UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2005
[ ] 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
----------
(I.R.S Employer Identification No.)
600 Century Plaza Drive, Suite 140, Houston, Texas 77073-6033
-------------------------------------------------------------
(Address of principal executive offices) (Zip code)
(281) 821-7100
--------------
(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 an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the close of business of May 2, 2005.
$0.001 Par Value Common Stock 23,516,251 shares
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2005
TABLE OF CONTENTS
Page
Number
------
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Income for the Three Months Ended
March 31, 2005 and March 31, 2004 3
Condensed Consolidated Balance Sheets at March 31, 2005 and December 31, 2004 4
Condensed Consolidated Statements of Cash Flows for the Three Months 5
Ended March 31, 2005 and March 31, 2004
Notes to Condensed Consolidated Financial Statements 6-9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-19
Item 3. Quantitative and Qualitative Disclosures about Market Risk 19
Item 4. Controls and Procedures 20
Part II. Other Information
Item 1. Legal Proceedings 21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits 21
Signature 22
2
PART I. - FINANCIAL INFORMATION
-------------------------------
ITEM 1. FINANCIAL STATEMENTS
ENGlobal Corporation
Condensed Consolidated Statements Of Income
(Unaudited)
For the Three Months
Ended March 31,
----------------------------
2005 2004
------------ ------------
Operating Revenue $ 44,629,262 $ 30,992,534
------------ ------------
Operating Expenses:
Direct cost 38,782,329 26,831,817
Selling, general and administrative 3,788,737 3,049,095
Depreciation and amortization 428,871 259,672
------------ ------------
Total operating expense 42,999,937 30,140,584
------------ ------------
Operating income 1,629,325 851,950
Other Income (Expense):
Other income 28,945 32,786
Interest income (expense), net (196,824) (171,210)
------------ ------------
Total other income (expense) (167,879) (138,424)
------------ ------------
Income before Provision for Income Taxes 1,461,446 713,526
Provision for Income Taxes 540,735 242,599
------------ ------------
Net Income $ 920,711 $ 470,927
============ ============
Net Income Per Common Share:
Basic $ 0.04 $ 0.02
Diluted $ 0.04 $ 0.02
Weighted Average Shares Used in Computing Net Income Per Share:
Basic 23,500,064 24,034,288
Diluted 24,012,375 24,487,415
See accompanying notes to interim condensed consolidated financial statements.
3
ENGlobal Corporation
Condensed Consolidated Balance Sheets
March 31, December 31,
2005 2004
------------ ------------
(unaudited)
ASSETS
------
Current Assets:
Cash $ 6,660 $ 8,006
Accounts receivable - trade, less allowance for doubtful accounts of
approximately $515,000 and $476,000, respectively 28,958,107 30,839,597
Costs and estimated earnings in excess of billings on uncompleted contracts 1,602,243 1,113,330
Prepaid and other 1,399,033 1,984,274
Inventories 177,610 172,715
Assets held for sale -- 678,106
Deferred tax asset 640,380 640,380
Income taxes receivable -- 118,000
------------ ------------
Total Current Assets 32,784,033 35,554,408
Property and Equipment, net 5,563,038 5,262,370
Goodwill 15,316,252 15,284,220
Other Assets 1,033,709 1,159,750
------------ ------------
Total Assets $ 54,697,032 $ 57,260,748
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable - trade $ 9,204,876 $ 10,512,123
Accrued salaries and benefits 8,098,597 6,059,221
Note payable 482,712 839,606
Current portion - long-term debt 622,410 622,410
Capital lease payable 2,760 4,371
Billings and estimated earnings in excess of costs on uncompleted contracts 2,228,178 2,313,954
Income taxes payable 422,734 --
Other liabilities 807,218 699,601
------------ ------------
Total Current Liabilities 21,869,485 21,051,286
Long-Term Debt, net of current portion 11,240,628 15,585,152
Deferred Tax Liability 573,380 573,380
------------ ------------
Total Liabilities 33,683,493 37,209,818
Contingencies (Note 8)
Stockholders' Equity:
Series A redeemable convertible preferred stock, $0.001 par value; 2,265,167
shares authorized; 0 shares issued and outstanding -- --
Common stock, $0.001 par value; 75,000,000 shares authorized; 23,500,842 and
23,466,839 outstanding and 24,153,219 and 24,119,216 issued at March 31,
2005 and December 31, 2004 24,153 24,119
Additional paid-in capital 12,240,080 12,198,215
Retained earnings 9,341,537 8,420,827
Treasury stock - 652,377 shares at cost (592,231) (592,231)
------------ ------------
Total Stockholders' Equity 21,013,539 20,050,930
------------ ------------
Total Liabilities and Stockholders' Equity $ 54,697,032 $ 57,260,748
============ ============
See accompanying notes to interim condensed consolidated financial statements.
