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, 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
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(State or other jurisdiction of
incorporation or organization)
88-0322261
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(I.R.S Employer Identification No.)
654 North Sam Houston Parkway East, Suite 400, Houston, TX 77060-5914
----------------------------------------------------------------------
(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 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 August 2, 2005.
$0.001 Par Value Common Stock 23,627,134 shares
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED JUNE 30, 2005
TABLE OF CONTENTS
Page
Number
------
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Income for the
Three Months Ended and Six Months Ended June 30,
2005 and June 30, 2004 3
Condensed Consolidated Balance Sheets at June 30,
2005 and December 31, 2004 4
Condensed Consolidated Statements of Cash Flows for
the Six Months Ended June 30, 2005 and June 30,
2004 5
Notes to Condensed Consolidated Financial Statements 6-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14-26
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 26
Item 4. Controls and Procedures 27
Part II. Other Information
Item 1. Legal Proceedings 28
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds 28
Item 3. Defaults Upon Senior Securities 28
Item 4. Submission of Matters to a Vote of Security Holders 28
Item 5. Other Information 28
Item 6. Exhibits 29
Signature 30
2
PART I. - FINANCIAL INFORMATION
-------------------------------
ITEM 1. FINANCIAL STATEMENTS
ENGlobal Corporation
Condensed Consolidated Statements of Income
(Unaudited)
For the Three Months Ended For the Six Months
June 30, Ended June 30,
------------------------------ -------------------------------
2005 2004 2005 2004
------------- ------------- ------------- -------------
Operating Revenue $ 59,419,270 $ 34,282,731 $ 104,048,532 $ 65,275,265
------------- ------------- ------------- -------------
Operating Expenses:
Direct cost 51,969,694 30,143,815 90,752,023 56,975,632
Selling, general and administrative 4,387,419 3,093,814 8,176,156 6,142,909
Depreciation and amortization 446,814 277,157 875,685 536,829
------------- ------------- ------------- -------------
Total operating expenses 56,803,927 33,514,786 99,803,864 63,655,370
------------- ------------- ------------- -------------
Operating income 2,615,343 767,945 4,244,668 1,619,895
Other Income (Expense):
Other income 44,301 (4,718) 73,245 28,068
Interest income (expense), net (246,728) (124,890) (443,551) (296,100)
------------- ------------- ------------- -------------
Total other income (expense) (202,427) (129,608) (370,306) (268,032)
------------- ------------- ------------- -------------
Income before Provision for Income Taxes 2,412,916 638,337 3,874,362 1,351,863
Provision for Income Taxes 892,779 217,034 1,433,514 459,633
------------- ------------- ------------- -------------
Net Income $ 1,520,137 $ 421,303 $ 2,440,848 $ 892,230
============= ============= ============= =============
Net Income Per Common Share:
Basic 0.06 0.02 0.10 0.04
Diluted 0.06 0.02 0.10 0.04
Weighted Average Shares Used in Computing Net
Income Per Share:
Basic 23,492,842 24,035,936 23,508,496 24,035,117
Diluted 24,156,525 24,347,589 24,155,176 24,346,990
See accompanying notes to interim condensed consolidated financial statements.
3
ENGlobal Corporation
Condensed Consolidated Balance Sheets
June 30, December 31,
2005 2004
------------ ------------
(unaudited)
ASSETS
------
Current Assets:
Cash $ 12,957 $ 8,006
Accounts receivable - trade, less allowance for doubtful accounts of
approximately $507,000 and $476,000, respectively 32,399,207 30,839,597
Costs and estimated earnings in excess of billings on uncompleted contracts 3,293,293 1,113,330
Prepaid and other 1,029,145 1,984,274
Inventories 183,475 172,715
Assets held for sale -- 678,106
Deferred tax asset 757,247 640,380
Income taxes receivable -- 118,000
------------ ------------
Total Current Assets 37,675,324 35,554,408
Property and Equipment, net 5,661,664 5,262,370
Goodwill 15,386,425 15,284,220
Other Assets 970,001 1,159,750
------------ ------------
Total Assets $ 59,693,414 $ 57,260,748
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable - trade $ 10,429,750 $ 10,512,123
Accrued salaries and benefits 9,497,872 6,059,221
Note payable 121,412 839,606
Current portion - long-term debt 549,220 622,410
Capital lease payable 1,115 4,371
Billings and estimated earnings in excess of costs on uncompleted contracts 1,747,696 2,313,954
Income taxes payable 1,125,950 --
Other liabilities 663,071 699,601
------------ ------------
Total Current Liabilities 24,136,086 21,051,286
Long-Term Debt, net of current portion 12,854,759 15,585,152
Deferred Tax Liability 99,810 573,380
------------ ------------
Total Liabilities 37,090,655 37,209,818
Contingencies (Note 11)
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; 23,548,822 and
23,466,839 outstanding and 24,201,199 and 24,119,216 issued at June 30,
2005 and December 31, 2004 24,201 24,119
Additional paid-in capital 12,309,115 12,198,215
Retained earnings 10,861,674 8,420,827
Treasury stock, 652,377 shares at cost (592,231) (592,231)
------------ ------------
Total Stockholders' Equity 22,602,759 20,050,930
------------ ------------
Total Liabilities and Stockholders' Equity $ 59,693,414 $ 57,260,748
============ ============
See accompanying notes to interim condensed consolidated financial statements.
