be undertaken overseas, located either closer to product demand in emerging economies or closer to less expensive feedstocks. We expect that future petrochemical work undertaken in the U.S. primarily will consist of smaller capital projects or will be maintenance related.
The midstream industry, consisting of pipeline transportation, storage and natural gas processing, has not been immune to the industry downturn. ENGlobal is capable of providing a midstream client with several services in addition to engineering, such as right-of-way acquisition, regulatory permitting, inspection and construction management. Our clients are able to take advantage of our ‘all in’ capabilities in this sector. The drivers we see behind growth in domestic midstream activity include: (1) crude oil, natural gas and natural gas liquids transportation away from shale discoveries in various parts of the country, (2) increasing activity in natural gas liquids processing given improved fractionation margins, (3) movement of heavy Canadian crude oil into the United States, (4) movement of refined products from Gulf Coast refineries to the Midwest and Northeast and (5) repairs and upgrades to the aging pipeline infrastructure which is driven by DOT pipeline integrity requirements.
Driven by government stimulus and improving credit availability, alternative energy may present the Company with new project opportunities. To date, ENGlobal has mainly focused its efforts on biomass processes, such as those related to the production of ethanol and biofuels, and the gasification of refinery petroleum coke, municipal waste and other feedstocks as an energy source. In addition, the Company has been pursuing business on electric power projects, as a large amount of capital spending is expected in the coming years, including the transporting of renewable electric energy produced in remote areas to population centers. In many cases, alternative energy projects are being developed by newer and smaller firms that expect to benefit from government grants and tax incentives, rather than our lar ger, traditional energy clients.
ENGlobal expects that a majority of the large capital energy-related projects will be built overseas. Therefore, the Company is forming business relationships with operating companies and other service providers that may result in an increased amount of engineering and related service work on international projects. The Company also expects that our large integrated oil and gas clients will continue to spend the major portion of their capital budgets on upstream exploration and production. Over time, ENGlobal expects to increase its activity in the upstream area, as evidenced by our recent acquisition of CDI. The Company is also performing engineering services on a small number of domestic civil infrastructure projects, as a means of offsetting reduced large capital project work from our her itage clients.
We are not immune to the current economic events and depressed level of client spending as evidenced by lower revenues in our Engineering, Construction and Land segments, as well as by our consolidated net losses. While we believe these conditions will improve eventually, we cannot be certain of the timing of this improvement, especially given the trend in our revenues and our decreased backlog. Until conditions improve, we will continue to experience delayed and cancelled projects, intense competition relating to pricing which is adversely affecting our net profits, more clients requiring fixed price contracts and a declining backlog. In addition, we are adversely affected by general economic conditions, reduced credit a vailability, lower refining margins, lower refinery utilization and uncertainty created by proposed government regulation. We believe this is an industry wide phenomenon. However, we are taking significant steps, such as increased focus on business development, to improve our ability to respond to these conditions in a manner that will allow the Company to return to profitability. We believe each of the Company’s business segments is well positioned for growth when market conditions improve for the following reasons:
Management's Discussion and Analysis (continued)
| · | ENGlobal has served many of our valued clients over a long period of time, and these strong relationships are the foundation of our business. We are also continuously undertaking business development activities to form new long-term client relationships. While some clients are basing their purchasing decisions on overall costs rather than existing relationships, we continue to see project awards from our long-term clients and we are entering into new and significant “preferred provider” or Master Services Agreements. |
| · | Our business relies primarily on small to mid-sized projects, many of which fall into the “run and maintain” category. We are not as dependent on large capital projects as many of our competitors, such as the tier one engineering and construction companies. Many of the projects we work on are driven by regulatory compliance and maintenance requirements that need to be completed in a certain timeline regardless of economic conditions. |
| · | We believe that major grassroots petrochemical
17
Management's Discussionnew pipelines and Analysis (continued)
- ------------------------------------------------
projectsstorage facilities will continue to be undertaken overseas, either closer to product
demand in emerging economies, or located closer to less expensive feed
stocks. We expect that future petrochemical work undertakenrequired in the U.S. primarily will consist of smaller capital projects or will be maintenance
related.
Despite past downturns in the industry, pipeline projects have remained
fairly constant. Although pipeline projects tend to require fewer
engineering man-hours than similarly sized downstream projects, ENGlobal
may also provideas a pipeline client with several additional services, such
as right-of-way acquisition, regulatory permitting, inspection, and
construction management. The drivers we see behind growth in domestic
pipeline activity include: (1) natural gas transportation away from the
Rocky Mountain area and new gas fields in other partsresult of the country, (2)
natural gas transportation relatedneed to LNG import facilities, (3) movement
of heavy Canadiantransport crude oil into the United States, and (4) movement of
refined products from Gulf Coast refineries to the Midwest and Northeast.
The country's focus on alternative energy has presented the Company with
many new project opportunities. The North American Industrial Project
Spending Index has recently indicated that capital spending for all
alternative energy projects exceeds that for refining and pipeline. To
date, ENGlobal has mainly focused its efforts on biomass processes, such as
those related to coal-to-liquids projects, the production of ethanol and
biofuels, and the gasification of refinery petroleum coke and other
feedstocks as an energy source. In addition, the Company has begun pursuing
business on electric transmission and distribution projects, as a large
amount of capital spending is expected for transporting renewable electric
energy produced in remote areas to population centers. In many cases,
alternative energy projects are being developed by new and smaller firms,
rather than our larger, traditional clients.
Tightening credit markets have triggered substantial uncertainty with
respect to the funding of capital expenditures by our customers, and oil and natural gas prices have fallen substantially from their highs in summer
2008. These changes have impacted general business conditionsdeveloping basins and may
continue to reduce demand forshale plays, such as the Bakken, Haynesville, Marcellus, Eagle Ford and Rocky Mountain areas. Although we cannot be certain of our products and services. As
mentioned above, some refiners have chosenthe timing of this activity within the United States, we also see continued need for pipelines to defer and cancel significant
new spending given the recent narrowingtransport imported sources of energy, processing margins.
Although wesuch as Canadian crude, liquefied natural gas and refined products. We are not immunealso entering into more international contracts and actively working to increase our ability to take advantage of these opportunities outside of the current financial and economic events as
evidenced by lower revenues inUnited States. |
| · | A significant part of our Engineering and Construction segments,
as well asAutomation segment’s work is driven by our lower consolidated net profits, we believe eachclients’ need to replace aging and obsolete distributed control system (“DCS”) and analytical equipment. While some of ENGlobal's business segmentsthese expenditures can be deferred, and Automation revenues and backlog have declined significantly, the need to replace DCS and other equipment has historically provided reliable and recurring projects for us. We expect to benefit as certain DCS manufacturers are currently phasing out their support for heritage platforms and launching new platforms. Although the timing of this is well positioned within the industry for the
following reasons:
o uncertain, with such a large installed base, our clients will be required to migrate to newer DCS platforms. Our Automation segment also has historically benefited from its ability to sell work to larger engineering and construction firms, thus gaining access to major international pr ojects through tier one firms. |
| · | About half of the states in the U.S. have enacted Renewable Portfolio Standards, which mandate a timeline and percentage for electricity generation from renewable sources, such as wind, solar, geothermal and biomass. Also, the Investment Tax Credit for these renewable energy
projects was due to expire on December 31, 2008, but was extended as
part of the recent stimulus legislation. We believe these two factors,
workingthat this factor, together will servewith the U.S. focusing on energy independence, environmental concerns and government stimulus, should work together to drive demand for alternative energy
projects in the future.
o and sustainable sources of energy. |
| · | Facilities in the energy industry, as well as in many other industries, are aging. No grass roots refinery has been built in the U.S. since 1976, and many of the country'scountry’s large pipelines were installed over 5040 years ago. WeAlthough this condition has been in place for a number of years and timing is uncertain, we anticipate that maintaining and rebuilding this aging infrastructure - an ENGlobal core competency - will benefit ourthe Company.
o ENGlobal has served many of our valued clients over a long period of
time, and these strong alliance relationships are the foundation of
our business. While some clients are basing their purchasing decisions
on overall costs rather than existing relationships, we are seeing
continued project awards from our long-term clients.
o Our business relies primarily on small |
Specific segment information contained below in this section provides further detail regarding the reasons for changes in our financial performance from period to period.
Management's Discussion and Analysis (continued)
Revenue:
Of the overall decrease in revenue for the three months ended March 31, 2010, as compared to the comparable 2009 period, approximately $13.1 million was attributable to our Engineering segment, $4.2 million to our Construction segment, $5.4 million to our Automation segment, and $2.8 million to our Land segment.