4
ENGlobal Corporation
Condensed Consolidated Statements Of Cash Flows
(Unaudited)
For the Three Months Ended
March 31,
--------------------------
2005 2004
----------- -----------
Cash Flows from Operating Activities:
Net income $ 920,711 $ 470,927
Adjustments for non-cash items 294,091 259,672
Changes in working capital 3,324,154 (170,457)
----------- -----------
Net cash provided by operating activities 4,538,956 560,142
----------- -----------
Cash Flows from Investing Activities:
Property and equipment acquired (682,651) (321,480)
Proceeds from sale of equipment 15,000 --
Proceeds from sale of assets held for sale 823,350 --
Additional consideration for acquisitions (10,000) --
----------- -----------
Net cash provided by (used in) investing activities 145,699 (321,480)
----------- -----------
Cash Flows from Financing Activities:
Net borrowings (payments) on line of credit (4,229,395) 319,463
Proceeds from issuance of common stock 41,899 --
Short-term note repayments (356,894) (325,644)
Capital lease repayments (1,611) (2,409)
Long-term debt repayments (140,000) (225,992)
----------- -----------
Net cash used in financing activities (4,686,001) (234,582)
----------- -----------
Net change in cash (1,346) 4,080
Cash, at beginning of period 8,006 39,439
----------- -----------
Cash, at end of period $ 6,660 $ 43,519
=========== ===========
Supplemental Disclosures:
Interest paid $ 181,052 $ 136,994
=========== ===========
Income taxes paid $ 2,144 $ 105,000
=========== ===========
Non-Cash:
Issuance of notes for EDGI assets $ -- $ 300,000
=========== ===========
See accompanying notes to interim condensed consolidated financial statements.
5
NOTE 1 - BASIS OF PRESENTATION
The condensed consolidated financial statements of ENGlobal Corporation
(which may be referred to as "ENGlobal", the "Company", "we", "us", or
"our") included herein, are un-audited for the three-month periods ended
March 31, 2005 and 2004. 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
years ended December 31, 2004 and 2003, which are included in the Company's
annual reports on Form 10-K. The Company believes that the disclosures made
herein are adequate to make the information presented not misleading.
NOTE 2 - 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 27, 2007. The loan agreement positions
Comerica as senior to all other debt. The line of credit is limited to
$22.0 million, subject to loan covenant restrictions. The Comerica Credit
Facility is collateralized by substantially all the assets of the Company.
The outstanding balance on the line of credit as of March 31, 2005 was $9.3
million. The remaining borrowings available under the line of credit as of
March 31, 2005 were $8.7 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
total funded debt to EBITDA; total funded debt to total liabilities, plus
net worth; and total funded debt to accounts/unbilled receivables. The
Company is also required, as of the end of each quarter, to maintain
minimum levels of net worth, plus the Company must comply with an annual
limitation on capital expenditures. The Company was in compliance with all
covenants under the Comerica Credit Facility as of the end of the last
reporting period on March 31, 2005.
March 31, December 31,
2005 2004
--------------------
(in thousands)
-------- --------
Schedule of Long-Term Debt:
Comerica Credit Facility - Line of credit, prime (5.75% at March 31, 2005),
maturing in July 2007 $ 9,300 $ 13,530
Sterling Planet and EDGI - Notes payable, interest at 5%, principal payments in
installments of $15,000 plus interest due quarterly, maturing in December 2008 240 255
Significant PEI Shareholders - Note payable, discounted at 4.5% interest, principal
payments in installments of $208,761 due annually, maturing in December 2006 388 385
Cleveland Inspection Services, Inc., CIS Technical Services and F.D. Curtis - Notes
payable, discounted at 5% interest, principal in installments of $100,000 due
quarterly, maturing in October 2009 1,685 1,762
InfoTech Engineering, Inc. - Note payable, interest at 5%, principal payments in
installments of $65,000 plus interest due annually, maturing in December 2007 195 195
Miscellaneous 55 80
-------- --------
Total long-term debt 11,863 16,207
Less: Current maturities (622) (622)
-------- --------
Long-term debt, net of current portion $ 11,241 $ 15,585
======== ========
6
Current note payable includes a note at both March 31, 2005 and December
31, 2004 to finance commercial insurance on a short-term basis, with a
balance of $483,000 and $840,000 as of March 31, 2005 and December 31,
2004, respectively. The current note payable bears interest at 4.84% and is
payable in monthly installments of principal and interest totaling $122,000
through July 2005.
NOTE 3 - RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued Statement of Financial Accounting
Standards No. 123, (revised 2004) "Share-Based Payment" ("SFAS 123R"). This
statement is a revision of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" as amended ("SFAS 123"), and
requires entities to measure the cost of employee services received in
exchange for an award of equity instruments based on the grant-date fair
value of the award. The cost will be recognized over the period during
which an employee is required to provide services in exchange for the award
(usually the vesting period). SFAS 123R covers various share-based
compensation arrangement rights and employee share purchase plans. SFAS
123R eliminates the ability to use the intrinsic value methods of
accounting for share options, as provided in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). SFAS
123R was scheduled to be effective as of the beginning of the first interim
period that begins after June 15, 2005, with early adoption encouraged.
On April 14, 2005, the Securities and Exchange Commission issued a release
announcing the adoption of a new rule delaying the required implementation
of SFAS No. 123R. Under this rule, SFAS No. 123R is effective as of the
beginning of the first annual reporting period that begins after June 15,
2005. We are currently evaluating the provisions of SFAS No. 123R and will
adopt it in the first quarter of 2006, as required.
NOTE 4 - GOODWILL
In accordance with Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets", goodwill is no longer amortized
over its estimated useful life, but rather will be subject to at least an
annual assessment for impairment. 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.