4
ENGlobal Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)
For the Six Months
Ended June 30,
--------------------------
2005 2004
----------- -----------
Cash Flows from Operating Activities:
Net income $ 2,440,848 $ 892,230
Adjustments for non-cash items 153,455 537,202
Changes in working capital 1,270,360 (1,367,083)
----------- -----------
Net cash provided by operating activities 3,864,663 62,349
----------- -----------
Cash Flows from Investing Activities:
Property and equipment acquired (1,177,076) (593,597)
Proceeds from sale of equipment 15,000 2,250
Proceeds from sale of assets held for sale 823,350 --
Additional consideration for acquisitions (59,403) --
----------- -----------
Net cash used in investing activities (398,129) (591,347)
----------- -----------
Cash Flows from Financing Activities:
Net borrowings (payments) on line of credit (2,589,561) 1,624,408
Proceeds from issuance of common stock 110,982 12,500
Short-term note repayments (717,248) (542,740)
Capital lease repayments (3,256) (5,087)
Long-term debt repayments (262,500) (589,423)
----------- -----------
Net cash provided by (used in) financing activities (3,461,583) 499,658
----------- -----------
Net change in cash 4,951 (29,340)
Cash, at beginning of period 8,006 39,439
----------- -----------
Cash, at end of period $ 12,957 $ 10,099
=========== ===========
Supplemental Disclosures:
Interest paid $ 369,700 $ 255,912
Income taxes paid $ 904,292 $ 455,000
See accompanying notes to interim condensed consolidated financial statements.
5
ENGlobal Corporation
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, 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 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
-------------------
The Company's revenues are composed of engineering service revenues and
product sales. The Company recognizes service revenues as soon as the
services are performed. The majority of the Company's engineering services
have historically been provided through cost-plus contracts whereas a
majority of the Company's product sales are earned on fixed fee contracts.
On occasion, the Company, serving as an agent for the client, procures
materials and equipment on behalf of the client and the cost of such
materials and equipment is reimbursed with no mark-up or profit. In
accordance with Statement of Position (SOP) 81-1, revenues and costs for
these types of purchases are not included in total revenues and costs. For
financial reporting, this "pass-through" type of transaction is reported
net. Pass-through transactions totaled $7.4 million and $10.8 million,
respectively, for the three months and six months ending June 30, 2005.
Profits and losses on fixed-fee contracts are recorded on the
percentage-of-completion method of accounting, measured by the
percentage-of-contract costs incurred to date relative to estimated total
direct contract costs. Direct contract costs include professional
compensation and related benefits, materials, subcontractor services and
other direct costs of projects. Direct contract costs also include variable
costs such as travel, repairs and maintenance and supplies directly related
to producing revenues. Any freight charges and inspection costs are
directly charged to the project to which the charges relate. On a project
that requires the purchase of a large amount of permanent materials,
including the costs of these materials in calculating the
percentage-of-completion may overstate the actual progress on the project.
For these types of projects, the cost-to-cost method does not appropriately
reflect the progress of the projects; accordingly, we use alternative
methods such as actual labor hours for measuring progress on the project
and we recognize revenue accordingly.
Under the percentage-of-completion method, revenue recognition is dependent
upon the accuracy of a variety of estimates, including the progress of
engineering and design efforts, material installation, labor productivity,
cost estimates and others. These estimates are based on various
professional judgments made with respect to the factors noted and are
difficult to accurately determine until projects are significantly
underway. Due to uncertainties inherent to the estimation process, it is
possible that actual completion costs may vary materially from estimates.
Anticipated losses on uncompleted contracts are charged to operations as
soon as such losses can be estimated. Changes in job performance, job
conditions, estimated profitability and final contract settlements may
result in revisions to costs and income and are recognized in the period in
which the revisions are determined.
Selling, general and administrative costs include management and staff
compensation, office costs such as rents and utilities, depreciation,
amortization, travel and other expenses that are unrelated to specific
client contracts, but directly relate to the support of each segment's
operations.
The cost recognized for labor includes all actual employee compensation
plus a burden factor to cover estimated variable labor expenses for the
year. These variable labor expenses consist of payroll taxes, self-insured
medical expenses, workers compensation insurance, general liability
6
ENGlobal Corporation
Notes to Condensed Consolidated Financial Statements
insurance, and employee benefits for paid time off. The actual periodic
cost for these expenses is adjusted at the end of each quarter to provide
consistent cost recognition throughout the year.
We have three major types of contracts:
Cost-Plus, labor plus fixed mark-up
-----------------------------------
Under cost-plus, labor plus fixed mark-up contracts, we charge clients
based on actual labor rates plus a fixed mark-up that includes estimated
recoverable direct and indirect costs and a profit component, which is
applied as a percentage of the recoverable labor, to arrive at a total
dollar estimate in negotiating a cost-plus, labor plus fixed mark-up
contract. We recognize revenues based on a multiple of the actual total
number of labor hours completed on a project multiplied by the actual labor
rates and multiplied by the negotiated fixed mark-up percentage, plus other
non-labor costs at cost plus a fixed mark-up that we negotiate at the time
of contract award. Aggregate revenues from cost-plus, labor plus fixed
mark-up contracts may vary in scope and we generally must obtain a change
order in order to receive additional revenues relating to any additional
costs that exceed the original contract estimate (see "Change Orders").
