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, 20072008
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 001-14217
ENGlobal Corporation
--------------------
(Exact name of registrant as specified in its charter)
Nevada
------
(State or other jurisdiction of
incorporation or organization)
88-0322261
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(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)
(281) 878-1000
--------------
(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 is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a non-accelerated filer.smaller reporting company. See
definitionthe definitions of "large accelerated filer," "accelerated filer," and large accelerated filer"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)
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 1, 2007.April 30, 2008.
$0.001 Par Value Common Stock 26,853,09027,063,541 shares
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 20072008
TABLE OF CONTENTS
Page
Number
------
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Operations for the Three Months Ended
March 31, 2007 and March 31, 2006 3
Consolidated Statements of Comprehensive Income for the Three Months Ended
March 31, 20072008 and March 31, 2006 42007 3
Condensed Consolidated Balance Sheets at March 31, 20072008 and December 31, 2006 52007 4
Condensed Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 20072008 and March 31, 2006 62007 5
Notes to Condensed Consolidated Financial Statements 7-136-10
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14-2311-22
Engineering Segment Results 18
Construction Segment Results 20
Automation Segment Results 21
Land Segment Results 22
Item 3. Quantitative and Qualitative Disclosures About Market Risk 2423
Item 4. Controls and Procedures 2423-24
Part II. Other Information
Item 1. Legal Proceedings 2725
Item 1A. Risk Factors 2725
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 2725
Item 3. Defaults Upon Senior Securities 2725
Item 4. Submission of Matters to a Vote of Security Holders 2725
Item 5. Other Information 2725
Item 6. Exhibits 2725
Signatures 2826
2
PART I. - FINANCIAL INFORMATION
-------------------------------
ITEM 1. FINANCIAL STATEMENTS
ENGlobal Corporation
Condensed Consolidated Statements Of OperationsIncome
(Unaudited)
(Dollars in Thousands)
For the Three Months
Ended March 31,
------------------------------------------------
2008 2007
2006
------------ ------------
Operating Revenue-------- --------
Revenues $ 81,658,63298,166 $ 66,626,836
------------ ------------
Operating Expenses:81,659
Direct cost 68,380,907 58,405,208costs 83,820 68,382
-------- --------
Gross Profit 14,346 13,277
Selling, general and administrative 7,743,688 6,100,351
------------ ------------
Total operating expense 76,124,595 64,505,559
------------ ------------7,226 7,744
-------- --------
Operating income 5,534,037 2,121,2777,120 5,533
Other Income (Expense):
Other income (expense) (131) 21,75226 --
Interest income (expense), net (559,843) (162,146)
------------ ------------
Total other income (expense) (559,974) (140,394)
------------ ------------(483) (560)
-------- --------
Income before Income Taxes 6,663 4,973
Provision for Federal and State Income Taxes 4,974,063 1,980,883
Provision for Income Taxes 1,819,720 746,740
------------ ------------2,660 1,818
-------- --------
Net Income $ 3,154,3434,003 $ 1,234,143
============ ============3,155
======== ========
Net Income Per Common Share:
Basic $ 0.120.15 $ 0.050.12
Diluted $ 0.120.15 $ 0.050.12
Weighted Average Shares Used in Computing Net Income Per Share:
Basic 26,809,006 26,332,60227,060 26,809
Diluted 27,259,948 27,246,34727,527 27,260
See accompanying notes to interim condensed consolidated financial statements.
3
ENGlobal Corporation
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
For the Three Months
EndedBalance Sheets
(Dollars in Thousands)
ASSETS
------
March 31, --------------------------December 31,
2008 2007
2006
----------- -----------
Net IncomeCurrent Assets: (unaudited) (audited)
--------- ---------
Cash $ 3,154,3432,019 $ 1,234,143
Foreign currency translation adjustment,908
Trade receivables, net (683) (433)
----------- -----------
Net Comprehensive Income67,186 64,141
Prepaid expenses and other current assets 1,794 2,125
Current portion of notes receivable 155 154
Costs and estimated earnings in excess of billings on uncompleted contracts 6,751 6,981
Deferred tax asset 3,081 3,081
--------- ---------
Total Current Assets 80,986 77,390
Property and Equipment, net 6,220 6,472
Goodwill 20,048 19,926
Other Intangible Assets, net 3,718 4,112
Long term notes receivable, net of current portion 10,546 10,593
Deferred tax asset, non-current 90 77
Other Assets 1,107 1,020
--------- ---------
Total Assets $ 3,153,660122,715 $ 1,233,710
=========== ===========119,590
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable $ 7,630 $ 10,482
Accrued compensation and benefits 15,270 16,182
Notes payable 569 931
Current portion of long-term debt 1,442 1,508
Deferred rent 527 558
Billings and estimated earnings in excess of costs on uncompleted contracts 922 963
Other liabilities and taxes payable 5,309 3,851
--------- ---------
Total Current Liabilities 31,669 34,475
Long-Term Debt, net of current portion 30,884 29,318
--------- ---------
Total Liabilities 62,553 63,793
--------- ---------
Commitments and Contingencies (Note 9)
Stockholders' Equity:
Common stock - $0.001 par value; 75,000,000 shares authorized; 27,063,541
and 27,051,766 shares issued and outstanding at March 31, 2008 and
December 31, 2007, respectively 28 28
Additional paid-in capital 34,003 33,593
Retained earnings 26,184 22,181
Accumulated other comprehensive income (loss) (53) (5)
--------- ---------
Total Stockholders' Equity 60,162 55,797
--------- ---------
Total Liabilities and Stockholders' Equity $ 122,715 $ 119,590
========= =========
See accompanying notes to interim condensed consolidated financial statements.
4
ENGlobal Corporation
Condensed Consolidated Balance SheetsStatements Of Cash Flows
(Unaudited)
ASSETS
------(Dollars in Thousands)
For the Three Months Ended
March 31,
December 31,--------------------
2008 2007
2006
------------- -------------
Current Assets:-------- --------
Cash Flows from Operating Activities:
Net income $ 949,6524,003 $ 1,402,8803,155
Adjustments to reconcile net income to net cash provided (used)
by operating activities:
Depreciation and amortization 1,111 1,069
Share based compensation expense 387 233
Gain on disposal of property, plant and equipment (1) (14)
Deferred income taxes (90) (39)
Changes in current assets and liabilities, net of acquisitions:
Trade receivables net 64,113,264 60,247,612
Prepaid expenses and other current assets 1,950,000 1,723,907
Current portion of notes receivable 52,815 52,031
Costs(3,044) (3,866)
Billings and estimated earnings in excess of billings on uncompleted contracts 8,068,993 5,390,111
Deferred tax asset 2,310,106 2,310,106
Federal income taxes receivable 101,135 1,148,014
------------- -------------
Total Current Assets 77,545,965 72,274,661
Propertycosts 230 (2,679)
Prepaid expenses and Equipment, net 8,474,181 8,724,902
Goodwill 19,688,030 19,202,197
Other Intangible Assets, net 4,747,347 5,426,824
Long term notes receivable, net of current portion 120,727 129,105
Other Assets 624,867 468,864
------------- -------------
Total Assets $ 111,201,117 $ 106,226,553
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:other assets 298 (462)
Accounts payable $ 10,636,078 $ 14,672,165
Federal and State Income Taxes 1,159,796 509,748(2,851) (4,036)
Accrued compensation and benefits 13,399,534 12,806,919
Notes payable 624,978 1,109,772
Current portion of long-term debt 1,427,352 1,418,029
Deferred rent 648,328 678,583(913) 593
Billings in excess of costs and estimated earnings on uncompleted contracts 1,697,445 539,910(41) 1,157
Other liabilities 3,737,345 5,352,886
------------- -------------
Total Current Liabilities 33,330,856 37,088,012
Long-Term Debt, net(903) (1,775)
Income taxes receivable/payable 2,210 1,732
-------- --------
Net cash provided (used) by operating activities 396 (4,932)
-------- --------
Cash Flows from Investing Activities:
Property and equipment acquired (445) (574)
Proceeds from sale of current portion 32,473,627 27,162,263
Deferred Tax Liability 1,075,716 1,114,224
------------- -------------
Total Liabilities 66,880,199 65,364,499
------------- -------------
Commitments and Contingencies (Note 11)
Stockholders' Equity:
Commonequipment -- 48
Proceeds from note receivable 46 8
Proceeds from sale of other assets 1 90
-------- --------
Net cash used in investing activities (398) (428)
-------- --------
Cash Flows from Financing Activities:
Borrowings on line of credit 64,078 39,412
Payments on line of credit (62,235) (33,759)
Proceeds from issuance of common stock - $0.001 par value; 75,000,000 shares authorized; 26,829,090
and 26,807,460 shares issued and outstanding23 42
Long-term debt repayments (705) (817)
-------- --------
Net cash provided by financing activities 1,161 4,878
-------- --------
Effect of Exchange Rate Changes on Cash (48) 29
-------- --------
Net change in cash 1,111 (453)
Cash, at March 31, 2007 and
December 31, 2006, respectively 27,481 27,459
Additional paid-in capital 31,422,851 31,147,343
Retained earnings 12,871,696 9,717,354
Accumulated other comprehensive income (loss) (1,110) (30,102)
------------- -------------
Total Stockholders' Equity 44,320,918 40,862,054
------------- -------------
Total Liabilities and Stockholders' Equitybeginning of period 908 1,403
-------- --------
Cash, at end of period $ 111,201,1172,019 $ 106,226,553
============= =============950
======== ========
Supplemental Disclosures:
Interest paid $ 393 $ 354
-------- --------
Income taxes paid $ 575 $ (135)
-------- --------
See accompanying notes to interim condensed consolidated financial statements.
5
ENGlobal Corporation
Condensed Consolidated Statements Of Cash Flows
(Unaudited)
For the Three Months Ended
March 31,
----------------------------
2007 2006
------------ ------------
Cash Flows from Operating Activities:
Net income $ 3,154,343 $ 1,234,143
Adjustments to reconcile net income to net cash used in operating activities -
Depreciation and amortization 1,068,649 648,703
Share based compensation expense 232,964 85,305
Gain on disposal of property, plant and equipment (13,561) (10,000)
Deferred income tax expense (38,508) (15,900)
Changes in current assets and liabilities, net of acquisitions -
Trade receivables (3,865,652) (2,870,680)
Inventories -- 153,968
Costs and estimated earnings in excess of billings (2,678,882) (381,574)
Prepaid expenses and other assets (462,064) 54,136
Accounts payable (4,036,087) (3,409,896)
Accrued compensation and benefits 592,615 (1,083,098)
Billings in excess of costs and estimated earnings 1,157,535 1,956,996
Other liabilities (1,775,443) (143,704)
Income taxes receivable (payable) 1,731,914 592,639
------------ ------------
Net cash used in operating activities (4,932,177) (3,188,962)
Cash Flows from Investing Activities:
Property and equipment acquired (574,759) (696,456)
Proceeds from sale of equipment 48,460 10,000
Proceeds from note receivable 7,594 --
Proceeds from sale of other assets 90,204 50,000
Net cash paid for acquisitions -- (649,251)
------------ ------------
Net cash used in investing activities (428,501) (1,285,707)
------------ ------------
Cash Flows from Financing Activities:
Borrowings on line of credit 39,411,802 32,604,288
Payments on line of credit (33,758,819) (28,278,338)
Proceeds from issuance of common stock 42,565 212,361
Long-term debt repayments (817,090) (205,971)
------------ ------------
Net cash provided by financing activities 4,878,458 4,332,340
------------ ------------
Effect of Exchange Rate Changes on Cash 28,992 2,928
------------ ------------
Net change in cash (453,228) (139,401)
Cash, at beginning of period 1,402,880 159,414
------------ ------------
Cash, at end of period $ 949,652 $ 20,013
============ ============
Supplemental Disclosures:
Interest paid $ 353,549 $ 90,254
------------ ------------
Income taxes paid $ (134,912) $ 248,867
------------ ------------
Non-Cash:
Issuance of note for ATI assets $ -- $ 1,000,000
------------ ------------
Acceptance of note for Constant Power assets $ -- $ 216,000
============ ============
See accompanying notes to interim condensed consolidated financial statements.