Many of our clients continue to delay or cancel scheduled capital projects due to the economy in general and lower oil prices. They are focusing more on “run and maintain” type smaller projects. These types of projects focus on work for required maintenance to keep the plant up and running but not on new capital expansions. Competition has increased greatly for the amount of project work on the market.
Gross Profit:
The overall $5.6 million decrease in gross profit for the three months ended March 31, 2010, as compared to the comparable 2009 period, was attributable to approximately $2.9 million in decreased revenue and approximately $2.7 million in increased costs of which approximately $934,000 in cost was non-project related. As a percentage of revenue, gross profit decreased from 11.2% to 7.2% for the three months ended March 31, 2010 compared to the same period in 2009.
The continued decreases in revenue volume and backlog have lowered our utilization of our billable resources resulting in increased non-project overhead costs to retain employees. We have also incurred increased overhead costs to expand our marketing to new sectors and new clients and increased per-employee costs of benefits. We also incurred lower margins due to the market pressure to renegotiate existing contracts.
Selling, General, and Administrative:
The increase in operating SG&A expense for the three months ended March 31, 2010, as compared to the comparable 2009 period, primarily consisted of increases of $785,000 in professional services and reserves expense, $196,000 in facilities expense, $62,000 in other taxes and licenses and $31,000 in insurance and amortization expenses offset by decreases of $322,000 in incentive bonus accruals that were for plans cancelled or modified, $259,000 in bad debt expense, $90,000 in marketing expense and $45,000 in stock compensation expense. Operating SG&A is discussed in further detail in each of the segment sections.
The decrease in all other SG&A expense for the three months ended March 31, 2010, as compared to the comparable 2009 period, was primarily the result of decreases of $79,000 in professional services, $61,000 in depreciation and amortization expense and $56,000 in incentive bonus accruals that were for plans cancelled or modified offset by increases of $62,000 in salaries and employee related expenses, $45,000 in facilities, office and marketing expenses and $16,000 in other expense. As a percentage of revenue, all other SG&A expense increased to 4.4% for the three months ended March 31, 2010, from 3.3% for the comparable prior-year period.
Operating Income:
The decrease in operating income for the three months ended March 31, 2010, as compared to the comparable 2009 period, was attributable to lower revenue levels as well as increased costs for maintaining core employees at a time when the Company had fewer projects and increased SG&A costs.
Other Income/Expense, net:
Other expense for the three months ended March 31, 2010 consisted of a $10,000 loss from an investment in a Costa Rican company, while other income for the same period in 2009 consisted mainly of $300,000 from insurance proceeds related to Hurricane Ike offset by expense of $43,000 in losses from an investment in a Costa Rican company.
Interest Income/Expense, net:
Interest expense decreased for the three months ended March 31, 2010, as compared to the comparable 2009 period, due to the lower balances on our line of credit and a favorable LIBOR rate option in our Credit Agreement.
Tax Provision:
Income tax expense for the three months ended March 31, 2010, as compared to the comparable 2009 period, decreased generally in proportion to the decrease in operating income.
Management's Discussion and Analysis (continued)
Net Income:
As a result of the changes detailed above, net income for the three months ended March 31, 2010 decreased $3.5 million, or 176.4%, to a loss of $1.5 million from an income of $2.0 million for the comparable prior year period.
Liquidity and Capital Resources
Overview
The Company defines liquidity as its ability to pay liabilities as they become due, fund business operations and meet monetary contractual obligations. Our primary source of liquidity at March 31, 2010 was borrowings under our senior revolving credit facility with Wells Fargo Bank. Cash on hand at March 31, 2010 totaled $0.3 million and availability under the credit facility, after consideration of loan covenant restrictions, totaled $24.4 million, resulting in total liquidity of $24.7 million. As of March 31, 2010, management believes the Company is positioned to meet its liquidity requirements for the next 12 months.
At March 31, 2010, no amounts were outstanding on the Company’s line of credit compared to $20.0 million at March 31, 2009.
Although our revenues, profits and opportunities have contracted over the past year, we still believe we are a growth company positioned to expand when general economic conditions improve. We expect to continue to manage our business to achieve reasonable growth objectives that are commensurate with profitable operations given existing and anticipated economic conditions. We believe that when market conditions improve, we will, once again, experience organic growth. In the meantime, we expect to target opportunities to make strategic acquisitions and we intend to continue to meet our incremental liquidity needs through internally generated profits and borrowing arrangements similar to those currently in place.
The current competitive contracting environment exposes us to situations where our clients may become unable or unwilling to complete a contract and meet their obligations to us in the normal course of business. These situations cause unexpected liquidity requirements, lower than expected profits and even losses. We currently are financing more than $14.7 million relating to the SLE, Alon and Bigler projects, described more fully in Note 9 to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q. While these situations have caused the Company to incur higher interest costs than would otherwise have been incurred, our liquidity remains sufficient to meet our objectives. Even though the Company believes it will receive favorable judgments in legal proceedings rega rding these situations, due to the current business and credit climate, just prevailing in disputes may not assure that cash or assets will be realized and that the Company will not be left with assets it cannot employ.
Despite the Company’s favorable liquidity situation, cash and the availability of cash could be materially restricted if:
| (i) | revenues continue to mid-sized projects, many of
which fall into the "run and maintain" category. We are notdecline as
dependent on large capital projects as many of our competitors. As a result although we have been affected by delayed or cancelled capital
project work and by clients awarding new capital project work based on
18
Management's Discussion and Analysis (continued)
- ------------------------------------------------
price, the impact on our business has not been as significant as it
might otherwise have been. In addition, we anticipate that our entry
into the renewable energy market will create potential for future
growth.
o A significant part of our Automation segment's work is driven by our
clients' need to replace aging and obsolete distributed control system
(DCS) and analytical equipment. While some of these expenditures can
be deferred, the need to replace DCS and other equipment has
historically provided a reliable and recurring source of projects. We
expect to benefit as manufacturers are currently phasing out their
support for heritage DCS platforms with a large installed based, and
our clients will therefore need to migrate to newer DCS platforms. We
are focusing our efforts on improving operational efficiencies that
will allow us to fully capitalize on these opportunities.
The specific segment information contained in this Item provides further
detail regarding the reasons for changes in our financial performance from
period to period.
Revenue:
Revenue decreased $4.7 million, or 4.8%, to $93.5 million for the three
months ended March 31, 2009, from $98.2 million for the comparable
prior-year period. Of the decrease, approximately $9.5 million is
attributable to our Engineering segment and $5.7 million to our
Construction segment, while we had increases in our Land segment of $0.3
million and our Automation segment of $10.2 million. Many of our clients
have delayed or canceled scheduled capital projects due to the economy in
general as well as lower oil prices. They are focusing more on run and
maintain type smaller projects. Competition has increased greatly for the
amount of project work on the market.
Gross Profit:
Gross profit decreased $3.8 million, or 26.6%, to $10.5 million for the
three months ended March 31, 2009, from $14.3 million for the comparable
prior-year period. The $3.8 million decrease in gross profit is
attributable to approximately $3.1 million in higher costs and increased
procurement services and a $0.7 million decrease in revenue.
As a percentage of revenue, gross profit decreased 3.4% from 14.6% for the
three months ended March 31, 2008, to 11.2% for the three months ended
March 31, 2009. The decrease in gross profit margin as a percentage of
revenue primarily relates to renegotiations of existing contracts to lower
margins, increased overhead costs to retain employees even though our level
of work has decreased, and increased overhead costs to expand our marketing
to new sectors and new clients.
Selling, General, and Administrative:
As a percentage of revenue, total SG&A expense increased 0.2% to 7.6% for
the three months ended March 31, 2009, from 7.4% for the comparable period
in 2008. Total expense for SG&A decreased $0.1 million, or 1.4%, to $7.1
million for the three months ended March 31, 2009, from $7.2 million for
the comparable prior-year period.
Operating Income:
Operating income decreased approximately $3.7 million, or 52.1%, to $3.4
million for the three months ended March 31, 2009, from $7.1 million for
the same period in 2008. As a percentage of revenue, operating income
decreased 3.6% to 3.6% for the three months ended March 31, 2009, from 7.2%
for the comparable prior-year period. Operating income decreased due to the
lower revenue levels as well as increased costs for both new sales efforts
and maintaining core employees during a time of decreasing projects.
19
Management's Discussion and Analysis (contined)
- -----------------------------------------------
Other Expense, net:
Other expense decreased $465,000 to an income of $8,000 for the three
months ended March 31, 2009. We had other expense of $457,000 for the
comparable prior-year period. This is due to our expected receipt in 2009
of $300,000 from our Hurricane Ike insurance claim, with the remainder of the expense reduction due to lower interest expense.