Cost-Plus, fixed labor rate
---------------------------
Under cost-plus, fixed labor rate contracts, we charge clients based on
fixed labor rates by work classification (Project Manager, Sr. Engineer,
Designer, CADD Operator, etc.) where the fixed labor rate includes
estimated recoverable direct and indirect costs plus a profit component. In
negotiating cost-plus, fixed labor rate contracts the total dollar estimate
is a multiple of the fixed labor rates times the recoverable work class
labor man-hours estimated to complete the project. We recognize revenues
based on a multiple of the fixed labor rates times the actual total number
of labor hours completed on a project, plus other non-labor costs at cost
plus a fixed rate negotiated at the time of contract award. Aggregate
revenues from cost-plus, fixed labor rate contracts may vary in scope and
we generally must obtain a change order in order to receive additional
revenues relating to any additional costs that exceed the original contract
estimate (see "Change Orders").
Fixed Price
-----------
Under fixed price contracts, the Company only charges its clients an agreed
amount negotiated in advance of a specific scope of work, be it related to
engineering service revenue or product sales. We recognize revenues on
fixed-price contracts using the percentage-of-completion method described
above. Prior to completion, gross profit recognition on any fixed-price
contract is dependent upon the accuracy of our estimates and will increase
to the extent that current estimates of aggregate actual costs are below
the amounts previously estimated. Conversely, if the Company's current
estimated costs exceed prior estimates, gross profit will decrease and we
may realize a loss on a project. In order to increase aggregate revenue on
a contract, we generally must obtain a change order to receive payment for
additional costs (see "Change Orders").
Change Orders
-------------
Change orders are modifications of an original contract that effectively
change the provisions of the contract without adding new provisions. Either
we or our clients may initiate change orders. Change orders may include
changes in specifications or design, manner of performance, equipment,
materials, scope of work and/or the period of completion of the project.
Change orders occur when changes are experienced after work on a contract
has begun. Change orders are sometimes documented and the terms of change
orders are agreed with the client before the work is performed. Other
times, circumstances may require that work progress without the client's
written agreement before the work is performed. Costs related to change
orders are recognized when they are incurred. Change orders are included in
the total estimated contract revenue when it is probable that the change
orders will result in a bona fide addition to value that can be reliably
estimated.
7
ENGlobal Corporation
Notes to Condensed Consolidated Financial Statements
Inspection and Acceptance (Cost-plus contracts)
-----------------------------------------------
Generally, clients inspect and accept work as executed based on designated
milestones or billing cycles, although such acceptance does not waive the
client's right to a claim under a warranty provision for work deficiencies
that exceed industry standards. If we are required to remedy defective
work, the client normally reimburses all costs except for the labor costs
necessary to correct such defects.
Inspection and Acceptance (Fixed Price contracts)
-------------------------------------------------
Generally, clients inspect and accept work based on designated milestones,
although such acceptance does not waive the client's right to a claim under
a warranty provision for work deficiencies. If we are required to remedy
defective work, the client normally reimburses all costs except for the
labor costs necessary to correct such defects.
Contract termination provisions
-------------------------------
Generally, our clients may terminate at any time and for any reason any
part of the Company's project work by giving proper notice, specifying the
part of the work to be terminated and the effective date of the
termination. If any part of the work on a project is terminated, the
client, with respect to such work, is required to reimburse the Company for
all costs incurred prior to the effective date of termination and for all
additional amounts that are directly related to the work performed. The
client is required to issue a Change Order with respect to any termination.
Based on the criteria found in SOP 81-1, paragraphs .40 and .41, the
Company has not historically entered into contracts that can be segmented.
NOTE 3 - DEBT AND LINE OF CREDIT
Current note payable:
The current note payable is a note at both June 30, 2005 and December 31,
2004 to finance commercial insurance on a short-term basis, with a balance
of $121,000 and $840,000 as of June 30, 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.
Line of credit:
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
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 June 30, 2005 was $10.9
million. The remaining borrowings available under the line of credit as of
June 30, 2005 were $9.5 million after consideration of loan covenant
restrictions and outstanding standby letters of credit aggregating to $1.6
million.
The Comerica Credit Facility contains covenants requiring the Company, as
of the end of each calendar month, to maintain certain ratios, including
the average total outstanding principal balance of the line of credit to
EBITDA; the average total outstanding principal balance of the line of
credit to total liabilities, plus net worth; and the average total
outstanding principal balance of the line of credit 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 June 30, 2005.
Letters of credit:
As of June 30, 2005, the Company had $1.6 million outstanding in standby
letters of credit issued to a refining client to cover contractual
obligations for progress payments made to equipment manufacturers for major
project items. We expect obligations under standby letters of credit to
increase to approximately $7.6 million during November 2005 and decrease
each month following until obligations are released in May 2006.
