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 June 30, 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 77060-591477073-6033
----------------------------------------------------- ----------
(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 August 1, 2007.5, 2008.
$0.001 Par Value Common Stock 26,921,22527,267,141 shares
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED JUNE 30, 20072008
TABLE OF CONTENTS
Page
Number
------
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Income for the Three Months Ended
Andand
Six Months Ended June 30, 20072008 and June 30, 20062007 3
Consolidated Statements of Comprehensive Income for the Three Months Ended
And Six Months Ended June 30, 2007 and June 30, 2006 4
Condensed Consolidated Balance Sheets at June 30, 20072008 and December 31, 2006 52007 4
Condensed Consolidated Statements of Cash Flows for the Six Months 6
Ended
June 30, 20072008 and June 30, 20062007 5
Notes to Condensed Consolidated Financial Statements 8-156-12
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 16-2813-29
Engineering Segment Results 21
Construction Segment Results 24
Automation Segment Results 26
Land Segment Results 28
Item 3. Quantitative and Qualitative Disclosures About Market Risk 2930
Item 4. Controls and Procedures 29-3130-31
Part II. Other Information
Item 1. Legal Proceedings 32
Item 1A. Risk Factors 32
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 3233
Item 3. Defaults Upon Senior Securities 3233
Item 4. Submission of Matters to a Vote of Security Holders 3233
Item 5. Other Information 3233
Item 6. Exhibits 32
Signature 3334
Signatures 35
2
PART I. - FINANCIAL INFORMATION
-------------------------------
ITEM 1. FINANCIAL STATEMENTS
ENGlobal Corporation
Condensed Consolidated Statements Ofof Income
(Unaudited)
(Dollars in Thousands)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------------ ---------------------------------------------------- ----------------------
2008 2007 20062008 2007
2006
------------- ------------- ------------- -------------
Operating Revenue--------- --------- --------- ---------
Revenues $ 89,576,296136,011 $ 75,065,71489,576 $ 171,234,929234,177 $ 141,692,550
------------- ------------- ------------- -------------
Operating Expenses:171,235
Direct cost 75,357,142 64,337,124 143,738,050 122,742,331costs 115,710 75,357 199,530 143,739
--------- --------- --------- ---------
Gross Profit $ 20,301 $ 14,219 $ 34,647 $ 27,496
Selling, general and administrative 6,570,025 6,812,569 13,615,778 12,510,241
Depreciation and amortization 719,917 353,720 1,417,852 756,400
------------- ------------- ------------- -------------
Total operating expenses 82,647,084 71,503,413 158,771,679 136,008,972
------------- ------------- ------------- -------------8,701 7,290 15,927 15,033
--------- --------- --------- ---------
Operating income 6,929,212 3,562,301 12,463,249 5,683,578$ 11,600 $ 6,929 $ 18,720 $ 12,463
Other Income (Expense):
Other income 515,247 387,355 515,117 409,107$ 59 $ 515 $ 85 $ 515
Interest income (expense), net (700,088) (252,996) (1,259,931) (415,142)
------------- ------------- ------------- -------------
Total other income (expense) (184,841) 134,359 (744,814) (6,035)
------------- ------------- ------------- -------------(413) (700) (896) (1,260)
--------- --------- --------- ---------
Income before Income Taxes $ 11,246 $ 6,744 $ 17,909 $ 11,718
Provision for Federal and State Income Taxes 6,744,371 3,696,660 11,718,435 5,677,543
Provision for Income Taxes 2,831,074 1,365,225 4,650,795 2,111,965
------------- ------------- ------------- -------------4,544 2,831 7,204 4,650
--------- --------- --------- ---------
Net Income $ 3,913,2976,702 $ 2,331,4353,913 $ 7,067,64010,705 $ 3,565,578
============= ============= ============= =============7,068
========= ========= ========= =========
Net Income Per Common Share:
Basic $ 0.25 $ 0.15 $ 0.090.40 $ 0.26
Diluted $ 0.14
Diluted0.24 $ 0.14 $ 0.090.39 $ 0.26 $ 0.13
Weighted Average Shares Used in Computing
Net Income Per Share:Share (in thousands):
Basic 26,864,358 26,444,185 26,839,184 26,388,702
Fully27,096 26,864 27,078 26,839
Diluted 27,290,047 27,191,617 27,208,578 27,218,98227,641 27,290 27,576 27,209
See accompanying notes to interim condensed consolidated financial statements.
3
ENGlobal Corporation
Condensed Consolidated Statements of Comprehensive IncomeBalance Sheets
(Unaudited)
For the Three Months For the Six Months
Ended(Dollars in Thousands)
ASSETS
------
June 30, EndedDecember 31,
2008 2007
--------- ---------
Current Assets:
Cash $ 2,344 $ 908
Trade receivables, net 92,886 64,141
Prepaid expenses and other current assets 1,353 2,125
Current portion of notes receivable 156 154
Costs and estimated earnings in excess of billings on uncompleted contracts 4,504 6,981
Deferred tax asset 3,081 3,081
--------- ---------
Total Current Assets $ 104,324 $ 77,390
Property and equipment, net $ 6,115 $ 6,472
Goodwill 20,314 19,926
Other intangible assets, net 3,618 4,112
Long term notes receivable, net of current portion 10,515 10,593
Deferred tax asset, non-current 257 77
Other assets 1,032 1,020
--------- ---------
Total Assets $ 146,175 $ 119,590
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable $ 21,746 $ 10,482
Accrued compensation and benefits 21,199 16,182
Notes payable 202 931
Current portion of long-term lease 168 --
Current portion of long-term debt 1,344 1,508
Deferred rent 497 558
Billings and estimated earnings in excess of costs on uncompleted contracts 388 963
Other current liabilities including taxes payable 5,473 3,851
--------- ---------
Total Current Liabilities $ 51,017 $ 34,475
Long-Term Lease, net of current portion 332 --
Long-Term Debt, net of current portion 26,477 29,318
--------- ---------
Total Liabilities $ 77,826 $ 63,793
--------- ---------
Commitments and Contingencies (Note 9)
Stockholders' Equity:
Common stock - $0.001 par value; 75,000,000 shares authorized; 27,242,141
and 27,051,766 shares issued and outstanding at June 30, -------------------------- --------------------------2008 and
December 31, 2007, 2006 2007 2006
----------- ----------- ----------- -----------
Net Incomerespectively $ 3,913,29728 $ 2,331,435 $ 7,067,640 $ 3,565,578
----------- ----------- ----------- -----------
Other Comprehensive Income (Loss):
Foreign currency translation adjustment (25,629) 10,238 (26,739) 9,535
Income tax effect 9,995 (3,942) 10,428 (3,671)
----------- ----------- ----------- -----------
Net28
Additional paid-in capital 35,489 33,593
Retained earnings 32,886 22,181
Accumulated other comprehensive income (15,634) 6,296 (16,311) 5,864
----------- ----------- ----------- -----------
Net Comprehensive Income(loss) $ 3,897,663(54) $ 2,337,731(5)
--------- ---------
Total Stockholders' Equity 68,349 55,797
--------- ---------
Total Liabilities and Stockholders' Equity $ 7,051,329146,175 $ 3,571,442
=========== =========== =========== ===========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 Six Months Ended
June 30,
December 31,----------------------
2008 2007
2006
------------- -------------
Current Assets:--------- ---------
Cash Flows from Operating Activities:
Net income $ 2,325,14510,705 $ 1,402,8807,068
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Depreciation and amortization 2,245 1,943
Share-based compensation expense 816 455
Gain on disposal of property, plant and equipment (85) (553)
Deferred income taxes (180) (77)
Changes in current assets and liabilities, net of acquisitions:
Trade receivables net 69,649,366 60,247,612
Prepaid expenses and other current assets 1,456,088 1,723,907
Current portion of notes receivable 53,611 52,031
Costs(28,745) (9,402)
Billings and estimated earnings in excess of billings on uncompleted contracts 10,188,515 5,390,111
Deferred tax asset 2,310,106 2,310,106
Federalcosts 2,477 (4,798)
Prepaid expenses and state income taxes receivable -- 638,266
------------- -------------
Total Current Assets 85,982,831 71,764,913
Property and Equipment, net 6,929,346 8,724,902
Goodwill 19,941,170 19,202,197
Other Intangible Assets, net 4,845,904 5,426,824
Long term notes receivable, net of current portion 1,587,022 129,105
Other Assets 927,080 468,864
------------- -------------
Total Assets $ 120,213,353 $ 105,716,805
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:other assets 400 (785)
Accounts payable $ 10,285,684 $ 14,672,165
Federal and state income taxes 1,370,780 --11,265 (4,386)
Accrued compensation and benefits 16,588,289 12,806,919
Notes payable 252,563 1,109,772
Current portion of long-term debt 1,554,556 1,418,029
Deferred rent 618,073 678,5835,016 3,781
Billings in excess of costs and estimated earnings on uncompleted contracts 3,399,936 539,910(575) 2,860
Other liabilities 3,205,651 5,352,886
------------- -------------
Total Current Liabilities 37,275,532 36,578,264
Long-Term Debt, net(79) (4,364)
Income taxes receivable/payable 1,256 3,850
--------- ---------
Net cash provided by (used in) operating activities $ 4,516 $ (4,408)
--------- ---------
Cash Flows from Investing Activities:
Property and equipment acquired $ (1,336) $ (1,051)
Proceeds from note receivable 76 20
Additional consideration for acquisitions -- 18
Proceeds from sale of current portion 33,317,984 27,162,263
Deferred Tax Liability 1,037,208 1,114,224
------------- -------------
Total Liabilities 71,630,724 64,854,751
------------- -------------
Commitments and Contingencies (Note 11)
Stockholders' Equity:
Commonother assets 383 711
--------- ---------
Net cash used in investing activities $ (877) $ (302)
--------- ---------
Cash Flows from Financing Activities:
Borrowings on line of credit $ 128,387 $ 76,453
Payments on line of credit (130,704) (69,494)
Proceeds from issuance of common stock - $0.001 par value; 75,000,000 shares authorized; 26,907,335
and 26,807,460 shares issued and outstanding1,080 194
Borrowing under capital lease 500 --
Long-term debt repayments (1,418) (1,524)
--------- ---------
Net cash (used in) provided by financing activities $ (2,155) $ 5,629
--------- ---------
Effect of Exchange Rate Changes on Cash (48) 3
--------- ---------
Net change in cash $ 1,436 $ 922
Cash, at June 30, 2007 and
December 31, 2006, respectively 27,559 27,459
Additional paid-in capital 31,796,816 31,147,343
Retained earnings 16,784,993 9,717,354
Accumulated other comprehensive loss (26,739) (30,102)
------------- -------------
Total Stockholders' Equity 48,582,629 40,862,054
------------- -------------
Total Liabilities and Stockholders' Equitybeginning of period 908 1,403
--------- ---------
Cash, at end of period $ 120,213,3532,344 $ 105,716,805
============= =============2,325
========= =========
Supplemental Disclosures:
Interest paid $ 840 $ 827
--------- ---------
Income taxes paid $ 6,141 $ 3,443
--------- ---------
See accompanying notes to interim condensed consolidated financial statements.
5
ENGlobal Corporation
Condensed Consolidated Statements Of Cash Flows
(Unaudited)
For the Six Months Ended
June 30,
--------------------------
2007 2006
----------- -----------
Cash Flows from Operating Activities:
Net income $ 7,067,640 $ 3,565,578
Adjustments to reconcile net income to net cash used in
operating activities -
Depreciation and amortization 1,942,564 1,253,070
Share based compensation expense 455,108 491,199
Loss on disposal of property, plant and equipment (552,562) 36,030
Deferred income tax benefit (77,016) (73,889)
Changes in current assets and liabilities, net of acquisitions -
Trade receivables (9,401,755) (2,869,847)
Costs and estimated earnings in excess of billings (4,798,403) (1,467,014)
Prepaid expenses and other assets (784,928) (77,889)
Accounts payable (4,386,481) (7,055,855)
Accrued compensation and benefits 3,781,371 1,367,860
Billings in excess of costs and estimated earnings 2,860,026 1,741,821
Other liabilities (4,364,188) 306,288
Income taxes receivable (payable) 3,849,950 802,170
----------- -----------
Net cash used in operating activities (4,408,674) (1,980,478)
----------- -----------
Cash Flows from Investing Activities:
Property and equipment acquired and construction in progress (1,051,344) (1,624,592)
Proceeds from sale of equipment -- 12,200
Proceeds from sale of other assets 710,790 50,000
Proceeds from note receivable 20,502 8,126
Business acquired in purchase transaction, net of cash acquired 18,125 (5,935,162)
Partnership distribution -- 350,000
Insurance proceeds -- 68,317
----------- -----------
Net cash used in investing activities (301,927) (7,071,111)
----------- -----------
Cash Flows from Financing Activities:
Net borrowings (payments) on line of credit 6,959,125 9,703,310
Proceeds from issuance of common stock 194,465 442,857
Long-term debt repayments (1,524,086) (383,387)
----------- -----------
Net cash provided by financing activities 5,629,504 9,762,780
----------- -----------
----------- -----------
Effect of Exchange Rate Changes on Cash 3,362 13,556
----------- -----------
Net change in cash 922,265 724,747
Cash, at beginning of period 1,402,880 159,414
----------- -----------
Cash, at end of period $ 2,325,145 $ 884,161
=========== ===========
Supplemental Disclosures:
Interest paid $ 827,201 $ 212,237
=========== ===========
Income taxes paid $ 3,442,783 $ 1,306,947
=========== ===========
See accompanying notes to interim condensed consolidated financial statements.
6
ENGlobal Corporation
Condensed Consolidated Statements Of Cash Flows
(Unaudited)
(Continued)
For the Six Months Ended
June 30,
--------------------------
2007 2006
----------- -----------
Non-Cash:
Issuance of note for purchase of WRC Corporation $ $ 2,400,000
=========== ===========
Issuance of common stock for purchase of WRC Corporation $ $ 1,400,000
=========== ===========
Issuance of note for ATI assets $ $ 1,000,000
=========== ===========
Acceptance of note for Constant Power assets $ $ (216,000)
=========== ===========
Acceptance of note from Oak Tree $(1,480,000) $ --
=========== ===========
See accompanying notes to interim condensed consolidated financial statements.
7
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 and six month
periods ended June 30, 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 as amended on Form 10K/A filed with the
Securities and Exchange Commission on March 29, 2007 (collectively referred
to as "2006 Annual Report on Form 10-K"). 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. As of June 30, 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.
WRC Corporation, which was acquired by the Company on May 26, 2006,
recently underwent a Federal tax audit for the pre-acquisition fiscal year
ended September 30, 2005. This audit was closed on July 12, 2007, with no
significant tax impact on the Company. The Company does not have any other
on-going Internal Revenue Service examinations, and the open years
currently subject to audit are 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 an expense
over the requisite service period (usually a vesting period). The Company
8
Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
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 $222,143 and $405,894 was recorded
for the three months ended June 30, 2007 and June 30, 2006, respectively,
and $455,107 and $491,198 was recorded the six months ended June 30, 2007
and June 30, 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 June 30,
2007 was $38,509 and for the six months ended June 30, 2007 was $77,018.