NOTE 5 - FIXED FEE CONTRACTS
Costs, estimated earnings and billings on uncompleted contracts consisted
of the following at March 31, 2005 and December 31, 2004:
March 31, December 31,
2005 2004
--------------------
(in thousands)
-------- --------
Costs incurred on uncompleted contracts $ 12,091 $ 8,292
Estimated earnings on uncompleted contracts 1,991 1,584
-------- --------
Earned revenues 14,082 9,876
Less billings to date (14,708) (11,077)
-------- --------
Net costs and estimated earnings in excess of billings
on uncompleted contracts $ (626) $ (1,201)
======== ========
Costs and estimated earnings in excess of billings on uncompleted contracts $ 1,602 $ 1,113
Less billings and estimated earnings in excess of cost on uncompleted contracts (2,228) (2,314)
-------- --------
Net costs and estimated earnings in excess of billings
on uncompleted contracts $ (626) $ (1,201)
======== ========
7
NOTE 6 - STOCK OPTION PLAN
The Company accounts for its nonqualified incentive stock option plan under
the recognition and measurement principles of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" and related
interpretations. Accordingly, no stock-based compensation cost is reflected
in net income, as all options granted under the Company's plan had exercise
prices equal to or greater than the market value of the Company's stock on
the date of grant.
The following table illustrates the effect on net income and earnings per
share for the three months ended March 31, 2005 and 2004, respectively, as
if the Company had applied the fair value recognition provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation."
Three Months Ended
March 31,
-------------------------
2005 2004
-------------------------
(in thousands)
-------------------------
Pro forma impact of fair value method (SFAS 148)
Net income attributable to common stockholders, as reported $ 921 $ 471
Less compensation expense determined under fair value method, net of tax (17) (5)
------------ ------------
Pro forma net income attributable to common stockholders $ 904 $ 466
============ ============
Earnings per share (basic)
As reported $ 0.04 $ 0.02
Pro forma $ 0.04 $ 0.02
Earnings per share (diluted)
As reported $ 0.04 $ 0.02
Pro forma $ 0.04 $ 0.02
Weighted average Black-Scholes fair value assumptions
Risk free interest rate 5% 5%
Expected life 2-9 years 2-9 years
Expected volatility 52% 73%
Expected dividend yield 0.0% 0.0%
NOTE 7 - SEGMENT INFORMATION
The Company operates in two business segments: (1) engineering, providing
services primarily to major integrated oil and gas companies; and (2)
systems, providing design and implementation of control systems for
specific applications primarily in the energy and process industries, and
uninterruptible power systems and battery chargers.
Revenue and operating income for each segment are set forth in the
following table.
Three Months Ended
March 31,
-----------------------
2005 2004
-----------------------
(in thousands)
-----------------------
Revenue:
Engineering $ 40,299 $ 28,464
Systems 4,330 2,529
-------- --------
Total revenue $ 44,629 $ 30,993
======== ========
Operating income (loss):
Engineering $ 3,473 $ 2,430
Systems 104 (97)
Corporate (1,948) (1,481)
-------- --------
Total operating income $ 1,629 $ 852
======== ========
8
NOTE 8 -CONTINGENCIES
Litigation
----------
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, are not expected to have a
material effect upon the consolidated financial position or operations of
the Company.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Statements
--------------------------
Certain information contained in this Form 10-Q, the Company's Annual
Report to Stockholders, 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, with
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. When used in this report, the words
"anticipate," "believe," "estimate," "expect," "may," and similar
expressions, as they relate to the Company, its subsidiaries and
management, identify forward-looking statements. Actual results could
differ materially from the results described in the forward-looking
statements due to the risks and uncertainties set forth in this Form 10-Q
and the specific risk factors identified in the Company's Annual Report on
Form 10-K for the year ended December 31, 2004.
The following discussion is qualified in its entirety by, and should be
read in conjunction with, the Company's Consolidated Financial Statements,
including the notes thereto, included in this Form 10-Q and the Company's
Annual Report on Form 10-K for the year ended December 31, 2004.
Executive Overview
------------------
Introduction:
ENGlobal Corporation is a leading provider of engineering services and
systems principally to the petroleum refining, petrochemical, pipeline,
production and process industries throughout the United States and
internationally. The services provided by our multi-disciplined staff span
the lifecycle of a project and include feasibility studies, design,
procurement and construction management. We also supply automation, control
and uninterruptible electrical power systems to our clients worldwide.
The Company was incorporated as Industrial Data Systems Corporation in the
State of Nevada in June 1994. In December 2001, the Company merged with
Petrocon Engineering, Inc. and in June 2002, changed its name from
Industrial Data Systems Corporation to ENGlobal Corporation. Effective June
16, 2002, the Company's trading symbol for its common stock, traded on the
American Stock Exchange, changed from IDS to ENG. The Company streamlined
its organizational structure and took steps to increase name recognition in
2003. As part of its restructuring, the Company sold selected assets of its
manufacturing segment and reorganized its subsidiaries into two segments.
In addition, substantially all of the Company's wholly-owned subsidiaries
adopted the ENGlobal name.