8
ENGlobal Corporation
Notes to Condensed Consolidated Financial Statements
June 30, December 31,
2005 2004
--------------------
(in thousands)
--------------------
Schedule of Long-Term Debt:
Comerica Credit Facility - Line of credit, prime (6.25% at June 30, 2005),
maturing in July 2007 $ 10,940 $ 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 218 255
Significant PEI Shareholders - Note payable, discounted at 4.5% interest, principal
payments in installments of $208,761 due annually, maturing in December 2006 391 385
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 1,605 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 13,404 16,207
Less: Current maturities (549) (622)
-------- --------
Long-term debt, net of current portion $ 12,855 $ 15,585
======== ========
NOTE 4 - RECENT ACCOUNTING PRONOUNCEMENTS
In May 2005 the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 154, "Accounting Changes and Error Corrections, a replacement of
APB Opinion No. 20 and FASB Statement No. 3." SFAS 154 requires
retrospective application to prior periods' financial statements for
changes in accounting principle, unless it is impracticable to determine
either the period-specific effects or the cumulative effect of the change.
SFAS 154 also requires that retrospective application of a change in
accounting principle be limited to the direct effects of the change.
Indirect effects of a change in accounting principle, such as a change in
non-discretionary profit-sharing payments resulting from an accounting
change, should be recognized in the period of the accounting change. SFAS
154 also requires that a change in depreciation, amortization, or depletion
method for long-lived, non-financial assets be accounted for as a change in
accounting estimate affected by a change in accounting principle. SFAS 154
is effective for accounting changes and corrections of errors made in
fiscal years beginning after December 15, 2005. Early adoption is permitted
for accounting changes and corrections of errors made in fiscal years
beginning after the date this Statement is issued. The Company is required
to adopt the provisions of SFAS 154, as applicable, for the year beginning
January 1, 2006.
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.
9
ENGlobal Corporation
Notes to Condensed Consolidated Financial Statements
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 5 - 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. A change in assumptions in the estimation of the fair market value of
the segments would unlikely give rise to an impairment of goodwill without
deteriorating operating results in the segments.
NOTE 6 - FIXED FEE CONTRACTS
Costs, estimated earnings and billings on uncompleted contracts consisted
of the following at June 30, 2005 and December 31, 2004:
June 30, December 31,
2005 2004
--------------------
(in thousands)
--------------------
Costs incurred on uncompleted contracts $ 15,572 $ 8,292
Estimated earnings on uncompleted contracts 2,675 1,584
-------- --------
Earned revenues 18,247 9,876
Less billings to date (16,702) (11,077)
-------- --------
Net costs and estimated earnings in excess of billings
on uncompleted contracts $ 1,545 $ (1,201)
======== ========
Costs and estimated earnings in excess of billings on uncompleted contracts $ 3,293 $ 1,113
Less billings and estimated earnings in excess of cost on uncompleted contracts (1,748) (2,314)
-------- --------
Net costs and estimated earnings in excess of billings
on uncompleted contracts $ 1,545 $ (1,201)
======== ========
NOTE 7 - 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 and six months ended June 30, 2005 and
2004, respectively, as if the Company had applied the fair value
recognition provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation."
10
ENGlobal Corporation
Notes to Condensed Consolidated Financial Statements
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
2005 2004 2005 2004
------- ------- ------- -------
(in thousands) (in thousands)
Pro forma impact of fair value method (SFAS 148):
Net income attributable to common stockholders, as reported $ 1,520 $ 421 $ 2,440 $ 892
Less compensation expense determined under fair value
method, net of tax (55) (5) (110) (10)
------- ------- ------- -------
Pro forma net income attributable to common stockholders $ 1,465 $ 416 $ 2,330 $ 882
======= ======= ======= =======
Earnings per share (basic):
As reported $ 0.06 $ 0.02 $ 0.10 $ 0.04
Pro forma $ 0.06 $ 0.02 $ 0.10 $ 0.04
Earnings per share (diluted):
As reported $ 0.06 $ 0.02 $ 0.10 $ 0.04
Pro forma $ 0.06 $ 0.02 $ 0.10 $ 0.04
Weighted average Black-Scholes fair value assumptions:
Risk free interest rate 5% 5% 5% 5%
Expected life 3 years 3-10 years 3 years 3-10 years
Expected volatility 51% 72% 51% 72%
Expected dividend yield 0.0% 0.0% 0.0% 0.0%
NOTE 8 - EMPLOYEE STOCK PURCHASE PLAN
On June 17, 2004, ENGlobal shareholders ratified the Company's adoption of
the 2004 Employee Stock Purchase Plan ("Plan"). Beginning April 2004, the
Company provided eligible employees with the opportunity and a convenient
means to purchase shares of the Company's Common Stock as an incentive to
exert maximum efforts for the success of the Company. ENGlobal intends that
options to purchase stock granted under the Plan qualify as options granted
under an "employee stock purchase plan" as defined in Section 423(b) of the
Code. The Plan will be construed so as to be consistent with Section 423 of
the Code, including Section 423(b)(5) which requires that all participants
have the same rights and privileges with respect to options granted under
the Plan. The cash deferred by participants into the plan has been used to
meet the Company's cash requirements or has been applied to the reduction
of the Company's long-term debt.
NOTE 9 - SEGMENT INFORMATION
The Company operates in two business segments: (1) engineering, providing
services primarily to major integrated oil and gas companies that, for the
most part, are located in the United States; 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 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 in the corporate segment includes those
activities that are not allocated to the operating segments and include
costs related to business development, executive function, finance,
accounting, safety, investor relations/governance, human resources, project
controls and information technology that are not specifically identifiable
11
ENGlobal Corporation
Notes to Condensed Consolidated Financial Statements
with the two segments. The inter-company elimination row includes the
amount of administrative costs allocated to the segments. The Corporate
function supports both business segments and therefore cannot be
specifically assigned to either. Significant portions of Corporate costs
are allocated to each segment based on each segment's revenues and
eliminated in consolidation.