Tax Provision:
Income tax expense decreased $1.3 million, or 48.1%, to $1.4 million for
the three months ended March 31, 2009, from $2.7 million for the comparable
prior-year period. The estimated effective tax rate was 41.3% for the three
months ended March 31, 2009, compared to 39.9% for the comparable
prior-year period.
The estimated effective tax rates are based on estimates using historical
rates adjusted by recurring and non-recurring book to tax differences.
Estimates at March 31, 2009 are based on results of the 2008 year end and
adjusted for estimates of non-recurring differences from the prior year, as
well as anticipated book to tax differences for 2009.
Net Income:
Net income for the three months ended March 31, 2009 decreased $2.0
million, or 50.0%, to $2.0 million from $4.0 million for the comparable
prior-year period. As a percentage of revenue, net income decreased 2.0% to
2.1% for the three months ended March 31, 2009, from 4.1% for the three
months ended March 31, 2008.
Liquidity and Capital Resources
- ------------------------------
Overview
The Company defines liquidity as its ability to pay liabilities as they
become due, fund our operations and meet monetary contractual obligations.
Our primary source of funds to meet liquidity needs during the period ended
March 31, 2009 was borrowings under our senior revolving credit facility.
Cash on hand at March 31, 2009 totaled $4.2 million and availability under
the credit facility totaled $29.1 million, resulting in cash and previously
arranged borrowing capacity to meet additional liquidity needs of $33.3
million. As of March 31, 2009, management believes the Company is
positioned to meet its liquidity requirements for the next 12 months.
At March 31, 2009, the amount outstanding on the Company's line of credit
was $20.0 million compared to $29.7 million at March 31, 2008.
We are a growth company and we manage our business to achieve reasonable
growth objectives that are commensurate with profitable operations given
existing and anticipated economic conditions. The outlook for our continued
organic growth is generally favorable. We also expect opportunities to make
strategic acquisitions. We intend to continue to meet our incremental
liquidity needs through internally generated profits and existing borrowing
arrangements.
The competitive contracting environment exposes us to situations where our
clients may become unable or unwilling to complete a contract and meet
their obligations to usfactors discussed in the normal course of business. These situations
cause unexpected liquidity requirements, lower than expected profitsIndustry and even losses. We currently are financing more than $8.6 million relating to
the SLE Project, described more fully in Note 9 to the condensed
consolidated financial statements included in this Quarterly Report on Form
10-Q. While this situation has caused the Company to incur higher interest
costs than would otherwise have been incurred, our liquidity remains
sufficient to meet our objectives.
20
Management's Discussion and Analysis (continued)
- ------------------------------------------------
Despite the Company's favorable liquidity situation, cash and the
availability of cash could be materially restricted if:
(1) circumstances prevent the timely internal processing of invoices,
(2) Overview section, |
| (ii) | amounts billed are not collected or are not collected in a timely manner,
(3) |
| (iii) | circumstances prevent the timely internal processing of invoices, |
| (iv) | project mix shifts from cost-reimbursable to fixed-price contracts (4) during significant periods of growth, |
| (v) | the Company loses one or more of its major customers,
(5) |
| (vi) | the Company experiences material cost overruns on fixed-price contracts,
(6) |
| (vii) | our client mix shifts from our historical owner-operator client base to more developer-based clients,
(7) |
| (viii) | acquisitions are not accretive or are not integrated timely, or
(8) |
| (ix) | we are unablenot able to meet the covenants of the Wells Fargo Credit Facility. |
If any such event occurs, we would be forced to consider alternative financing options.
Management's Discussion and Analysis (continued)
Historically, we have satisfied our cash requirements through operations and borrowings under a revolving credit facility. In December 2009, the Company entered into a new credit agreement with Wells Fargo Bank, which provides a twenty-eight month, $25 million senior secured revolving credit facility (“Wells Fargo Credit Facility”). The Wells Fargo Credit Facility is guaranteed by substantially all of the Company’s subsidiaries, is secured by substantially all of the Company’s assets and positions Wells Fargo as senior to all other debt. The Wells Fargo Credit Facility replaced a $50 million senior revolving credit facility with Comerica Bank that would have expired in August 2010. There were no amounts outstanding on the Wells Fargo Credit Facility as of March& #160;31, 2010. The remaining borrowings available under the Wells Fargo Credit Facility as of March 31, 2010 were $24.4 million after consideration of loan covenant restrictions.
The Company’s Credit Facility requires the Company to maintain certain financial covenants as of the end of each calendar quarter, including the following:
| · | Total Liabilities to consider alternative
financing options, if such options are available given current market
conditions.
Cash Flows from Operating Activities:
Operations generated approximately $8.2 million in net cash for the three
months ended March 31, 2009, compared with net cash used by operations of
$0.4 million during the same period in 2008.
The primary changes in working capital accounts during the period were:
o Tangible Net Worth Ratio not greater than 2.25 to 1.00; |
| · | Asset Coverage Ratio not less than 2.00 to 1.00; and |
| · | Fixed Charge Coverage Ratio not less than 1.75 to 1.00. |
The Wells Fargo Credit Facility also contains covenants that place certain limitations on the Company including limits on capital expenditures, other indebtedness, mergers, asset sales, investments, guaranties, restrictions on certain distributions and pledges of assets.
The Company was in compliance with all covenants under the Wells Fargo Credit Facility as of March 31, 2010. During the current quarterly reporting period our Total Liabilities to Tangible Net Worth Ratio was 0.51 to 1.00; our Asset Coverage Ratio was in compliance due to not having an amount outstanding on the Company’s line of credit as of March 31, 2010; and our Fixed Charge Ratio was 1.89 to 1.00. During the three month period ended March 31, 2010 we expended or committed approximately 8.6%, or $0.3 million, of the $3.5 million fiscal year covenant limitation on capital expenditures. The balance of our capital expenditures for the three month period has been for normal operating requirements including office furniture, computers, software and vehicles. The Company does not expect to exceed the covenant limitation during the balance of the current fiscal year.
During the three month period ended March 31, 2010 our Total Liabilities to Tangible Net Worth Ratio and Asset Coverage Ratio covenant levels improved over their respective average ratios for the three previous quarterly periods. The Company’s Fixed Charge Coverage Ratio for the quarterly period ended March 31, 2010 declined 67% from the average ratio of the three previous quarterly periods.
Cash Flows from Operating Activities:
Operations generated approximately $6.5 million in net cash during the three months ended March 31, 2010, compared with net cash generated from operations of $8.2 million during the same period in 2009.
The primary changes in working capital accounts during the three months ended March 31, 2010 were:
| · | Decreased Trade Receivables -– The decrease of $20.7$5.4 million from December 31, 2008,2009, was primarily the result of an overall decline in operating activity. Our collections on past due Accounts Receivable
balances continue to improve although our days sales outstanding has increaseddecreased from 6272 days for the three-monththree month period ended March 31, 2008
and 642009 but increased from 55 days for the twelve-monthtwelve month period ended December 31, 20082009 to 7260 days at the end of the three-monththree month period ended March 31, 2009.2010. The
primary reasons for the increase in our days sales outstanding were
three past due client accounts totaling $11.9 million which added 11
daysbalance on Accounts Receivable invoices for services provided to Bigler negatively impacted our average days sales outstanding for the three-monththree month period endingended March 31, 2009.
o 2010 by four days. The Company manages its billing and client collection processes toward reducing days sales outstanding to the extent practicable. We believe that our allowance for bad debt is adequate to cover any potential non-payment by our customers. |
| · | Decreased Accounts Payable -Costs and Billings on Uncompleted Contracts – The decrease of $6.8$1.4 million from December 31, 2008,2009 was primarily the result of payouts of vendor and
sub-contractor charges incurred by our Automation segment due to increasedthe overall decline in operating activity duringactivity. |
| · | Increased Other Current Liabilities – the three months ended December
31, 2008.
o Decreased Accrued Compensation and Benefits - The decreaseincrease of $9.2$0.7 million from December 31, 2008 was primarily due to timing of
bi-weekly payroll and benefits payments at March 31, 2009 as well as a
decrease of approximately 200 employees.