6
Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
NOTE 1 - BASIS OF PRESENTATION
The condensed consolidated financial statements of ENGlobal Corporation
(which may be referred to as "ENGlobal", the "Company", "we", "us", or
"our") included herein, are un-audited for the three-month periods ended
March 31, 2007 and 2006. 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 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, 2006, included in the Company's Annual Report on
Form 10-K filed with the Securities and Exchange Commission on March 16,
2007 and Form 10K/A filed on March 29, 2007. 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 2006 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 2006 Annual
Report on Form 10-K.
The Company's adoption of SFAS No. 123(R), "Share-Based Payment," became
effective January 1, 2006 and is further described in Note 3, below.
On July 13, 2006, the FASB issued FIN 48, "Accounting for Uncertainty in
Income Taxes, and Related Implementation Issues," which provides guidance
on the financial statement recognition, measurement, presentation and
disclosure of uncertain tax positions that a company has taken or expects
to take on a tax return. Under FIN 48, financial statements should reflect
expected future tax consequences of such positions presuming the taxing
authorities have full knowledge of the position and all relevant facts.
This interpretation also revises the disclosure requirements and was
adopted by the Company effective as of January 1, 2007. There are currently
no material tax positions identified as uncertain for the Company or its'
subsidiaries.
We recognize interest related to uncertain tax positions in interest
expense and penalties related to uncertain tax positions in governmental
penalties. As of March 31, 2007, we have not recognized interest or
penalties relating to any uncertain tax positions.
The Company is subject to federal and state income tax audits from time to
time that could result in proposed assessments. The Company cannot predict
with certainty the timing of such audits, how these audits would be
resolved and whether the Company would be required to make additional tax
payments, which may or may not include penalties and interest. The Company
was subject to a Federal tax audit for the years 2002 and 2003. That
examination has been closed.
As of March 31, 2007, the Company has been notified that its' recently
acquired subsidiary, WRC Corporation is subject to an audit for the
pre-acquisition fiscal year ending September 30, 2005. The Company does not
have any other examination on-going by the Internal Revenue Service, and
the open years subject to audit are currently tax years 2004-2006. For most
states where the Company conducts business, the Company is subject to
examination for the preceding three to six years.
NOTE 3 - SHARE BASED COMPENSATION
The Company currently sponsors a stock-based compensation plan as described
below. Effective January 1, 2006, the Company adopted the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 123 (Revised),
"Share-Based Payment" ("SFAS No. 123(R)"). Under the fair value recognition
provisions of SFAS No. 123(R), stock-based compensation is measured at the
grant date based on the value of the awards and is recognized as expense
7
Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
over the requisite service period (usually a vesting period). The Company
selected the modified prospective method of adoption described in SFAS No.
123(R). The fair values of the stock awards recognized under SFAS No.
123(R) are determined based on the vested portion of the awards; however,
the total compensation expense is recognized on a straight-line basis over
the vesting period.
In accordance with the provisions of SFAS No. 123(R), total stock-based
compensation expense in the amount of $232,964 and $85,366 was recorded in
the three months ended March 31, 2007, and March 31, 2006, respectively.
The total stock-based compensation expense was recorded in selling, general
and administrative expense. The total income tax benefit recognized in the
condensed consolidated statements of income for the share-based
arrangements for the three months ended March 31, 2007 was $38,509.
Prior to January 1, 2006, the Company accounted for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. Under APB Opinion No. 25, no
compensation expense was recognized for stock options issued to employees
because the grant price equaled or was above the market price on the date
of grant for options issued by the Company.
The total fair value of vested options during the three months ended March
31, 2007 and 2006 was $6.5 million and $10.7 million, respectively. The
average price per share for the three months ended March 31, 2007 and 2006
was $6.00 per share and $11.14 per share, respectively.
Stock Option and Incentive Plans
The Company maintains a stock option plan (the "Option Plan") under which
the Company may issue incentive stock options to employees and non-employee
directors. Under the Option Plan, a maximum of 2,650,000 shares of our
common stock was approved to be issued or transferred to certain
non-employee directors, officers and employees pursuant to stock based
awards granted. As of March 31, 2007, 150,806 shares remain available for
grant under the Option Plan.
On March 30, 2007, the Board of Directors approved, subject to stockholder
approval on June 14, 2007, an amendment to the Option Plan. The proposed
amendment would increase the number of shares available for issuance under
the Plan from 2,650,000 to 3,250,000 in order to enhance the ability of
ENGlobal to compensate its non-employee directors and to attract employees
of outstanding ability.
The Company's policy regarding share issuance upon option exercise takes
into consideration the optionee's eligibility and vesting status. Upon
receipt of an optionee's exercise notice and payment, and the Company's
subsequent determination of eligibility, the Company's Chief Governance
Officer or the Chairman of the Compensation Committee instructs our
transfer agent to issue shares of our Common Stock to the optionee.
Stock options have been granted with exercise prices at or above the market
price on the date of grant. The granted options have vested generally over
one year for non-employee directors and ratably over four years for
officers and employees. The granted options generally have ten year
contractual terms.
Compensation expense of $1,480,583 related to previously granted stock
option awards which are non-vested had not yet been recognized at March 31,
2007. This compensation expense is expected to be recognized over a
weighted-average period of approximately 20 months.
8
Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
NOTE 1 - BASIS OF PRESENTATION
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, 2008 and 2007. 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 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, 2007, included in the Company's Annual Report on
Form 10-K filed with the Securities and Exchange Commission on March 28,
2008. 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 2007 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 2007 Annual
Report on Form 10-K.
NOTE 3 - STOCK BASED COMPENSATION
The Company currently sponsors a stock-based compensation plan as described
below. Effective January 1, 2006, the Company adopted the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 123 (Revised),
"Share-Based Payment" ("SFAS No. 123(R)"). Under the fair value recognition
provisions of SFAS No. 123(R), stock-based compensation is measured at the
grant date based on the value of the awards and is recognized as expense
over the requisite service period (usually a vesting period). The Company
selected the modified prospective method of adoption described in SFAS No.
123(R). The fair values of the stock awards recognized under SFAS No.
123(R) are determined based on the vested portion of the awards; however,
the total compensation expense is recognized on a straight-line basis over
the vesting period.
In accordance with the provisions of SFAS No. 123(R), total stock-based
compensation expense in the amount of $387,000 and $233,000 was recorded in
the three months ended March 31, 2008, and March 31, 2007, respectively.
The total stock-based compensation expense was recorded in selling, general
and administrative expense. The total income tax benefit recognized in the
condensed consolidated statements of income for the stock-based
arrangements was $90,000 and $39,000 for the three months ended March 31,
2008, and March 31, 2007, respectively.
The total fair value of vested options outstanding as of March 31, 2008 and
2007 was $4.6 million and $6.5 million, respectively. The average closing
price per share of our common stock for the three months ended March 31,
2008 and 2007 was $9.26 per share and $6.00 per share, respectively. Our
common stock was quoted on the NASDAQ Global Select market during the three
months ended March 31, 2008 and on the American Stock Exchange during the
three months ended March 31, 2007.
Stock Option and Incentive Plans
The Company maintains a stock option plan (the "Option Plan") under which
the Company may issue incentive stock options to employees and non-employee
directors. Under the Option Plan, a maximum of 3,250,000 shares of our
common stock was approved to be issued or transferred to certain
non-employee directors, officers and employees pursuant to stock based
awards granted. As of March 31, 2008, 482,494 shares remain available for
grant under the Option Plan.
The Company's policy regarding share issuance upon option exercise takes
into consideration the optionee's eligibility and vesting status. Upon
receipt of an optionee's exercise notice and payment, and the Company's
subsequent determination of eligibility, the Company's Chief Governance
Officer or the Chairman of the Compensation Committee instructs our
transfer agent to issue shares of our Common Stock to the optionee.
6
Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
Stock options have been granted with exercise prices at or above the market
price on the date of grant. The granted options have vested generally over
one year for non-employee directors and ratably over four years for
officers and employees. The granted options generally have ten year
contractual terms.
Compensation expense of $1.6 million related to previously granted stock
option awards which are non-vested had not yet been recognized at March 31,
2008. This compensation expense is expected to be recognized over a
weighted-average period of approximately 30 months.
The following summarizes stock option activity for the first quarter of
2007.2008:
Weighted Weighted Average
Average Remaining Aggregate
Number of Exercise Contractual Intrinsic *
Options Price Term (Years) Value (000's)
----------- --------- ----------------------- ---------- ------------ -------------
Balance at December 31, 2006 1,422,4942007 1,306,500 $ 5.16 7.9 years6.26 7.4 $ 2,8713,920
Granted - - - -140,000 9.44 10.0 --
Exercised 21,630 1.97 - 77(11,775) 1.98 -- (86)
Canceled or expired - - - -
----------- --------- --------------- -- -- --
---------- ---------- -------- ----------
Balance at March 31, 2007 1,400,8642008 1,434,725 $ 5.21 7.76.61 7.2 $ 2,948
=========== ========= =============3,802
========== ========== ======== ==========
Exercisable at March 31, 2007 1,088,1642008 1,115,525 $ 4.66 7.75.79 7.0 $ 2,504
=========== ========= =============3,871
========== ========== ======== ==========
*Based on average stock price for the first quarter 20072008 of $6.00$9.26 per
share. The average stock price for the same period in 20062007 was $11.14$6.00 per
share.
The total intrinsic value of options exercised was $77,000$86,000 and $488,000$77,000 for
the three months ended March 31, 20072008 and 2006,2007, respectively.
NOTE 4 - FIXED FEE CONTRACTS
Costs, estimated earnings and billings on uncompleted contracts consisted
of the following at March 31, 20072008 and December 31, 2006:2007:
March 31, December 31,
2008 2007
2006
--------------------
(in thousands)
------------------------------------------
(Dollars in Thousands)
----------------------
Costs incurred on uncompleted contracts $ 72,60074,374 $ 75,31774,599
Estimated earnings (losses) on uncompleted contracts (7,792) (7,390)(1,390) (1,686)
-------- --------
Earned revenues 64,808 67,92772,984 72,913
Less: Billings to date 58,438 63,077
-------- --------
Net costs and estimated earnings in excess of billings $ 6,370 $ 4,850
on uncompleted contracts
======== ========
Costs and estimated earnings in excess of billings on uncompleted contracts $ 8,068 $ 5,390
Billings and estimated earnings in excess of cost on uncompleted contracts (1,698) (540)67,155 66,895
-------- --------
Net costs and estimated earnings in excess of billings
on uncompleted contracts $ 6,3705,829 $ 4,8506,018
======== ========
NOTE 5 - COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) represents netCosts and estimated earnings in excess of billings on uncompleted contracts $ 6,751 $ 6,981
Billings and any revenue,
expenses, gainsestimated earnings in excess of cost on uncompleted contracts (922) (963)
-------- --------
Net costs and estimated earnings in excess of billings
on uncompleted contracts $ 5,829 $ 6,018
======== ========
Estimated losses that, under accounting principles generally
acceptedon uncompleted contracts are related to a large EPC
contract, discussed in the United States of America,our 2007 Annual Report on Form 10-K and 2006 Annual
Report on Form 10-K/A and are excluded from net earnings
and recognized directly as a component of stockholders' equity. At March
31, 2007, comprehensive income included a loss of $683 from foreign
currency translation adjustments.