Our business is managed under two reportable segments: engineering and
systems. The engineering segment provides engineering consulting services
primarily to major oil and gas companies through four subsidiary companies,
including ENGlobal Engineering, Inc., RPM Engineering, Inc. d/b/a ENGlobal
Engineering, Inc., ENGlobal Construction Resources, Inc., and ENGlobal
Design Group, Inc. The engineering segment earns revenue primarily from
fees for professional and technical services. As a service company, we are
labor rather than capital intensive and our income is derived from our
ability to generate revenues and collect cash under cost reimbursable
contracts based on our employees' time in excess of any subcontract
expense, the cost of pass-through materials and equipment, non-labor costs,
and our selling, general and administrative (SG&A) expenses.
Our systems segment designs, assembles, programs, installs, integrates and
services control and instrumentation systems for specific applications in
the energy and process-related industries. The systems segment currently
consists of one company, ENGlobal Systems, Inc. ("ESI"). The systems
segment earns revenue primarily from fees on contracts for the design and
assembly of control and instrumentation systems. Income from the systems
segment is derived from our ability to generate revenues and collect cash
on fixed price contracts in excess of our costs for labor, materials and
equipment and transportation costs, plus our SG&A expenses.
10
Key Performance Indicators at March 31, 2005:
We believe the following were key indicators of our performance and results
of operations in the first quarter of 2005 as compared to results from the
first quarter of 2004:
o Revenue increased 44.0% to $44.6 million
o Gross profit increased 40.5% to $5.8 million
o Operating income increased 91.2% to $1.6 million
o SG&A expense, as a percentage of revenue, decreased 11.24% to
9.5%
o Stockholders' equity increased 12.7% to $21.0 million
Results of Operations
---------------------
The following table presents, for the periods indicated, the approximate
percentage of total revenues and operating income or loss attributable to
our reportable segments:
Three Months Ended
March 31,
--------------------------
2005 2004
--------------------------
Revenue:
Engineering 90.3% 89.1%
Systems 9.7% 10.9%
Operating income (loss):
Engineering 9.0% 9.4%
Systems 2.4% (6.3%)
Revenue 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 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.
For internal analytical purposes only, we review total revenue less 1)
revenue received from non-labor material, equipment and subcontractor
costs, and 2) revenue received from material assets or companies acquired
during the current year, as well as revenue received from acquisitions of
material assets or companies during the first 12 months following their
respective dates of acquisition. In the course of providing our services,
we routinely provide major engineering materials, equipment and subcontract
services. Generally, these materials, equipment and subcontractor costs are
passed through to our clients and, in accordance with industry practice and
generally accepted accounting principles, are included in revenue. Because
subcontractor services can change significantly from project to project,
changes in non-labor revenue may not be indicative of our core business
trends. Revenue recognized from acquired assets of companies during the
first 12 months after closing is referred to as "Acquisition" revenue. We
also review gross profit and SG&A expense from material asset or company
acquisitions on the same basis as we review total revenue.
Gross profit includes the gross margin resulting from the financial
performance on contracts, less indirect variable labor and non-labor
expenses not directly related to projects. The primary indirect labor
expenses include compensation and benefit costs for indirect technical
support staff, for employees on stand-by time and for time required for
technical staff to prepare cost estimates and project schedules for
proposals requested through business development representatives.
11
Operating SG&A expense includes management and staff compensation, and
office costs, such as rents, utilities, depreciation, amortization, travel
and other expenses generally unrelated to specific client contracts, but
directly related to the support of a segment's operation.
Corporate SG&A expense is comprised of costs related to business
development, executive, finance, accounting, safety, investor
relations/governance, human resources, project controls, and information
technology functions, as well as, depreciation and amortization and other
costs generally unrelated to specific client projects.
Critical Accounting Policies:
A summary of significant accounting policies is disclosed in Note 2 to the
Consolidated Financial Statements included in our 2004 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 2004 Annual
Report on Form 10-K. There have been no changes in the nature of our
critical accounting policies or the application of those policies since
December 31, 2004.
12
Consolidated Results of Operations for the Three Months
Ended March 31, 2005 and 2004
(unaudited)
Three Months Ended
March 31,
-----------------------------------------
2005 2004
-----------------------------------------
(In thousands)
-----------------------------------------
Revenue:
Engineering - labor $ 26,899 60.3% $ 19,921 64.3%
Engineering - non-labor 10,469 23.4% 7,799 25.1%
Systems 4,330 9.7% 2,070 6.7%
Acquisition 2,931 6.6% 1,203 3.9%
-------- --------
Total revenue $ 44,629 100.0% $ 30,993 100.0%
======== ========
Gross profit:
Engineering - labor $ 4,733 17.6% $ 3,704 18.6%
Engineering - non-labor 159 15.2% 61 7.8%
Systems 567 13.1% 244 11.8%
Acquisition 388 13.2% 152 12.6%
-------- --------
Total gross profit 5,847 13.1% 4,161 13.4%
-------- --------
SG&A expense:
Engineering 1,519 4.1% 1,316 4.7%
Systems 463 10.7% 380 18.4%
Corporate 1,948 4.4% 1,481 4.8%
Acquisition 288 9.8% 132 11.0%
-------- --------
Total SG&A expense 4,218 9.5% 3,309 10.7%
-------- --------
Operating income:
Engineering 3,373 9.0% 2,450 8.8%
Systems 104 2.4% (136) (6.6%)
Corporate (1,948) (4.4%) (1,481 (4.8%)
Acquisition 100 3.4% 19 1.6%
-------- --------
Total operating income 1,629 3.7% 852 2.7%
-------- --------
Other income (expense), net (167) 0.4% (138) 0.4%
Tax provision (541) 1.2% (243) 0.8%
-------- --------
Net income $ 921 2.1% $ 471 1.5%
======== ========
Other financial comparisons:
- ----------------------------
Working capital $ 10,915 $ 7,879
Total assets $ 54,697 $ 40,609
Long-term debt, net of current portion $ 11,241 $ 7,889
Stockholders' equity $ 21,014 $ 18,646
In the results presented for the first quarter of 2005, "Acquisition"
totals include the combined results of operations related to assets
acquired from Cleveland Inspection Services, Inc. ("Cleveland") and AmTech
Inspection, LLC ("AmTech"). In the results for the first quarter of 2004,
"Acquisition" totals are the combined results of operations related to
assets acquired from Petro-Chem and Senftleber. For analytical purposes
only, results from acquired companies or acquired assets are shown
separately for the first 12 months after closing.