21
Management's Discussion and Analysis (continued)
- ------------------------------------------------
Engineering Segment Results
- ---------------------------
Three Months Ended
March 31,
-------------------------------------------
2009 2008
------------------- -------------------
Dollars in Thousands)
-------------------------------------------
Revenue before eliminations $ 43,115 $ 52,035
Inter-segment eliminations (540) (6)
-------- ---------
Total revenue $ 42,575 $ 52,029
======== ========
Detailed revenue:
Detail-design $ 30,506 71.7% $ 37,935 72.9%
Field services 10,493 24.6% 12,988 25.0%
Procurement services 309 0.7% 34 0.1%
Fixed-price 1,267 3.0% 1,072 2.0%
-------- --------
Total revenue: 42,575 100.0% 52,029 100.0%
Gross profit: 4,616 10.8% 9,882 19.0%
Operating SG&A expense: 1,326 3.1% 1,295 2.5%
-------- --------
Operating income: $ 3,290 7.7% $ 8,587 16.5%
======== ========
Overview of Engineering Segment:
Our Engineering segment has been affected by the current economic
conditions. Many of our clients have delayed or canceled scheduled capital
projectsis due to the economy in general and lower commodity prices, as well
as lower energy processing margins. They are focusing more on run and
maintain type smaller projects. Competition has increased greatly for the
amountincrease of project work on the market. We still have certain clients that
have been particularly strongreserves for uslegal issues. |
| · | Increased Federal and Income Tax Receivable – The increase of $1.0 million from whom we continue to receive
project awards. We are also focusing on increased marketing efforts not
only to expand our opportunities in the chemical, refining and pipeline
sectors, but to also grow into other markets within the energy and
infrastructure sector.
Revenue:
Engineering segment revenue decreased $9.4 million, or 18.1%, to $42.6
million for the three months ended MarchDecember 31, 2009, from $52.0 million for
the comparable prior-year period.
The decrease in Engineering segment revenue resulted primarily from
decreased demand for engineering and related professional services for
energy related projects. Generally, the first quarter of the year is slower
due to client budgeting processes. However, we have also been affected by
delayed or canceled capital project work by our clients in reaction to the
current economy. Renewable energy appears to be an emerging area of
activity and potential growth, with the Company currently focused on
biofuels, gasification of various feedstocks, and other biomass processes.
Our detail-design services decreased 19.5%, or $7.4 million, to $30.5
million for the three months ended March 31, 2009, from $37.9 million for
the comparable period in 2008. As a percentage of the total Engineering
segment revenue during these periods, detail-design revenue decreased 1.2%
to 71.7% in 2009 from 72.9% in 2008. The decrease is related to the lower
amount of capital project work available for the reasons described above.
22
Management's Discussion and Analysis (continued)
- ------------------------------------------------
Our field services revenues decreased 19.2%, or $2.5 million, to $10.5
million for the three months ended March 31, 2009, from $13.0 million for
the comparable period in 2008. As a percentage of the total Engineering
segment revenue during these periods, field services revenue decreased 0.4%
to 24.6% in 2009 from 25.0% in 2008.
Revenue from procurement services increased 808.8%, or $275,000, to
$309,000 for the three months ended March 31, 2009, from $34,000 for the
comparable period in 2008. As a percentage of the total Engineering segment
revenue, procurement services revenue increased 0.6% to 0.7% for the three
months ended March 31, 2009, from 0.1% for the comparable period in 2008.
The increase is directly related to rebuilding a single refinery. We do not
anticipate that a similar project will replace this project on its
completion. Procurement services include subcontractor placements,
equipment purchases, and other procurement activities necessary to rebuild
the damaged facilities.
Fixed-price revenue increased 18.2%, or $0.2 million, to $1.3 million for
the three months ended March 31, 2009, from $1.1 million for the comparable
period in 2008. As a percentage of the total Engineering segment revenue,
fixed-price revenue increased 1.0% to 3.0% for the three months ended March
31, 2009, from 2.0% for the comparable period in 2008. Due to the current
economy, more clients are requesting work to be performed on a fixed price
basis to control their costs and shift risk to their contractors.
Gross Profit:
Our Engineering segment's gross profit decreased $5.3 million, or 53.5%, to
$4.6 million for the three months ended March 31, 2009, from $9.9 million
for the comparable period in 2008. As a percentage of the total Engineering
segment revenue, gross profit decreased by 8.2% to 10.8% from 19.0% for the
three months ended March 31, 2009 and 2008, respectively. Of the overall
$5.3 million decrease in gross profit, $3.5 million was attributable to
increased costs, while decreased revenues contributed to $1.8 million of
overall decrease. Generally, clients are awarding new work based on
competitive bidding. In response to the decrease in work, we have decreased
our number of employees. However, realization of the cost savings
associated with reducing our workforce lags a period of increased overhead
costs associated with employees being removed from projects and being
carried as non-billable employees prior to termination.
Selling, General, and Administrative:
Our Engineering segment's SG&A expense remained stable at $1.3 million for
the three months ended March 31, 2009 and the comparable period in 2008. As
a percentage of the total Engineering segment revenue, due to the decline
in revenue, the segment's SG&A costs increased by 0.6% to 3.1% from 2.5%
for the three months ended March 31, 2009 and 2008, respectively.
Operating Income:
Operating income for the Engineering segment decreased $5.3 million, or
61.6%, to $3.3 million for the three months ended March 31, 2009, from $8.6
million for the comparable prior-year period. As a percentage of the total
Engineering segment revenue, operating income decreased by 8.8% to 7.7% for
the three months ended March 31, 2009, from 16.5% for the comparable
prior-year period.
23
Management's Discussion and Analysis (continued)
- ------------------------------------------------
Construction Segment Results
- ----------------------------
Three Months Ended
March 31,
------------------------------------------
2009 2008
------------------ ------------------
Dollars in Thousands)
------------------------------------------
Revenue before eliminations $ 22,550 $ 27,017
Inter-segment eliminations (1,313) (117)
-------- --------
Total revenue $ 21,237 $ 26,900
======== ========
Detailed revenue:
Inspection $ 18,203 85.7% $ 23,394 87.0%
Construction services 3,034 14.3% 3,506 13.0%
-------- --------
Total revenue: 21,237 100.0% 26,900 100.0%
Gross profit: 1,640 7.7% 2,028 7.5%
Operating SG&A expense: 476 2.2% 703 2.6%
-------- --------
Operating income: $ 1,164 5.5% $ 1,325 4.9%
======== ========
Overview of Construction Segment:
The construction group provides construction management personnel and
inspection services in the areas of mechanical integrity, vendor and
turnaround surveillance, field support, construction, and high-tech
maintenance. Our construction management business provides project
managers, instrument technicians, clerical staff, and construction
personnel.
Revenue:
Our Construction segment's revenue decreased $5.7 million, or 21.2%, to
$21.2 million for the three months ended March 31, 2009, from $26.9 million
for the comparable prior-year period.
Due to the current economic environment, we have experienced decline in our
inspection related revenue as a result of project delays, primarily in the
area of pipeline construction. We expect that the work for this area will
remain down through most of the remainder of this year. Inspection related
revenues decreased $5.2 million, or approximately 22.2%, to $18.2 million
for the three months ended March 31, 2009, from $23.4 million for the
comparable prior-year period.
Construction services revenues decreased $0.5 million, or 14.3%, to $3.0
for the three months ended March 31, 2009, from $3.5 million for the
comparable period in 2008. Revenue in this area decreased slightly due to
the delay or cancellation of projects by our clients in response to the
current economy. However, we have been focusing on some new opportunities
with both biofuels technology providers and gasification technology
providers.
The Construction segment has taken action to develop new business by adding
new sales personnel.
24
Management's Discussion and Analysis (continued)
- ------------------------------------------------
Gross profit:
Our Construction segment's gross profit decreased approximately $0.4
million, or 20.0%, to $1.6 million for the three months ended March 31,
2009, from $2.0 million for the comparable prior-year period and, as a
percentage of the total Construction segment revenue, gross profit
increased by 0.2% to 7.7% from 7.5% for the respective periods. The
decrease in gross profit is primarily attributable to the overall decrease
in available work and increased costs incurred in connection with our
efforts to win new work resulting in higher overhead costs.
Selling, General, and Administrative:
Our Construction segment's SG&A expense decreased $0.2 million, or 28.6%,
to $0.5 million for the three months ended March 31, 2009, from $0.7
million for the same period in 2008. As a percentage of the total
Construction segment revenue, SG&A expense decreased by 0.4% to 2.2% from
2.6% for the respective periods. The decrease in SG&A expense was related
to reductions in salaries and related employee expenses.
Operating Income:
Our Construction segment's operating income decreased $0.1 million, or
7.7%, to $1.2 million for the three months ended March 31, 2009, from $1.3
million for the comparable prior-year period. The decrease in operating
income is primarily attributable to decreased revenue in our inspection
services and our increased costs to win new work. As a percentage of the
total Construction segment revenue, operating income increased by 0.6% to
5.5% for the three months ended March 31, 2009, from 4.9% for the
comparable prior-year period.