NOTE 6 - GOODWILL
In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets,"
goodwill is no longer amortized over its estimated useful life, but rather
is subject to at least an annual assessment for impairment. SFAS 142 also
requires that intangible assets with estimable useful lives be amortized
over their respective estimated useful lives to their estimated residual
values and reviewed for impairment in accordance with SFAS No. 144,
9pending final resolution.
7
Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
"Accounting for the Impairment or Disposal of Long-Lived Assets." Goodwill
has been allocated to the Company's two reportable segments. The test for
impairment is made on each of these reporting segments. No impairment of
goodwill has been incurred to date.
Reference is made to NOTE 16 - ACQUISITIONS, in the Company's Report to
Shareholders on Form 10K for the period ending December 31, 2006. A
third-party valuation of intangible assets was received relating to the
Company's acquisition of WRC Corporation. A portion of the goodwill was
allocated to intangible assets based on the value and nature of the
agreements and is being amortized accordingly over the term of the
agreements. During the three month period ending March 31, 2007, the
Company consulted with the third-party valuation provider and revised the
allocation to intangible assets resulting in approximately $669,000 being
re-allocated back to goodwill. This caused an additional $70,000 of
amortization of intangibles during 2006 than would have been recognized
given the final analysis of the WRC acquisition. The Company's amortization
of the affected intangible assets will be adjusted over the remaining five
year term of those assets and will not have a material effect on the
current or future period financial results.
NOTE 75 - LINE OF CREDIT AND DEBT
Effective March 30, 2007, the Company and Comerica Bank ("Comerica")
entered into an amendment to the Company's existing Credit Facility (the
"Comerica Credit Facility") whereby the limit on the revolving credit note
was increased from $30 million to $35 million, subject to loan covenant
restrictions. The maturity date of the Comerica Credit Facility will remain
at July 26, 2009. The loan agreement positions Comerica as senior to all
other debt and the Comerica Credit Facility is collateralized by
substantially all the assets of the Company. The outstanding balance on the
line of credit as of March 31, 2007 was $29.6 million. The remaining
borrowings available under the line of credit as of March 31, 2007 were
$5.4 million as loan covenant restrictions did not limit the available
borrowings.
The Comerica Credit Facility contains covenants requiring the Company, as
of the end of each calendar month, to maintain certain ratios, including
total funded debt to EBITDA; total funded debt to total liabilities, plus
net worth; and total funded debt to accounts/unbilled receivables. The
Company is also required, as of the end of each quarter, to maintain
minimum levels of net worth, plus the Company must comply with an annual
limitation on capital expenditures. The Company was in compliance with all
covenants under the Comerica Credit Facility as of March 31, 2007 and had
no standby letters of credit outstanding. Standby letters of credit
previously issued to a refining client expired in August 2006.
10
Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
March 31, December 31,
2008 2007
2006
--------------------
(in thousands)
------------------------------------------
(Dollars in Thousands)
----------------------
Schedule of Long-Term Debt:
Comerica Credit Facility - Line of credit, prime (8.25%variable interest at 5.0% at March 31,
2007),2008, maturing in July 20092010 $ 29,61629,678 $ 23,96327,835
Sterling Planet and EDGI - Notes payable, interest at 5%, principal payments in
installments of $15,000 plus interest due quarterly, maturing in December 2008 105 12045 60
Cleveland Inspection Services, Inc., CIS Technical Services and F.D. Curtis - Notes
payable, discounted at 5% interest, principal in installments of $100,000 due
quarterly, maturing in October 2009 1,023 1,109
InfoTech Engineering, Inc. - Note payable, interest at 5%, principal payments in
installments of $65,000 plus interest due annually, maturing in December 2007 75 75575 667
A.T.I. Inc. - Note payable, interest at 6%, principal payments in installments of
$30,422 including interest due monthly, maturing in January 2009 632 713296 382
Michael Lee - Note payable, interest at 5%, principal payments in installments of
$150,000 plus interest due quarterly, maturing in July 2010 1,950 2,1001,350 1,500
Watco Management, Inc. - Note payable, interest at 4%, principal payments in
installments of $137,745 including interest annually, maturing in October 2010 500 500
Miscellaneous -- --382 382
-------- --------
Total long-term debt 33,901 28,58032,326 30,826
Less: Current maturities (1,427) (1,418)(1,442) (1,508)
-------- --------
Long-term debt, net of current portion $ 32,47430,884 $ 27,16229,318
======== ========
NOTE 86 - SEGMENT INFORMATION
TheDuring the first three quarters of 2007, the Company operates inmanaged and reported
through two business segments: (1)Engineering and Systems. In the fourth
quarter of 2007, due to the past and anticipated growth in certain areas of
our business and change in leadership during 2007, we reevaluated our
reportable segments under Financial Accounting Standards Board Statement
No. 131, "Disclosures about Segments of an Enterprise and Related
Information." As a result, we have elected to realign both management and
reporting into four business segments: Engineering, Construction,
Automation and Land.
The Engineering segment provides consulting services relating to the
development, management and execution of projects requiring professional
engineering providingand 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 majorthe pipeline,
utility and telecom companies involved in the hydrocarbon and chemical processing industries, pipelines, oil and gas development, and
cogeneration units that, for the most part, are located inother owner/operators of infrastructure
facilities throughout the United States;States and (2) systems, providing designCanada.
Our Corporate segment includes costs related to business development,
investor relations/governance, executive functions, finance, accounting,
safety, human resources and implementationinformation technology that are not
specifically attributable to one of control
systems for specific applications primarily in the energyfour operating segments but do
support corporate activities and process
industries, and uninterruptible power systems and battery chargers to
customers that, for the most part, are located in the United States.initiatives. Revenue and operating income
for each segment are set forth in the following table.
The amount under Corporate includes those activities that
are not allocated to the operating segments and include costs related to
business development, executive function, finance, accounting, investor
relations/governance, project controls, information technology, legal,
safety and human resources that are not specifically identifiable with the
two segments. Inter-company elimination includes the amount of
administrative costs allocated to the segments. Corporate functions support
both business segments and therefore cannot be specifically assigned to
either. Significant portions of Corporate cost are allocated to each
segment based on each segment's revenues and eliminated in consolidation.
118
Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
Note 6 - Segment Information (continued) Three Months Ended
March 31,
------------------------------------------
2008 2007 2006
-------- --------
(in thousands)(Dollars in Thousands)
Revenue:
Engineering $ 76,14952,029 $ 62,587
Systems 5,510 4,04051,449
Construction 26,900 13,785
Automation 10,402 9,538
Land 8,835 6,887
-------- --------
Total revenue $ 81,65998,166 $ 66,62781,659
======== ========
Operating income (loss):
Engineering $ 9,5018,587 $ 4,890
Systems (180) (182)7,297
Construction 1,325 1,455
Automation 412 (64)
Land 715 667
Corporate 683 129
Inter-company eliminations (4,470) (2,716)(3,919) (3,822)
-------- --------
Total operating income $ 5,5347,120 $ 2,1215,533
======== ========
Financial information about geographic areas
--------------------------------------------
Revenue from the Company's non-U.S. operations is currently not material.
Long-lived assets (principally leasehold improvements and computer
equipment) outside the United States were $76,741$79,000 as of March 31, 2007,2008, net
of accumulated depreciation.depreciation, stated in U.S. dollars.
NOTE 97 - FEDERAL INCOME TAXES
The components of income tax expense (benefit) for the periodsthree months ended
March 31, 20072008 and 20062007 were as follows:
Three Months Ended
March 31,
----------------------
2008 2007
2006
------- -------
(in thousands)-------- --------
(Dollars in Thousands)
Current $ 1,8202,750 $ 7631,857
Deferred (90) (39) (16)
------- -------
Total tax provision $ 1,7812,660 $ 7471,818
======= =======
12
Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
NOTE 108 - EARNINGS PER SHARE
The following table reconciles the denominator used to compute basic
earnings per share to the denominator used to compute diluted earnings per
share ("EPS").
Three Months Ended
March 31,
---------------------------------
2008 2007
2006
------ -------------- --------
(in thousands)
Weighted average shares outstanding
(denominator used to compute basic EPS) 27,060 26,809 26,333
Effect of employee and outside director stock options 467 451 913
------ ------
Denominator used to compute diluted EPS 27,527 27,260 27,246
====== ======
9
Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
NOTE 11 - CONTINGENCIES9 -CONTINGENCIES
Employment Agreements
The Company has employment agreements with certain of its executive
officers and certain other officers, the terms of which expire in January
2009.officers. Such agreements provide for minimum
salary levels. If the Company terminates the employment of the employee for
any reason other than 1)
termination(1) for cause, 2)as defined in the employment
agreement, (2) voluntary resignation, or 3)(3) the employee's death, the
Company is obligated to provide a severance benefit equal to six 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
non-compete. These agreements are renewable for one year at the Company's
option.
Litigation
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 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 protectionLong-term Note Receivable
In the first quarter of 2007, ENGlobal Engineering, Inc. ("EEI") and South
Louisiana Ethanol, LLC ("SLE") executed an agreement for EPC services
relating to the retro-fit of an ethanol plant in southern Louisiana. The
history of the SLE project (the "Project") is described in Note 12 to the
Company's financial statements included in its Quarterly Report on Form
10-Q for the quarter ended September 30, 2007 (the "Third Quarter 10-Q")
and is discussed further in the Company's Annual Report on Form 10-K for
the year ended December 31, 2007.
Although work has not recommenced on the Project and SLE has not obtained
permanent financing, the Company with $175,000 per occurrencecontinues to believe that, due to the
value of the Collateral, the Note Receivable is fully collectible.
Specifically, an updated appraisal from the bridge lending bank's appraiser
indicates a fair market value of $35.8 million, an orderly liquidation
value of $25.3 million, and approximately $12.1 milliona forced liquidation value of $20.0 million.
Moreover, SLE may seek equity financing for the Project in aggregatelieu of or in
each policy year being covered by a separate insurance policy.
13addition to debt financing.
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.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Statements
--------------------------
Certain information contained in this 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 with 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
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 Form 10-Q, the specific risk factors identified in the Company's
Annual Report on Form 10-K for the year ended December 31, 20062007 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 Consolidated Financial Statements,
including the notes thereto, included in this Form 10-Q and the Company's
Annual Report on Form 10-K for the year ended December 31, 2006.2007.
MD&A Overview
-------------
The following list sets forth a general overview of the morecertain significant
changes in the Company's financial condition and results of operations for
the three month periodmonths ended March 31, 2007,2008, compared to the corresponding period
in 2006.2007.