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 average price per share for the three months ended June 30, 2007 and
2006 was $8.83 per share and $9.53 per share, respectively, and for the six
months ended June 30, 2007 and 2006 was $7.44 per share and $10.33 per
share, respectively.
Stock Option and Incentive Plans
The Company maintains a stock option plan (the "Option Plan") under which
the Company may issue stock options to employees and non-employee
directors. On March 30, 2007, the Board of Directors approved (subject to
stockholder approval which occurred on June 14, 2007) an amendment to the
Option Plan to increase the number of shares available for issuance under
the Plan from 2,650,000 to 3,250,000. The Company intends to issue
stock-based awards under the option plan in order to enhance its ability to
attract, retain and compensate employees and non-employee directors of
outstanding ability. As of June 30, 2007, 600,806 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.
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 options generally have a ten-year term.
Compensation expense of $1.4 million related to previously granted stock
option awards which are not vested had not yet been recognized at June 30,
2007. This compensation expense is expected to be recognized over a
weighted-average period of approximately 12 months.
9
Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
NOTE 1 - BASIS OF PRESENTATION
Our condensed consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United States of
America. Our Company consolidates all of its wholly-owned subsidiaries and
all significant inter-company accounts and transactions have been
eliminated in the consolidation.
The condensed consolidated financial statements of ENGlobal Corporation
(which may be referred to as "ENGlobal," the "Company," "we," "us," or
"our") included herein are unaudited for the three month and six month
periods ended June 30, 2008 and 2007, have been prepared from the books and
records of the Company pursuant to the rules and regulations of the
Securities and Exchange Commission, and in the case of the condensed
balance sheet as of December 31, 2007, have been derived from the audited
financial statements. These financial statements reflect all adjustments
(consisting of normal recurring adjustments), which are, in the opinion of
management, necessary to fairly present the results for the periods
presented. Certain information and note disclosures, normally included in
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America, have been condensed or
omitted pursuant to rules and regulations of 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. 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 - SHARE-BASED COMPENSATION
Prior to June 6, 2008, the Company sponsored a share-based incentive plan
(the "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), share-based
compensation for employees 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 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.
The Company maintained the Plan, under which the Company had the ability to
award non-statutory options, incentive stock options, restricted stock and
stock appreciation rights to employees including non-employee directors.
Under the Plan, a maximum of 3,250,000 shares of our common stock was
approved to be issued or transferred to non-employee directors, officers
and employees pursuant to awards granted. At the date of the Plan's
expiration, June 5, 2008, 502,494 shares remained available under the 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.
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.
In accordance with the provisions of SFAS No. 123(R), total share-based
compensation expense in the amount of $429,000 and $222,000 was recorded in
the three months ended June 30, 2008, and June 30, 2007, respectively.
Total stock-based compensation expense in the amount of $816,000 and
6
Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
$455,000 was recorded in the six months ended June 30, 2008, and June 30,
2007, respectively. The total share-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 was $90,000 and $38,000 for the three months
ended June 30, 2008, and June 30, 2007, respectively, and $180,000 and
$77,000 for the six months ended June 30, 2008, and June 30, 2007,
respectively.
Compensation expense related to outstanding non-vested stock option awards
under the Plan of $1.1 million had not been recognized at June 30, 2008.
This compensation expense is expected to be recognized over a
weighted-average period of approximately 32 months.
The following table summarizes stock option activity forthrough the second
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 150,000 10.93 10.0 years140,000 9.44 9.7 -
Exercised 99,875 1.66(190,375) 5.73 - 587
Canceled or expired 20,000 2.05(30,000) 5.27 - -
--------- --------- ------------ ---------- ----------- -------------
Balance at June 30, 2007 1,452,6192008 1,226,125 $ 6.04 7.86.73 5.9 $ 3,458
========= =========6,564 *
============ ========== =========== =============
Exercisable at June 30, 2007 1,047,4192008 1,021,925 $ 5.08 7.86.10 6.4 $ 4,974
========= =========5,036
============ ========== =========== =============
*Based on average stock price forthrough the second quarter 2007 of $8.832008 of $10.11
per share. The average stock price for the same period in 20062007 was $9.53$7.44
per share. Our common stock was quoted on the NASDAQ Global Select market
during the six months ended June 30, 2008 and on the American Stock
Exchange during the six months ended June 30, 2007. The total fair value of
vested options outstanding as of June 30, 2008 and 2007 was $5.0 million
and $3.1 million, respectively.
The total intrinsic value of options exercised was $405,000$967,000 and $608,000
for the three months ended June 30, 2007 and 2006, respectively, and
$587,000 and $930,000
for the six months ended June 30, 2008 and 2007, respectively.
Restricted Stock Unit Awards
In June 2008, the Company granted compensation to each of its three
non-employee directors via restricted stock awards. It was the Company's
intention that such awards be issued pursuant to the Plan. It was later
determined that the grants had been made after the Plan's expiration.
Therefore, the grants of restricted stock were rescinded. On August 8,
2008, the Company replaced the grants of restricted stock with grants of
non-Plan restricted stock units equivalent to 6,420 shares of common stock.
The award of restricted stock units is intended to compensate and 2006,
respectively.retain
the directors over the term of the award. The fair value of the award was
$93,411 per director based on the market price of $14.55 per share of the
Company's stock on the date the award was granted. Upon vesting, the units
will be convertible into cash or, if shareholder approval is obtained,
common stock. The units will vest in equal quarterly installments beginning
on September 30, 2008, so long as the grantee continues to serve as an
independent director of the Company. Recognition of compensation related to
the restricted stock awards will commence in the third quarter of 2008.
7
Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
NOTE 4 - FIXED FEE CONTRACTS
Costs, estimated earnings and billings on uncompleted contracts consisted
of the following at June 30, 20072008 and December 31, 2006:2007:
June 30, December 31,
2008 2007
2006
--------------------
(in thousands)
------------------------------------------
(Dollars in Thousands)
----------------------
Costs incurred on uncompleted contracts $ 84,21470,327 $ 75,31774,599
Estimated earnings (losses) on uncompleted contracts (7,417) (7,390)(1,328) (1,686)
-------- --------
Earned revenues 76,797 67,92768,999 72,913
Less: Billingsbillings to date 70,008 63,07764,883 66,895
-------- --------
Net costs and estimated earnings in excess of billings
on uncompleted contracts $ 6,7894,116 $ 4,8506,018
======== ========
Costs and estimated earnings in excess of billings on uncompleted contracts $ 10,1894,504 $ 5,3906,981
Billings and estimated earnings in excess of cost on uncompleted contracts (3,400) (540)(388) (963)
-------- --------
Net costs and estimated earnings in excess of billings
on uncompleted contracts $ 6,7894,116 $ 4,8506,018
======== ========
NOTE 5 - COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) represents net earnings and any revenue,
expenses, gains and losses that, under accounting principles generally
accepted in the United States of America, are excluded from net earnings
and recognized directly as a component of stockholders' equity. At June 30,
2007, comprehensive income included losses of ($16,659) and ($17,380) for
the quarter and year to date, respectively, 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
10
Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
values and reviewed for impairment in accordance with SFAS No. 144,
"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 2006 Annual
Report on Form 10K for the period ended 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 months ended 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. As
a result, in 2006, we amortized $70,000 more of intangibles than we would
have amortized based on the second valuation. 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 7 - LINE OF CREDIT AND DEBT
At the end of the reporting period, the Company had a Credit Facility (the
"Comerica Credit Facility") with Comerica Bank ("Comerica") that consisted
of a line of credit maturing on July 26, 2009. The Comerica Credit Facility
positions the Comerica debt as senior to all other debt. The line of credit
is limited to $35 million, subject to loan covenant restrictions and is
collateralized by substantially all the assets of the Company. The
outstanding balance on the line of credit as of June 30, 2007 was $30.9
million. The remaining borrowings available under the line of credit as of
June 30, 2007 were $4.1 million after consideration of loan covenant
restrictions.
The Comerica Credit Facility contains covenants requiring the Company, as
of the end of each calendar month, to maintain certain ratios, including
the 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, and 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 June 30, 2007.
11
Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
June 30, 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 June 30,
2007),2008, maturing in July 20092010 $ 30,92225,518 $ 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 90 12030 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 936 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 75482 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 550 713209 382
Michael Lee - Note payable, interest at 5%, principal payments in installments of
$150,000 plus interest due quarterly, maturing in July 2010 1,800 2,1001,200 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 34,873 28,58027,821 30,826
Less: Currentcurrent maturities (1,555) (1,418)of long-term debt (1,344) (1,508)
-------- --------
Long-term debt, net of current portion $ 33,31826,477 $ 27,16229,318
Borrowings under capital lease 500 --
Less: current maturities of capital lease (168) --
-------- --------
Total $ 26,809 $ 29,318
======== ========
NOTE 8 - SEGMENT INFORMATION
The Company operates in two business segments: (1) engineering, providing
services primarily to major companies involved inplans additional borrowings of approximately $500,000 under
capital leases during the hydrocarbon and
chemical processing industries, pipelines, oil and gas development, and
cogeneration units that, for the most part, are located in the United
States; and (2) systems, providing design and implementationremainder of control
systems for specific applications primarily in the energy and process
industries, and uninterruptible power systems and battery chargers to
customers that, for the most part, are located in the United States.
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.
122008.
8
Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
Three Months Ended Six Months EndedNOTE 6 - SEGMENT INFORMATION
ENGlobal has four reportable segments: Engineering, Construction,
Automation and Land. Our segments are strategic business units that offer
different services and products and therefore require different marketing
and management strategies. Our segments have grown through strategic
acquisitions, which have also served to augment management expertise.
The Engineering segment provides consulting services relating to the
development, management and execution of projects requiring professional
engineering and related project services. Services provided by the
Engineering segment include feasibility studies, engineering, design,
procurement, and construction management. The Construction segment provides
construction management personnel and services in the areas of inspection,
mechanical integrity, vendor and turnaround surveillance, field support,
construction, quality assurance and plant asset management. The Automation
segment provides services related to the design, fabrication, and
implementation of process distributed control and analyzer systems,
advanced automation, and information technology projects. The Land segment
provides land management, right-of-way, environmental compliance, and
governmental regulatory compliance services primarily to pipeline, utility
and telecom companies and other owner/operators of infrastructure
facilities throughout the United States and Canada.
The accounting policies of each of the segments are the same as those
described in the summary of significant accounting policies. The Company
evaluates performance based on profit or loss from operations before
interest, income taxes and other income or loss, but after selling, general
and administrative expenses attributable to the reportable segments.
Transactions between reportable segments are at market rates comparable to
terms available from unrelated parties.
(Dollars in Thousands)
For the three months ended
June 30, June 30,
---------------------- ----------------------
2007 2006 2007 20062008 Engineering Construction Automation Land All Other Consolidated
-------------------------- ----------- ------------ ---------- ---- --------- ------------
Revenue before eliminations $ 77,480 $ 38,858 $ 11,411 $ 11,842 $ -- $ 139,591
Inter-segment eliminations $ (1) (3,204) (375) -- -- (3,580)
--------- --------- --------- --------- (in thousands)
------------------------------------------------
Revenue:
Engineering--------- ---------
Revenue $ 84,26377,479 35,654 11,036 11,842 $ 69,869136,011
Gross profit $ 160,70612,779 3,988 1,362 2,172 $ 132,499
Systems 5,767 5,576 11,277 9,888
Less intercompany revenue (454) (379) (748) (694)20,301
SG&A $ 2,262 759 749 881 4,050 $ 8,701
--------- --------- --------- --------- Total revenue $ 89,576 $ 75,066 $ 171,235 $ 141,693
========= ========= ========= =========--------- ---------
Operating income (loss):
Engineering $ 10,49510,517 $ 6,5963,229 $ 19,996613 $ 11,486
Systems (60) 55 (240) (127)
Corporate (3,506) (3,089) (7,293) (5,676)1,291 $ (4,050) $ 11,600
--------- --------- --------- --------- Total operating---------
Other income (expense) (354)
Tax provision (4,544)
---------
Net income $ 6,702
=========
(Dollars in Thousands)
For the three months ended
June 30, 2007
--------------------------
Revenue before eliminations $ 56,972 $ 19,032 $ 9,942 $ 7,104 $ -- $ 93,050
Inter-segment eliminations $ (6) (3,044) (424) -- -- (3,474)
-------- -------- -------- -------- -------- --------
Revenue $ 56,966 15,988 9,518 7,104 -- $ 89,576
Gross profit $ 9,584 2,646 1,112 877 -- $ 14,219
SG&A $ 1,732 666 773 574 3,545 $ 7,290
-------- -------- -------- -------- -------- --------
Operating income $ 7,852 $ 1,980 $ 339 $ 303 $ (3,545) $ 6,929
-------- -------- -------- -------- --------
Other income (expense) (185)
Tax provision (2,831)
--------
Net income $ 3,5623,913
========
9
Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
NOTE 6 - SEGMENT INFORMATION (continued)
(Dollars in Thousands)
For the six months ended
June 30, 2008 Engineering Construction Automation Land All Other Consolidated
------------------------ ----------- ------------ ---------- ---- --------- ------------
Revenue before eliminations $ 129,515 $ 65,875 $ 21,968 $ 20,677 $ -- $ 238,035
Inter-segment eliminations $ (7) (3,321) (530) -- -- (3,858)
--------- --------- --------- --------- --------- ---------
Revenue $ 129,508 62,554 21,438 20,677 -- $ 234,177
Gross profit $ 22,661 6,016 2,406 3,564 -- $ 34,647
SG&A $ 3,557 1,462 1,381 1,558 7,969 $ 15,927
--------- --------- --------- --------- --------- ---------
Operating income $ 19,104 $ 4,554 $ 1,025 $ 2,006 $ (7,969) $ 18,720
--------- --------- --------- --------- ---------
Other income (expense) (811)
Tax provision (7,204)
---------
Net income $ 10,705
=========
(Dollars in Thousands)
For the six months ended
June 30, 2007
------------------------
Revenue before eliminations $ 108,414 $ 33,667 $ 19,765 $ 13,991 $ -- $ 175,837
Inter-segment eliminations $ 1 (3,894) (709) -- -- (4,602)
--------- --------- --------- --------- --------- ---------
Revenue $ 108,415 29,773 19,056 13,991 -- $ 171,235
Gross profit $ 18,748 4,728 1,893 2,127 -- $ 27,496
SG&A $ 3,599 1,293 1,618 1,156 7,367 $ 15,033
--------- --------- --------- --------- --------- ---------
Operating income $ 15,149 $ 3,435 $ 275 $ 971 $ (7,367) $ 12,463
--------- --------- --------- --------- ---------
Other income (expense) (745)
Tax provision (4,650)
---------
Net income $ 5,683
========= ========= =========7,068
=========
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 Stateslocated
in Canada were $98,539valued at $70,000 as of June 30, 2007,2008, net of accumulated
depreciation.depreciation, stated in U.S. dollars.