25
Management's Discussion and Analysis (continued)
- ------------------------------------------------
Automation Segment Results
- --------------------------
Three Months Ended
March 31,
----------------------------------------------
2009 2008
-------------------- --------------------
(Dollars in Thousands)
----------------------------------------------
Revenue before eliminations $ 20,677 $ 10,557
Inter-segment eliminations (86) (155)
-------- --------
Total revenue $ 20,591 $ 10,402
======== ========
Detailed revenue:
Fabrication $ 7,194 34.9% $ 6,683 64.3%
Non-fabrication 13,397 65.1% 3,719 35.7%
-------- --------
Total revenue: 20,591 100.0% 10,402 100.0%
Gross profit: 2,857 13.9% 1,044 10.0%
Operating SG&A expense: 1,240 6.0% 632 6.1%
-------- --------
Operating income: $ 1,617 7.9% $ 412 4.0%
======== ========
Overview of Automation Segment:
Our Automation group provides services relating to the implementation of
process controls, advanced automation and information technology projects.
We provide clients with a full range of services including front-end
engineering feasibility studies and the execution of active engineering,
procurement, and construction projects. By focusing on such large-scope
projects, we intend to pursue Distributed Control Systems (DCS) conversion
and new installation projects by utilizing our own resources as well as
resources from our engineering and systems businesses. ENGlobal has proven
capabilities for plant automation services and products to respond to an
industry progression toward replacing obsolete technology with new open
system architecture DCS.
Revenue:
Our Automation segment's revenue increased approximately $10.2 million, or
98.1%, to $20.6 million for the three months ended March 31, 2009, from
$10.4 million for the comparable prior-year period. This increase was
primarily attributable to increased work due to Hurricane Ike recovery
projects that included high levels of purchased materials. In addition,
approximately $2.1 million of our revenue increase came from the
acquisition of Advanced Control Engineering LLC in September 2008. Our
Automation segment has put a new focus on marketing not only to our
existing client base, but also expanding our client base outside of the
energy sector. We will also be focusing on both domestic and international
clients to expand our revenue base.
Gross profit:
The Automation segment's gross profit increased approximately $1.9 million,
or 190.0%, to $2.9 million for the three months ended March 31, 2009, from
$1.0 million for the comparable prior-year period. As a percentage of the
total Automation segment revenue, gross profit increased by 3.9% to 13.9%,
from 10.0% for the three months ended March 31, 2009 and 2008,
respectively.
26
Management's Discussion and Analysis (continued)
- ------------------------------------------------
Selling, General, and Administrative:
Our Automation segment's SG&A expense increased $0.6 million, or 100.0%, to
$1.2 million for the three months ended March 31, 2009 from $0.6 million
for the three months ended March 31, 2008. Increases in salaries and
related employee expenses of $0.3 million and facilities expenses of $0.2
million make up the primary increase, with the remainder based on increases
in associate relations, professional services and taxes. As a percentage of
the total Automation segment revenue, SG&A expense decreased by 0.1% to
6.0%, from 6.1% for the three months ended March 31, 2009 and 2008,
respectively.
Operating Income:
Operating income increased $1.2 million, or 300.0%, to $1.6 million for the
three months ended March 31, 2009 from $0.4 million for the three months
ended March 31, 2008. As a percentage of the total Automation segment
revenue, operating income also increased by 3.9% to 7.9% for the three
months ended March 31, 2009, from 4.0% for the comparable prior-year
period.
27
Management's Discussion and Analysis (continued)
- ------------------------------------------------
Land Segment Results
- --------------------
Three Months Ended
March 31,
----------------------------------------
2009 2008
---------------- ------------------
(Dollars in Thousands)
----------------------------------------
Revenue before eliminations $9,086 $8,835
Inter-segment eliminations -- --
------ ------
Total revenue 9,086 100.0% 8,835 100.0%
Gross profit: 1,371 15.1% 1,392 15.8%
Operating SG&A expense: 637 7.0% 677 7.7%
------ ------
Operating income: $ 734 8.1% $ 715 8.1%
====== ======
Overview of Land Segment:
Our Land segment possesses a long, reputable history of land management
expertise in title research, permitting and acquisition. We provide land
and right of way consulting services and a broad menu of complementary
solutions primarily to the energy, utility, transportation, electric power
and government sectors. We have successfully built a reputation for
quality, budget management and focused objectives, as long term alliance
partners with our clients.
The Land segment was formed out of our acquisition of WRC Corporation in
May 2006, which was renamed ENGlobal Land, Inc. in January 2008. The Land
segment provides services to a cross-section of clients in the energy
markets. As the country attempts to shift its dependence on foreign energy
to reliance on domestic sources, we anticipate that the Land segment will
have additional project opportunities.
Revenue:
The Land segment's revenue increased approximately $0.3 million, or 3.4%,
to $9.1 million for the three months ended March 31, 2009, from $8.8
million for the comparable prior-year period. This increase in Land segment
revenue is primarily attributable to expanded market opportunities in the
energy and alternative energy industries, as well as expansion
geographically with services being provided throughout the United States.
Gross profit:
The Land segment's gross profit remained stable at $1.4 million for the
three months ended March 31, 2009 and March 31, 2008. As a percentage of
the total Land segment revenue, gross profit decreased by 0.7% to 15.1%,
from 15.8% for the three months ended March 31, 2009 and 2008,
respectively.
Selling, General, and Administrative:
The Land segment's SG&A expense decreased approximately $40,000, or 5.9%,
to $637,000 for the three months ended March 31, 2009, from $677,000 for
the same period in 2008. As a percentage of the total Land segment revenue,
SG&A expense decreased by 0.7% to 7.0%, from 7.7% for the three months
ended March 31, 2009 and 2008, respectively. Decreases in SG&A costs for
the three months ended March 31, 2009 were related to a reduction of bad
debt expense in the amounts of $25,000 and $19,000 for office expenses.
28
Management's Discussion and Analysis (continued)
- ------------------------------------------------
Operating Income:
The Land segmentnet loss recorded an operating income of $0.7 million for both the
three months ended March 31, 2009 and the three months ended March 31,
2008. As a percentage of the total Land segment revenue, operating income
was 8.1% for both the three months ended March 31, 2009 and for the same
period in 2008.
29
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our financial instruments include cash and cash equivalents, accounts
receivable, accounts payable, notes and capital leases payable, and debt
obligations. The book value of cash and cash equivalents, accounts
receivable, accounts payable and short-term notes payable are considered to
be representative of fair value because of the short maturity of these
instruments.
We do not utilize financial instruments for trading purposes and we do not
hold any derivative financial instruments that could expose us to
significant market risk. In the normal course of business, our results of
operations are exposed to risks associated with fluctuations in interest
rates and currency exchange rates.
Our exposure to market risk for changes in interest rates relates primarily
to our obligations under the Comerica Credit Facility (the "Credit
Facility"). As of March 31, 2009, $20.0 million had been borrowed under the
Credit Facility, accruing interest at an average rate of 2.92% per year,
excluding amortization of prepaid financing costs. If it becomes necessary
for the Company to replace the Credit Facility in the current economic
environment, it may not be able to obtain as favorable a rate structure as
the existing arrangement.
In general, our exposure to fluctuating exchange rates relates to the
effects of translating the financial statements of our Canadian subsidiary
from the Canadian dollar to the U.S. dollar. We follow the provisions of
SFAS No. 52 - "Foreign Currency Translation" in preparing our condensed
consolidated financial statements. Currently, we do not engage in foreign
currency hedging activities.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures of a
registrant designed to ensure that information required to be disclosed by
the registrant in the reports that it files or submits under the Exchange
Act is properly recorded, processed, summarized, and reported, within the
time periods specified in the Securities and Exchange Commission's ("SEC")
rules and forms. Disclosure controls and procedures include processes to
accumulate and evaluate relevant information and communicate such
information to a registrant's management, including its Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow for timely
decisions regarding required disclosures.
We evaluated the effectiveness of the design and operation of our
disclosure controls and procedures as of March 31, 2009, as required by
Rule 13a-15 of the Exchange Act. Based on the evaluation described above,
our Chief Executive Officer and Chief Financial Officer have concluded
that, as of March 31, 2009, our disclosure controls and procedures were
effective to ensure that information required to be disclosed by us in the
reports we file or submit under the Exchange Act is recorded, processed,
summarized, and reported, within the time periods specified in the SEC's
rules and forms.