During the three monththree-month period
ended March 31, 20072008
-----------------------------
Revenue Increased 23%20.2%
Gross profit Increased 62%7.5%
Operating income Increased 161%29.1%
SG&A expense Increased 27%Decreased 6.5%
Net income Increased 156%25.0%
Long-term debt, net of current portion, increased 19.6%5.5%, or $5.3$1.6 million,
from $27.2$29.3 million at December 31, 20062007 to $32.5$30.9 million at March 31, 2007,
and2008,
however, as a percentage of stockholders' equity, long-term debt increaseddecreased
to 73.3%51.3% from 66.5%52.5% at these same dates. The primary reason for the increase in long-term debt is
primarily related to the $1.9 million increase in our line of credit
supporting our growth and the timing difference related tobetween meeting short-term
bi-weekly payroll obligations from our growth and longer collection periods
on receipts from our clients.collections of associated trade
receivables. On average, our accounts receivableday's sales outstanding increased to 62 days
outstanding has increased tofor the three-month period ended March 31, 2008, from 61 days at December
31, 2007, but decreased from 71 days for the three month period ended March
31, 2007, from 66 days for the comparable three-month period
in 2006.2007. The Company continues to work toward improving billing and
collection processes.
Total stockholders' equity increased 8.5%7.9%, or $3.4$4.4 million, from $40.9$55.8
million as of December 31, 20062007 to $44.3$60.2 million as of March 31, 2007.
142008.
11
MD&A/Results of OperationsManagement's Discussion and Analysis (continued)
- --------------------------------------------------------------------------------------
Consolidated Results of Operations for the Three Months
Ended March 31, 2008 and 2007
and 2006
(Unaudited)
(Dollars in Thousands)
Three Months Ended
March 31,
-------------------------------------------------------------------------------------
2008 2007
2006
---------------------------------------------
(In thousands)
-------------------------------------------------------------------------------------
Revenue:
Engineering $ 69,262 84.852,029 53.0 % $ 62,587 93.951,449 63.0 %
Systems 5,510 6.8Construction 26,900 27.4 % 4,040 6.113,785 16.9 %
AcquisitionAutomation 10,402 10.6 % 9,538 11.7 %
Land 8,835 9.0 % 6,887 8.4 %
- - %
------------ --------------------- ------ --------- ------
Total revenue $ 98,166 100.0 % $ 81,659 100.0 %
$ 66,627 100.0 %
============ ===================== ------ ========= ------
Gross profit:
Engineering $ 11,779 17.09,882 10.1 % $ 7,796 12.59,164 11.2 %
Systems 249 4.5Construction 2,028 2.1 % 426 10.62,082 2.6 %
AcquisitionAutomation 1,044 1.1 % 781 1.0 %
Land 1,392 1.4 % 1,250 18.21.5 %
- - %
------------ --------------------- ------ --------- ------
Total gross profit 13,27814,346 14.7 % 13,277 16.3 %
8,222 12.3 %
------------ --------------------- ------ --------- ------
SG&A expense:
Engineering 2,946 4.31,295 1.3 % 2,906 4.61,867 2.3 %
Systems 429 7.8Construction 703 0.7 % 608 15.1627 0.8 %
Automation 632 0.6 % 845 1.0 %
Land 677 0.7 % 583 0.7 %
Corporate 3,787 4.63,919 4.0 % 2,587 3.93,822 4.7 %
Acquisition 582 8.5 % - - %
------------ --------------------- ------ --------- ------
Total SG&A expense 7,226 7.3 % 7,744 9.5 %
6,101 9.2 %
------------ --------------------- ------ --------- ------
Operating income:
Engineering 8,832 12.88,587 8.8 % 4,890 7.87,297 8.9 %
Systems (180) (3.3)Construction 1,325 1.4 % (182) (4.5)1,455 1.8 %
Automation 412 0.5 % (64) 0.0 %
Land 715 0.7 % 667 0.8 %
Corporate (3,787) (4.6)(3,919) (4.0)% (2,587) (3.9)(3,822) (4.7)%
Acquisition 669 9.7 % - - %
------------ ---------------------- ------ --------- ------
Total operating income 5,5347,120 7.4 % 5,533 6.8 %
2,121 3.2 %
------------ ---------------------- ------ --------- ------
Other income (expense), net (457) (0.6)% (560) (0.7)% (140) (0.2)%
Tax provision (1,820)(2,660) (2.7)% (1,818) (2.2)%
(747) (1.1)%
------------ --------------------- ------ --------- ------
Net income $ 3,1544,003 4.1 % $ 3,155 3.9 %
$ 1,234 1.9 %
============ ============
Other financial comparisons:
- ----------------------------
March 31, March 31,
2007 2006
-------------------
(In thousands)
-------------------
Working capital $ 44,215 $ 26,062
Total assets $111,201 $ 80,474
Long-term debt, net========= =========
The percentages shown in the table above represent each segment's portion of current portion $ 32,474 $ 9,910
Stockholders' equity $ 44,321 $ 41,314
15the
gross profit, SG&A and operating income as a percentage of the Company's total
revenue for each respective period.
12
MD&A/Results of OperationsManagement's Discussion and Analysis (continued)
- --------------------------------------------------------------------------------------
March 31, March 31,
Quarter-to-Quarter Balance Sheet Comparisons: 2008 2007
----------------------
(Dollars in Thousands)
----------------------
Working capital $ 49,317 $ 44,215
Total assets $122,715 $111,201
Long-term debt, net of current portion $ 30,884 $ 32,474
Stockholders' equity $ 60,162 $ 44,321
We recorded net income of $4.0 million, or $0.15 per diluted share for the
three months ended March 31, 2008, compared to net income of $3.2 million,
or $0.12 per diluted share for the three months ended March 31, 2007, compared to net income of $1.2 million,
or $0.05 per diluted share for the corresponding period last year.
The following table presents, for the periods indicated, the approximate
percentage of total revenues and operating income or loss attributable to
our reportable segments:
Three Months Ended
March 31,
2007 2006
------ ------
Revenue:
Engineering 93.2 % 93.9 %
Systems 6.8 % 6.1 %
Operating income (loss):
Engineering 12.5 % 7.8 %
Systems (3.3)% (4.5)%
The Company's revenue is composed of engineering, construction and
procurement service revenue, systems, land/management and related product
sales.
The Company recognizes service revenue as soon as the services are
performed. The majority of the Company's engineering servicesservice revenues have historically
been provided through cost-plus contracts whereas a majority of the Company's product sales areour
fabrication and turnkey EPC projects revenue is earned on fixed-price
contracts. However, our engineering segment recognized approximately $3.8Approximately $8.1 million in fixed-price revenue was recognized
in the three monththree-month period ended March 31, 2007,2008, compared to less than $4.7$8.9 million of
similar revenue in the same period in 2006.2007. Of the fixed pricefixed-price revenue,
$1.8 million$46,000 and $2.7$1.8 million for the three monththree-month period ending March 31, 20072008
and March 31, 2006,2007, respectively, were related to the two projects with
recorded losses during 2006.
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, these 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 costs and fees are included in revenue. The use
of subcontractor services can change significantly from project to project;
therefore, changes in revenue and gross profit, SG&A expense and operating
income as a percent of revenue may not be indicative of business trends.
For analytical purposes only, we segregate from our total revenue the
revenues derived from material assets or companies acquired during the
first 12 months following their respective dates of acquisition and refer
to such revenue as "Acquisition" revenue. We also segregate gross profits
and SG&A expenses derived from material assets or company acquisitions on
the same basis as we segregate revenues.
Operating SG&A expense includes management and staff compensation, office
costs such as rents and utilities, depreciation, amortization, travel and
other expenses generally unrelated to specific client contracts, but
directly related to the support of a segment's operation.operations.
Corporate SG&A expense is comprised primarily of marketingbusiness 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 client projects, but which are incurred to
support corporate activities and initiatives.
16
MD&A/Results of Operations (continued)
- --------------------------------------
Industry Overview:
Many ENGlobal offices have benefited from the strong downstream refinery
market. We expect significant capital projects to be generated by refinery
operationsoperators over the next several years and we will continue to research
other markets that value our services. Overall, projects related to
increasing refining capacity and the utilization of heavy or sour crude oil
have trended upward, while projects to satisfy environmental mandates have
trended upward.downward. Given that global demand for oil products has tightened
the supply of both crude oil as well as refineryrefined products, we believe each
of ENGlobal's business segments is well positioned within the industry should refineryas
capacity be addedincrease and modernization projects are undertaken in the United
States of AmericaStates.
13
Management's Discussion and the overseas markets continue to rise.Analysis (continued)
- ------------------------------------------------
The downstream petrochemical industry has recentlyhistorically been a good source
of projects for ENGlobal. WeWhile not currently as robust as the refining
market, we have seen ana recent increase in both maintenance and capital
spending after several years of relative inactivity. TheWe believe that major
grassroots petrochemical industry
alongprojects will continue to be undertaken overseas,
either closer to product demand in emerging economies, or located closer to
less expensive feed stocks. We expect for the Gulf Coast continues to struggle withforeseeable future, that
petrochemical work undertaken in the aftermathU.S. will consist of Hurricane
Katrina and Hurricane Rita. Although it will take several years to rebuild,
we expect that we will assist our clients with repairs to regional
petrochemical facilities in order to resolve current supply limitations.smaller capital
projects or be maintenance related.
Despite past downturns in the industry, pipeline projects have remained
constant for the most part, and we have recently seen ana significant
increase in project activity. PipelineFrom an engineering perspective, pipeline
projects tend to require less engineering man hours as the scope of engineering work is typically smaller than for similar sized
downstream projects. However, ENGlobal provides several services such as
right-of-way acquisition, inspection and construction management that are
in addition to its pipeline related engineering services. However the
drivers we see behind growth in domestic pipeline activity include: 1)
Natural gas transportation away from the Rocky Mountain area as well as
from new gas fields in other parts of the country, 2) Natural gas
transportation related to LNG import facilities, 3) Movement of heavy
Canadian crude oil into the U.S., 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
combined. To date, ENGlobal has mainly focused its efforts on biomass
process, such as those related to the production of ethanol and biodiesel,
coal to liquids, along with the utilization of refinery petroleum coke as
an energy source. In addition, the project awardsCompany sees a good opportunity in solar
energy in the pipeline segment are smallercoming years, both by performing project services on solar
collector facilities, as well as facilities for the production of
polysilicon, used in nature than those in other industries.photo voltaic cells. Most of our work on alternative
energy project is not for our traditional large client base, but instead
for financially backed developers
Revenue:
Revenue increased $15.0$16.5 million, or 22.5%20.2%, to $81.7$98.2 million for the three
months ended March 31, 20072008 from $66.7$81.7 million for the comparable prior
year period with approximately $6.6$0.6 million of the increase coming from our
engineering segment, $6.9 million attributable to the acquisition of WRC,
and $1.5 attributable to
our systemsEngineering segment, $13.1 million of the increase attributable to our
Construction segment, $0.9 million of the increase attributable to our
Automation segment and $1.9 million of the increase attributable to our
Land segment. This is discussed further in our segment information.
Gross Profit:
Gross profit increased $5.1$1.0 million, or 62.0%7.5%, to $13.3$14.3 million for the
three months ended March 31, 2008 from $13.3 million for the comparable
prior year period. Approximately $2.7 million of the increase in gross
profit was due to the $16.5 million increase in revenue offset by
approximately $1.7 million in higher costs and lower margins.
As a percentage of revenue, gross profit decreased 1.6% from 16.3% for the
three months ended March 31, 2007 to 14.7% for the quarter ended March 31,
2008. The decrease in gross profit margin as a percentage of revenue was
primarily related to a shift in revenue mix quarter-over-quarter resulting
from $8.2a 119% increase in lower margin Inspection revenue within our
Construction segment.
Selling, General, and Administrative:
As a percentage of revenue, SG&A expense decreased 2.2% to 7.3% for the
three months ended March 31, 2008 from 9.5% for the comparable period in
2007. Total expense for SG&A decreased $0.5 million, or 6.5%, to $7.2
million for the three months ended March 31, 2008 from $7.7 million for the
comparable prior year period.