13
Revenue:
Revenue increased $13.6 million, or 44.0%, to $44.6 million for the three
months ended March 31, 2005 from $31.0 million for the comparable prior
year period. Excluding non-labor engineering revenue, the Company's
adjusted revenue for the three months ended March 31, 2005 increased $11.0
million, or 47.3%, over comparable revenue for the three months ended March
31, 2004. Acquisition revenue contributed $1.7 million, or 15.8%, of the
increase in adjusted revenue.
Gross Profit:
Gross profit increased overall $1.7 million, or 40.5%, to $5.8 million for
the three months ended March 31, 2005 from $4.1 million for the comparable
prior year period, with acquisition gross profit contributing $236,000, or
14.0%, of the total increase. As a percentage of revenue, gross profit
increased in all areas except engineering, primarily due to engineering's
continued investment in internal growth initiatives such low sulfur diesel,
polymers, and integrated controls, plus the cost of technical staff to
produce cost estimates and project schedules to meet the increased level of
proposal activity. These factors resulted in an overall decrease in
consolidated gross profit to 13.1% for the three months ended March 31,
2005 from 13.4% for the quarter ended March 31, 2004.
Selling, General, and Administrative:
As a percentage of revenue, SG&A expense decreased to 9.5% for the three
months ended March 31, 2005 from 10.7% for the three months ended March 31,
2004. SG&A expense increased $900,000, or 27.5%, to $4.2 million for the
three months ended March 31, 2005 from $3.3 million for the comparable
prior year period. Even though each reporting area incurred additional
costs (Engineering - $200,000; Systems - $80,000; Corporate - $470,000 and
Acquisition - $150,000), the costs as a percentage of their respective
revenues decreased.
Corporate SG&A expense increased $470,000, or 31.5%, to $1.95 million for
the three months ended March 31, 2005 from $1.48 million for the comparable
prior year period, due primarily to accrued incentive plan compensation
($180,000) and the increased investment in marketing and business
development ($115,000). As a percentage of total revenue, corporate SG&A
expense decreased to 4.4% for the three months ended March 31, 2005 from
4.8% for the comparable prior year period.
Operating Income:
Operating income increased $800,000, or 91.2%, to $1.6 million for the
three months ended March 31, 2005 from $800,000 compared to the same period
in 2004. As a percentage of revenue, operating income increased to 3.7% for
the three months ended March 31, 2005 from 2.7% for the comparable prior
year period.
Other Expense, net:
Other expense increased $29,000, to $167,000 for the three month period
ended March 31, 2005 from $138,000 for the comparable prior year period,
primarily due to increased net interest expense ($65,000) and a one-time
write-off of finance charges related to our line of credit ($75,000)
offsetting a $134,000 gain recorded from the sale of the Thermal facility.
Tax Provision:
Income tax expense increased $300,000, or 123%, to $540,000 for the three
months ended March 31, 2005 from $240,000 for the comparable prior year
period. The estimated effective tax rate was 37% for the three-month period
ended March 31, 2005 compared to 34% for the comparable prior year period.
Net Income:
Net income for the three months ended March 31, 2005 increased $450,000, or
95.5%, to $921,000 from $471,000 for the comparable prior year period. As a
percentage of revenue, net income increased to 2.1% for the three month
period ended March 31, 2005 from 1.5% for the period ended March 31, 2004.