NOTE 97 - FEDERAL AND STATE INCOME TAXES
The components of income tax expense (benefit) for the three months and six
months ended June 30, 20072008 and 20062007 were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------------------------- --------------------
2008 2007 20062008 2007
2006
------- ------- ------- -------
(in---- ---- ---- ----
(Dollars in thousands) ----------------------------------------(Dollars in thousands)
Current $ 4,634 $ 2,869 $ 1,4237,384 $ 4,728 $ 2,1864,727
Deferred (90) (38) (58)(180) (77) (74)
------- ------- ------- -------
Total tax provision $ 4,544 $ 2,831 $ 1,3657,204 $ 4,652 $ 2,1124,650
======= ======= ======= =======
13Effective tax rate 40.4% 42.0% 40.2% 39.7%
------- ------- ------- -------
The estimated effective tax rates are based on estimates using historical
rates adjusted by recurring and non-recurring book to tax differences.
Estimates at June 30, 2008, are based on results of the 2007 year end and
adjusted for estimates of non-recurring differences from the prior year, as
well as anticipated book to tax differences for 2008.
10
Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
NOTE 108 - EARNINGS PER SHARE
The following table reconciles the denominatornumber of shares used to compute basic
earnings per share to the denominatornumber of shares used to compute diluted earnings
per share ("EPS").
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- ----------------------------------------- -----------------
2008 2007 20062008 2007
2006
---------- ---------- ---------- ----------
(in---- ---- ---- ----
(Shares in thousands) -------------------------------------------------(Shares in thousands)
Weighted average shares outstanding
(denominator used to compute basic EPS) 26,864,358 26,444,185 26,839,184 26,388,702EPS 27,096 26,864 27,078 26,839
Effect of employee and outside director stock options 425,689 747,432 369,394 830,280
---------- ---------- ---------- ----------
Denominatorshare-based plan 545 426 498 370
------ ------ ------ ------
Shares used to compute diluted EPS 27,290,047 27,191,617 27,208,578 27,218,982
========== ========== ========== ==========
NOTE 11 - CONTINGENCIES
Employment Agreements
The Company has employment agreements with certain of its executive
officers, the latest of which expires in February 2009. The agreements
provide for minimum salary levels. If the Company terminates the employment
of the employee for any reason other than 1) termination for cause, 2)27,641 27,290 27,576 27,209
====== ====== ====== ======
NOTE 9 -COMMITMENTS AND CONTINGENCIES
Employment Agreements
The Company has employment agreements with certain of its executive
officers and certain other officers. Such agreements provide for minimum
salary levels. If the Company terminates the employment of the employee for
any reason other than (1) for cause, as defined in the employment
agreement, (2) voluntary resignation, or (3) the employee's death, the
Company is obligated to provide a severance benefit equal 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
employee's agreement not to engage in certain competitive activities. These
agreements are renewable for one year at the Company's option.
Long-term Note Receivable
In the first quarter of 2007, ENGlobal Engineering, Inc. ("EEI") and South
Louisiana Ethanol, LLC ("SLE") executed an agreement for engineering,
procurement and construction (EPC) services relating to the retro-fit of an
ethanol plant in southern Louisiana. The history of the SLE project (the
"SLE 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.
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 3) 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 a non- competition
provision. These agreements are renewable for one year at the Company's
option. The Company has employment agreements with certain other officers
which contain the elements of those agreements with its executive officers
but are in effect from three to five years.
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 for which we have reserves, which 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.
Due to SLE's continued failure to obtain permanent financing, on May 30,
2008, the Company filed suit in the United States District Court for the
Eastern District of Louisiana, Cause Number 08-3601, the Company is seeking
damages of $15.8 million. An independent appraisal, dated March 17, 2008,
from the bridge lending bank's appraiser, Revpro and Associates, indicates
a fair market value of SLE's assets of $35.8 million, an orderly
liquidation value of $25.3 million, and a forced liquidation value of $20.0
million. While the Company believes that in the event the collateral is
liquidated, SLE's obligations to the Company would be paid in full pursuant
to the Collateral Mortgage in favor of the Company, collectability is not
assured at this time. However, at this time the Company believes that the
ultimate disposition of the SLE collateral will not materially adversely
affect our liquidity or overall financial position.
11
Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
Insurance
The Company carries a broad range of insurance coverage, including general
and business automobile liability, commercial property, professional errors
and omissions, workers' compensation insurance and a general umbrella
policy. The Company is not aware of any claims in excess of insurance
recoveries. ENGlobal is partially self-funded for health insurance claims.
Provisions for expected future payments are accrued based on the Company's
experience.
Specific stop loss levels provide protection for the Company
with $175,000 per occurrence and approximately $12.1 millionBuilding Lease Commitment
As discussed in aggregate
in each policy year being covered by a separate insurance policy.
Unapproved Change Orders and Claims
At June 30,Note 20 of our 2007 the Company had outstanding unapproved change
orders/claims of approximately $18.6 million. The Company recorded $1.2
million in revenue during the year ended December 31, 2006 related to these
claims. No additional amounts have been recognized during 2007 related to
these claims. Generally, collection of amounts related to unapproved change
orders and claims is expected within twelve months. However, clients
generally will not pay these amounts until final resolution of related
claims, thus accordingly, collection of these amounts may extend beyond one
year. In the future, if the Company determines collection of any unapproved
change order/claim is not probable, it will post a charge to earnings in
the period such determination is made.
14
Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
NOTE 12 - SUBSEQUENT EVENT
On August 6, 2007, the CompanyAnnual Report on Form 10-K, on February
28, 2008, ENGlobal entered into a Credit Agreement (the "Credit
Agreement"), provideslease agreement with a three-year, $50 million senior secured revolving
creditthird party
relating to the construction of a new facility (the "New Credit Facility"). Becoming effective August 8,
2007,in Beaumont, Texas.
Commencement of the New Credit Facility is guaranteed by substantially alllease agreement and construction of Company's subsidiariesthe facility was
contingent on the sale of property to the developer/lessor. During May
2008, the Company completed the sale of property to the developer/lessor.
Construction has commenced on the new facility and is secured by a lien on substantially allexpected to continue
throughout 2008.
NOTE 10 - SUBSEQUENT EVENTS
Sale of Office Building in Baton Rouge
In June 2007, we sold an office building we owned in Baton Rouge,
Louisiana. At the time of the Company's assets.sale, we accepted a note receivable from the
buyer for approximately $1.4 million. On July 24, 2008, the buyer paid the
note in full. The New Credit Facility replacedsale of the building was described in our Quarterly
Report on Form 10-Q for the quarter ended June 30, 2007.
SemCrude, L.P.
We have potential exposure to SemCrude, L.P. ("SemCrude"), an affiliate of
SemGroup, L.P. ("SemGroup"), related to services provided by our
Engineering and Construction segments to SemCrude in connection with the
construction of the White Cliffs Pipeline. As of June 30, 2008, on a
$35 million senior
revolving credit facilitycombined basis our Engineering and Construction segments had received
payments from SemCrude totaling approximately $2.7 million. On July 22,
2008, SemGroup and several of its affiliates, including SemCrude (Case
Number 08-11525), filed a voluntary petition for reorganization under
Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy
Court for the District of Delaware.
As of June 30, 2008, combined Engineering and Construction segment
receivables attributable to SemCrude totaled approximately $2.0 million. As
of July 25, 2008, our exposure was approximately $2.8 million. Because
SemCrude's account with ENGlobal had historically been paid on a materially
current basis, and because it was materially current as of June 30, 2008,
we did not reflect any portion of SemCrude's account in either our
Engineering segment's or our Construction segment's allowance for doubtful
accounts. On July 28, 2008, ENGlobal was notified that the White Cliffs
Pipeline project would continue under a third-party manager and that it was
anticipated that SemCrude's accounts would be kept current. On August 1,
and August 7, 2008, the Company received payments of approximately $941,000
and $339,000, respectively, each of which brought SemCrude's account
materially current as of those dates. We have expired in July 2009.
The New Credit Facilitycontinued performing work on
this project.
We are currently unable to quantify what amount of SemCrude's balance, if
any, may be used for working capital, issuancesuncollectible. However, we believe that the ultimate
disposition of letters of creditSemCrude's asset investment in the White Cliffs Pipeline
project will not materially adversely affect our liquidity or other lawful corporate purposes. The Credit Agreement
contains customary affirmative and negative covenants that place certain
limitations and restrictions on the Company. These covenants place certain
limitations on the Company including limits on new debt, mergers, asset
sales, investments, and fixed price contracts along with restrictions on
certain distributions. The Company must also maintain certainoverall
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 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.
At the Company's option, amounts borrowed under the New Credit Facility
will bear interest at LIBOR or an Alternate Base Rate, plus in each case,
an additional margin based on the Leverage Ratio. The Alternate Base Rate
is the greater of the Prime Rate or the Fed Funds Effective Rate, plus
1.0%. The additional margin ranges from 0% on the Alternate Base Rate loans
and 1.50% to 2.0% on the LIBOR-based loans.
15position.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Statements
--------------------------
Certain information contained in this Quarterly Report on Form 10-Q, the Company's 2006 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 Quarterly Report on Form 10-Q, the specific risk factors identified in the Company's
2006 Annual Report on Form 10-K for the year ended December 31, 2007 and those
described from time to time in our future reports filed with the Securities
and Exchange Commission.
The following discussion is qualified in its entirety by, and should be
read in conjunction with, the Company's Condensed Consolidated Financial
Statements, including the notes thereto, included in this Quarterly Report on Form 10-Q and the
Company's 2006 Annual Report on Form 10-K.10-K for the year ended December 31, 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 months and six months ended June 30, 2007,2008, compared to the
corresponding period in 2006.2007.
During the three months During the six months
ended June 30, 20072008 ended June 30, 2007
($ in millions) % ($ in millions) %
--------------- ------ --------------- ------2008
------------------- -------------------
Revenue $ 14.5 19.3% $ 29.5 20.8%Increased 51.8% Increased 36.8%
Gross profit 3.5 32.7% 8.5 44.7%Increased 43.0% Increased 26.0%
Operating income 3.3 91.7% 6.8 119.3%Increased 67.4% Increased 50.2%
SG&A expense 0.1 1.4% 1.7 12.8%Increased 19.4% Increased 5.9%
Net income 1.6 70.0% 3.5 97.2%
Long-term debt, net of current portion, increased 22.4%, or $6.1million,
from $27.2 million at December 31, 2006 to $33.3 million at June 30, 2007,
and as a percentage of stockholders' equity, long-term debt increased to
68.6% from 66.5% at these same dates. The primary reason for the increase
in long-term debt is the timing difference related to meeting short-term
bi-weekly payroll obligations from our growth and longer collection periods
on receipts from our clients. On average, our accounts receivable days
outstanding is 70 days for the three months ended June 30, 2007, compared
to 64 days for the three months ended June 30, 2006. The Company continues
to work toward improving billing and collection processes.
Total stockholders' equity increased 18.8%, or $7.7 million, from $40.9
million as of December 31, 2006 to $48.6 million as of June 30, 2007.
16Increased 71.3% Increased 51.5%
13
MD&A/Results of OperationsManagement's Discussion and Analysis (continued)
- --------------------------------------------------------------------------------------
As of As of As of
Selected Balance Sheet Comparisons June 30, December 31, June 30,
2008 2007 2007
-------- -------- --------
(Dollars in Thousands)
-------------------------------
Working capital $ 53,307 $ 42,915 $ 48,707
Total assets $146,175 $119,590 $120,213
Long-term debt, net of current portion $ 26,477 $ 29,318 $ 33,318
Stockholders' equity $ 68,349 $ 55,797 $ 48,583
Long-term debt, net of current portion, decreased 9.6%, or $2.8 million,
from $29.3 million at December 31, 2007 to $26.5 million at June 30, 2008.
As a percentage of stockholders' equity, long-term debt decreased to 38.7%
from 52.5% at these dates. The decrease in long-term debt primarily relates
to the $2.3 million decrease in our line of credit resulting from improved
collections of associated trade receivables. On average, our day's sales
outstanding remained at 61 days for the three-month period ended June 30,
2008, equal to 61 days at December 31, 2007, but decreased from 70 days for
the comparable three-month period in 2007. The Company continues to work
toward improving internal billing and client collection processes.
Total stockholders' equity increased 22.4%, or $12.5 million, from $55.8
million as of December 31, 2007 to $68.3 million as of June 30, 2008.
Consolidated Results of Operations for the Three Months
Ended June 30, 2008 and 2007
(Unaudited)
For the three months ended
June 30, 2008
(Dollars in Thousands) Engineering Construction Automation Land All Other Consolidated
-------------------------- ----------- ------------ ---------- ---- --------- ------------
Revenue before eliminations $ 77,480 $ 38,858 $ 11,411 $ 11,842 $ -- $ 139,591
Inter-segment eliminations (1) (3,204) (375) -- -- (3,580)
--------- --------- --------- --------- --------- ---------
Revenue $ 77,479 $ 35,654 $ 11,036 $ 11,842 $ -- $ 136,011
--------- --------- --------- --------- --------- ---------
Gross profit $ 12,779 $ 3,988 $ 1,362 $ 2,172 $ -- $ 20,301
SG&A 2,262 759 749 881 4,050 8,701
--------- --------- --------- --------- --------- ---------
Operating income $ 10,517 $ 3,229 $ 613 $ 1,291 $ (4,050) $ 11,600
--------- --------- --------- --------- ---------
Other income (expense) (354)
Tax provision (4,544)
---------
Net income $ 6,702
=========
For the three months ended
June 30, 2007
(Dollars in Thousands)
--------------------------
Revenue before eliminations $ 56,972 $ 19,032 $ 9,942 $ 7,104 $ -- $ 93,050
Inter-segment eliminations (6) (3,044) (424) -- -- (3,474)
-------- -------- -------- -------- -------- --------
Revenue $ 56,966 $ 15,988 $ 9,518 $ 7,104 $ -- $ 89,576
-------- -------- -------- -------- -------- --------
Gross profit $ 9,584 $ 2,646 $ 1,112 $ 877 $ -- $ 14,219
SG&A 1,732 666 773 574 3,545 7,290
-------- -------- -------- -------- -------- --------
Operating income $ 7,852 $ 1,980 $ 339 $ 303 $ (3,545) $ 6,929
-------- -------- -------- -------- --------
Other income (expense) (185)
Tax provision (2,831)
--------
Net income $ 3,913
========
14
Management's Discussion and Analysis (continued)
- ------------------------------------------------
Consolidated Results of Operations for the Six Months
Ended June 30, 2008 and 2007
and 2006
(Unaudited)
Three Months Ended Six Months EndedFor the six months ended
June 30, June 30,
---------------------------------------- -----------------------------------------
2007 2006 2007 2006
------------------- ------------------- ------------------- -------------------
(dollars2008
(Dollars in thousands)
------------------------------------------------------------------------------------
Revenue:Thousands) Engineering Construction Automation Land All Other Consolidated
------------------------ ----------- ------------ ---------- ---- --------- ------------
Revenue before eliminations $ 83,938 93.7 %129,515 $ 69,752 92.9 %65,875 $ 160,087 93.5 %21,968 $ 132,339 93.4 %
Systems 5,638 6.3 % 5,314 7.1 % 11,148 6.5 % 9,354 6.6 %
---------- ------ ---------- ------ ---------- ------ ---------- ------
Total revenue20,677 $ 89,576 100.0 %-- $ 75,066 100.0 %238,035
Inter-segment eliminations (7) (3,321) (530) -- -- (3,858)
--------- --------- --------- --------- --------- ---------
Revenue $ 171,235 100.0 %129,508 $ 141,693 100.0 %
========== ========== ========== ==========62,554 $ 21,438 $ 20,677 $ -- $ 234,177
--------- --------- --------- --------- --------- ---------
Gross profit:
Engineeringprofit $ 13,967 15.6 %22,661 $ 10,189 13.6 %6,016 $ 26,996 15.7 %2,406 $ 17,986 12.7 %
Systems 252 0.3 % 539 0.7 % 501 0.3 % 964 0.7 %
---------- ------ ---------- ------ ---------- ------ ---------- ------
Total gross profit 14,219 15.9 % 10,728 14.3 % 27,497 16.0 % 18,950 13.4 %
---------- ---------- ---------- ----------3,564 $ -- $ 34,647
SG&A expense:
Engineering 3,472 3.9 % 3,593 4.8 % 7,000 4.1 % 6,500 4.6 %
Systems 312 0.3 % 484 0.6 % 741 0.4 % 1,091 0.8 %
Corporate 3,506 4.0 % 3,089 4.1 % 7,293 4.3 % 5,676 4.0 %
---------- ------ ---------- ------ ---------- ------ ---------- ------
Total SG&A expense 7,290 8.2 % 7,166 9.5 % 15,034 8.8 % 13,267 9.4 %
---------- ---------- ---------- ----------3,557 1,462 1,381 1,558 7,969 $ 15,927
--------- --------- --------- --------- --------- ---------
Operating income:
Engineering 10,495 11.7 % 6,596 8.8 % 19,996 11.7 % 11,486 8.1 %
Systems (60) - % 55 - % (240) (0.2)% (127) (0.1)%
Corporate (3,506) (4.0)% (3,089) (4.0)% (7,293) (4.3)% (5,676) (4.0)%
---------- ------ ---------- ------ ---------- ------ ---------- ------
Total operating income 6,929 7.7 % 3,562 4.8 % 12,463 7.2 % 5,683 4.0 %
---------- ---------- ---------- ----------$ 19,104 $ 4,554 $ 1,025 $ 2,006 $ (7,969) $ 18,720
--------- --------- --------- --------- ---------
Other income (expense), net (185) (0.2)% 134 0.1)% (745) (0.4)% (6) - % (811)
Tax provision (2,831) (3.1)% (1,365) (1.8)% (4,650) (2.7)% (2,112) (1.5)%
---------- ------ ---------- ------ ---------- ------ ---------- ------(7,204)
---------
Net income $ 3,913 4.4 % $ 2,331 3.1 % $ 7,067 4.1 % $ 3,565 2.5 %
========== ========== ========== ==========
All percentages are based on total revenue.