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2005 2004 2005 2004
--------- --------- --------- ---------
(in thousands) (in thousands)
Revenue:
Engineering $ 54,028 $ 30,404 $ 94,327 $ 58,004
Systems 5,391 3,879 9,722 7,271
--------- --------- --------- ---------
Total revenue $ 59,419 $ 34,283 $ 104,049 $ 65,275
========= ========= ========= =========
Operating income (loss):
Engineering $ 4,742 $ 2,742 $ 8,217 $ 5,327
Systems 157 (335) 261 (548)
Corporate 1,252 397 1,924 716
Intercompany eliminations (3,536) (2,036) (6,157) (3,875)
--------- --------- --------- ---------
Total operating income $ 2,615 $ 768 $ 4,245 $ 1,620
========= ========= ========= =========
Financial information about geographic areas
--------------------------------------------
Revenues from the Company's non-U.S. operations are currently not material.
The Company does not own any long-lived assets located in any other country
other than the United States.
On June 24, 2005, we created a new, indirect subsidiary named ENGlobal
Canada ULC, which will operate out of Calgary, Canada. ENGlobal Canada is a
wholly-owned subsidiary of ENGlobal Technologies, Inc. ("ETI") and ETI is a
wholly-owned subsidiary of ENGlobal Systems, Inc ("ESI"). ETI will be
renamed ENGlobal Automation Group, Inc. ("EAG") and will subsequently
become a subsidiary of ENGlobal Engineering, Inc. ("EEI").
NOTE 10 - INCOME TAXES PAYABLE
Due to the results of a recent audit by the Internal Revenue Service of the
Company's Form 1120 filing for the tax-year ended December 31, 2003, the
Company recorded an additional income tax payable (for tax-years 2002, 2003
and 2004) and a deferred tax asset equaling $590,000. The re-classification
of the tax liability and deferred tax asset were the result of a
re-calculation on the limitation of the net operating loss ("NOL")
carry-forwards occurring prior to the merger in 2001 (see the Executive
Overview in Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operation). The additional deferred tax asset will
be available to offset income in tax-years 2005 through 2009. Interest was
assessed in the amount of $56,200, although no penalties were assessed as a
result of the audit. During August 2005, the Company expects to pay the
United States Treasury Department approximately $622,000 for the additional
tax liability and interest charges and close the audit.
NOTE 11 -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.
12
ENGlobal Corporation
Notes to Condensed Consolidated Financial Statements
In our Form 10-K for the year ended December 31, 2004, we reported that the
Company and its subsidiaries had been successful in obtaining dismissals in
all but one of the lawsuits that had been filed in Louisiana on behalf of
former employees of Bernard and Burk, Inc. The Company has now received a
release from the remaining petition.
NOTE 12 -SUBSEQUENT EVENTS
During July 2005, ENGlobal Design Group, Inc. ("EDG") received notification
from the Department of the Navy that unresolved liabilities under the
predecessor contract with Engineering Design Group, Inc. ("EDGI") are
interfering with the ability of the Dallas office of the Defense Contract
Management Agency ("DCMA") to process the novation agreements required by
FAR 42.12; and that in order to protect the DCMA's contractual interests,
until the novation agreements are executed, EDG will not be solicited for
any future proposals for work under such contracts. In January 2004,
ENGlobal purchased selected assets of EDGI, including certain of EDGI's
contract rights with the Department of the Navy. EDG revenues under these
contracts totaled $1.9 million and $1.3 million respectively for the year
ended December 31, 2004 and the six-month period ended June 30, 2005 and
represented approximately 53.7% and 52.9% respectively of EDG's total
revenues during such periods. EDG's current backlog under these contracts
is $6.5 million. ENGlobal will be permitted to complete this backlog but
will not be awarded new work until this matter is resolved. We do not
expect the DCMA's action to have a material effect upon the consolidated
financial position or operation of ENGlobal and are seeking resolution of
this matter.
13
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, it 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
and operating divisions 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
14
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.
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 Six Months Ended
June 30, June 30,
---------------- ---------------
2005 2004 2005 2004
------ ------ ------ ------
Revenue:
Engineering 90.9 % 88.6 % 90.7 % 88.9 %
Systems 9.1 % 11.4 % 9.3 % 11.1 %
Operating income (loss):
Engineering 8.8 % 9.0 % 8.7 % 9.2 %
Systems 2.9 % (8.6)% 2.7 % (7.9)%
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.
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.
Corporate SG&A expense is comprised of costs related to business
development, executive function, 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.
15
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. Additional disclosure regarding specific policies is as
follows:
Revenue Recognition:
Because the majority of the Company's revenues are recognized under
cost-plus contracts, significant estimates are generally not involved in
determining revenue recognition. In addition, most of our contracts are
with Fortune 500 companies. As a result, collection risk is generally not a
relevant factor in the recognition of revenue.
Goodwill:
A change in assumptions in the estimation of the fair market value of the
segments would unlikely give rise to an impairment of goodwill without
deteriorating operating results in the segments.