14
Segment Results
---------------
Engineering
-----------
Three Months Ended
March 31,
-------------------------------------------
2005 2004
-------------------------------------------
(In thousands)
-------------------------------------------
Revenue:
Engineering - labor $ 26,899 66.7% $ 19,921 70.0%
Engineering - non-labor 10,469 26.0% 7,799 27.4%
Acquisition 2,931 7.3% 744 2.6%
-------- --------
Total revenue $ 40,299 100.0% $ 28,464 100.0%
======== ========
Gross profit:
Engineering - labor $ 4,733 17.6% $ 3,704 18.6%
Engineering - non-labor 159 1.5% 61 0.8%
Acquisition 388 13.2% 72 9.7%
-------- --------
Total gross profit 5,280 13.1% 3,837 13.5%
-------- --------
Operating SG&A expense:
Engineering 1,519 4.1% 1,316 4.7%
Acquisition 288 9.8% 91 12.2%
-------- --------
Total SG&A expense 1,807 4.5% 1,407 4.9%
-------- --------
Operating income:
Engineering 3,373 9.0% 2,450 8.8%
Acquisition 100 3.4% (20) (2.7%)
-------- --------
Total operating income $ 3,473 8.6% $ 2,430 8.5%
-------- --------
Overview:
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 is very active and
supplied a large percentage of the Company's backlog. ENGlobal also
benefited from the renewed interest of its chemical/petrochemical clients
in maintenance and retrofit projects as product margins in this marketplace
improve. The Company's Beaumont engineering office continued its
performance as the largest profit contributing operation during the first
quarter of 2005, with a small increase in its profits compared to those in
the first quarter of 2004. In addition, the Company's Tulsa office realized
substantial growth and increased profitability over the last year.
New contracts in our Tulsa office also bring revenue diversification
through clients like Coffeyville Resources Refining & Marketing, LLC and
Frontier Refining, Inc. and help minimize the normal industry threat of the
loss of a major customer that might comprise a significant percentage of
our backlog at any point in time, and the loss of which could have a
material adverse effect on our business.
The Company's field services staffing operation, which includes ENGlobal
Construction Resources, Inc., approximately doubled its profit contribution
during the first quarter of 2005 compared to the same period in 2004. The
increase resulted in part from the acquisitions of Cleveland and AmTech in
2004 as well as improved demand for outsourced technical personnel.
Acquisition totals for the three months ended March 31, 2005 are from
results of operations related to assets acquired from Cleveland and AmTech.
In the results for the three-month period ended March 31, 2004, acquisition
totals are from results of operations related to assets acquired from
Petro-Chem.
15
Revenue:
Revenue increased $11.8 million, or 41.6%, to $40.3 million for the three
months ended March 31, 2005 from $28.5 million for the comparable prior
year period. Excluding non-labor revenue, revenue for the three months
ended March 31, 2005 increased $9.2 million, or 44.4%, over comparable
revenue for the three months ended March 31, 2004. Of this increase,
acquisition revenue accounted for $2.2 million and revenue from internal
growth accounted for $7.0 million. Revenue from internal growth, not
related to acquisitions or non-labor items, for the three months ended
March 31, 2005 represented a 35.0% increase over such revenue for the
comparable period ended March 31, 2004.
Non-labor revenue represented 26.0% of the total engineering revenue for
the quarter ended March 31, 2005 and increased $2.7 million to $10.5
million from $7.8 million for the comparable period ended March 31, 2004.
This represented 22.6% of the revenue increase.
Gross Profit:
Gross profit increased $1.4 million, or 37.6%, to $5.3 million for the
three months ended March 31, 2005 from $3.8 million for the comparable
period in 2004. Excluding gross profit from non-labor revenue, gross profit
increased $1.3 million, or 35.6%, for the three months ended March 31, 2005
when compared to the three months ended March 31, 2004, with gross profit
from internal growth accounting for $1.0 million of the increase. Gross
profit from internal growth for the three months ended March 31, 2005
represented a 29.9% increase over gross profit from internal growth for the
comparable period ended March 31, 2004. Project reversals of $283,000 were
recorded during the period on two lump sum projects being performed in our
Houston office. To address these reversals, the Company has initiated
project reviews on all significant projects to identify and correct
weaknesses in both project control systems and personnel. The Company does
not expect to record significant additional losses on these projects in
future reporting periods.
As a percentage of revenue, gross profit increased on contract activities
to 15.4% from 14.9% for the three-month periods ended March 31, 2005 and
2004, respectively. Non-project variable labor expenses for internal growth
initiatives related to low sulfur diesel, polymers, advanced automation and
integrated controls, plus the additional cost of technical staff to produce
cost estimates and project schedules to cover increased proposal activity,
increased to approximately $900,000 for the three-month period ended March
31, 2005 from approximately $400,000 for the comparable period ended March
31, 2004 and contributed to the our overall net decrease in gross profit
percentage to 13.1% from 13.5% for the three months ended March 31, 2005
and 2004, respectively.
Selling, General, and Administrative:
As a percentage of revenue, excluding non-labor revenue, SG&A expense
decreased to 6.1% for the three-month period ended March 31, 2005 from 6.8%
for the three-month period ended March 31, 2004. SG&A expense increased
$400,000 overall, or 28.4%, to $1.8 million for the three months ended
March 31, 2005 from $1.4 million for the comparable prior year period
primarily related to growth for office space (Rents - $90,000); equipment
(Depreciation - $100,000) and administrative support staff (Salaries -
$10,000), plus $200,000 in expense primarily related to the assets acquired
from Cleveland during the last quarter of 2004.
Operating Income:
Operating income increased $1.0 million, or 42.9%, to $3.5 million for the
three months ended March 31, 2005 from $2.5 million for the comparable
prior year period. As a percentage of revenue, operating income increased
to 8.6% for the three months ended March 31, 2005 from 8.5% for the
comparable prior year period.