Other financial comparisons:
----------------------------
As of10,705
=========
For the six months ended
June 30, -------------------
2007
2006
-------- --------
(in thousands)
-------------------
Working capital(Dollars in Thousands)
-------------------------
Revenue before eliminations $ 48,707108,414 $ 31,051
Total assets $120,21333,667 $ 93,053
Long-term debt, net of current portion19,765 $ 33,31813,991 $ 16,943
Stockholders' equity-- $ 48,583175,837
Inter-segment eliminations 1 (3,894) (709) -- -- (4,602)
--------- --------- --------- --------- --------- ---------
Revenue $ 45,777
17108,415 $ 29,773 $ 19,056 $ 13,991 $ -- $ 171,235
--------- --------- --------- --------- --------- ---------
Gross profit $ 18,748 $ 4,728 $ 1,893 $ 2,127 $ -- $ 27,496
SG&A 3,599 1,293 1,618 1,156 7,367 $ 15,033
--------- --------- --------- --------- --------- ---------
Operating income $ 15,149 $ 3,435 $ 275 $ 971 $ (7,367) $ 12,463
--------- --------- --------- --------- ---------
Other income (expense) (745)
Tax provision (4,650)
---------
Net income $ 7,068
=========
15
MD&A/Results of OperationsManagement's Discussion and Analysis (continued)
- --------------------------------------------------------------------------------------
We recorded net income of $3.9$6.7 million, or $0.15$0.24 per diluted share, for the
three months ended June 30, 2007,2008, compared to net income of $2.3$3.9 million,
or $0.09$0.14 per diluted share, for the corresponding period last year.
WeCumulatively, we recorded net income of $10.7 million, or $0.39 per diluted
share, for the six months ended June 30, 2008, compared to net income of
$7.1 million, or $0.26 per diluted share, for the six months ended June 30, 2007, compared to net income of $3.6 million, or
$0.13 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 Six Months Ended
June 30, June 30,
--------------------- ------------------
2007 2006 2007 2006
------ ------ ------ ------
Revenue:
Engineering 93.7 % 92.9 % 93.5 % 93.4 %
Systems 6.3 % 7.1 % 6.5 % 6.6 %
Operating income (loss):
As a % of Total Revenues
Engineering 11.7 % 8.8 % 11.7 % 8.1 %
Systems - % - % (0.2)% (0.1)%
The Company's revenue is composed of engineering, construction and
procurement service revenue, systems, land/management and related product
sales.in
2007.
The Company recognizes service revenue as soon as the services are
performed. The majority of the Company's engineering services haveservice revenue has 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 $8.0 million inRevenue on fixed-price revenue in the six months ended June 30, 2007, compared to
$14.8 million of similar revenue in the same period in 2006.
Revenuecontracts 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 either a
subcontracted or direct
hire or subcontractor basis. Generally, thesethe materials, equipment and
subcontractor costs are passed through to our clients and reimbursed, along
with fees, which in the aggregate,total are at margins lower than those of our normal
core business. In accordance with industry practice and generally accepted
accounting principles, all such costs and fees are included in reported
revenue. The use of subcontractor services can change significantly from
project to project; therefore, changes in revenue and gross profit, SG&A
expense and operating income as a percent of revenue may not be indicative
of the Company's core business trends.
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.
18
MD&A/Results of Operations (continued)
- --------------------------------------
Corporateoperations.
All other 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.
Industry Overview:
Many ENGlobal offices have benefited fromGiven the strong refinery market. We
expect significant capital projects to be generated by refinery operations
over the next several years given increasing demand for refined products,
improved margins, and an aging refining infrastructure in the U.S. Overall,
projects that relate to expanding capacity at existing refineries or those
projects that relate to processing lower cost grades of crude have trended
upward. Givenfact that global demand for energyoil products has tightened the supply
of both crude oil as well as refined products, we believe each ENGlobalof
ENGlobal's business segmentsegments is well positioned within the industry and to perform
services primarilygiven
increased spending on energy infrastructure in North America.
Many ENGlobal offices have benefited from significant capital projects in
the North American market.downstream refinery market, primarily related to increasing capacity,
the utilization of heavy or sour crude oil, and rebuilding facilities
damaged by accidents. While many existing projects of this type are
underway, it is possible that some refiners will defer significant new
spending given a recent tightening of refining margins. The Company expects
a continuation of refining projects that are compliance driven, such as EPA
environmental initiatives and OSHA safety related projects that can
originate as a result of increased audits of U.S.-based refineries. The
Company is also currently seeing good opportunities to upgrade obsolete
automation and control systems at existing refineries, and also to plan and
manage turnaround projects.
The downstream petrochemical industry has historically been a good source
of projects for ENGlobal. WeWhile not currently as robust as the refining
market, we have seen a smallrecent increase in both maintenance and capital
spending on domestic facilities after several years of relative inactivity. InWe believe that major
grassroots petrochemical projects 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 Company's view, largeforeseeable future, that
petrochemical work undertaken in the U.S. will consist of smaller capital
projects or be maintenance related.
16
Despite past downturns in the petrochemical industry, are currently being undertaken outside the U.S., in areas of the world with
increasing product demand or lower cost feedstock.
The Company is currently seeingpipeline projects have remained
fairly constant and we have recently seen a significant increase in North American
pipeline project
activity. It is projected that this activity in terms of
pipeline miles built will increase approximately 70% in 2007, when compared
to 2006. Moving products through cross country pipelines requires other
installations on which the Company performs services, such as pump
stations, gas compression facilities, tank farms, metering and surveillance
installations. As a general statement,Although pipeline projects tend to require less engineering man
hours as the scope of engineering work is somewhat
smaller than for similar sized downstream projects.projects, ENGlobal is seeing significant increasedmay also provide a
pipeline client with several additional services, such as right-of-way
acquisition, inspection, and construction management. The drivers we see
behind growth in domestic pipeline activity on projectsinclude: 1) natural gas
transportation away from the Rocky Mountain area and 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 United
States, and 4) movement of refined products from Gulf Coast refineries to
the Midwest and Northeast.
The country's focus on alternative and renewable energy. Inenergy has presented the Company with
many cases, our clients for these
projects are new project developers, as opposed to our historical client
baseopportunities. The North American Industrial Project
Spending Index has recently indicated that are much larger in sizecapital spending for all
alternative energy projects exceeds that for refining and with long operating histories. In
this area, the Company primarily focusespipeline
combined. To date, ENGlobal has mainly focused its marketing efforts on facilities that will utilize biomass
technologies, includingprocesses, such as those related to coal-to-liquids projects, the
production of ethanol and biodiesel, coal to liquids and the utilization of refinery
petroleum coke as an energy source. In addition, the Company predicts
possible opportunities related to solar energy in the coming years,
including the potential opportunity to perform project services on solar
collector and poly-silicon (used in photovoltaic cells) production
facilities. Most of our alternative-energy projects are for smaller
developers rather than our larger, traditional clients.
Revenue:
Revenue increased $29.5$46.4 million, or 20.8%51.8%, to $171.2$136.0 million for the sixthree
months ended June 30, 20072008, from $141.7$89.6 million for the comparable
prior
year period with approximately $27.8prior-year period. Approximately $77.5 million of the increase coming from
our engineering segment and $1.7is
attributable to our systemsEngineering segment, while $35.7 million of the
increase is attributable to our Construction segment, $11.0 million of the
increase is attributable to our Automation segment, and $11.8 million of
the increase is attributable to our Land segment. Revenue from procurement
services increased 218.2%, or $12.0 million, to $17.5 million for the three
months ended June 30, 2008, from $5.5 million for the comparable period in
2007. This is discussed further in our segment information.
Revenue increased $14.5$63.0 million, or 19.3%36.8%, to $89.6$234.2 million for the threesix
months ended June 30, 20072008, from $75.1$171.2 million for the comparable
prior year
period with approximately $14.1prior-year period. Approximately $129.5 million of the increase coming from our
engineering segment and $0.3 millionis
attributable to our systemsEngineering segment, while $62.6 million of the
increase is attributable to our Construction segment, $21.4 million of the
increase is attributable to our Automation segment, and $20.7 million of
the increase is attributable to our Land segment. Revenue from procurement
services increased 157.4%, or $10.7 million, to $17.5 million for the six
months ended June 30, 2008, from $6.8 million for the comparable period in
2007. This is discussed further in our segment information.
Gross Profit:
Gross profit increased $8.5$6.1 million, or 44.7%43.0%, to $27.5$20.3 million for the
three months ended June 30, 2008, from $14.2 million for the comparable
prior-year period. The $6.1 million increase in gross profit is
attributable to a $46.4 million increase in revenue, which was offset by
approximately $40.3 million in higher costs and lower margins.
As a percentage of revenue, gross profit decreased 1.0% from 15.9% for the
three months ended June 30, 2007, to 14.9% for the three months ended June
30, 2008. The decrease in gross profit margin as a percentage of revenue
primarily relates to a shift in revenue mix quarter-over-quarter. Revenues
in the Engineering segment for the three months ended June 30, 2008,
included $17.5 million in procurement services compared to $5.5 million for
the three months ended June 30, 2007. Revenues in the Construction segment
for the three months ended June 30, 2008, included $31.0 million in
inspection services compared to $12.1 million for the three months ended
June 30, 2007. While these two portions of our revenue added $30.9 million
to our overall revenue growth, these pass-through type services have
typically been performed at lower margins, thereby, resulting in an average
reduction of 1.0% in our overall gross margin.
Gross profit increased $7.1 million, or 25.8%, to $34.6 million for the six
months ended June 30, 20072008, from $19.0$27.5 million for the comparable
prior yearprior-year period. The $7.1 million increase in gross profit is
attributable to a $63.0 million increase in revenue, which was offset by
approximately $55.9 million in higher costs and lower margins.
17
Management's Discussion and Analysis (continued)
- ------------------------------------------------
As a percentage of revenue, gross profit increased 2.6%decreased 1.3% from 13.4%16.1% for the
six months ended June 30, 20062007, to 16.0%14.8% for the quarter ended June 30,
2007. Of2008. . Revenues in the overall $8.5Engineering segment for the three months ended June
30, 2008, included $17.5 million increase in gross profit,
approximately $3.9 million was primarily dueprocurement services compared to the $29.5 million increase
in revenue and approximately $4.6 million was due to equivalent lower
costs.
Gross profit increased $3.5 million, or 32.7%, to $14.2$6.8
million for the three months ended June 30, 2007 from $10.7 million for2007. Revenues in the
comparable
prior year period. As a percentage of revenue, gross profit increased 1.6%
from 14.3%Construction segment for the three months ended June 30, 20062008, included
$54.4 million in inspection services compared to 15.9%$22.8 million for the
quarterthree months ended June 30, 2007. Of theWhile these two portions of our revenue
added $42.3 million to our overall $3.5 million increaserevenue growth, these pass-through type
services have typically been performed at lower margins, thereby, resulting
in an average reduction of 1.3% in our overall gross profit, approximately $2.1 million was primarily due to the $14.5 million
increase in revenue and approximately $1.4 million was due to equivalent
lower costs.
19
MD&A/Results of Operations (continued)
- --------------------------------------margin.
Selling, General, and Administrative:
As a percentage of revenue, total SG&A expense decreased 0.6%1.7% to 8.8%6.4% for
the three months ended June 30, 2008, from 8.1% for the comparable period
in 2007. Total expense for SG&A increased $1.4 million, or 19.2%, to $8.7
million for the three months ended June 30, 2008, from $7.3 million for the
comparable prior-year period.
As a percentage of revenue, operating SG&A expense decreased 0.8% to 3.4%
for the three months ended June 30, 2008, from 4.2% for the comparable
prior-year period. Operating SG&A increased $0.8 million, or 21.1%, to $4.6
million for the three months ended June 30, 2008, from $3.8 million for the
comparable prior-year period. Increases in Operating SG&A were primarily
related to increases in higher bad debt expense. Operating SG&A is
discussed in further detail in each of the segment sections.
As a percentage of revenue, all other SG&A expense decreased 0.9% to 3.0%
for the three months ended June 30, 2008, from 3.9% for the comparable
prior-year period. All other SG&A expense increased approximately $0.6
million, or 17.1%, to $4.1 million for the three months ended June 30,
2008, from $3.5 million for the comparable prior-year period. The increase
over the prior year's all other SG&A expense was related to increases of
approximately $169,000 related to stock compensation expense, $99,000 in
depreciation and amortization expense, and $236,000 for professional
services.