Change Orders:
Change orders are modifications of an original contract that effectively
change the provisions of the contract without adding new provisions. Either
we or our clients may initiate change orders. Change orders may include
changes in specifications or design, manner of performance, equipment,
materials, scope of work, and/or the period of completion of the project.
Change orders occur when changes are experienced once a contract is begun.
Change orders are sometimes documented and the terms of change orders are
agreed with the client before the work is performed. Other times,
circumstances may require that work progress without the client's written
agreement before the work is performed. Costs related to change orders are
recognized when they are incurred. Change orders are included in the total
estimated contract revenue when it is probable that the change orders will
result in a bona fide addition to value that can be reliably estimated.
We have a favorable history of negotiating and collecting for work
performed under change orders and our bi-weekly billing cycle has proven to
be timely enough to properly account for change orders.
16
Consolidated Results of Operations
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------------- --------------------------------------------
2005 2004 2005 2004
------------------ ------------------- ------------------- ---------------------
(in thousands) (in thousands)
Revenue:
Engineering - labor $ 29,402 49.5% $ 18,380 53.6% $ 55,809 53.6% $ 37,243 57.1%
Engineering - non-labor 20,809 35.0% 11,289 32.9% 31,770 30.5% 19,281 29.5%
Systems 5,391 9.1% 2,384 7.0% 9,722 9.3% 4,454 6.8%
Acquisition 3,817 6.4% 2,230 6.5% 6,748 6.5% 4,297 6.6%
--------- --------- --------- ---------
Total revenue $ 59,419 100.0% $ 34,283 100.0% $ 104,049 100.0% $ 65,275 100.0%
========= ========= ========= =========
Gross profit:
Engineering - labor $ 4,899 16.7% $ 3,045 16.6% $ 9,647 17.3% $ 6,252 16.8%
Engineering - non-labor 1,513 7.3% 542 4.8% 1,656 5.2% 906 4.7%
Systems 686 12.7% 135 5.7% 1,253 12.9% 378 8.5%
Acquisition 352 9.2% 417 18.7% 741 11.0% 764 17.8%
--------- --------- --------- ---------
Total gross profit 7,450 12.5% 4,139 12.1% 13,297 12.8% 8,300 12.7%
--------- --------- --------- ---------
SG&A expense:
Engineering 1,745 3.5% 945 3.2% 3,262 3.7% 1,925 3.4%
Systems 529 9.8% 416 17.5% 992 10.2% 848 19.0%
Corporate 2,284 3.8% 1,541 4.5% 4,233 4.1% 3,023 4.6%
Acquisition 277 7.3% 469 21.0% 565 8.4% 884 20.6%
--------- --------- --------- ---------
Total SG&A expense 4,835 8.1% 3,371 9.8% 9,052 8.7% 6,680 10.2%
--------- --------- --------- ---------
Operating income:
Engineering 4,667 9.3% 2,642 8.9% 8,041 9.2% 5,233 9.3%
Systems 157 2.9% (281) (11.8)% 261 2.7% (470) (10.6)%
Corporate (2,284) (3.8)% (1,541) (4.5)% (4,233) (4.1)% (3,023) (4.6)%
Acquisition 75 2.0% (52) (2.2)% 176 2.6% (120) (2.8)%
--------- --------- --------- ---------
Total operating income 2,615 4.4% 768 2.2% 4,245 4.1% 1,620 2.5%
--------- --------- --------- ---------
Other income (expense), net (202) (0.3)% (130) (0.4)% (370) (0.4)% (268) (0.4)%
Tax provision (893) (1.5)% (217) (0.6)% (1,434) (1.4)% (460) (0.7)%
--------- --------- --------- ---------
Net income $ 1,520 2.6% $ 421 1.2% $ 2,441 2.3% $ 892 1.4%
========= ========= ========= =========
Other financial comparisons: As of June 30,
- ---------------------------- -------------------
2005 2004
------- -------
Working capital $13,539 $ 9,387
Total assets $59,693 $40,456
Long-term debt, net of current portion $12,854 $ 9,070
Stockholders' equity $22,603 $19,080
In the results presented for the three and six months ended June 30, 2005,
"Acquisition" totals include the combined results of operations related to
assets acquired from Cleveland Inspection Services, Inc. ("Cleveland") and
17
AmTech Inspection, LLC ("AmTech"). In the results for the three and six
months ended June 30, 2004, "Acquisition" totals are the combined results
of operations related to assets acquired from Petro-Chem, Senftleber, and
EDG. For analytical purposes only, results from acquired companies or
acquired assets are shown separately for the first 12 months after closing.
Revenue:
Revenue increased $25.1 million, or approximately 73.3%, to $59.4 million
for the three months ended June 30, 2005 from $34.3 million for the
comparable prior year period. Revenue increased $38.8 million, or
approximately 59.4%, to $104.0 million for the six months ended June 30,
2005 from $65.2 million for the comparable prior year period. Excluding
non-labor engineering revenue, the Company's adjusted revenue for the three
months ended June 30, 2005 increased $15.6 million, or approximately 67.9%,
over comparable revenue for the three months ended June 30, 2004 and the
Company's adjusted revenue for the six months ended June 30, 2005 increased
$26.3 million, or approximately 57.1%, over comparable revenue for the six
months ended June 30, 2004. Acquisition revenue contributed $1.6 million,
or 10.2%, of the increase in adjusted revenue and contributed $2.5 million,
or 9.3%, of the increase in adjusted revenue for the three and six months
ended June 30, 2005.