16
Systems
-------
Three Months Ended
March 31,
-----------------------------------------
2005 2004
-----------------------------------------
(In thousands)
-----------------------------------------
Revenue:
Systems $ 4,330 100.0% $ 2,070 81.9%
Acquisition -- -- 459 18.1%
------- -------
Total revenue $ 4,330 100.0% $ 2,529 100.0%
======= =======
Gross profit:
Systems $ 567 13.1% $ 244 11.8%
Acquisition -- -- 80 17.4%
------- -------
Total gross profit 567 13.1% 324 12.8%
------- -------
Operating SG&A expense:
Systems 463 10.7% 380 18.4%
Acquisition -- -- 41 8.9%
------- -------
Total SG&A expense 463 10.7% 421 16.6%
------- -------
Operating income:
Systems 104 2.4% (136) (6.6%)
Acquisition -- -- 39 8.5%
------- -------
Total operating income $ 104 2.4% $ (97) (3.8%)
======= =======
Overview:
Our systems segment's financial results during the three months ended March
31, 2005 offset the overall loss that had been incurred during the first
three months of the prior year. The primary reason for the improvement was
the large influx of new work during the period, plus our lower operating
costs as a result of a reorganization of the systems segment.
Acquisition totals for the three months ended March 31, 2004 are from
results of operations related to the purchase of Senftleber. There was no
acquisition activity for the three months ended March 31, 2005.
Revenue:
Revenue increased $1.8 million, or 71.2%, to $4.3 million for the three
months ended March 31, 2005 from $2.5 million for the comparable prior year
period.
Gross profit:
Gross profit increased $243,000, or 75.0%, to $567,000 for the three months
ended March 31, 2005 from $324,000 for the comparable prior year period. As
a percentage of revenue, gross profit increased to 13.1% for the three
months ended March 31, 2005 from 12.8% for the comparable prior year
period.
Project over-runs totaling $183,000 were recorded during the period on
multiple fixed price projects being performed by our Houston facility. To
address such over-runs, the Company initiated project reviews on all
significant projects to identify and correct weaknesses in both project
control systems and personnel. The Company does not expect to record
significant additional losses on these projects in future reporting
periods.
17
Selling, General, and Administrative:
SG&A expense increased $42,000, or 10.0%, to $463,000 for the three months
ended March 31, 2005 from $421,000 for the comparable prior year period. As
a percentage of revenue, SG&A expense decreased to 10.7% for the three
months ended March 31, 2005 from 16.6% for the comparable prior year
period.
In January 2004, ENGlobal Constant Power, Inc. relocated offices and shop
facilities to the same facility used by ENGlobal Systems to improve shop
personnel utilization, reduce duplicate overhead functions and reduce
facilities expenses.
Operating Income:
Operating income increased $201,000, or 207%, to $104,000 for the three
months ended March 31, 2005 from a loss of $97,000 for the comparable prior
year period.
Liquidity and Capital Resources
-------------------------------
Historically, cash requirements have been satisfied through operations and
borrowings under a revolving line of credit, which is currently in effect
with Comerica Bank (the "Comerica Credit Facility"). As of March 31, 2005,
we had working capital of $10.9 million. Long-term debt, on March 31, 2005
was $11.2 million, including $9.3 million outstanding under the Comerica
Credit Facility.
The Comerica Credit Facility is senior to all other debt, and the line of
credit is limited to $22.0 million, subject to borrowing base restrictions.
The Comerica Credit Facility is collateralized by substantially all the
assets of the Company. The Comerica Credit Facility contains covenants
requiring the Company, as of the end of each calendar month, to maintain
certain ratios, including total funded debt to EBITDA; total funded debt to
total liabilities, plus net worth; and total funded debt to
accounts/unbilled receivables. The Company is also required, as of the end
of the most recent quarters then ended, to maintain minimum levels of net
worth, and must comply with an annual limitation on capital expenditures.
The Company is currently in compliance with all loan covenants, although no
assurances can be given regarding such compliance in the future. We are not
currently subject to any standby letters of credit, guarantees, repurchase
obligations or other commitments. We have no off-balance sheet
arrangements.
The Company has been awarded a significant project with Coffeyville
Resources Refining & Marketing, LLC ("CRRM") and entered into an Agreement
for Engineering and Procurement Services to provide detailed engineering
and procurement services on a cost reimbursable basis. We estimate that the
agreement will result in a significant amount of revenue attributable to
the procurement of materials and equipment. Per the terms of the agreement,
any progress payments made by CRRM for project items must be secured by one
or more irrevocable stand-by letters of credit issued on the account of
ENGlobal. The project began in January 2005 and is scheduled to be
completed in the third quarter of 2006.
As of March 31, 2005, we had the following long-term debt:
o $240,000 in two notes of $127,500 and $112,500, respectively, to
Sterling Planet and EDGI, each bearing interest at 5% per annum and
maturing in 2008. Principal amounts of $15,000 are payable quarterly
with accrued interest. The Sterling Planet and EDGI notes were issued
as part of the purchase of certain assets of EDGI.
o $25,000 in a non-interest bearing note to AmTech, maturing in 2006.