Changes in Internal Control over Financial Reporting
No changes in our internal control over financial reporting occurred during
the three months ended March 31, 2009, that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
30
PART II. - OTHER INFORMATION
----------------------------
ITEM 1. LEGAL PROCEEDINGS
The Company received notice of an action filed in the 234th District Court for
Harris County, TX on or about March 20, 2009, seeking declaratory relief to
clear title to real property and improvements owned by Bigler Chemical on which
ENGlobal Engineering, Inc. ("EEI") had filed a statutory mechanics lien
statement in the amount of $3,169,000 on or about February 18, 2009. Bigler also
claims breach of contract by EEI and monetary damages. The Company filed its
Answer and Counterclaim for damages on breach of contract, for its attorneys'
fees and costs, and to foreclose on its lien interest on April 27, 2009.
As discussed in Note 9 above, in the first quarter of 2007 ENGlobal Engineering,
Inc. and South Louisiana Ethanol, LLC ("SLE") executed an agreement for EPC
services relating to the retro-fit of an ethanol plan in southern Louisiana. The
history of the SLE Project is described in Note 12 to the Company's condensed
consolidated financial statements included in its Quarterly Report on Form 10-Q
for the quarter ended March 31, 2008, and is discussed further in the Company's
Annual Report on Form 10-K for the year ended December 31, 2007. Due to the
continued failure of SLE to obtain permanent financing, on May 30, 2008, the
Company filed suit in the United States District Court for the Eastern District
of Louisiana, Cause Number 08-3601. The Company is seeking damages of $15.8
million.
From time to time, the Company and its subsidiaries become parties to various
legal proceedings arising in the ordinary course of normal business activities.
While we cannot predict the outcome of these proceedings, in our opinion and
based on reports of counsel, any liability arising from such matters,
individually or in the aggregate, is not expected to have a material effect upon
the consolidated financial position or operations of the Company.
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this Quarterly Report on Form
10-Q, you should carefully consider the factors discussed in Part I, "Item 1A.
Risk Factors" in our Annual Report on Form 10-K for the year ended December 31,
2008, which could materially affect our business, financial condition or future
results. The risks described in our Annual Report on Form 10-K are not the only
additional risks facing our Company. Additional risks and uncertainties not
currently known to us or that we currently deem to be immaterial also may
materially adversely affect our business, financial conditions or operating
results.
31
ITEM 6. EXHIBITS
Incorporated by Reference to:
-------------------------------------------------
Exhibit No. Form or Filing Date SEC File
Description Schedule Exhibit No. with SEC Number
----------- -------- ---------- ----------- --------
3.1 Restated Articles of Incorporation of Registrant 10-Q 3.1 11/14/02 001-14217
dated August 8, 2002
3.2 Amendment to the Restated Articles of 8-A12B 3.1 12/17/07 001-14217
Incorporation of the Registrant, filed with the
Nevada Secretary of State on June 2, 2006
3.3 Amended and Restated Bylaws of Registrant dated 10-K 3.3 03/28/08 001-14217
November 6, 2007
3.4 Amendments to Amended and Restated Bylaws of 10-Q 3.2 05/07/08 001-14217
Registrant dated April 29, 2008.
*10.1 Fifth Amendment to the ENGlobal 401(K) Plan
effective January 1, 1009.
*31.1 Certifications Pursuant to Rule 13a - 14(a) of
the Securities Exchange Act of 1934 for the First
Quarter 2009
*31.2 Certifications Pursuant to Rule 13a - 14(a) of
the Securities Exchange Act of 1934 for the First
Quarter 2009
*32.0 Certification Pursuant to Rule 13a - 14(b) of the Securities
Exchange Act of 1934 and 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for the
First Quarter 2009
*Filed herewith
32
2010. |
Management's Discussion and Analysis (continued)
Engineering Segment Results
| Three Months Ended March 31, |
| 2010 | | 2009 | | Increase/(Decrease) |
| (dollars in thousands) |
Revenue before eliminations | $ | 29,428 | | | | | $ | 43,115 | | | | | $ | (13,687 | ) | | |
Inter-segment eliminations | | - | | | | | | (540 | ) | | | | | 540 | | | |
Total revenue | $ | 29,428 | | | | | $ | 42,575 | | | | | $ | (13,147 | ) | | |
| | | | | | | | | | | | | | | | | |
Detailed revenue: | | | | | | | | | | | | | | | | | |
Detail-design | $ | 15,402 | | 52.3 | % | | $ | 30,506 | | 71.7 | % | | $ | (15,104 | ) | (49.5 | %) |
Field services | | 11,383 | | 38.7 | % | | | 10,493 | | 24.6 | % | | | 890 | | 8.5 | % |
Procurement services | | 1 | | 0.0 | % | | | 309 | | 0.7 | % | | | (308 | ) | (99.7 | %) |
Fixed-price | | 2,642 | | 9.0 | % | | | 1,267 | | 3.0 | % | | | 1,375 | | 108.5 | % |
Total revenue: | $ | 29,428 | | 100.0 | % | | $ | 42,575 | | 100.0 | % | | $ | (13,147 | ) | (30.9 | %) |
| | | | | | | | | | | | | | | | | |
Gross profit: | | 1,913 | | 6.5 | % | | | 4,616 | | 10.8 | % | | | (2,703 | ) | (58.6 | %) |
| | | | | | | | | | | | | | | | | |
Operating SG&A expense: | | 2,394 | | 8.1 | % | | | 1,326 | | 3.1 | % | | | 1,068 | | 80.5 | % |
| | | | | | | | | | | | | | | | | |
Operating income (loss): | $ | (481 | ) | (1.6 | %) | | $ | 3,290 | | 7.7 | % | | $ | (3,771 | ) | (114.6 | %) |
| | | | | | | | | | | | | | | | | |
Overview of Engineering Segment:
The Company’s Engineering segment provides consulting services relating to the development, management and execution of projects requiring professional engineering and related project services to the midstream and downstream sectors. Among various subsidiaries, the Engineering segment provides these services primarily to clients in the petroleum refining, petrochemical, pipeline, production and alternative energy industries. ENGlobal also provides field services throughout the United States. Services provided by the Engineering segment include feasibility studies, engineering design, procurement, and construction management.
Our Engineering segment has been adversely affected by the current economic conditions. Many of our clients have delayed or canceled scheduled capital projects due to the economy in general and lower commodity prices, as well as lower energy processing margins. Instead, they are focusing more on maintenance (“run and maintain”) projects which are smaller than many of the other projects we have historically been involved in. Competition has increased greatly for the amount of project work on the market. ENGlobal is fortunate to maintain a base of significant clients for whom we have performed engineering services for many years and, while these clients have fewer projects, they continue to award projects to us. We are also focusing on increased marketing efforts not onl y to expand our opportunities in the chemical, refining and pipeline sectors, but to also expand into other markets within the energy and infrastructure sector.
Management's Discussion and Analysis (continued)
The decrease in Engineering segment revenue resulted primarily from decreased demand for engineering and related professional services for energy related projects. We have also been affected by delayed or cancelled capital project work by clients in reaction to the current economy.
Of the overall decrease in revenue from detail-design services for the three months ended March 31, 2010, approximately $10.5 million was related to the completion or near completion of several major projects while the remainder of the decrease is accounted for by lower availability of work due to client delays or cancellation of projects.
The increase in revenue from field services for the three months ended March 31, 2010, was primarily due to the addition of new on-site assignments in the Beaumont, Lake Charles and Houston areas with existing customers.
The overall decrease in revenue from procurement services for the three months ended March 31, 2010 was due to the completion of projects. Procurement services included subcontractor placements, equipment purchases and other procurement activities as required by the client. Our clients are expressing more interest in EPC work so activity for procurement services could increase in the future if we are awarded more of this type of work. Typically, procurement services have lower margins than engineering services.
The overall increase in revenue from fixed-price services for the three months ended March 31, 2010, was due to the current economy. More clients are requesting work to be performed on a fixed price basis to control their costs and shift risk to their contractors.
Gross Profit:
Of the overall decrease in gross profit for the three months ended March 31, 2010, $1.3 million was attributable to increased costs, while decreased revenues contributed to $1.4 million of the overall decrease. The decrease is the result of clients awarding new work based on competitive bidding, resulting in lower margins. These lower margins along with increased per employee costs of benefits have accounted for 69.8% of the overall decrease in gross profit percentage. Increased costs of strategically carrying key employees as non-billable prior to termination associated with reducing our workforce also contributed to the lower gross profit percentage.
Selling, General, and Administrative:
The increase in the Engineering segment’s SG&A expense for the three months ended March 31, 2010 was mainly attributable to increases of $765,000 in professional services and reserves, $194,000 in facilities expenses, $68,000 in other taxes and licenses and $45,000 in salaries and employee related expenses.