As a percentage of revenue, total SG&A expense decreased 2.0% to 6.8% for
the six months ended June 30, 20072008, from 9.4%8.8% for the comparable prior year period.period in
2007. Total expense for SG&A increased $1.7$0.9 million, or 12.8%6.0%, to $15.0$15.9
million for the six months ended June 30, 20072008, from $13.3$15.0 million for the
comparable prior yearprior-year period.
As a percentage of revenue, operating SG&A expense decreased 1.3%1.1% to 8.2%3.4%
for the six months ended June 30, 2008, from 4.5% for the comparable
prior-year period. Operating SG&A expense increased approximately $0.3
million to $7.9 million for the six months ended June 30, 2008, from $7.6
million for the comparable prior-year period. Increases in Operating SG&A
were primarily related to increases in higher bad debt expense, offset by
identifying certain associate expenses as direct costs rather than
overhead.
As a percentage of revenue, all other SG&A expense decreased 0.9% to 3.4%
for the six months ended June 30, 2008, from 4.3% for the comparable
prior-year period. All other SG&A expense increased approximately $0.6
million, or 8.1%, to $8.0 million for the six months ended June 30, 2008,
from $7.4 million for the comparable prior-year period. The increase over
the prior year's all other SG&A was related to increases of approximately
$321,000 related to stock compensation expense, $224,000 in depreciation
and amortization expense, and $152,000 in professional services.
Operating Income:
Operating income increased approximately $4.7 million, or 68.1%, to $11.6
million for the three months ended June 30, 2008, from $6.9 million for to
the same period in 2007. As a percentage of revenue, operating income
increased 0.7% to 8.5% for the three months ended June 30, 2008, from 7.8%
for the comparable prior-year period.
Operating income increased approximately $6.2 million, or 49.6%, to $18.7
million for the six months ended June 30, 2008, from $12.5 million for the
comparable period in 2007. As a percentage of revenue, operating income
increased 0.7% to 8.0% for the three months ended June 30, 2008, from 7.3%
for the comparable prior- year period.
18
Management's Discussion and Analysis (continued)
- ------------------------------------------------
Other Expense, net:
Other expense increased $0.2 million, to $0.4 million for the three months
ended June 30, 2008, from $0.2 million for the comparable prior-year
period, primarily due to other income related to gain on the sale of the
Baton Rouge office building in the second quarter of 2007. Net interest
expense on our Credit Facility was reduced from $633,000 in June 2007 (with
a rate of 8.25%) to $356,000 in June 2008 (with an average rate of
approximately 4.5%). Other expense for the three months ended June 30,
2008, is net of approximately $82,000 gain on the sale of land described in
Note 9 above, and other expense for the three months ended June 30, 2007,
is net of approximately $500,000 gain on the sale of the Baton Rouge
building described in Note 10, above.
Other expense increased $0.1 million, to $0.8 million for the six months
ended June 30, 2008, from 9.5%$0.7 million for the comparable prior year
period. Totalprior-year
period, primarily due to other income related to gain on the sale of the
Baton Rouge office building in the second quarter of 2007. Net interest
expense was reduced related to lower interest rates on our Credit Facility
from $1.1 million for the six months ended June 2007, to $794,000 for the
six months ended June 2008. Other expense for SG&Athe three months ended June
30, 2008, is net of approximately $82,000 gain on the sale of land
described in Note 9 above, and other expense for the three months ended
June 30, 2007, is net of approximately $500,000 gain on the sale of the
Baton Rouge building described in Note 10 above.
Tax Provision:
Income tax expense increased $0.1$1.7 million, or 1.4%60.7%, to $7.3$4.5 million for
the three months ended June 30, 20072008, from $7.2$2.8 million for the comparable
prior yearprior-year period. As a percentage of revenue, Corporate SG&A expense increased 0.3% to 4.3%The estimated effective tax rate was 40.4% for the sixthree
months ended June 30, 2007 from 4.0%2008, compared to 42.0% for the comparable prior
yearprior-year
period.
Corporate SG&AIncome tax expense increased approximately $1.6$2.6 million, or 28.1%56.5%, to $7.3$7.2 million for
the six months ended June 30, 20072008, from $5.7$4.6 million for the comparable
prior yearprior-year period. Corporate SG&A grew as personnel increased to 92 employeesThe estimated effective tax rate was 40.2% for the six
months ended June 30, 20072008, compared to 75 employees for the six months
ended June 30, 2006. The Company increased the Business Development, Human
Resources, Accounting and IT departments to support the overall growth of
the Company. Facilities expenses of approximately $100,000 were added over
this timeframe to add additional office space in Houston and Denver and to
add to our office network.
As a percentage of revenue, Corporate SG&A expense decreased 0.1% to 4.0%
for the three months ended June 30, 2007 from 4.1%39.7% for the comparable prior
year period. Corporate SG&A expense increased approximately $0.4 million,
or 12.9%, to $3.5 million for the three months ended June 30, 2007 from
$3.1 million for the comparable prior year period.
Operating Income:
Operating income increased approximately $6.8 million, or 119.3%, to $12.5
million for the six months ended June 30, 2007 from $5.7 million compared
to the sameprior-year
period in 2006. As a percentage of revenue, operating income
increased 3.2% to 7.2% for the six months ended June 30, 2007 from 4.0% for
the comparable prior year period.
Operating income increased approximately $3.3 million, or 91.7%, to $6.9
million for the three months ended June 30, 2007 from $3.6 million compared
to the same period in 2006. As a percentage of revenue, operating income
increased 2.9% to 7.7% for the three months ended June 30, 2007 from 4.8%
for the comparable prior year period.
Other Expense, net:
Other expense increased $739,000 for the six months ended June 30, 2007
from the comparable prior year period. Interest expense increased $845,000
due to an increased outstanding balance on our line of credit. Other income
increased $106,000 due to a gain of $483,000 recorded for the sale of our
office building located in Baton Rouge, Louisiana. Other income for the six
months ended June 30, 2006 was mainly from insurance proceeds related to
Hurricane Rita damage.
Other expense increased $319,000 for the three months ended June 30, 2007
from the comparable prior year period. Interest expense increased $447,000
due to an increased outstanding balance on our line of credit. Other income
increased $128,000 due to the gain on the sale of the building.
Tax Provision:
Income tax expense increased $2.6 million, or 123.8%, to $4.7 million for
the six months ended June 30, 2007 from $2.1 million for the comparable
prior year period. The estimated effective tax rate wasand 39.7% for the six
monthstwelve-month period ended June 30, 2007 compared to 37.2% for the comparable prior year
period. The change in the effective tax rate is the result of increasing
state income taxes.
20
MD&A/Results of Operations (continued)
- --------------------------------------
Income tax expense increased $1.4 million, or 100.0%, to $2.8 million for
the three months ended June 30, 2007 from $1.4 million for the comparable
prior year period. The estimated effective tax rate was 42.0% for the three
months ended June 30, 2007 compared to 36.9% for the comparable prior year
period. The change in the effective tax rate is the result of increasing
state income taxes.
As we experienced greater earnings in a broader range of jurisdictions
compared to 2006, we realized the need to recognize greater tax obligations
to those jurisdictions. The effective rate of 42.0% for the three months
ended June 30, 2007 compared to the 39.7% effective rate for the six months
ended June 30, 2007, indicates that the increased estimates were booked in
the second quarter. Our expected effective rate for 2007, annualizing the
impact of Federal and state taxes, should average approximately 41%.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 June 30, 2006 included the effect of non-recurring differences
in tax estimates from the 2005 year end. Estimates at June 30, 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 June 30, 2008 increased $2.8 million,
or 71.8%, to $6.7 million from $3.9 million for the comparable prior-year
period. As a percentage of revenue, net income increased 0.5% to 4.9% for
the three months ended June 30, 2008, from 4.4% for the three months ended
June 30, 2007.
Net income for the six months ended June 30, 20072008 increased $3.5$3.6 million,
or 97.2%50.7%, to $7.1$10.7 million from $3.6$7.1 million for the comparable prior yearprior-year
period. As a percentage of revenue, net income increased 1.6%0.5% to 4.1% for the six
months ended June 30, 2007 from 2.5% for the period ended June 30, 2006.
Net income4.6% for
the three months ended June 30, 2007 increased $1.6 million,
or 69.6%, to $3.9 million2008, from $2.3 for the comparable prior year period.
As a percentage of revenue, net income increased 1.3% to 4.4%4.1% for the three months ended
June 30, 2007 from 3.1% for2007.
Liquidity and Capital Resources
-------------------------------
Overview
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 funds to meet liquidity needs during the
period ended June 30, 2006.
Liquidity and Capital Resources
-------------------------------
Historically, cash requirements have been satisfied through operations and2008 was borrowings under aour senior revolving lineCredit
Facility, also. Cash on hand at June 30, 2008 totaled $2.3 million and
availability under the Credit Facility totaled $23.3 million resulting in
cash and previously arranged borrowing capacity to meet additional
liquidity needs of credit, which is currently in effect
with Comerica Bank (the "Comerica Credit Facility").$25.6 million. As of June 30, 2007,
we had working capital of $49.1 million. Long-term debt, net of current
portion, was $33.3 million as of June 30, 2007, including $30.9 million
outstanding under the Comerica Credit Facility.
The Comerica Credit Facility positions the Comerica debt as senior to all
other debt. The line of credit is limited to $35 million, subject to loan
covenant restrictions and is collateralized by substantially all the assets
of the Company. The outstanding balance on the line of credit as of June
30, 2007 was $30.9 million. The remaining borrowings available under the
line of credit as of June 30, 2007 were $4.1 million after consideration of
loan covenant restrictions.
The Comerica Credit Facility contains covenants requiring the Company, as
of the end of each calendar month, to maintain certain ratios, including
the 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, and 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 June 30, 2007.
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 June 30, 2007,2008, management believes
the Company's cash positionCompany is sufficientpositioned to meet its working capitalliquidity requirements for at least the next
twelve months. Any future decrease in demand for the Company's services or
products would reduce the availability of funds through operations.
On August 6, 2007, the Company entered into a Credit Agreement (the "Credit
Agreement"), provides a three-year, $50 million senior secured revolving
credit facility (the "New Credit Facility"). Becoming effective August 8,
2007, the New Credit Facility is guaranteed by substantially all of
Company's subsidiaries and is secured by a lien on substantially all of the
Company's assets. The New Credit Facility replaced a $35 million senior
revolving credit facility that would have expired in July 2009.
21
MD&A/Results of Operations (continued)
- --------------------------------------
The New Credit Facility may be used for working capital, issuances of
letters of credit or other lawful corporate purposes. The Credit Agreement
contains customary affirmative and negative covenants that place certain
limitations and restrictions on the Company. These covenants place certain
limitations on the Company including limits on new debt, mergers, asset
sales, investments, and fixed price contracts along with restrictions on
certain distributions. The Company must also 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 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.
At the Company's option, amounts borrowed under the New Credit Facility
will bear interest at LIBOR or an Alternate Base Rate, plus in each case,
an additional margin based on the Leverage Ratio. The Alternate Base Rate
is the greater of the Prime Rate or the Fed Funds Effective Rate, plus
1.0%. The additional margin ranges from 0% on the Alternate Base Rate loans
and 1.50% to 2.0% on the LIBOR-based loans.
Cash Flow
---------
The Company believes that it has available the necessary cash required for
operations for the next
12 months.
CashWe are a growth company and we manage our business to achieve reasonable
growth objectives that are commensurate with profitable operations given
existing and anticipated economic conditions. The outlook for our continued
organic growth is generally favorable. We also expect to have opportunities
to make strategic acquisitions. We intend to continue to meet both of the
incremental liquidity needs through our internally generated profits and
19
Management's Discussion and Analysis (continued)
- ------------------------------------------------
existing borrowing arrangements. In 2008, we began to utilize capital lease
arrangements for a significant upgrade in our computing equipment. We
expect that the capital lease commitment will approximate $1.0 million when
completed by the end of 2008.
The competitive contracting environment exposes us to situations where our
clients may become unable or unwilling to complete a contract and meet
their obligations to us in the normal course of business. These situations
cause unexpected liquidity requirements, lower than expected profits and
even losses. We currently are financing more than $10 million relating to
such a situation (i.e. the SLE Project note receivable) as described more
fully in Note 9 to the Condensed Consolidated Financial Statements. While
this situation has caused the Company to incur higher interest costs than
would otherwise have been incurred, our liquidity remains sufficient to
meet our objectives.
However, 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,
if demand for the Company's services decreases, 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 accretive or 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.
Cash Flows from Operating activities:
NetActivities:
Operations generated approximately $4.5 million in net cash used in operating activities was $4.4 million for the six
months ended June 30, 2007,2008, compared with net cash used for operations of
$2.0$4.4 million in the
same period in 2006. For the three months ended June 30, 2007, the
Company's operating activities provided approximately $500,000 of cash
compared with approximately $1.2 million of cash provided during the same period in 2006. The credit facility increased from $29.62007. Operations generated
approximately $4.1 million as of
March 31, 2007 and from $13.5 million as of June 30, 2006 to $30.9 million
as of June 30, 2007.
Our average days of sales outstanding ("DSO") was 70 daysin net cash for the three months ended June 30,
20072008, compared to 64 daysthe $0.4 million generated for the comparable three month periodmonths ended
March 31, 2008. The unfavorable changes in 2006 and 69 days forworking capital accounts during
the six-month period ended December 31, 2006.June 30, 2008, which negatively impacted cash
flows, were more than offset by income and non-cash provided by operating
activities. The Company revisedprimary changes in working capital accounts were due to the
method used for calculating DSO changing from
annualized average revenuefollowing:
o Increased Trade Receivables - The increase was primarily the
result of an overall increase in operating activity. Our
collections on past due Accounts Receivable balances continue to
improve.
o Increased Accounts Payable - The increase was primarily the
result of increases in vendor and accounts receivable totalssub-contractor charges due to
average
quarterly revenue and accounts receivable totals. The average DSO for all
periods referenced herein and for all future periods have been and will be
calculated under the new method.
The decreaseincreased operating activity in our cash needsEngineering segment during
the three months ended June 30, 2008. The material portion of
these obligations must be met during the third quarter of 2008
and are expected to be funded through receipts from collections
of Trade Receivables. An additional $1.3 million in payments
scheduled to be made during the second quarter of 2008 for
commitments related to the SLE Project were extended due to
delays in execution of settlement and release documents. The SLE
obligations are expected to also be met during the third quarter
of 2008.
o Increased Accrued Compensation and Benefits - The increase was
primarily due to timing of bi-weekly payroll and benefits
payments for the three months ended June 30, 2007 was
primarily due to:
1) an increase in net income;
2) an increase in accrued compensation and benefits due to timing of
the quarter's last bi-weekly payroll;
3) an increase in billings in excess of costs on fixed price
engineering projects; offset by:
a) an increase in trade receivables due to increased revenue
and past due accounts;
b) an increase in costs in excess of billings in our systems
manufacturing segment; and
c) a decrease in accrued liabilities due to subcontractor
payments made against reserves related to the fixed price
contract losses in 2006.