Principal amounts of $25,000 are payable annually. The note was issued
as part of the purchase price of certain assets of AmTech.
o $388,264 payable to Significant PEI Shareholders, payable in two
remaining equal installments before December 31 of 2005 and 2006. The
notes were issued in connection with the termination of the escrow
agreements of 2001.
o $1,684,673 in notes of $1,389,855, $42,177 and $252,701, to Cleveland
Inspection Services, Inc., CIS Technical Services and F.D. Curtis,
respectively, each discounted at 5% and maturing in 2009. Principal
amounts of $100,000 in the aggregate are payable quarterly. The
Cleveland notes were issued as part of the purchase of certain assets
of Cleveland Inspection Services, Inc.
18
o $225,000 in two notes of $195,000 and $30,000, respectively, to
InfoTech Engineering, Inc., each bearing interest at 5% per annum and
maturing in 2007. Principal amounts of $65,000 in the aggregate are
payable annually with accrued interest. The InfoTech notes were issued
as part of the purchase of certain assets of InfoTech Engineering,
Inc.
As of March 31, 2005, management believes the Company's cash position is
sufficient to meet its working capital requirements. Any future decrease in
demand for the Company's services or products would reduce the availability
of funds through operations.
Cash Flow
---------
The Company believes that it has available the necessary cash required for
operations for the next 12 months. Cash and the availability of cash could
be materially restricted if circumstances prevent the timely internal
processing of invoices, if amounts billed are not collected, if project mix
shifts from cost reimbursable to fixed costs contracts during significant
periods of growth, if the Company was to lose one or more of its major
customers, or if the Company is not able to meet the covenants of the
Comerica Credit Facility. If any such events occur, the Company would be
forced to consider alternative financing options.
Operating activities:
Net cash provided by operating activities was $4.5 million for the
three-month period ended March 31, 2005, compared to $560,000 in the same
period in 2004. Changes in working capital, due to the timing of
collections of trade receivables, payments for trade payables and accruals,
contributed to the strong cash flows from operations in the first quarter
of 2005. During the quarter, the line of credit decreased from $13.5
million as of December 31, 2004 to $9.3 million as of March 31, 2005. Net
income was the primary driver of the Company's positive cash flows from
operations in the first quarter of 2004
Investing activities:
Net cash provided by investing activities was $146,000 for the three-month
period ended March 31, 2005, compared with net cash used of $321,000 in the
same period in 2004. In the first quarter of 2005, the Company completed
the sale of the Thermaire building, receiving $823,000 in cash from the
sale. The Company also used cash for capital expenditures in the first
three months of 2005 and 2004.
Financing activities:
Net cash used by financing activities was $4.7 million for the three-month
period ended March 31, 2005, compared with $235,000 in the same period in
2004. In the first quarter of 2005, the Company reduced the outstanding
line of credit by $4.2 million using cash generated from working capital as
compared to a net increase in the outstanding line of credit of $319,000 in
the same period in 2004.
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 $29.0 million and $30.8 million at March 31, 2005 and
December 31, 2004, respectively. The number of days sales outstanding in
trade accounts receivables was 56 days and 62 days at March 31, 2005 and
December 31, 2004, respectively.
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. Our exposure to market risk for changes in
19
interest rates relates primarily to our obligations under the Comerica
Credit Facility. As of March 31, 2005, $9.3 million had been borrowed under
the Credit Facility, accruing interest at 5.75% per year, excluding
amortization of prepaid financing costs. A 10% increase in the short-term
borrowing rates on the Credit Facility outstanding as of March 31, 2005
would be 57.5 basis points. Such an increase in interest rates would
increase our annual interest expense by approximately $53,000, assuming the
amount of debt outstanding remains constant.
ITEM 4. CONTROLS AND PROCEDURES
As of March 31, 2005, 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 "disclosure controls and procedures," as such term is
defined under Exchange Act Rules 13a-15(e) and 15d-15(e).
Based on this evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that, as of March 31, 2005, such disclosure controls and
procedures were effective to ensure that information required to be
disclosed by us in the reports we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods
specified in the rules and forms of the Securities and Exchange Commission,
and accumulated and communicated to our management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure.
In designing and evaluating the disclosure controls and procedures, our
management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving
the desired control objectives and, in reaching a reasonable level of
assurance, our management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and
procedures.
There were no changes in our internal controls over financial reporting
during the quarter ended March 31, 2005 that materially affected, or are
reasonably likely to materially affect, our internal controls over
financial reporting.
20
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company and its subsidiaries become parties to
various legal proceedings arising in the ordinary course of normal business
activities. While we cannot predict the outcome of these proceedings, in
our opinion and based on reports of counsel any liability arising from such
matters, individually or in the aggregate, are not expected to have a
material effect upon the consolidated financial position or operations of
the Company.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
31.1 Certifications Pursuant to Rule 13a - 14(a) of the Exchange Act for
2002 for the First Quarter 2005
31.2 Certifications Pursuant to Rule 13a - 14(a) of the Exchange Act for
2002 for the First Quarter 2005
32 Certification Pursuant to Rule 13a - 14(b) of the Exchange Act and
18U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 for the First Quarter 2005
21
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ENGlobal CORPORATION
Dated: May 10, 2005
By: /s/ Robert W. Raiford
-------------------------
Robert W. Raiford
Chief Financial Officer and Treasurer
22