As a percentage of revenue, gross profit increased 4.0%
from 12.3%Operating SG&A expense decreased 1.5% to 3.3%
for the three months ended March 31, 20062008 from 4.8% for comparable prior
year period. Operating SG&A expense decreased approximately $0.6 million
quarter-over-quarter primarily due to 16.3% for$0.3 million in employee and
associated costs re-classified to direct expense, $0.2 million in
non-recurring costs associated with closing the Dallas office during the
quarter ended March 31, 2007. Of the overall $5.1 million increase in gross
profit, approximately $1.9 million was primarily due to the $15.0 million
increase in revenue plus approximately $3.22007, and $0.1 million in equivalent lower costs.
Selling, General,bad debt expense.
14
Management's Discussion and Administrative:
As a percentage of revenue, SG&A expense remained relatively level
increasing 0.3% to 9.5% for the three months ended March 31, 2007 from 9.2%
for the comparable period in 2006. Total expense for SG&A increased $1.6
million, or 26.2%, to $7.7 million for the three months ended March 31,
2007 from $6.1 million for the comparable prior year period.Analysis (continued)
- ------------------------------------------------
As a percentage of revenue, Corporate SG&A expense increaseddecreased 0.7% to 4.6%4.0%
for the three months ended March 31, 20072008 from 3.9%4.7% for the comparable
prior year period. Corporate SG&A expense increased approximately $1.2$0.1
million, or 46.4%2.6%, to $3.8$3.9 million for the three months ended March 31, 20072008
from $2.6$3.8 million for the comparable prior year period. The increase over
the prior year inyear's Corporate SG&A was related to $243,000 in costs incurred
on the continuing preparation and reviewincreases of approximately
$151,000 related to SOX compliance;
$264,000 in accrued management incentives; $148,000 related to increased
stock compensation expense; $244,000 related to additionalexpense and $125,000 in depreciation
and amortization expense, offset by reduced costs of approximately $91,000
in salaries and relatedother employee expenses, for business development; $200,000 related to the new
Corporate Services$44,000 in facilities expense and
Legal departments and $149,000 for increases$84,000 in cost
for other supportprofessional services. The increase in business development costs was
due to a change in reporting of our systems' sales personnel from
operations to corporate, and the addition of personnel to support our
growth, including the WRC acquisition.
Operating Income:
Operating income increased approximately $3.4$1.6 million, or 160.3%29.1%, to $5.5$7.1
million for the three months ended March 31, 20072008 from $2.1$5.5 million
compared to the same period in 2006.2007. As a percentage of revenue, operating
income increased 3.6%0.6% to 6.8%7.4% for the three months ended March 31, 20072008
from 3.2%6.8% for the comparable prior year period.
17
MD&A/Results of Operations (continued)
- --------------------------------------
Other Expense, net:
Other expense increased $ 420,000,decreased $0.1 million, to $560,000$0.5 million for the three month periodmonths
ended March 31, 20072008 from $140,000$0.6 million for the comparable prior year
period, primarily due to higherlower net interest expense related to an increased
outstanding balancelower
interest rates on our line of credit.Credit Facility.
Tax Provision:
Income tax expense increased $1.1$0.9 million, or 143.6%50.0%, to $1.8$2.7 million for
the three months ended March 31, 20072008 from $0.7$1.8 million for the comparable
prior year period. The estimated effective tax rate was 36.6%39.9% for the
three-month period ended March 31, 20072008 compared to 37.7%36.6% for the
comparable prior year period. The change in the effective tax rate is the
result of utilization of net operating lossquarterly period and 39.7% for the 2006 year.twelve-month
period ended December 31, 2007.
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, 2006 included the effect of non-recurring
differences in tax estimates from the 2005 year-end. Estimates at March 31,
20072008 are based on results of the 20062007 year-end and
adjusted for estimates of non-recurring differences from the prior year, as
well as anticipated book to tax differences for 2007.2008.
Net Income:
Net income for the three months ended March 31, 20072008 increased $2.0$0.8
million, or 166.7%25.0%, to $3.2$4.0 million from $1.2$3.2 million for the comparable
prior year period. As a percentage of revenue, net income increased 2.0%0.2% to
3.9%4.1% for the three monththree-month period ended March 31, 20072008 from 1.9%3.9% for the
period ended March 31, 2006.2007.
Liquidity and Capital Resources
-------------------------------
Historically, cash requirements have been satisfied throughOverview
The Company defines liquidity as its ability to pay liabilities as they
become due, fund the business operations and meet monetary contractual
obligations. Our primary source of liquidity during the period ended March
31, 2008 was borrowings under aour senior revolving lineCredit Facility, also
discussed under Note 8 - Line of credit, which is currentlyCredit and Debt, to the Consolidated
Financial Statements included in effect
with Comerica Bank (the "Comericathe 2007 Annual Report on Form 10-K. Cash
on hand at March 31, 2008 totaled $2.0 million and availability under the
Credit Facility").Facility totaled $20.1 million resulting in total liquidity of $22.1
million. As of March 31, 2007,
we had working capital of $44.2 million. Long-term debt, net of current
portion, was $32.5 million as of March 31, 2007, including $29.6 million
outstanding under the Comerica Credit Facility.
The Comerica Credit Facility is senior to all other debt, and the line of
credit is limited to $35.0 million, after consideration of loan covenant
restrictions.. The Comerica Credit Facility is collateralized by
substantially all of the assets of the Company. The Comerica Credit
Facility contains covenants requiring the Company, as of the end of each
calendar month, to maintain certain ratios, including total funded debt to
EBITDA; total funded debt to total liabilities, plus net worth; and total
funded debt to accounts/unbilled receivables. The Company is also required,
as of the end of the most recent quarter then ended, to maintain minimum
levels of net worth, and must comply with an annual limitation on capital
expenditures. The Company is currently in compliance with all loan
covenants, although no assurances can be given regarding such compliance in
the future. We are not currently subject to any obligations under standby
letters of credit, guarantees, repurchase obligations or other commitments.
We have no off-balance sheet arrangements.
As of March 31, 2007,2008, management believes the Company's cash
position is sufficient to meet its working capital requirements. Any future decrease in
demand for the Company's services or products would reduce the availability
of funds through operations.
Cash Flow
---------
The Company believes that it has available the necessary cash required for
operationsrequirements for the
next 12 months. CashHowever, cash and the availability of cash could be
materially restricted ifif:
(1) circumstances prevent the timely internal processing of invoices,
if(2) amounts billed are not collected ifor are not collected in a timely
manner,
(3) project mix shifts from cost reimbursablecost-reimbursable to fixed costfixed-price
contracts during significant periods of growth,
if(4) the Company was to loseloses one or more of its major customers,
or if(5) the Company isexperiences material cost overruns on fixed-price
contracts,
(6) our client mix shifts from our historical owner-operator client
base to more developer based clients,
(7) acquisitions are not integrated timely, or
(8) we not able to meet the covenants of the Comerica Credit Facility.
If any such event occurs, the Companywe would be forced to consider alternative
financing options.
15
Management's Discussion and Analysis (continued)
- ------------------------------------------------
Cash Flows from Operating activities:
NetActivities:
Operations generated approximately $0.4 million in net cash used in operating activities was $4.9 million for the
three-month period ended March 31, 2007,2008, compared with net cash used for
operations of $3.2$4.9 million induring the same period in 2006. Changes2007. Unfavorable
changes in working capital accounts during the period negatively impacted
cash flows from operating activities. The primary changes in working
capital were due to the timingfollowing:
o Increased Trade Receivables - The increase was primarily the
result of 18
MD&A/Results of Operations (continued)increased operating activity. Our collections on past
due Accounts Receivable balances continue to improve and
management does not expect any material collection issues in the
future.
o Decreased Accounts Payable - --------------------------------------
collections of trade receivablesThe decrease was primarily due to
$1.9 million in scheduled vendor and sub-contractor payments
for trade payables and
accruals, contributedrelated to the negative cash flows from operations inSLE project, which was terminated during the firstthird
quarter of 2007. An additional $2.0 million in similar payments
are scheduled to be made during the second quarter of 2008, which
we anticipate will complete our current material cash commitments
related to the SLE project.
During the quarter, the line of credit increased by $1.9 million from $24.0$27.8
million as of December 31, 20062007 to $29.6$29.7 million as of March 31, 2007.2008.
Our average daysday's sales outstanding ("DSO") was 7162 days for the three month
period ended March 31, 2007 compared to 66 days for the comparable period
in 2006 and 69 days for the period ended December 31, 2006. We have revised
the method used for calculating DOS changing from annualized average
revenue and accounts receivable totals to quarterly revenue and accounts
receivable balances. The average DSO for all periods referenced herein and
for all future periods have been and will be calculated under the new
method.
The primary factors impacting the increase in our need for cash and the
increases in average DSO during the three month period ending March 31,
2007 were:
1) a decrease in accounts payable of approximately $4 million
primarily related to contractor payments on the two fixed-price
EPC projects;
2) an increase in accounts receivable of approximately $4 million
primarily due to delays in processing billings within the
Engineering segment, particularly in getting the WRC acquisition
billings current following its conversion to the ENGlobal
financial accounting system on December 31, 2006; and
3) an increase in costs and estimated earnings-in-excess of billings
from approximately $5.4 million as of December 31, 2006 to $8.1
million for the three month period ended March 30, 2007 primarily
related to extended payment terms and milestones on fixed price
contracts within our Systems segment.
Accounts payable are not expected to materially impact cash during the
second quarter as the two fixed-price EPC projects are scheduled to be
completed during that period with final billings and retention collections
expected to have a positive cash impact. Also, the Company expects to have
Engineering segment billings current before the end of the three month
period ending June 30, 2007.
A continued increase in costs and estimated earnings-in-excess of billings
is not expected during the second quarter even though improvements can only
be made with more favorable contractual terms.
Investing activities:
Net cash used in investing activities was $429,000 for the three-month
period ended March 31, 2007,2008 compared with net cash provided of $1.3
million into 71 days for the samecomparable
three-month period in 2006. In the first quarter of 2006, the
Company acquired the assets of ATI, Inc. for $750,000 cash and a note
payable. The Company also used cash for capital expenditures in the first
three months of 2007 and 2006.
Financing activities:
Net61 days for the twelve months ended December
31, 2007.
Cash Flows from Investing Activities:
Investing activities used $398,000 in cash provided by financing activities was $4.9 million for the three-month period ended
March 31, 2007,2008, compared with netto $429,000 cash provided of
$4.3 million inused during the same period in
2006.2007. The Company's primary use of invested capital during both periods was
for capital expenditures, mainly computers and technical software
applications. Future investing activities are anticipated to remain
consistent with prior years and include expenditures for capital leasehold
improvements, technical applications software, and equipment, such as
upgrades to computers. Our Credit Facility limits annual capital
expenditures to $3.25 million.
Cash Flows from Financing Activities:
Financing activities provided $1.2 million in cash for the three-month
period ended March 31, 2008, compared to $4.9 million in cash provided
during the same period in 2007. In the first quarter of 2007,2008, the Company
increased its outstanding line of credit by $5.7$1.9 million for working
capital needs compared to an increase of $5.6 million in theits outstanding
line of credit of $4.3 million infor the same period in 2006.2007.