22
MD&A/Results of Operations (continued)
- --------------------------------------
Accounts payable are not expected to materially impact cash during the
third 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. A continued increase in costs and
estimated earnings in excess of billings is not expected during the third
quarter even though improvements can only be made with more favorable
contractual terms.
Investing activities:
Net cash used in investing activities was $302,000 for the six months ended
June 30, 2007, compared with net cash used of $7,071,000 in the same period
in 2006. In the first six months of 2006, the Company acquired the assets
of ATI, Inc. for $750,000 cash and a note payable and the Company acquired
the assets of WRC for $10.1 million. That transaction included $4.3 million
assumption of debt, $2 million in cash, notes payable of
$2.4 million and ENGlobal shares of common stock valued at $1.4 million.
The Company also used cash for capital expenditures in the six months ended
June 30, 2007 of $1.1 million and $1.6 million in the comparable prior year
period.
Financing activities:
Net cash provided by financing activities was $5.6 million for the six
months ended June 30, 2007, compared with net cash provided of $9.8 million
in the same period in 2006. In the first six months of 2007, the Company
increased its outstanding credit facility by $7.0 million for working
capital needs compared to an increase in the credit facility of $9.7
million in the same period in 2006.
Asset Management
----------------
The Company's cash flow from operations has been affected primarily by the
timing of its collection of trade accounts receivable. The Company
typically sells its products and services on short-term credit terms and
seeks to minimize its credit risk by performing credit checks and
conducting its own collection efforts. The Company had net trade accounts
receivable of $69.6 million and $60.2 million at June 30, 2007 and December
31, 2006, respectively. The DSO in trade accounts receivables was 70 days
at June 30, 2007 and at December 31, 2006.
232008.
20
Management's Discussion and Analysis (continued)
- ------------------------------------------------
Engineering Segment Results
(continued)
- ------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
------------------------------------- ------------------------------------------------------------------------------- ---------------------------------------------
2008 2007 20062008 2007
2006
----------------- ----------------- ----------------- -----------------
(dollars------------------------------------------------------------------------------------------
(Dollars in thousands)
-----------------------------------------------------------------------------
GrossThousands)
------------------------------------------------------------------------------------------
Revenue before eliminations $ 77,480 $ 56,972 $ 129,515 $ 108,414
Inter-segment eliminations (1) (6) (7) 1
---------- ----------- ------------ -----------
Total revenue $ 84,26377,479 $ 69,86956,966 $ 160,706129,508 $ 132,499
Less intercompany revenue (325 (117) (619) (160)
--------- --------- --------- ---------108,415
========== =========== ============ ===========
Detailed revenue:
Detail-design $ 46,041 59.4% $ 33,531 58.9% $ 83,976 64.9% $ 66,327 61.2%
Field services 13,069 16.9% 14,035 24.7% 26,057 20.1% 27,793 25.6%
Procurement services 17,466 22.5% 5,454 9.6% 17,500 13.5% 6,786 6.3%
Fixed-price 903 1.2% 3,946 6.8% 1,975 1.5% 7,509 6.9%
---------- ----------- ------------- -----------
Total Revenue:revenue: $ 83,938 100%77,479 100.0% $ 69,752 100%56,966 100.0% $ 160,087 100%129,508 100.0% $ 132,339 100%108,415 100.0%
Gross profit: $ 13,967 16.6%12,779 16.5% $ 10,189 14.6% $ 26,9969,584 16.8% $ 17,986 13.6%22,661 17.5% $ 18,748 17.3%
Operating SG&A expense: $ 3,472 4.1%2,262 2.9% $ 3,593 5.2%1,732 3.0% $ 7,000 4.4%3,557 2.7% $ 6,500 4.9%3,599 3.3%
---------- ----------- ------------- -----------
Operating income: $ 10,495 12.5%10,517 13.6% $ 6,596 9.5%7,852 13.8% $ 19,996 12.5%19,104 14.8% $ 11,486 8.7%
15,149 14.0%
========== =========== ============= ===========
Overview of Engineering Segment:
Our 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 benefit from a large project load
generated primarily by both its downstream and midstream clients. The
industry's refining and pipeline segments continue 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 small capital projects as product margins in this
marketplace improve.
Revenue:
Engineering segment revenue increased $20.5 million, or 36.0%, to $77.5
million for the three months ended June 30, 2008, from $57.0 million for
the comparable prior-year period.
Engineering segment revenue increased $21.1 million, or 19.5%, to $129.5
million for the six months ended June 30, 2008, from $108.4 million for the
comparable prior-year period.
The increase in Engineering segment revenue was primarily brought about by
increased activity in the engineering and construction markets.
Refining-related activity has been particularly strong, and includes
projects to 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, petroleum coke to ammonia, and other biomass processes.
The increases in detail-design services and procurement services are
directly related to rebuilding a refinery. Procurement services include
subcontractor placements, equipment purchases, and other procurement
activities necessary to rebuild the damaged facilities. Most of the
services rendered to date have occurred in the second quarter of 2008,
impacting both the three months and six months ended June 30, 2008.
21
Management's Discussion and Analysis (continued)
- ------------------------------------------------
Our detail-design services proved strong with revenue increasing 37.3%, or
$12.5 million, to $46.0 million for the three months ended June 30, 2008,
from $33.5 million for the comparable period in 2007. As a 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.
Even though some of our subsidiary entities may focus more on one
discipline than another, each of the entities provides services to our
clients in the petrochemical and energy industries. As our clients have
downsized and began limiting the number of vendors and subcontractors, we
have attempted to become a "one-stop shop" solution for an entire project
or large portion of that project with more than one entity providing a
portion of the work, while other times only one entity may provide one or
more portions of the entire project. For example, we may have a project in
which WRC provides right of way services, EEI provides engineering and
design services, and ECR provides construction management and inspection
services. The client would view the work as one project under one contract.
We provide these services based on the client requirements.
We provide services to a wide range of industrial sectors including:
petroleum refining, gas processing, pipeline and product movement,
petrochemical, production, sulfur processing, manufacturing, chemical
exploration, and co-generation. Each of our subsidiaries can service
customers in these industries. The various entities also share similar
processes for delivery of services.
All of our entities are greatly impacted by the general availability of
qualified engineers and other technical professional staff and employees
are often shared among entities as needed.
Revenue
Year over yeartotal Engineering segment revenue, detail-design revenue increased $27.80.5%
to 59.4% in 2008 from 58.9% in 2007.
Our detail-design services proved strong with revenue increasing 26.7%, or
$17.7 million, or 21.0%, to $160.1$84.0 million for the six months ended June 30, 20072008,
from $132.3$66.3 million for the comparable prior year period.period in 2007. As a percentage of
the total Engineering segment revenue, detail-design revenue increased 3.7%
to 64.9% in 2008 from 61.2% in 2007.
Our field services revenues remained relatively stable with a decrease of
6.4%, or $0.9 million, to $13.1 million for the three months ended June 30,
2008, from $14.0 million for the comparable period in 2007. As a percentage
of the total Engineering segment revenue, field services revenue decreased
7.8% to 16.9% in 2008 from 24.7% in 2007.
Our field services revenues remained relatively stable with a decrease of
6.1%, or $1.7 million, to $26.1 million for the six months ended June 30,
2008, from $27.8 million for the comparable period in 2007. As a percentage
of the total Engineering segment revenue, field services revenue decreased
5.5% to 20.1% in 2008 from 25.6% in 2007.
Revenue from procurement services increased 218.2%, or $12.0 million, to
$17.5 million for the three months ended June 30, 2008, from $5.5 million
for the comparable period in 2007. As a percentage of the total Engineering
segment revenue, procurement services revenue increased 12.9% to 22.5% for
the three months ended June 30, 2008, from 9.6% for the comparable period
in 2007. The 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.
Revenue from procurement services increased 157.4%, or $10.7 million, to
$17.5 million for the six months ended June 30, 2008, from $6.8 million for
the comparable period in 2007. As a percentage of the total Engineering
segment revenue, procurement services revenue increased 7.2% to 13.5% for
the six months ended June 30, 2008, from 6.3% for the comparable period in
2007. The 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 76.9%, or $3.0 million, to $0.9 million for
the three months ended June 30, 2008, from $3.9 million for the comparable
period in 2007. As a percentage of the total Engineering segment revenue,
fixed-price revenue decreased 4.6% to 1.2% for the three months ended June
30, 2008, from 6.8% for the comparable period in 2007 as the Company neared
completion of certain EPC contracts.
Fixed-price revenue decreased 73.3%, or $5.5 million, to $2.0 million for
the six months ended June 30, 2008, from $7.5 million for the comparable
period in 2007. As a percentage of the total Engineering segment revenue,
fixed-price revenue decreased 5.4% to 1.5% for the six months ended June
30, 2008, from 6.9% for the comparable period in 2007 as the Company neared
completion of certain EPC contracts.
22
Management's Discussion and Analysis (continued)
- ------------------------------------------------
Gross Profit:
Our Engineering segment's gross profit increased $3.2 million, or 33.3%, to
$12.8 million for the three months ended June 30, 2008, from $9.6 million
for the comparable period in 2007. As a percentage of the total Engineering
segment revenue, gross profit decreased by 0.3% to 16.5% from 16.8% for the
three months ended June 30, 2008 and 2007, respectively. The overall $3.2
million increase in gross profit was attributable to the $20.5 million
increase in total revenue, including approximately $17.5 million in lower
margin procurement revenue.
Our Engineering segment's gross profit increased $4.0 million, or 21.4%, to
$22.7 million for the six months ended June 30, 2008, from $18.7 million
for the comparable period in 2007. As a percentage of the total Engineering
segment revenue, gross profit increased by 0.2% to 17.5% from 17.3% for the
six months ended June 30, 2008 and 2007, respectively. Of the overall $4.0
million increase in gross profit, approximately $3.5 million was
attributable to the $21.1 million increase in total revenue, plus
approximately $0.5 million in improved margins. The increase in engineering revenue resulted
primarily from increasedmargins can
be attributed to the reduced activity in the engineering and construction
markets. Refining related activity has been particularly strong, includinglow margin/high dollar procurement
projects, to satisfy environmental mandates, expand existing facilities and
utilize heavier sour crude. Capital spendingas these projects are being replaced with higher margin, core
revenue derived from labor activity. Margin improvement slowed in the
pipeline area is also
trendingsecond quarter of 2008, as Engineering revenue included approximately $17.5
million in lower margin procurement revenue.
Selling, General, and Administrative:
Our Engineering segment's SG&A expense increased $0.6 million, or 35.3%, to
$2.3 million for the three months ended June 30, 2008, from $1.7 million
for the comparable period in 2007. The increase in the Engineering
segment's SG&A expense came from approximately $0.8 million in higher bad
debt expense offset by approximately $0.2 million in employee and
associated costs reclassified to direct expense. As a percentage of the
total Engineering segment revenue, the segment's SG&A costs decreased by
0.1% to 2.9% from 3.0% for the three months ended June 30, 2008 and 2007,
respectively.
Our Engineering segment's SG&A expense remained flat at $3.6 million for
the six months ended June 30, 2008, from $3.6 million for the comparable
period in 2007. The differences in the Engineering segment's SG&A expense
are attributable to approximately $0.5 million in lower employee and
associated costs re-classified to direct expense in 2008, $0.1 million in
non-recurring costs associated with numerous projectsclosing the Dallas office during the
first quarter of 2007, a $0.7 million increase in North America currently underwaybad debt expense and a
$0.1 million decrease in share-based incentives for the six months ended
June 30, 2008. As a percentage of the total Engineering segment revenue,
the segment's SG&A costs decreased by 0.6% to deliver crude oil, natural gas, petrochemicals2.7% from 3.3% for the six
months ended June 30, 2008 and refined products.
Renewable energy appears2007, respectively.
Operating Income:
Operating income for the Engineering segment increased $2.6 million, or
32.9%, to be an emerging area$10.5 million for the three months ended June 30, 2008, from $7.9
million for the comparable prior-year period. As a percentage of activity and potential
growth, with the Company currently performingtotal
Engineering segment revenue, operating income decreased by 0.2% to 13.6%
for the three months ended June 30, 2008, from 13.8% for the comparable
prior-year period, primarily due to increased procurement services.
Operating income for the Engineering segment increased $4.0 million, or
26.5%, to $19.1 million for the six months ended June 30, 2008, from $15.1
million for the comparable prior-year period. As a varietypercentage of servicesthe total
Engineering segment revenue, operating income increased by 0.8% to 14.8%
for ethanol, biodiesel, coal to liquids, petroleum coke to ammonia, and other
biomass processes. The acquisition of WRC in May 2006, together with our
clients' increased demandthe six months ended June 30, 2008, from 14.0% for in-plant and inspection resources, stimulated
growth in our staffing services division.
24the comparable
prior-year period.
23
EngineeringManagement's Discussion and Analysis (continued)
- ------------------------------------------------
Construction Segment Results
(continued)
- ---------------------------------------
The following table illustrates the composition of the Company's revenue
mix quarter over quarter for the six months ended June 30, 2007 and 2006,
and provides a comparison of the changes in revenue and revenue trends
period over period.
Six Months Ended June 30,
--------------------------------------------------------------
2007 % rev 2006 % rev $ change % change
-------- ----- -------- ----- -------- --------
(dollars in millions)
Detail-design $ 72.0 45% $ 56.0 43% $ 16.0 29 %
Field services & inspection 73.3 46% 44.6 34% 28.7 64 %
Procurement & construction 6.8 4% 16.9 13% (10.1) (60)%
Design-build fixed price 8.0 5% 14.8 10% (6.8) (46)%
-------- -------- --------
$ 160.1 100% $ 132.3 100% $ 27.8 21 %
======== ======== ========
o The largest increase in revenue came from field services and
inspection activity which increased $28.7 million, or
approximately 64%, to $73.3 million for the six months ended June
30, 2007 from $44.6 million for the comparable prior year period.
o Detail-design services increased $16.0 million, or approximately
29% for the six months ended June 30, 2007. Our core engineering
segment's activities accounted for approximately 91% of
engineering's total revenue mix during the six months ended June
30, 2007 compared to approximately 77% for the comparable prior
year period.
o Revenue from non-labor procurement and construction activity
decreased $10.1 million from $16.9 million during the six months
ended June 30, 2006 to $6.8 million during the six months ended
June 30, 2007.
o The design-build fixed price revenue decreased $6.8 million, or
(46)%, from $14.8 million for the six months ended June 30, 2006
to $8.0 million for the same period in 2007 and accounted for
approximately 5% of engineering's total revenue.