The increases in engineering revenues reflect the economic impact of
increased oil and crude prices. Specifically we have contracts with clients
who are improving their clean fuel refining capabilities. Two new contracts
in 2005, providing services for ultra low sulfur diesel fuel projects
through our Tulsa office, have contributed $12.3 million of our revenue
increase over the prior year. Improved economic conditions have allowed
other customers the opportunity to take advantage of increasing refining
capabilities and improving reliability. This has helped fuel our growth in
revenues in the Beaumont area. Beaumont office contract revenues have
increased for one group of our customers by approximately $13.1 million due
to increased Engineering, Procurement and Construction (EPC) work. Revenues
from our materials procurement services have provided $15.2 million and
$20.0 million for the three months and six months ended June 30, 2005,
respectively as compared to $10.1 million and $17.1 million for the
comparable prior year periods. Procurement services provide low or no
margins and are provided in addition to engineering and subcontractor
services. Our systems segment has also seen increases in revenues as a
result of market conditions, with customers spending on a variety of
capital projects, such as meeting environmental requirements and increasing
capacities.
Gross Profit:
Gross profit increased $3.3 million, or approximately 80.0%, to $7.4
million for the three months ended June 30, 2005 from $4.1 million for the
comparable prior year period. Acquisition gross profit contributed
$352,000, or approximately 4.7%, of the total gross profit for the three
months ended June 30, 2005. Gross profit increased $5.0 million, or
approximately 60.2%, to $13.3 million for the six months ended June 30,
2005 from $8.3 million for the comparable prior year period. Acquisition
gross profit contributed $741,000, or approximately 5.6%, of the total
gross profit for the six months ended June 30, 2005. As a percentage of
revenue, gross profit increased to 12.5% for the three months ended June
30, 2005 from 12.1% for the quarter ended June 30, 2004 and 12.8% for the
six months ended June 30, 2005 from 12.7% for the quarter ended June 30,
2004.
Gross profit percentages in the engineering segment continue to be affected
by low margins on the procurement services portion of EPC projects. Margins
on the procurement services range from zero markup to a 6.5% markup.
Selling, General, and Administrative:
As a percentage of revenue, SG&A expense decreased to 8.1% for the three
months ended June 30, 2005 from 9.8% for the three months ended June 30,
2004 and 8.7% for the six months ended June 30, 2005 from 10.2% for the six
months ended June 30, 2004. SG&A expense increased $1.4 million, or
approximately 43.4%, to $4.8 million for the three months ended June 30,
2005 from $3.4 million for the comparable prior year period and increased
$2.4 million, or approximately 35.5%, to $9.1 million for the six months
ended June 30, 2005 from $6.7 million for the comparable prior year period.
Each reporting area except acquisitions incurred additional costs for the
three and six months ended June 30, 2005 (Engineering - $800,000 and $1.3
million, respectively; Systems - $113,000 and $144,000, respectively;
Corporate - $743,000 and $1.2 million, respectively and Acquisition -
$192,000 and $319,000, respectively) the costs as a percentage of their
respective revenues decreased in each area except the engineering segment
which experienced a fractional increase.
18
Corporate SG&A expense increased $743,000, or approximately 48.2%, to $2.3
million for the three months ended June 30, 2005 from $1.5 million for the
comparable prior year period. This increase is primarily due to accrued
incentive plan compensation ($370,000 and $597,000) and an increase in
salaries and burden ($373,000 and $903,000, respectively). As a percentage
of total revenue, corporate SG&A expense decreased to 3.8% for the three
months ended June 30, 2005 from 4.5% for the comparable prior year period
and decreased to 4.1% for the six months ended June 30, 2005 from 4.6% for
the comparable prior year period. Corporate SG&A expense increased $1.2
million, or approximately 40.0%, to $4.2 million for the six months ended
June 30, 2005 from $3.0 million for the comparable prior year period.
Operating Income:
Operating income increased $1.8 million, or approximately 240.5%, to $2.6
million for the three months ended June 30, 2005 from $800,000 compared to
the same period in 2004 and increased $2.6 million, or approximately
162.0%, to $4.2 million for the six months ended June 30, 2005 from $1.6
million compared to the same period in 2004. As a percentage of revenue,
operating income increased to 4.4% for the three months ended June 30, 2005
from 2.2% for the comparable prior year period and increased to 4.1% for
the six months ended June 30, 2005 from 2.5% for the comparable prior year
period.
Other Income/Expense, net:
Other expense increased 55.4% and 38.1%, respectively for the three and six
month periods ended June 30, 2005 from the comparable prior year periods.
The increases are due to increased interest expense on our credit facility
as interest rates have increased from 4.25% at June 30, 2004 to 6.25% at
June 30, 2005. Long term debt increased in the fourth quarter of 2004 with
the acquisition of certain assets of Cleveland Inspection Services. The
interest associated with the acquisition notes contributed to the increase
in interest expense as compared to the same periods in the prior year. We
also had a one-time interest expense recognized in the second quarter of
2005 of approximately $56,000 resulting from interest charges on the IRS
audit assessment on the 2002 and 2003 tax year.