Operating Income:
Of the overall decrease in the Engineering segment’s operating income for the three months ended March 31, 2010 stated as a percent of revenues, 4.3 percentage points of change was due to lower margin work because of client pressures for competitive bidding and 5.0 percentage points of change was due to increased SG&A expenses for increased professional services and reserve expenses, facilities expenses and salaries and employee related expenses.
Management’s Discussion and Analysis (continued)
Construction Segment Results
| Three Months Ended March 31, |
| 2010 | | 2009 | | Increase/(Decrease) |
| (dollars in thousands) |
Revenue before eliminations | $ | 17,179 | | | | | $ | 22,550 | | | | | $ | (5,371 | ) | | |
Inter-segment eliminations | | (110 | ) | | | | | (1,313 | ) | | | | | 1,203 | | | |
Total revenue | $ | 17,069 | | | | | $ | 21,237 | | | | | $ | (4,168 | ) | | |
| | | | | | | | | | | | | | | | | |
Detailed revenue: | | | | | | | | | | | | | | | | | |
Inspection | $ | 13,321 | | 78.0 | % | | $ | 18,203 | | 85.7 | % | | $ | (4,882 | ) | (26.8 | %) |
Construction services | | 3,748 | | 22.0 | % | | | 3,034 | | 14.3 | % | | | 714 | | 23.5 | % |
Total revenue: | $ | 17,069 | | 100.0 | % | | $ | 21,237 | | 100.0 | % | | $ | (4,168 | ) | (19.6 | %) |
| | | | | | | | | | | | | | | | | |
Gross profit: | | 760 | | 4.5 | % | | | 1,640 | | 7.7 | % | | | (880 | ) | (53.7 | %) |
| | | | | | | | | | | | | | | | | |
Operating SG&A expense: | | 389 | | 2.3 | % | | | 476 | | 2.2 | % | | | (87 | ) | (18.3 | %) |
| | | | | | | | | | | | | | | | | |
Operating income: | $ | 371 | | 2.2 | % | | $ | 1,164 | | 5.5 | % | | $ | (793 | ) | (68.1 | %) |
| | | | | | | | | | | | | | | | | |
Overview of Construction Segment:
Serving primarily the midstream and upstream sectors, the Construction segment focuses on energy infrastructure projects in the United States by providing construction management personnel and services primarily in the area of inspection but also in the areas of construction, construction management, vendor and turnaround management, plant asset management, commissioning and start-up, instrumentation and electrical, mechanical integrity, field support and quality assurance. Our Construction segment’s clients include operators and developers of pipeline, refining, utility, chemical, petrochemical, alternative energy and power facilities throughout the United States. Our construction management business provides project managers, instrument technicians, CADD operators, clerical staff and inspectors.
Our Construction segment has been adversely affected by the current economic conditions primarily in our inspection related work. Clients have delayed or cancelled planned projects in response to the current economy.
In August 2009, the Company acquired the operations of PCI Management and Consulting Company (“PCI”). PCI provides engineering, consulting and project management services, specializing in projects relating to the generation, transmission and distribution of energy. These services complement the other services historically provided by our Construction segment and we anticipate that PCI’s location in the Chicago, Illinois area, will allow us to expand the Construction segment’s service territory and establish a strong base from which to serve the power market. Results of operations are included in the Construction segment beginning August 15, 2009.
Revenue:
The overall decrease in revenue from inspection related services for the three months ended March 31, 2010 was related to the current economic conditions which have resulted in project delays and competitive pricing pressure. We believe that things are starting to improve in this area and are expecting revenues to begin to increase over the next few quarters.
Of the overall increase in revenue from construction services for the three months ended March 31, 2010, $0.4 million was derived from the August 2009 acquisition of PCI. The remaining increase in revenue was due to more work with external customers rather than intersegment work with ENGlobal. We continue to focus on new opportunities for both alternative and conventional energy facilities.
Management’s Discussion and Analysis (continued)
Gross profit:
Of the overall decrease in our Construction segment’s gross profit for the three months ended March 31, 2010, $0.6 million was attributable to increased costs, while decreased revenues contributed to $0.3 million of the overall decrease. As a percentage of revenue, the increased costs are primarily attributable to competitive pressures to reduce billing rates.
Selling, General, and Administrative:
The overall decrease in our Construction segment’s SG&A expense for the three months ended March 31, 2010 was mainly attributable to decreases of $100,000 in bad debt expense, $18,000 in stock compensation expense and $9,000 in marketing expenses offset by an increase of $33,000 in facilities expense and $17,000 in professional services expense.
Operating Income:
The overall decrease in our Construction segment’s operating income for the three months ended March 31, 2010 was primarily attributable to the increased direct and indirect costs of approximately 3.2% and increased SG&A expenses of 0.1%.
Management’s Discussion and Analysis (continued)
Automation Segment Results
| Three Months Ended March 31, |
| 2010 | | 2009 | | Increase/(Decrease) |
| (dollars in thousands) |
Revenue before eliminations | $ | 15,217 | | | | | $ | 20,677 | | | | | $ | (5,460 | ) | | |
Inter-segment eliminations | | - | | | | | | (86 | ) | | | | | 86 | | | |
Total revenue | $ | 15,217 | | | | | $ | 20,591 | | | | | $ | (5,374 | ) | | |
| | | | | | | | | | | | | | | | | |
Detailed revenue: | | | | | | | | | | | | | | | | | |
Fabrication | $ | 9,271 | | 60.9 | % | | $ | 7,194 | | 34.9 | % | | $ | 2,077 | | 28.9 | % |
Non-fabrication | | 5,946 | | 39.1 | % | | | 13,397 | | 65.1 | % | | | (7,451 | ) | (55.6 | %) |
Total revenue: | $ | 15,217 | | 100.0 | % | | $ | 20,591 | | 100.0 | % | | $ | (5,374 | ) | (26.1 | %) |
| | | | | | | | | | | | | | | | | |
Gross profit: | | 1,382 | | 9.1 | % | | | 2,857 | | 13.9 | % | | | (1,475 | ) | (51.6 | %) |
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Operating SG&A expense: | | 1,137 | | 7.5 | % | | | 1,574 | | 7.6 | % | | | (437 | ) | (27.8 | %) |
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Operating income: | $ | 245 | | 1.6 | % | | $ | 1,283 | | 6.3 | % | | $ | (1,038 | ) | (80.9 | %) |
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Overview of Automation Segment:
The Automation segment provides services related to the design, fabrication and implementation of process distributed control and analyzer systems, advanced automation, information technology and heat tracing projects primarily to the upstream and downstream sectors. This segment also designs, assembles, integrates and services control and instrumentation systems for specific applications in the energy and processing related industries. We provide clients with a full range of services including front-end engineering feasibility studies and the execution of active large scope engineering, procurement, and construction projects. By focusing on large-scope projects, we intend to pursue Distributed Control Systems (DCS) conversion and new installation projects by utilizing the Automation segment resources as well as resources from our Engineering segment. ENGlobal has proven capabilities for plant automation services and products to respond to an industry progression toward replacing obsolete technology with new open system architecture DCS. Our Automation segment is focusing significant efforts not only on marketing to our existing client base, but also to expanding our client base outside of the energy sector both domestically and internationally.
Our Automation segment has been adversely affected by the current economic conditions. A significant part of our Automation segment’s work is driven by our clients’ need to replace aging and obsolete DCS and analytical equipment. The need to replace DCS and other equipment has historically provided a reliable and recurring source of projects. While some of these expenditures have been deferred in recent years and may continue to be deferred, we may benefit from changes being made by certain manufacturers who are currently phasing out their support for heritage DCS platforms. With such a large installed base, our clients will be required to migrate to newer DCS platforms within the next five years.
Revenue:
Of the overall decrease in our Automation segment’s revenue for the three months ended March 31, 2010, $7.6 million is attributable to the work due to Hurricane Ike recovery projects completing in 2009 for the non-fabrication revenue. That decrease is offset by new work acquired as a result of our increased sales effort in the fabrication area.
Management’s Discussion and Analysis (continued)
Gross profit:
Of the overall decrease in our Automation segment’s gross profit for the three months ended March 31, 2010, $0.7 million was attributable to increased costs, while decreased revenues contributed to $0.8 million of the overall decrease. The gross profit percentage decrease is attributable to overhead costs associated with employees being removed from projects as volume and backlog decreased and being carried as non-billable employees prior to termination.