Senior Revolving Credit Facility:
Our Credit Facility is used primarily to satisfy changes in working capital
needs and requirements for the issuance of letters of credit. At March 31,
2008, the capacity of the Credit Facility was $50.0 million with an
outstanding balance of $29.7 million and one letter of credit outstanding
in the amount of $247,000 to cover self-insured deductibles under both our
general liability and workers' compensation insurance policies. The letter
of credit was issued in November 2007 and covers the policy period from
September 30, 2007 through September 30, 2008. The remaining borrowings
available under the Credit Facility as of March 31, 2008 were $20.1 million
after consideration of loan covenant restrictions.
Availability under our Credit Facility is as follows:
March 31, December 31, March 31,
2008 2007 2007
------- ------- -------
(Dollars in Thousands)
---------------------------------
Credit Facility $50,000 $50,000 $35,000
Amounts borrowed 29,678 27,835 29,616
Letters of credit 247 247 --
------- ------- -------
Availability under Credit Facility $20,075 $21,918 $ 5,384
======= ======= =======
16
Management's Discussion and Analysis (continued)
- ------------------------------------------------
The Credit Facility requires the Company to maintain certain financial
covenants as of the end of each calendar month, including the following:
o Leverage Ratio not to exceed 3.00 to 1.00;
o Asset Management
----------------Coverage Ratio to be less than 1.00 to 1.00; and
o Net Worth must be greater than the sum of $40.1 million plus 75%
of positive Net Income earned in each fiscal quarter after
January 1, 2007 plus 100% of the net proceeds of any offering,
sale or other transfer of any capital stock or any equity
securities.
The Company's cash flowCredit Facility also contains covenants that place certain limitations
on the Company including limits on new debt, mergers, asset sales,
investments, fixed-price contracts, and restrictions on certain
distributions. The Company was in compliance with all covenants under the
Credit Facility as of March 31, 2008.
17
Management's Discussion and Analysis (continued)
- ------------------------------------------------
Engineering Segment Results
- ---------------------------
Three Months Ended
March 31,
-------------------------------------------
2008 2007
-------------------- ---------------------
(Dollars in Thousands)
-------------------------------------------
Gross revenue $ 52,035 $ 51,442
Less intercompany revenue (6) 7
----------- -----------
Total revenue $ 52,029 $ 51,449
=========== ===========
Detailed revenue:
Detail-design 37,935 72.9% 32,796 63.8%
Field services 12,988 25.0% 13,758 26.7%
Procurement services 34 0.1% 1,332 2.6%
Fixed-price 1,072 2.0% 3,563 6.9%
----------- ------- ----------- -------
Total revenue: $ 52,029 100.0% $ 51,449 100.0%
Gross profit: $ 9,882 19.0% $ 9,164 17.8%
Operating SG&A expense: $ 1,295 2.5% $ 1,867 3.6%
----------- -----------
Operating income: $ 8,587 16.5% $ 7,297 14.2%
Overview of Engineering Segment:
Our Engineering segment continues to benefit from operations has been affecteda large project load
generated primarily by its downstream clients and to a lesser extent by its
midstream clients. The industry's refining segment continues to be very
active, supplying a large percentage of the timingCompany's backlog. ENGlobal is
benefiting from the renewed interest of its collection of trade accounts receivable. The Company
typically sells its productschemical/petrochemical clients
in maintenance and services on short-term credit terms and
seekssmall capital projects as product margins in this
marketplace improve.
Revenue:
Engineering segment revenue increased $0.6 million, or 1.2%, to minimize its credit risk by performing credit checks and
conducting its own collection efforts. The Company had net trade accounts
receivable of $64.1$52.0
million and $60.2 million atfor the three months ended March 31, 2007 and
December 31, 2006, respectively. The number of days sales outstanding in
trade accounts receivables was 71 days and 69 days at March 31, 2007 and
December 31, 2006, respectively.
19
Engineering Segment Results
- ---------------------------
Three Months Ended
March 31,
-------------------------------------------------
2007 2006
-------------------------------------------------
(In thousands)
-------------------------------------------------
Revenue:
Engineering $ 69,262 91.0 % $ 62,587 100.0 %
Acquisition 6,887 9.0 % - - %
------------- ------------
Total revenue $ 76,149 100.0 % $ 62,587 100.0 %
============= ============
Gross profit:
Engineering $ 11,779 17.0 % $ 7,796 12.5 %
Acquisition 1,250 18.2 % - - %
------------- ------------
Total gross profit 13,029 17.1 % 7,796 12.5 %
------------- ------------
Operating SG&A expense:
Engineering 2,946 4.3 % 2,906 4.6 %
Acquisition 582 8.5 % - - %
------------- ------------
Total SG&A expense 3,528 4.6 % 2,906 4.6 %
------------- ------------
Operating income:
Engineering 8,832 12.8 % 4,890 7.8 %
Acquisition 669 9.7 % - - %
------------- ------------
Total operating income $ 9,501 12.5 % $ 4,890 7.8 %
------------- ------------
Overview of Engineering Segment:
Our engineering segment continues to benefit from a large project load
generated primarily by its downstream clients and to a lesser extent by its
midstream clients. The industry's refining segment continues to be very
active, supplying a large percentage of the Company's backlog. ENGlobal is
benefiting from the renewed interest of its chemical/petrochemical clients
in maintenance and retrofit projects as product margins in this marketplace
improve.
Acquisition totals for the three months ended March 31, 2007 are from the
results of operations related to the acquisition of WRC Corporation. There
were no acquisition totals for the engineering segment for the three months
ended March 31, 2006, as all previous acquisitions had been fully
integrated.
20
Engineering Segment Results (continued)
- ---------------------------------------
Revenue:
Revenue increased $13.5 million, or 21.6%, to $76.1 million for the three
months ended March 31, 2007 from $62.62008 from $51.4 million for
the comparable prior
year period. The following table illustrates the composition of the
Company's revenue mix quarter over quarter for the three month periods
ended March 31, 2007 and 2006, and provides a comparison of the changes in
revenue (in thousands) and revenue trends period over period:
2007 % rev 2006 % rev $ change % change
------ ------ ------ ------ -------- --------
Detail-design 35.8 47% 27.6 44% 8.2 30%
Field services & inspection 35.2 46% 19.6 31% 15.6 80%
Procurement & construction 1.3 2% 10.6 17% (9.3) (88)%
Design-build fixed price 3.8 5% 4.7 8% (.9) (19)%
------ ------ ------ ------ ------- -------
76.1 100% 62.5 100% 13.6 22%
The increase in engineeringEngineering segment revenue was primarily brought about by
increased activity in the engineering and construction markets. Refining
related activity has been particularly strong, including projects to
satisfy environmental mandates, expand
existing facilities and utilize heavier sour crude. Capital spending in the
pipeline area is also trending higher, with numerous projects in North
America currently underway to deliver crude oil, natural gas,
petrochemicals and refined products. Renewable energy appears to be an
emerging area of activity and potential growth, with the Company currently
performing a variety of services for ethanol, biodiesel, coal to liquids,coal-to-liquids,
petroleum coke to ammonia, and other biomass processes.
The acquisition of WRC in May 2006, togetherOur detail-design services proved strong with our
clients' increased demand for in-plant and inspection resources, stimulated
growth in our staffing services division.
The largest increase in revenue came from field services and inspection
activity that increased $15.6increasing 15.6%, or
$5.1 million, or approximately 80%, to $35.2$37.9 million for the first quarter of 2007period ending March 31, 2008 from
$19.6$32.8 million for the comparable period in 2006. Approximately $6.9 million2007. As a percentage of the increasetotal
Engineering segment revenue, detail-design revenue increased 9.1% to 72.9%
in 2008 from 63.8% in 2007.
Our field services revenue is directly related to the acquisitionrevenues remained relatively stable with a decrease of
WRC in May of
2006 which provides integrated land management, engineering, and related
services (Reference is made to NOTE 16 - ACQUISITIONS, in the Company's
Report to Shareholders on Form 10K5.8%, or $0.8 million, from $13.8 million for the period ending December 31,
2006).
On a combined basis, with the increase in detail-design services of $8.2
million, or approximately 30%, our core engineering segment's activities
accounted for approximately 93% of engineering's total revenue mix during
the three month period ended March 31,
2007 compared to approximately 75%$13.0 million for the comparable period in 2008. As a percentage of
2006.total Engineering segment revenue, field services revenue decreased 1.7% to
25.0% in 2008 from 26.7% in 2007.
18
Management's Discussion and Analysis (continued)
- ------------------------------------------------
Engineering Segment Results (continued)
- ---------------------------------------
Revenue from non-labor procurement and construction activityservices decreased $9.3
million97.5%, or $1,298,000, from
$10.6 million during the three months ended March 31, 2006 to
$1.3 million$1,332,000 for the first quarter of 2007.
The design-build fixed price revenue decreased approximately $900,000, or
(19)%, from $4.7 million for the three month period ended March, 31 20062007 to $3.8 million for the same period in 2007 and accounted for approximately 5%
of engineering's total revenue. If the revenue from the two fixed-price EPC
projects that recorded losses in 2006, which totaled $1.8 and $2.7 million
during the three month periods ending March 31, 2007 and March 31, 2006,
respectively, were eliminated for comparison purposes, fixed price revenue
would have remained the same at $2.0 million$34,000 for the
comparable periods,
but would have decreased asperiod in 2008. As a percentage of total Engineering segment
revenue, by 0.5%procurement services revenue decreased 2.5% to 0.1% in 2008 from
3.2% in
2006 to 2.7%2.6% in 2007. Approximately $900,000The level of procurement services is project dependent and
varies over time depending on the volume of procurement activity our
customers choose to do themselves as opposed to using our services.
Fixed-price revenue decreased 71.4%, or $2.5 million, from $3.6 million in
2007 to $1.1 million in 2008. As a percentage of total Engineering segment
revenue, fixed-price revenue duringdecreased 4.9% to 2.0% in 2008 from 6.9% in
2007 as the three month period ending March 31, 2007 came from one
fixed-price, engineering-only project with a contract valueCompany neared completion of approximately $6.9 million, but also includes reimbursable material and
construction costs estimated to be approximately $34 million. The project
is scheduled to be completed during the first quarter of 2008.certain EPC contracts.
Gross Profit:
GrossOur Engineering segment's gross profit increased $5.2$0.7 million, or 66.7%7.6%, to
$13.0$9.9 million for the three months ended March 31, 20072008 from $7.8$9.2 million
for the comparable period in 2006.2007. As a percentage of total Engineering
segment revenue, gross profit increased by 4.6%1.2% to 17.1%19.0% from 12.5%17.8% for the
three-month periods ended March 31, 20072008 and 2006,2007, respectively. Of the
overall $5.2$0.7 million increase in gross profit, approximately $1.7 million$103,000 was
attributable to the $13.5$0.7 million increase in total revenue, plus
approximately $3.5 million$615,000 in improved margins. The increase in margins can be
attributed to the reduced activity in low margin/high dollar procurement
projects, as these projects are being replaced with higher margin, core
revenue derived from labor activity.
21
Engineering Segment Results (continued)
- ---------------------------------------
At March 31, 2007, we had outstanding unapproved change orders/claims of
approximately $17.4 million, net of reserves of $1.2 million associated
with ongoing fixed-price EPC projects. If in the future we determine
collection of the unapproved change orders/claims is not probable, it will
result in a charge to earnings in the period such determination is made for
the reserves of $1.2 million.