Quarter over quarter revenue increased $14.1 million, or 20.2%, to $83.9
million for the three months ended June 30, 2007 from $69.8 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
months ended June 30, 2007 and 2006, and provides a comparison of the
changes in revenue and revenue trends period over period:
Three Months Ended June 30,
---------------------------------------------------------
2007 % rev 2006 % rev $ change % change
-------- ----- -------- ----- -------- --------
(dollars in millions)
Detail-design $ 36.1 43% $ 28.4 41% $ 7.7 27 %
Field services & inspection 38.2 45% 25.0 36% 13.2 53 %
Procurement & construction 5.5 7% 6.3 9% (0.8) (13)%
Design-build fixed price 4.2 5% 10.1 14% (5.9) (58)%
-------- -------- --------
$ 84.0 100% $ 69.8 100% $ 14.2 20 %
======== ======== ========
Gross Profit:
Gross profit increased $9.0 million, or 50.0%, to $27.0 million for the six
months ended June 30, 2007 from $18.0 million for the comparable prior year
period. As a percentage of revenue, gross profit increased by 3.2% to 16.8%
from 13.6% for the six months ended June 30, 2007 and 2006, respectively.
Of the overall $9.0 million increase in gross profit, approximately $3.8
million was attributable to the $27.8million increase in total revenue, and
approximately $5.2 million was attributable to improved margins. The
increase in margins can be attributed to the reduced activity in low
margin/high dollar procurement projects being replaced with higher margin
core revenue derived from labor activity. Included in gross profit for the
six months ended June 30, 2007, were $456,000 of additional losses related
to the completion of the two fixed price contracts.
25
Engineering Segment Results (continued)
- ---------------------------------------
Gross profit increased $3.8 million, or 37.3%, to $14.0 million for the
three months ended June 30, 2007 from $10.2 million for the comparable
prior year period. As a percentage of revenue, gross profit increased by
2.0% to 16.6% from 14.6% for the three months ended June 30, 2007 and 2006,
respectively. Of the overall $3.8 million increase in gross profit,
approximately $2.1 million was attributable to the $14.1million increase in
total revenue, and approximately $1.7 million was attributable to improved
margins. The increase in margins can be attributed to the reduced activity
in low margin/high dollar procurement projects being replaced with higher
margin core revenue derived from labor activity. Included in gross profit
for the three months ended June 30, 2007, were $456,000 of additional
losses related to the completion of the two fixed price contracts.
At June 30, 2007, the Company had outstanding unapproved change
orders/claims of approximately $18.6 million. The Company recorded $1.2
million in revenue during the year ended December 31, 2006 related to these
claims. No additional amounts have been recognized during 2007 related to
these claims. Generally, collection of amounts related to unapproved change
orders and claims is expected within twelve months. However, clients
generally will not pay these amounts until final resolution of related
claims, thus accordingly, collection of these amounts may extend beyond one
year. In the future, if the Company determines collection of any unapproved
change order/claim is not probable, it will post a charge to earnings in
the period such determination is made.
Selling, General, and Administrative:
As a percentage of revenue, SG&A expense decreased 0.5% to 4.4% for the six
months ended June 30, 2007 from the comparable prior year period. SG&A
expense increased $0.5 million, or 7.7%, to $7.0 million for the six months
ended June 30, 2007 from $6.5 million for the comparable prior year period.
As a percentage of revenue, SG&A expense decreased 1.1% to 4.1% for the
three months ended June 30, 2007 from 5.2% for the comparable prior year
period. SG&A expense decreased $0.1 million, or (2.8)%, to $3.5 million for
the three months ended June 30, 2007 from $3.6 million for the comparable
prior year period.
Operating Income:
Operating income increased $8.5 million, or 73.9%, to $20.0 million for the
six months ended June 30, 2007 from $11.5 million for the comparable prior
year period. As a percentage of revenue, operating income increased to
12.5% for the six months ended June 30, 2007 from 8.7% for the comparable
prior year period.
Operating income increased $3.9 million, or 59.1%, to $10.5 million for the
three months ended June 30, 2007 from $6.6 million for the comparable prior
year period. As a percentage of revenue, operating income increased to
12.5% for the three months ended June 30, 2007 from 9.5% for the comparable
prior year period.
26
Systems Segment Results
- ---------------------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
------------------------------------- ----------------------------------------------------------------------------------- ----------------------------------------
2008 2007 20062008 2007
2006-------------------- --------------------- ------------------- ------------------
--------------- ---------------- ------------------
(dollars(Dollars in thousands)
-------------------------------------------------------------------------------Thousands)
------------------------------------------------------------------------------------------
Revenue before eliminations $ 5,76738,858 $ 5,576 $11,27719,032 $ 9,888
Gross65,875 $ 33,667
Inter-segment eliminations (3,204) (3,044) (3,321) (3,894)
---------- ------------ ---------- ----------
Total revenue Less intercompany revenue 129 262 129 534
------- ------- ------- -------$ 35,654 $ 15,988 $ 62,554 $ 29,773
========== ============ ========== ==========
Detailed revenue:
Inspection 31,026 87.0% 12,065 75.5% 54,420 87.0% 22,768 76.5%
Construction Services 4,628 13.0% 3,923 24.5% 8,134 13.0% 7,005 23.5%
---------- ------------ ---------- ----------
Total revenue: $ 5,638 100.0 % 5,31435,654 100.0% $11,148 100.0 % $ 9,354 100.0 %15,988 100.0% $ 62,554 100.0% $ 29,773 100.0%
Gross profit: $ 252 4.5 %3,988 11.2% $ 539 10.1%2,646 16.6% $ 501 4.5 %6,016 9.6% $ 964 10.3 %
------- ------- ------- -------4,728 15.9%
Operating SG&A expense: 312 5.5 % 484 9.1% 741 6.7 % 1,091 11.7 %
------- ------- ------- -------$ 759 2.1% $ 666 4.2% 1,462 2.3% 1,293 4.4%
---------- ------------ ---------- ----------
Operating income: (60) (1.1)% 55 1.0% (240) (2.2)% (127) (1.4)%
======= ======= ======= =======$ 3,229 9.1% $ 1,980 12.4% $ 4,554 7.3% $ 3,435 11.5%
========== ============ ========== ==========
Overview of Construction Segment:
Revenue:
Our Construction segment's revenue increased $19.7 million, or 123.1%, to
$35.7 million for the three months ended June 30, 2008, from $16.0 million
for the comparable prior-year period. We have experienced significant
growth in our inspection related revenue due to increased capital spending
mainly by our pipeline clients. While inspection related revenues increased
$18.9 million, or approximately 156.2%, to $31.0 million for the three
months ended June 30, 2008, from $12.1 million for the comparable
prior-year period, the contribution to gross profit was reduced. To
increase market share and remain competitive, we accepted work at lower
margins. Increased variable costs associated with labor to perform
proposals, project controls and project management also contributed to the
decrease in gross profit. Increased market share has contributed to the
increase in our construction services revenues. Construction services
revenues increased $0.7 million, or 17.9%, to $4.6 for the three months
ended June 30, 2008, from $3.9 million for the comparable period in 2007.
Our Construction segment's revenue increased $32.8 million, or 110.1%, to
$62.6 million for the six months ended June 30, 2008, from $29.8 million
for the comparable prior-year period. We have experienced significant
growth in our inspection related revenue due to increased capital spending
mainly by our pipeline clients. While inspection related revenues increased
$31.6 million, or approximately 138.6%, to $54.4 million for the six months
ended June 30, 2008, from $22.8 million for the comparable prior-year
period, the contribution to gross profit was effectively unchanged.
Increased variable costs associated with labor to perform proposals,
project controls and project management also contributed to the decrease in
gross profit. Increased market share has contributed to the increase in our
construction services revenues. Construction services revenues increased
$1.1 million, or 15.7%, to $8.1 for the six months ended June 30, 2008,
from $7.0 million for the comparable period in 2007.
Our Construction and Engineering segments are both providing services in
connection with the refinery rebuild with many of those services being
performed at tighter margins. The Construction segment is taking actions to
develop new business and added a quality control manager in the third
quarter of 2008.
24
Management's Discussion and Analysis (continued)
- ------------------------------------------------
Gross profit:
Our Construction segment's gross profit increased approximately $1.4
million, or 53.8%, to $4.0 million for the three months ended June 30,
2008, from $2.6 million for the comparable prior-year period and, as a
percentage of the total Construction segment revenue, gross profit
decreased by 5.4% to 11.2% from 16.6% for the respective periods. The
decrease in gross profit percentage is primarily attributable to the major
increase in revenue related to an increase in our provision of inspection
services, where increased employee-related costs and competitive pressure
on bill rates resulted in lower margins.
Our Construction segment's gross profit decreased approximately $1.3
million, or 27.7%, to $6.0 million for the six months ended June 30, 2008,
from $4.7 million for the comparable prior-year period and, as a percentage
of the total Construction segment revenue, gross profit decreased by 6.3%
to 9.6% from 15.9% for the respective periods. The decrease in gross profit
percentage is primarily attributable to the major increase in revenue
related to an increase in our provision of inspection services, where
increased employee-related costs and competitive pressure on bill rates
resulted in lower margins.
Selling, General, and Administrative:
Our Construction segment's SG&A expense increased approximately $0.1
million, or 14.3%, to $0.8 million for the three months ended June 30,
2008, from $0.7 million for the same period in 2007. As a percentage of the
total Construction segment revenue, SG&A expense decreased by 2.1% to 2.1%
from 4.2% for the respective periods.
Our Construction segment's SG&A expense increased approximately $0.2
million, or 15.4%, to $1.5 million for the six months ended June 30, 2008,
from $1.3 million for the same period in 2007. As a percentage of the total
Construction segment revenue, SG&A expense decreased by 2.1% to 2.3% from
4.4% for the respective periods.
Operating Income:
Our Construction segment's operating income increased $1.2 million, or
60.0%, to $3.2 million for the three months ended June 30, 2008, from $2.0
million for the comparable prior-year period. As a percentage of the total
Construction segment revenue, operating income decreased by 3.3% to 9.1%
for the three months ended June 30, 2008, from 12.4% for the comparable
prior-year period.
Our Construction segment's operating income increased $1.2 million, or
35.3%, to $4.6 million for the six months ended June 30, 2008, from $3.4
million for the comparable prior-year period. As a percentage of the total
Construction segment revenue, operating income decreased by 4.2% to 7.3%
for the six months ended June 30, 2008, from 11.5% for the comparable
prior-year period.
25
Management's Discussion and Analysis (continued)
- ------------------------------------------------
Automation Segment Results
--------------------------
Three Months Ended Six Months Ended
June 30 June 30
---------------------------------------------- -------------------------------------------
2008 2007 2008 2007
--------------------- ------------------------ ---------------------- --------------------
(Dollars in Thousands)
-------------------------------------------------------------------------------------------
Revenue before eliminations $ 11,411 $ 9,942 $ 21,968 $ 19,765
Inter-segment eliminations (375) (424) (530) (709)
---------- ------------ ---------- ----------
Total revenue $ 11,036 $ 9,518 $ 21,438 $ 19,056
========== ============ ========== ==========
Detailed revenue:
Fabrication 6,938 62.9% 5,638 59.2% 13,621 63.5% 11,148 58.5%
Non-Fabrication 4,098 37.1% 3,880 40.8% 7,817 36.5% 7,908 41.5%
---------- ------------ ---------- ----------
Total revenue: $ 11,036 100.0% $ 9,518 100.0% $ 21,438 100.0% $ 19,056 100.0%
Gross profit: $ 1,362 12.3% $ 1,112 11.7% $ 2,406 11.2% $ 1,893 9.9%
Operating SG&A expense: $ 749 6.8% $ 773 8.1% 1,381 6.4% 1,618 8.5%
---------- ------------ ---------- ----------
Operating income: $ 613 5.5% $ 339 3.6% $ 1,025 4.8% $ 275 1.4%
========== ============ ========== ==========
Overview of Automation Segment:
Revenue:
Our Automation segment's revenue increased approximately $1.5 million, or
15.8%, to $11.0 million for the three months ended June 30, 2008, from $9.5
million for the comparable prior-year period.
Our Automation segment's revenue increased approximately $2.3 million, or
12.0%, to $21.4 million for the six months ended June 30, 2008, from $19.1
million for the comparable prior-year period.
The Automation segment is aggressively pursuing new business going into the
third quarter. The plant expansions along the upper Texas Gulf Coast may
provide a number of opportunities for remote instrument enclosures ("RIEs")
and analytical systems, which this segment is poised to provide. The
Automation segment experienced a significant increase in its
engineering-services proposal activity during this period. The segment
continues to evaluate potential acquisitions with the goal of complimenting
its current portfolio.
Gross profit:
The Automation segment's gross profit increased approximately $0.3 million,
or 27.3%, to $1.4 million for the three months ended June 30, 2008, from
$1.1 million for the comparable prior-year period. As a percentage of the
total Automation segment revenue, gross profit increased by 0.6% to 12.3%,
from 11.7% for the three months ended June 30, 2008 and 2007, respectively.
The Automation segment's gross profit increased approximately $0.5 million,
or 26.3%, to $2.4 million for the six months ended June 30, 2008, from $1.9
million for the comparable prior-year period. As a percentage of the total
Automation segment revenue, gross profit increased by 1.3% to 11.2%, from
9.9% for the six months ended June 30, 2008 and 2007, respectively. Margins
on fixed-price projects increased significantly in 2008 compared to the
same period in 2007. Project review processes put in place in 2007 are
beginning to yield bottom line results.
Selling, General, and Administrative:
Our Automation segment's SG&A expense remained relatively flat for the
three months ended June 30, 2008, from $0.8 million for the same period in
2007. As a percentage of the total Automation segment revenue, SG&A expense
decreased by 1.3% to 6.8%, from 8.1% for the three months ended June 30,
2008 and 2007, respectively.
26
Management's Discussion and Analysis (continued)
- ------------------------------------------------
Our Automation segment's SG&A expense decreased approximately $0.2 million,
or 12.5%, to $1.4 million for the six months ended June 30, 2008, from $1.6
million for the same period in 2007. As a percentage of the total
Automation segment revenue, SG&A expense decreased by 2.1% to 6.4%, from
8.5% for the six months ended June 30, 2008 and 2007, respectively.
Operating Income:
The Automation segment recorded an operating income of $0.6 million for the
three months ended June 30, 2008, compared to operating income of $0.3
million for the three months ended June 30, 2007. As a percentage of the
total Automation segment revenue, operating income increased by 1.9% to
5.5% for the three months ended June 30, 2008, from 3.6% for the comparable
prior-year period. Improved control of direct costs and overhead
contributed to the increased operating income of the Automation segment
during the three months ended June 30, 2008.
The Automation segment recorded an operating income of $1.0 million for the
six months ended June 30, 2008, compared to operating income of $0.3
million for the six months ended June 30, 2007. As a percentage of the
total Automation segment revenue, operating income increased by 3.4% to
4.8% for the six months ended June 30, 2008, from 1.4% for the comparable
prior-year period. Improved control of direct costs and overhead
contributed to the increased operating income of the Automation segment
during the six months ended June 30, 2008.