Selling, General, and Administrative:
The overall decrease in our Automation segment’s SG&A expense for the three months ended March 31, 2010 was attributable to decreases of $183,000 in incentive bonus accruals that were for plans cancelled or modified, $150,000 in bad debt expenses, $75,000 in salaries and employee related expenses, $48,000 in facilities expenses and $45,000 in losses on the disposal of assets net of an increase of $68,000 in depreciation and amortization expenses.
Operating Income:
The overall $1.0 million decrease in our Automation segment’s operating income for the three months ended March 31, 2010 was due to the factors discussed above.
Management’s Discussion and Analysis (continued)
Land Segment Results
| Three Months Ended March 31, |
| 2010 | | 2009 | | Increase/(Decrease) |
| (dollars in thousands) |
Revenue before eliminations | $ | 6,270 | | | | | $ | 9,086 | | | | | $ | (2,816 | ) | | |
Inter-segment eliminations | | - | | | | | | - | | | | | | - | | | |
Total revenue | $ | 6,270 | | 100.0 | % | | $ | 9,086 | | 100.0 | % | | $ | (2,816 | ) | (31.0 | %) |
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Gross profit: | | 817 | | 13.0 | % | | | 1,371 | | 15.1 | % | | | (554 | ) | (40.4 | %) |
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Operating SG&A expense: | | 447 | | 7.1 | % | | | 637 | | 7.0 | % | | | (190 | ) | (29.8 | %) |
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Operating income: | $ | 370 | | 5.9 | % | | $ | 734 | | 8.1 | % | | $ | (364 | ) | (49.6 | %) |
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Overview of Land Segment:
Our Land segment provides land management, right-of-way, environmental compliance, legislative affairs support and governmental regulatory compliance services primarily to the midstream sector, including pipeline, utility and telecom companies and other owner/operators of infrastructure facilities throughout the United States and Canada. We have successfully built a reputation for quality, budget management and focused objectives, as long term alliance partners with our clients. The Land segment provides services to a cross-section of clients in the energy markets. As the country attempts to shift its dependence on foreign energy to reliance on domestic sources, we anticipate that the Land segment will have additional project opportunities.
Our Land segment has been adversely affected by the current economic conditions. Overall pipeline and other midstream projects have been less affected than upstream projects. Although pipeline projects tend to require fewer engineering man-hours than similarly sized downstream projects, ENGlobal may also provide a pipeline client with several additional services, such as right-of-way acquisition, regulatory permitting, inspection and construction management. Our clients are able to take advantage of our ‘all in’ capabilities in the midstream sector. We believe, as the economy improves, the drivers behind the growth in domestic pipeline activity will include: (1) natural gas transportation away from the shale discoveries in various parts of the country, (2) natural gas transportation related to LNG import facilities, (3) movement of heavy Canadian crude oil into the United States, (4) movement of refined products from Gulf Coast refineries to the Midwest and Northeast, and (5) repairs and upgrades to the aging pipeline infrastructure which is driven by DOT pipeline integrity requirements.
Revenue:
Of the overall decrease in our Land segment’s revenue for the three months ended March 31, 2010, $2.0 million was attributed to the completion of several major projects with the remaining decrease attributable to clients delaying capital projects.
Gross profit:
Due to current economic conditions, we are experiencing higher client demands for lower costs. As a result, some of our contracts provide lower margins than we have been able to earn in the past. This trend is adversely affecting our gross profit.
Of the overall decrease in our Land segment’s gross profit for the three months ended March 31, 2010, $0.2 million was attributable to increased costs, while decreased revenues contributed to $0.4 million of the decrease. Lower margins resulting from competitive pressures account for approximately 1.8% of the gross profit decrease offset by an increase of 0.3% which is attributable to decreased non-billable and indirect costs associated with carrying employees between projects.
Management’s Discussion and Analysis (continued)
Selling, General, and Administrative:
The overall decrease in our Land segment’s SG&A expense for the three months ended March 31, 2010 was mainly attributable to decreases of $139,000 in incentive bonus accruals that were for plans modified or cancelled, $78,000 in marketing expenses and $7,000 from a gain on the sale of assets offset by increases of $19,000 in professional services expenses and $17,000 in facilities expense.
Operating Income:
The overall $0.4 million decrease in our Land segment’s operating income for the three months ended March 31, 2010 was due to the factors discussed above.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our financial instruments include cash and cash equivalents, accounts and notes receivable, accounts payable, notes and capital leases payable, and debt obligations. The book value of cash and cash equivalents, accounts receivable, accounts payable and short-term notes payable are considered to be representative of fair value because of the short maturity of these instruments.
We do not utilize financial instruments for trading purposes and we do not hold any derivative financial instruments that could expose us to significant market risk. In the normal course of business, our results of operations are exposed to risks associated with fluctuations in interest rates and, to a minor extent, currency exchange rates.
Our exposure to market risk for changes in interest rates relates primarily to our obligations under the Wells Fargo Credit Facility. As of March 31, 2010, there was not a balance outstanding under the Wells Fargo Credit Facility that accrues interest at 2% above the Daily One Month LIBOR Rate in effect from time to time or a fixed rate per annum determined by Wells Fargo to be 2% above LIBOR in effect on the first day of an applicable fixed rate term. The Wells Fargo Credit Facility includes a commitment fee of 30 basis points for the unused portion of the $25 million credit facility.
In general, our exposure to fluctuating exchange rates relates to the effects of translating the financial statements of our Canadian subsidiary from the Canadian dollar to the U.S. dollar. We follow the provisions of ASC 830-30, “Foreign Currency Translation” in preparing our condensed consolidated financial statements. Currently, we do not engage in foreign currency hedging activities.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures of a registrant that are designed to ensure that information required to be disclosed by the registrant in the reports that it files or submits under the Exchange Act is properly recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's (“SEC”) rules and forms. Disclosure controls and procedures include processes to accumulate and evaluate relevant information and communicate such information to a registrant’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosures.
We evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2010, as required by Rule 13a-15 of the Exchange Act. Based on the evaluation described above, our Chief Executive Officer and Chief Financial Officer have concluded that, as of March 31, 2010, our disclosure controls and procedures were effective insofar as they are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports t hat we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
No changes in our internal control over financial reporting occurred during the three months ended March 31, 2010, that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, ENGlobal or one or more of its subsidiaries is involved in various legal proceedings or are 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, and the outcome of any such claims or proceedings cannot be predicted with certainty. Certain specific matters are discussed in Note 9 to the Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q. As of the date of this filing, all such active proceedings and claims of substance that have been raised against any subsidiary business entity have been adequately reserved for, or are covered by insurance, such that, if determined adversely to those entities, individuall y or in the aggregate, they would not have a material adverse effect on our results of operations or financial position.
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2009, which outlines factors that could materially affect our business, financial condition or future results. The risks described, in our Annual Report on Form 10-K, are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial conditions or operating results.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
| | | Incorporated by Reference to: |
| | | | |
Exhibit No. | | Description | | | | |
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3.1 | | Restated Articles of Incorporation of Registrant dated August 8, 2002 | 10-Q | 3.1 | 11/14/02 | 001-14217 |
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3.2 | | Amendment to the Restated Articles of Incorporation of the Registrant, filed with the Nevada Secretary of State on June 2, 2006 | 8-A12B | 3.1 | 12/17/07 | 001-14217 |
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3.3 | | Amended and Restated Bylaws of Registrant dated November 6, 2007 | 10-K | 3.3 | 03/28/08 | 001-14217 |
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3.4 | | Amendments to Amended and Restated Bylaws of Registrant dated April 29, 2008. | 10-Q | 3.2 | 05/07/08 | 001-14217 |
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*10.1 | | First Amendment and Restated ENGlobal Corporation Incentive Bonus Plan effective January 1, 2010. | | | | |
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*10.2 | | Fourth Amendment to the Lease Agreement between YPI North Belt Portfolio, LLC ad ENGlobal Corporate Services, Inc. dated March 1, 2010. | | | | |
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*31.1 | | Certifications Pursuant to Rule 13a – 14(a) of the Securities Exchange Act of 1934 for the First Quarter 2010 | | | | |
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*31.2 | | Certifications Pursuant to Rule 13a – 14(a) of the Securities Exchange Act of 1934 for the First Quarter 2010 | | | | |
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*32.0 | | Certification Pursuant to Rule 13a – 14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for the First Quarter 2010 | | | | |
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* Filed herewith
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ENGlobal Corporation
Dated: May 11, 2009
By: /s/ Robert W. Raiford
-------------------------------------
Robert W. Raiford
Chief Financial Officer and Treasurer
33
ENGlobal Corporation | |
| |
Dated: May 5, 2010 | |
| |
By: | /s/ Robert W. Raiford |
| Robert W. Raiford |
| Chief Financial Officer and Treasurer |
| |