Selling, General, and Administrative:
As a percentage of revenue,Our Engineering segment's SG&A expense was 4.6% for both the three-month
periods ended March 31, 2007 and March 31, 2006. SG&A expense increaseddecreased $0.6 million, or 20.6%31.6%, to
$3.5$1.3 million for the three months ended March 31, 20072008 from $2.9$1.9 million
for the comparable prior year period.period in 2007. The increasequarter-over-quarter decrease in the
Engineering segment's SG&A expense included $68,000 attributable to the support of
expanded facilities and supplies as offices in Tulsa, Houston, and Beaumont
were expanded to meet both current and projected growth requirements.
Additional increases came from salaries, burdensapproximately $0.3 million in
employee and benefits of $194,000,
amortizationassociated costs re-classified to direct expense, $0.2 million
in non-recurring costs associated with closing the Dallas office during the
quarter ended March 31, 2007, and depreciation expense of $169,000 primarily related to
amortization of intangible assets from the acquisition of WRC (reference is
made to NOTE 5 - GOODWILL, page 9), and $69,000$0.1 million in other charges. An
additionallower bad debt expenseexpense.
As a percentage of $135,000 was also recorded duringtotal Engineering segment revenue, the periodsegment's SG&A
costs decreased by 1.1% to increase2.5% from 3.6% for the allowance for doubtful accounts primarily related to
changes in client mix.three-month periods ended
March 31, 2008 and 2007, respectively.
Operating Income:
Operating income for the Engineering segment increased $4.6$1.3 million, or
94.1%17.8%, to $9.5$8.6 million for the three months ended March 31, 20072008 from $4.9$7.3
million for the comparable prior year period. As a percentage of total
Engineering segment revenue, operating income increased by 2.3% to 12.5%16.5%
for the three months ended March 31, 20072008 from 7.8%14.2% for the comparable
prior year period.
2219
SystemsManagement's Discussion and Analysis (continued)
- ------------------------------------------------
Construction Segment Results
- ---------------------------------------------------
Three Months Ended
March 31,
------------------------------------------------------------------------------------
2008 2007
2006
--------------------------------------- --------------------
(In thousands)
-------------------------------------------(Dollars in Thousands)
-----------------------------------------
Gross revenue $ 5,510 100.0 %27,017 $ 4,040 100.0 %
Revenue:
=========== ===========14,635
Less intercompany revenue (117) (850)
--------- ---------
Total revenue $ 26,900 $ 13,785
========= =========
Detailed revenue:
Inspection 23,394 87.0% 10,703 77.7%
Construction services 3,506 13.0% 3,082 22.3%
--------- ------ --------- ------
Total revenue: $ 26,900 100.0% $ 13,785 100.0%
Gross profit: $ 249 4.5 %2,028 7.5% $ 426 10.6 %
----------- -----------2,082 15.1%
Operating SG&A expense: 429 7.8 % 608 15.1 %
----------- -----------$ 703 2.6% $ 627 4.5%
Operating income: (180) (3.3)% (182) (4.5)%
=========== ===========$ 1,325 4.9% $ 1,455 10.6%
Overview of SystemsConstruction Segment:
The systems segment began a detailed review process in the fourth quarter
of 2006. Continuing on this trend of self-improvement in the first quarter
of 2007, project cost control/forecasting was initiated on all active lump
sum projects in order to identify potential areas of remediation and
improve financial results. Going into 2007, the systems segment had record
backlog of $17.7 million with several large projects being booked in April.
In addition, the systems segment is planning to reduce overhead costs to
drive efficiency and profitability upwards.
Revenue:
RevenueOur Construction segment's revenue increased approximately $1.5$13.1 million, or 37.1%94.9%, to
$5.5$26.9 million for the three monththree-month period ended March 31, 20072008 from $4.0$13.8
million for the comparable prior year period. A general turnaroundWe have experienced
significant growth in our inspection related revenue due to increased
capital spending mainly by our pipeline clients. Also contributing to the
oil and gas industry, together with the
acquisition of Analyzer Technology International, Inc. ("ATI")increase in January
2006construction services revenue has increased the demand for systems services. Another factor
positively affecting systems business is that the computer-based
distributed control systems equipment used for facility plant automation
becomes technologically obsolete over time, which supports ongoing
replacement of these systems.been our ability to increase
our market share.
Gross profit:
GrossOur Construction segment's gross profit decreased approximately $177,000,$0.1
million, or 41.5%4.8%, to $249,000$2.0 million for the three months ended March 31, 20072008
from $426,000$2.1 million for the comparable prior year period and, as a percentage
of total Construction segment revenue, gross profit decreased by 7.6% to
4.5%7.5% from 10.6%15.1% for the respective periods. The decrease in gross profit
waspercentage is primarily attributable to the major increase in revenue
related to our growth in inspection services where increased employee
related costs and competitive pressure on bill rates resulted in lower
margins of fixed price work accountingmargins. While inspection related revenues increased $12.7 million, or
approximately 119%, to $23.4 million for 3% of
the margin changes. The remainderthree months ended March 31,
2008 from $10.7 million for the comparable prior year period, the
contribution to gross profit was increasedeffectively unchanged. Increased variable
costs associated with labor to perform proposals, project controls and
increased project management.management also contributed to the decrease in gross profit.
Selling, General, and Administrative:
Our Construction segment's SG&A expense increased approximately $0.1
million, or 16.7%, to $0.7 million for the three months ended March 31,
2008 from $0.6 million for the same period in 2007 and, as a percentage of
total Construction segment revenue, SG&A expense decreased by 1.9% to 2.6%
from 4.5% for the respective periods.
Operating Income:
Our Construction segment's operating income decreased $0.2 million, or
13.3%, to $1.3 million for the three months ended March 31, 2008 from $1.5
million for the comparable prior year period. As a percentage of total
Construction segment revenue, operating income decreased by 5.7% to 4.9%
for the three months ended March 31, 2008 from 10.6% for the comparable
prior year period.
20
Management's Discussion and Analysis (continued)
- ------------------------------------------------
Automation Segment Results
- --------------------------
Three Months Ended
March 31,
-----------------------------------------
2008 2007
------------------ -------------------
(Dollars in Thousands)
-----------------------------------------
Gross revenue $ 10,557 $ 9,823
Less intercompany revenue (155) (285)
--------- ---------
Total revenue $ 10,402 $ 9,538
========= =========
Detailed revenue:
Fabrication 6,683 64.3% 5,510 57.8%
Non-fabrication 3,719 35.7% 4,028 42.2%
--------- ------ --------- ------
Total revenue: $ 10,402 100.0% $ 9,538 100.0%
Gross profit: $ 1,044 10.0% $ 781 8.2%
Operating SG&A expense: $ 632 6.1% $ 845 8.9%
Operating income: $ 412 4.0% $ (64) (0.7%)
Overview of Automation Segment:
Revenue:
Our Automation segment's revenue increased approximately $0.9 million, or
9.5%, to $10.4 million for the three-month period ended March 31, 2008 from
$9.5 million for the comparable prior year period.
Gross profit:
The Automation segment's gross profit increased approximately $0.2 million,
or 25.0%, to $1.0 million for the three months ended March 31, 2008, from
$0.8 million for the comparable prior year period and, as a percentage of
total Automation segment revenue, gross profit increased by 1.8% to 10.0%
from 8.2% for the respective periods. During the first quarter of 2007, we
experienced reduced margins on a few larger lump sum projects that were not
repeated in the first quarter of 2008. We also are performing more detailed
project reviews and analysis, which have contributed to higher gross
profits.
Selling, General, and Administrative:
Our Automation segment's SG&A expense decreased approximately $179,000,$0.2 million,
or 29.4%25.0%, to $429,000$0.6 million for the three months ended March 31, 2008 from
$0.8 million for the same period in 2007 and, as a percentage of total
Automation segment revenue, SG&A expense decreased by 2.8% to 6.1% from
8.9% for the respective periods. Approximately $145,000 of the reduction of
SG&A expenses was due to a reduction in overhead staff.
Operating Income:
The Automation segment recorded an operating income of $0.4 million for the
three months ended March 31, 2008 compared to an operating loss of ($0.1)
million for the three-month period ended March 31, 2007. As a percentage of
total Automation segment revenue, operating income increased by 4.7% to
4.0% for the three months ended March 31, 2008 from (0.7)% for the
comparable prior period. Overall, improved control of direct costs and
overhead contributed to the increased operating income of the Automation
segment during the three months ended March 31, 2008.
21
Management's Discussion and Analysis (continued)
- ------------------------------------------------
Land Segment Results
- --------------------
Three Months Ended
March 31,
-----------------------------------------
2008 2007
------------------- -------------------
(Dollars in Thousands)
-----------------------------------------
Gross revenue $ 8,835 $ 6,887
Less intercompany revenue - -
-------- --------
Total Revenue: $ 8,835 100.0% $ 6,887 100.0%
Gross profit: $ 1,392 15.8% $ 1,250 18.2%
Operating SG&A expense: $ 677 7.7% $ 583 8.5%
Operating income: $ 715 8.1% $ 667 9.7%
Overview of Land Segment:
Revenue:
The Land segment's revenue increased approximately $1.9 million, or 27.5%,
to $8.8 million for the three-month period ended March 31, 2008 from $6.9
million for the comparable prior year period. The Land segment was formed
out of our acquisition of WRC Corporation in May 2006, which was renamed
ENGlobal Land, Inc. in January, 2008.
Gross profit:
The Land segment's gross profit increased approximately $0.1 million, or
7.7%, to $1.4 million for the three months ended March 31, 2008 from $1.3
million for the comparable prior year period and, as a percentage of total
Land segment revenue, gross profit decreased by 2.4% to 15.8% from 18.2%
for the respective periods. As we focused on growing business in the Land
segment, we increased the number of personnel by approximately 37% as of
March 31, 2008 compared to our staffing level at March 31, 2007. Our gross
profit margins have decreased due to the resulting increased costs of labor
and expenses that we were not able to immediately pass through to clients
under existing contracts. We are currently renegotiating billing rates on
existing contracts to accommodate these increased costs.
Selling, General, and Administrative:
The Land segment's SG&A expense increased approximately $0.1 million, or
16.7%, to $0.7 million for the three months ended March 31, 2008 from $0.6
million for the same period in 2007 but, as a percentage of total Land
segment revenue, SG&A expense decreased by 0.8% to 7.7% from 8.5% for the
respective periods. Increases in SG&A costs for the three months ended
March 31, 2008, were related to marketing the ENGlobal brand name as WRC
Corporation was renamed ENGlobal Land, Inc. in January 2008; travel and
marketing expenses were $40,000 higher; bad debt expense grew by $25,000
and another $19,000 was attributable to increased office expenses.
Operating Income:
The Land segment recorded an operating income of $0.7 million for the three
months ended March 31, 2008, compared to an operating income of $0.7
million for the three-month period ended March 31, 2007. As a percentage of
total Land segment revenue, operating income decreased 1.6% from 9.7% for
the three months ended March 31, 2007 from $608,000to 8.1% for the same period in 2006 and, as a percentage of revenue, SG&A expense decreased to 7.8% from
15.0% for the respective periods. Salaries and related expenses decreased
by $288,000 due to the fact the expenses of four sales persons were moved
to Corporate SG&A from Operations; some salaries were moved to direct costs
variable; and the Company's personnel decreased. Amortization expense
increased by $138,000 in relation to the non-compete intangible that was
created with the purchase price analysis related to the ATI acquisition.
Facilities and related expenses decreased by $27,000 as a result of moving
the office for the ATI acquisition into the existing Systems office.
Operating Income:
The systems segment recorded an operating loss of $180,000 for the three
months ended March 31, 2007 compared to an operating loss of $182,000 for
the three month period ended March 31, 2006.
232008.