27
Management's Discussion and Analysis (continued)
- ------------------------------------------------
Land Segment Results
--------------------
Three Months Ended Six Months Ended
June 30 June 30
------------------------------------------------ -----------------------------------------
2008 2007 2008 2007
----------------------- ------------------------ ---------------------- ------------------
(Dollars in Thousands)
------------------------------------------------------------------------------------------
Revenue before eliminations $ 11,842 $ 7,104 $ 20,677 $ 13,991
Inter-segment eliminations - - - -
---------- ------------ ---------- ----------
Total revenue $ 11,842 100.0% $ 7,104 100.0% $ 20,677 100.0% $ 13,991 100.0%
========== ============ ========== ==========
Gross profit: $ 2,172 18.3% $ 877 12.4% $ 3,564 17.2% $ 2,127 15.2%
Operating SG&A expense: $ 881 7.4% $ 574 8.1% 1,558 7.5% 1,156 8.3%
---------- ------------ ---------- ----------
Operating income: $ 1,291 10.9% $ 303 4.3% $ 2,006 9.7% $ 971 6.9%
========== ============ ========== ==========
Overview of Land Segment:
Revenue:
The Land segment's revenue increased approximately $4.7 million, or 66.2%,
to $11.8 million for the three months ended June 30, 2008, from $7.1
million for the comparable prior-year period.
The Land segment's revenue increased approximately $6.7 million, or 47.9%,
to $20.7 million for the six months ended June 30, 2008, from $14.0 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. The Land
segment provides services to a cross-section of clients in the energy
markets. With energy a concern across the country, the Land segment is
working on its teamwork and efficiencies in order to address its clients'
needs. Energy concerns are expected to increase as the country attempts to
shift its dependence on foreign energy to reliance on domestic sources.
Gross profit:
The Land segment's gross profit increased approximately $1.3 million, or
144.4%, to $2.2 million for the three months ended June 30, 2008, from $0.9
million for the comparable prior-year period. As a percentage of the total
Land segment revenue, gross profit increased by 5.9% to 18.3%, from 12.4%
for the three months ended June 30, 2008 and 2007, respectively. As we
focused on growing this segment's business, we increased the number of its
personnel. As a result, our gross profit margins decreased because we were
not able to immediately pass through to clients the resulting increased
costs of labor and expenses. We renegotiated billing rates on existing
contracts to accommodate these increased costs and implemented these
changes in the acceptance of new work. As the gross profit percentage has
increased by 5.9% for the three months ended June 30, 2008, the success of
these modifications and our growth is becoming apparent.
The Land segment's gross profit increased approximately $1.5 million, or
71.4%, to $3.6 million for the six months ended June 30, 2008, from $2.1
million for the comparable prior-year period. As a percentage of the total
Land segment revenue, gross profit increased by 2.0% to 17.2%, from 15.2%
for the six months ended June 30, 2008 and 2007, respectively.
Selling, General, and Administrative:
The Land segment's SG&A expense increased approximately $0.3 million, or
50.0%, to $0.9 million for the three months ended June 30, 2008, from $0.6
million for the same period in 2007. As a percentage of the total Land
segment revenue, SG&A expense decreased by 0.7% to 7.4%, from 8.1% for the
three months ended June 30, 2008 and 2007, respectively. Increases in SG&A
costs for the three months ended June 30, 2008, were related to $131,000 in
higher salaries and associated expenses primarily associated with our
growth, and an increase in bad debt expense of $138,000.
28
Overview of Systems Segment:
Management's Discussion and Analysis (continued)
- ------------------------------------------------
The systems segment began a detailed review process in the fourth quarter
of 2006. As a continuation of this initiative in the first six months of
2007, the Company initiated more detailed project cost control/forecasting
was initiated on all active lump sum projects in order to identify
potential areas of remediation and improve financial results.
Revenue:
RevenueLand segment's SG&A expense increased approximately $1.7$0.4 million, or
18.1%33.3%, to $11.1$1.6 million for the six months ended June 30, 20072008, from $9.4$1.2
million for the comparable
prior year period.
Revenue increased approximately $0.3 million, or 5.7%same period in 2007. As a percentage of the total Land
segment revenue, SG&A expense decreased by 0.8% to 7.5%, from 8.3% for the
six months ended June 30, 2008 and 2007, respectively. Most of the
increases in SG&A costs for the six months ended June 30, 2008, were
related to $5.6$132,000 in higher salaries and associated expenses primarily
associated with our growth, and an increase in bad debt expense of
$163,000.
Operating Income:
The Land segment recorded an operating income of $1.3 million for the three
months ended June 30, 2007 from $5.32008, compared to an operating income of $0.3 million for the comparable
prior year period.
A general turnaround in the oil and gas industry, together with the
acquisition of Analyzer Technology International, Inc. ("ATI") in January
2006 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, requiring ongoing replacement
of these systems.
Gross profit:
Gross profit decreased approximately $463,000, or 48.0%, to $501,000 for
the six months ended June 30, 2007 from $964,000 for the comparable prior
year period. As a percentage of revenue, gross profit decreased to 4.5%
from 10.3% for the respective periods. Lower margins on fixed price work
accounted for 3% of the decrease. The remainder was caused by increased
project management costs and increased variable costs associated with labor
to perform proposals.
Gross profit decreased approximately $287,000, or 53.2%, to $252,000
for the three months ended June 30, 2007 from $539,000 for the comparable prior
year period and, as2007. As a percentage of the total Land
segment revenue, gross profit decreasedoperating income increased 6.6% to 4.5%
from 10.1% for the respective periods.
Selling, General, and Administrative:
SG&A expense decreased approximately $350,000, or 32.1%, to $741,000 for
the six months ended June 30, 2007 from $1,091,000 for the same period in
2006 and, as a percentage of revenue, SG&A expense decreased to 6.7% from
11.7% for the respective periods. Salaries and related expenses decreased
by $535,000 for a variety of reasons. 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 Systems segment personnel
decreased. Amortization expense increased by $290,000 as a result of the
non-compete intangible related to the ATI acquisition. Facilities and
related expenses decreased by $27,000 as a result of consolidating the
offices of ATI and Systems.
27
Systems Segment Results
- -----------------------
SG&A expense decreased approximately $172,000, or 35.5%, to $312,00010.9% for the three
months ended June 30, 20072008, from $484,0004.3% for the same period in 2006 and, as a percentage of revenue, SG&A expense decreased to 5.5% from
9.1% for the respective periods as a result of the measures described for
the six months ended above.
Operating Income:2007.
The systemsLand segment recorded an operating lossincome of $240,000 for the six
months ended June 30, 2007 compared to an operating loss of $127,000 for
the six months ended June 30, 2006.
The systems segment recorded an operating loss of $60,000$2.0 million for the three
months ended June 30, 20072008, compared to an operating income of $55,000$1.0 million
for the three months ended June 30, 2006.
282007. As a percentage of the total Land
segment revenue, operating income decreased 2.8% to 9.7% for the three
months ended June 30, 2008, from 6.9% for the same period in 2007.
29
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our financial instruments include cash and cash equivalents, accounts
receivable, accounts payable, notes and capital leases payable, and debt
obligations. The book value of cash and cash equivalents, accounts
receivable, accounts payable and short-term notes payable are considered to
be representative of fair value because of the short maturity of these
instruments.
We do not utilize financial instruments for trading purposes and we do not
hold any derivative financial instruments that could expose us to
significant market risk. In the normal course of business, our results of
operations are exposed to risks associated with fluctuations in interest
rates and currency exchange rates.
Our exposure to market risk for changes in interest rates relates primarily
to our obligations under the Comerica Credit Facility. As of June 30, 2007, $30.92008,
$25.5 million had been borrowed under the Comerica Credit Facility, accruing
interest at 8.25%4.75% per year, excluding amortization of prepaid financing
costs. A 10% increase in the short-term borrowing rates on the Comerica
Credit
Facility outstanding as of June 30, 20072008 would be 8347.5 basis points. Such
an increase in interest rates would increase our annual interest expense by
approximately $256,000,$121,000, 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 condensed
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 June 30, 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 June 30, 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 December
31, 2006, which remained outstandingJune 30,
2008. Based on the evaluation described above, our Chief Executive Officer
and Chief Financial Officer have concluded that, as of June 30, 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 June
30, 2008.
30
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.
29
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 quartersix months ended June 30, 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 weaknesses disclosed in its
2006 Annual Report on Form 10-K/A and is committed to effectively
remediating known weaknesses as expeditiously as possible. Thesediscussed above.
While progress has been made, these remedial steps have not been completed;
however, the Company has performed additional analysis and procedures in
order to ensure that the condensed 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 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
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:
30
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 applicationreinforced.
The Company has been holding quarterly meetings of those policies and procedures
throughout the Company. Recruitment for these positions has begun and
the selection process is ongoing.
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. During the second quarter, the Company
conducted training for the accounting staff with an emphasisto
facilitate quarterly closing procedures and review of quarterly checklists.
Certain training needs have been addressed as a result. The Company has
engaged Sirius Solutions to review specific non-recurring technical
accounting issues and to review SEC disclosure checklists to improve
various accounting functions going forward.
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 In the first six months of 2007, we have begun 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. In
conjunction with the Company's SOX Section 404 Steering Committee,
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 have also begun 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's external auditors began its review
of the 2007 internal controls audit. In July 2007, the Company hired 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 with its remediation plan will assist its independent
auditors in their preparation for the final assessment in the third and
fourth quarters, allowing for any remediation before December 31, 2007.compliance.
31
PART II. - OTHER INFORMATION
----------------------------
ITEM 1. LEGAL PROCEEDINGS
As discussed in Note 9 above, in the first quarter of 2007 ENGlobal
Engineering, Inc. and South Louisiana Ethanol, LLC ("SLE") executed an
agreement for EPC services relating to the retro-fit of an ethanol plan in
southern Louisiana. The history of the SLE Project is described in Note 12
to the Company's 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. Due to the continued failure of SLE
to obtain permanent financing, on May 30, 2008, the Company filed suit in
the United States District Court for the Eastern District of Louisiana,
Cause Number 08-3601. The Company is seeking damages of $15.8 million.
From time to time, the Company and its subsidiaries become parties to
various legal proceedings arising in the ordinary course of normal business
activities. While we cannot predict the outcome of these proceedings, in
our opinion and based on reports of counsel, any liability arising from
such matters, individually or in the aggregate, is not expected to have a
material effect upon the consolidated financial position or operations of
the Company.
ITEM 1A. RISK FACTORS
If we are unable to collect our receivables, our results of operations and
cash flows could be adversely affected.
--------------------------------------------------------------------------
Our business depends on our ability to successfully obtain payment from our
clients of the amounts they owe us for work performed and materials
supplied. We bear the risk that our clients will pay us late or not at all.
Though we evaluate and attempt to monitor our clients' financial condition,
there is no guarantee that we will accurately assess their
creditworthiness. Financial difficulties or business failure experienced by
one or more of our major customers could have a material adverse affect on
both our ability to collect receivables and our results of operations.
As discussed further in Note 9 above, due to the continued failure of South
Louisiana Ethanol, LLC ("SLE") to obtain permanent financing, the Company
has filed suit against SLE seeking damages of $15.8 million. While the
Company believes that in the event that 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.
As discussed further in Note 10 above, we have potential exposure to
SemCrude, L.P. ("SemCrude"), an affiliate of SemGroup, L.P. ("SemGroup),
related to services provided by our Engineering and Construction segments
in connection with construction of the White Cliffs Pipeline. While
SemCrude's account was materially current as of August 7, 2008, the Company
is pursuing various legal remedies in connection with the SemGroup
situation, and we are currently unable to quantify what amount of
SemCrude's balance, if any, may be uncollectible.
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 2006 Annual Report on Form 10-K.10-K for the year ended December 31, 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.
32
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.On June 19, 2008, the Company held its Annual Meeting of Stockholders. As
of the April 21, 2008 record date, 27,063,541 shares of Common Stock were
entitled to vote at the meeting. Represented at the meeting in person or by
proxy were 23,980,538 shares, or 88.6% of the total shares of Common Stock
entitled to vote at the meeting.
The purpose of the meeting was the re-election of four directors to a
one-year term. All of management's nominees as listed in the Company's
proxy statement were elected. The following table sets forth the results of
the election:
Shares Voted FOR Shares WITHHELD
---------------- ---------------
William A. Coskey, P.E. 23,488,022 492,516
David W. Gent, P.E. 23,358,326 622,212
Randall B. Hale 23,359,599 620,939
David C. Roussel 23,444,659 535,879
ITEM 5. OTHER INFORMATION
None.Indemnification Agreements
--------------------------
In June 2008, ENGlobal's Board of Directors authorized the Company's entry
into indemnification agreements with the following Company directors and
executive officers: William A. Coskey, P.E. (Chairman of the Board and
Chief Executive Officer), Robert W. Raiford (Chief Financial Officer and
Treasurer), Michael M. Patton, P.E. (Senior Vice President, Business
Development), R. David Kelley (Senior Vice President, Corporate Services),
Randall B. Hale (Director), David W. Gent (Director), and David C. Roussel
(Director).
Under each indemnification agreement, the Company agrees to indemnify the
officer or director signing the agreement against expenses (including
reasonable attorneys' fees) and other types of losses incurred by reason of
his serving the Company, or other enterprise at the Company's request, as
an officer, director, employee, or agent, subject to certain limitations.
The Company also agrees to advance his expenses, and each officer and
director undertakes to repay the advances should a court ultimately
determine that indemnification was not authorized.
The above description does not purport to be complete and is qualified in
its entirety by reference to the full text of the form of indemnification
agreement, which is filed as Exhibit 10.1 to this Quarterly Report on Form
10-Q and incorporated into this Item 5 by reference.
Restricted Stock Unit Awards
----------------------------
In June 2008, the Company granted compensation to each of its three
non-employee directors via restricted stock awards. It was the Company's
intention that such awards be issued pursuant to the Plan. It was later
determined that the grants had been made after the Plan's expiration.
Therefore, the grants of restricted stock were rescinded. On August 8,
2008, the Company replaced the grants of restricted stock with grants of
non-Plan restricted stock units equivalent to 6,420 shares of common stock.
The award of restricted stock units is intended to compensate and retain
the directors over the term of the award. The fair value of the award was
$93,411 per director based on the market price of $14.55 per share of the
Company's stock on the date the award was granted. Upon vesting, the units
will be convertible into cash or, if shareholder approval is obtained,
common stock. The units will vest in equal quarterly installments beginning
on September 30, 2008, so long as the grantee continues to serve as an
independent director of the Company. Recognition of compensation related to
the restricted stock awards will commence in the third quarter of 2008. The
form of Restricted Stock Unit Award Agreement granted to the non-employee
directors is included as Exhibit 10.2 to this Quarterly Report on Form 10-Q
and incorporated into this Item 5 by reference.
33
ITEM 6. EXHIBITS
10.1 Form of Indemnification Agreement between ENGlobal Corporation
and its Directors and Executive Officers
10.2 Form of Restricted Stock Unit Award Agreement between ENGlobal
Corporation and its Independent Non-employee Directors
31.1 Certifications Pursuant to Rule 13a - 14(a) of the Securities
Exchange Act of 20021934 for the Second Quarter 20072008
31.2 Certifications Pursuant to Rule 13a - 14(a) of the Securities
Exchange Act of 20021934 for the Second Quarter 2007
322008
32.0 Certification Pursuant to Rule 13a - 14(b) of the Securities
Exchange Act of 1934 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
Second Quarter 2007
322008
34
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: August 7, 200711, 2008
By: /s/ Robert W. Raiford
-------------------------------------------------------
Robert W. Raiford
Chief Financial Officer and Treasurer
3335