22
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. As of March 31,
2007, $29.62008, $29.7 million had been borrowed under the Credit Facility, accruing
interest at 8.25%5% per year, excluding amortization of prepaid financing costs.
A 10% increase in the short-term borrowing rates on the Credit Facility
outstanding as of March 31, 20072008 would be 8350 basis points. Such an increase
in interest rates would increase our annual interest expense by
approximately $244,000,$148,500, assuming the amount of debt outstanding remains
constant.
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 consolidated
financial statements. Currently, we do not engage in foreign currency
hedging activities.
ITEM 4. CONTROLS AND PROCEDURES
a.a) Evaluation of Disclosure Controls and Procedures
Our management is responsible for establishing and maintaining our
disclosure controls and procedures. As of March 31, 2007, we carried out an
evaluation, under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosureDisclosure controls and procedures or "disclosure controls." Disclosure controls are controls and other procedures of a
registrant designed to ensure that information required to be disclosed by the
registrant in ourthe reports filedthat it files or submits under the Securities Exchange Act of 1934 is
properly recorded, processed, summarized, and reported, within the time periods
specified in the U.S. 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 the CEOits Chief Executive Officer and CFO,Chief Financial Officer,
as appropriate, to allow for timely decisions regarding required disclosure. In designingdisclosures.
We evaluated the effectiveness of the design and evaluating theoperation of our disclosure
controls and procedures management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and
management is required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
Based on the controls evaluation, our CEO and CFO have concluded that, as a
result of the matters discussed below with respect to our internal control
over financial reporting, our disclosure controls as of March 31, 2007,
were not effective.
A material weakness in internal control over financial reporting is a
significant deficiency, or combination of significant deficiencies, that
results in more than a remote likelihood that a material misstatement2008, as required by Rule 13a-15 of the
annual or interim financial statements will not be prevented or
detected. Management's assessment identified the followingExchange Act. As described below, material weaknesses were identified in our
internal control over financial reporting as of DecemberMarch 31, 2006, which remained outstanding2008. Based on the
evaluation described above, our Chief Executive Officer and Chief Financial
Officer have concluded that, as of March 31, 2007:
o2008, our disclosure controls and
procedures were not 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
In our Form 10-K for the year ended December 31, 2007, we disclosed certain
material weaknesses in internal control over financial reporting, which are
identified below. Neither material weakness has been remediated as of March 31,
2008.
23
Deficiencies in the Company's Control Environment. Our control
environment did not sufficiently promote effective internal control
over financial reporting throughout the organization. Specifically, we
had a shortage of supportEnvironment and resources in our accounting department,
which resulted in insufficient: (i) documentation and communication of
our accounting policies and procedures; and (ii) internal audit
processes of our accounting policies and procedures.
24
o Deficiencies in the Company's Information Technology Access Controls.
We did not maintain effective controls over preventing access by
unauthorized personnel to end-user spreadsheets and other information
technology programs and systems.
o Deficiencies in the Company's Accounting System
Controls.
We did not effectively and accurately close the general ledger in a timely
manner and we did not provide complete and accurate disclosure in our notes to
financial statements, as required by generally accepted accounting principles.
o DeficienciesSpecifically, the Company lacks sufficient knowledge and expertise in financial
reporting to adequately handle complex or non-routine accounting issues,
resulting in the following:
- failure in a timely manner to properly evaluate goodwill for
potential impairment in accordance with SFAS 142, "Goodwill and
Other Intangible Assets";
- difficulty in obtaining timely resolution of SEC comments related
to the above item, causing a delay in the Company's Controls Regarding Purchasesperiod-end
closing process for its 2007 Form 10-K; and
Expenditures. We did not maintain effective controls over the tracking
of our commitments and actual expenditures with- failure to effectively utilize third-party subsidiaries onspecialists in a
timely basis.
o Deficiencies in the Company's Controls Regarding Fixed-Price Contract
Information. We did not maintain effective controls over the complete,
accurate, and timely processing of information relatingmanner to the
estimated cost of fixed-price contracts.
o Deficiencies in the Company's Revenue Recognition Controls. We did not
maintain effective policies and procedures relating to revenue
recognition of fixed price contracts, which accounted for
approximately 11% of the Company's revenues in 2006.
o Deficiencies in the Company's Controls over Income Taxes. We did not
maintain sufficient internal controls to ensure that amounts provided
for in our financial statements for income taxes accurately reflected
our income tax position as of December 31, 2006.
o Management assessed the effectiveness of our internal control over
financial reporting as of December 31, 2006, but management did not
complete its assessment until March 2, 2007. Due to the lack of
adequate time to permit Hein to audit management's assessment, Hein
was unable to render an opinion on our assessment of the effectiveness
of our internal control over financial reporting as of December 31,
2006. Accordingly, management identified this as a material weakness.
Management's assessment process did not conclude in adequate time to
permit Hein to audit management's assessment due to a number of
factors, including: (i) our failure to prepare and plan for a timely
completion of management's assessment, including adding the resources
necessary to do so; and (ii) our failure to ensure that ourassist with complex or non-routine accounting
department was adequately staffed and sufficiently trained to meet
deadlines.
Except asissues.
As noted below under the heading "Remediation Initiatives,"above, no change in our internal control over financial reporting
(as defined in Rule
13a-15(f) under the Securities Exchange Act of 1934) occurred during the quarter ended March 31, 2007,2008, that has materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting.
b.
Remediation Initiatives
Management, with oversight from the Audit Committee of the Board of Directors,
has been addressing the material weakness disclosed in its 2006
Annual Report on Form 10-K and is committed to effectively remediating
known weaknesses as expeditiously as possible. Due to the fact thatdiscussed above. While progress has
been made, these remedial steps have not been completed,completed; however, the Company
has performed additional analysis and procedures in order to ensure that the
consolidated financial statements contained in this Quarterly Report on Form
10-Q were prepared in accordance with generally accepted accounting principles
in the United States of America.States. Although the Company's remediation efforts are well underway,
control weaknesses will not be considered remediated until new internal controls
over financial reporting are implemented and operational for a sufficient period
of time to allow for effective testing and are tested, and management and its
independent registered certified public accounting firm conclude that these
controls are operating effectively. Management, along with its outside
consultants, and the Audit Committee of the Company's Board of Directors have begunare
working with
the Company's auditors to determine the most effective way to implement the remedial measures
listed below, and, if necessary, to develop additional remedial measures to
address the internal control deficiencies identified 25
above. The Company will monitoris
monitoring the effectiveness of planned actions and will make any other changes
and take such other actions as management or the Audit Committee determines to
be appropriate. The Company's remediation plansefforts include:
o We plan to hire additional personnelengagement of various third-party consultants to assist us with
documentingspecific technical accounting issues;
o engagement of third-party consultants to provide valuation services in
accordance with SFAS 142;
o implementation of quarterly and communicatingannual disclosure checklists, which
are utilized in connection with the completion of our quarterly
financial statements;
o provision of additional training to accounting staff on SFAS 142, SEC
reporting principles, and GAAP; and
o implementation of periodic accounting management meetings where our
accounting policiesprocesses and procedures to ensure the
properare communicated and consistent application of those policies and procedures
throughout the Company. Recruitment for this position(s) has begun and
the selection process is expected to be completed during the second
quarter of 2007.
o We plan to implement formal processes requiring periodic
self-assessments, independent tests, and reporting of our personnel's
adherence to our accounting policies and procedures.
o We plan to design effective policies and procedures to control
security of and access to spreadsheet information. If necessary, we
will also consider implementing a software solution with automatic
control checkpoints for day-to-day business processes.
o We plan to (i) require additional training for our current accounting
personnel; (ii) to hire additional accounting personnel to enable the
allocation of job functions among a larger group of accounting staff;
(iii) to engage outside consultants with technical accounting
expertise, as needed; and (iv) to consider restructuring our
accounting department, each to increase the likelihood that our
accounting personnel will have the resources, experience, skills, and
knowledge necessary to effectively perform the accounting system
functions assigned to them. The Company currently has three days of
in-house training scheduled for the accounting staff at the end of May
2007, to improve our accounting functions as we prepare to report the
second quarter, as well as to improve the remainder of the year.
o We plan to improve procurement and operational efficiencies by
implementing a software system and a matrix organization to more
completely, accurately, and timely track commitments on Company-wide
purchase and expenditure transactions.
o We plan to improve revenue recognition policies and procedures
relating to fixed-price contracts by evaluating the level of economic
success achieved by past fixed-price contracts and by stressing
throughout the Company the importance of (i) accurately estimating
costs, (ii) timely updating cost estimates to reflect the accuracy of
the cost savings, (iii) accurately estimating expected profit, (iv)
timely identifying when a project's scope changes, (v) promptly
reporting man hours and costs in excess of those originally estimated;
and (vi) closely scrutinizing the bid process.
o We plan to train personnel to effectively implement and evaluate the
overall design of the Company's fixed-price project control processes.
Specifically, we plan to enhance and tighten controls as they relate
to the initial bid process and the attendant recognition and
management of risk by only bidding on large procurement and
construction activities on a cost plus basis.
Management recognizes that many of these enhancements require continual
monitoring and evaluation for effectiveness. The development of these
actions is an iterative process and will evolve as the Company continues to
evaluate and improve our internal controls over financial reporting.
Management will review progress on these activities on a consistent and
ongoing basis at the Chief Executive Officer and senior management level in
conjunction with our Audit Committee. We also plan to take additional steps
to elevate Company awareness about and communication of these important
issues through formal channels such as Company meetings, departmental
meetings, and training.
During the second quarter, the Company will begin its 2007 internal
controls audit and the Investor Relations/Governance department expects to
hire a third-party consultant to oversee the testing of its internal
financial and information technology controls. A quarterly review by
consultants will assist the Company and its independent auditors in
preparing for the final assessment in September 2007, allowing for any
remediation by December 31, 2007.
26reinforced.
24
PART II. - OTHER INFORMATION
----------------------------
ITEM 1. LEGAL PROCEEDINGS
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 report, 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, 2006,2007,
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 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.In September 2005, Hurricane Rita destroyed our administrative offices in
Beaumont, Texas. Since that time, we have leased additional office space
near our existing Beaumont operations. In March 2008, agreement was met on
our building specifications in a build-to-suit lease agreement.
Groundbreaking commenced April 28, 2008, with plans for completion in the
fall of 2008.
ITEM 6. EXHIBITS
10.1 Seventh3.1 Amended and Restated Bylaws of ENGlobal Corporation, dated
November 6, 2007.
3.2 Amendment to CreditAmended and Restated Bylaws of ENGlobal Corporation,
effective as of April 29, 2008.
10.1 Build-to-Suit Lease Agreement bybetween Clay Real Estate
Development, L.P. and among Comerica BankENGlobal Corporate Services, Inc., executed
March 6, 2008.
10.2 Amended and Restated Option Pool Agreement between ENGlobal
Corporation and its subsidiaries dated April 18,
2007,Alliance 2000 Ltd., effective retroactive to March 30, 2007.December 20, 2006.
31.1 Certifications Pursuant to Rule 13a - 14(a) of the Exchange Act
of 2002 for the First Quarter 20072008
31.2 Certifications Pursuant to Rule 13a - 14(a) of the Exchange Act
of 2002 for the First Quarter 20072008
32 Certification Pursuant to Rule 13a - 14(b) of the Exchange Act
and 18U.S.C.18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 for the First Quarter 2007
272008
25
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 9, 20076, 2008
By: /s/ Robert W. Raiford
-------------------------
Robert W. Raiford
Chief Financial Officer and Treasurer
2826