Tax Provision:
Income tax expense increased $676,000, or approximately 311.5%, to $893,000
for the three months ended June 30, 2005 from $217,000 for the comparable
prior year period and increased $1.0 million, or approximately 211.7%, to
$1.4 million for the six months ended June 30, 2005 from $400,000 for the
comparable prior year period. The estimated effective tax rate was 37% for
the three-month and six-month periods ended June 30, 2005 compared to 34%
for the comparable prior year periods.
Net Income:
Net income for the three months ended June 30, 2005 increased $1.1 million,
or approximately 261.0%, to $1.5 million from $400,000 for the comparable
prior year period. For the six months ended June 30, 2005, net income
increased $1.5 million, or approximately 173.7%, to $2.4 million from
$900,000 for the comparable prior year period. As a percentage of revenue,
net income increased to 2.6% for the three-month period ended June 30, 2005
from 1.2% for the three-month period ended June 30, 2004 and increased to
2.3% for the six-month period ended June 30, 2005 from 1.4% for the period
ended June 30, 2004.
19
Segment Results
---------------
Engineering
-------------------------
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------- ----------------------------------------
2005 2004 2005 2004
----------------- ----------------- ---------------- --------------------
(in thousands) (in thousands)
Revenue:
Engineering - labor $ 29,402 54.4% $ 18,380 60.5% $ 55,809 59.2% $ 37,243 64.2%
Engineering - non-labor 20,809 38.5% 11,289 37.1% 31,770 33.7% 19,281 33.2%
Acquisition 3,817 7.1% 735 2.4% 6,748 7.2% 1,480 2.6%
-------- -------- -------- --------
Total revenue $ 54,028 100.0% $ 30,404 100.0% $ 94,327 100.0% $ 58,004 100.0%
======== ======== ======== ========
Gross profit:
Engineering - labor $ 4,899 16.7% $ 3,045 16.6% $ 9,647 17.3% $ 6,252 16.8%
Engineering - non-labor 1,513 7.3% 542 4.8% 1,656 5.2% 906 4.7%
Acquisition 352 9.2% 78 10.6% 741 11.0% 149 10.1%
-------- -------- -------- --------
Total gross profit 6,764 12.5% 3,665 12.4% 12,044 12.8% 7,307 12.8%
-------- -------- -------- --------
Operating SG&A expense:
Engineering 1,745 3.5% 945 3.2% 3,262 3.7% 1,925 3.4%
Acquisition 277 7.3% 76 10.3% 565 8.4% 167 11.3%
-------- -------- -------- --------
Total SG&A expense 2,022 3.7% 1,021 3.4% 3,827 4.1% 2,092 3.6%
-------- -------- -------- --------
Operating income:
Engineering 4,667 9.3% 2,642 8.9% 8,041 9.2% 5,233 9.3%
Acquisition 75 2.0% 2 0.0% 176 2.6% (18) (0.1)%
-------- -------- -------- --------
Total operating income $ 4,742 8.8% $ 2,644 9.0% $ 8,217 8.7% $ 5,215 9.2%
-------- -------- -------- --------
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 has also
benefited from the renewed interest of its chemical/petrochemical clients
in maintenance and retrofit projects as product margins in this marketplace
have improved. The Company's Beaumont engineering office continued its
performance as the largest profit contributing operation during the first
half of 2005, with a small increase in its profits compared to those in the
first half 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 two new refining clients. This helps to minimize the threat posed
by having a major customer that comprises a significant percentage of our
backlog, 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 half 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 and six months ended June 30, 2005 are
from results of operations related to assets acquired from Cleveland and
AmTech. In the results for the three and six month periods ended June 30,
2004, acquisition totals are from results of operations related to assets
acquired from Petro-Chem.
20
Revenue:
Revenue increased $23.6 million, or approximately 77.7%, to $54.0 million
for the three months ended June 30, 2005 from $30.4 million for the
comparable prior year period. Revenues increased $36.3 million, or
approximately 62.6%, to $94.3 million for the six months ended June 30,
2005 from $58.0 million for the comparable prior year period. Excluding
non-labor revenue, revenue for the three months ended June 30, 2005
increased $14.1 million, or approximately 73.8%, over comparable revenue
for the three months ended June 30, 2004 and revenue for the six months
ended June 30, 2005 increased $23.8 million, or approximately 61.5%, over
comparable revenue for the six months ended June 30, 2004. Of this
increase, acquisition revenue accounted for $3.1 million and revenue from
internal growth accounted for $11.0 million for the three-month period
ended June 30, 2005, acquisition revenue accounted for $5.3 million and
revenue from internal growth accounted for $18.5 million for the six-month
period ended June 30, 2005. Revenue from internal growth, not related to
acquisitions or non-labor items, for the three months ended June 30, 2005
represented a 60.0% increase over such revenue for the comparable period
ended June 30, 2004. For the six months ended June 30, 2005, it represented
a 49.9% increase over such revenue for the comparable period ended June 30,
2004.
Non-labor revenue represented approximately 38.5% of the total engineering
revenue for the quarter ended June 30, 2005 and increased $9.5 million to
$20.8 million from $11.3 million for the comparable period ended June 30,
2004. This represented approximately 40.3% of our revenue increase.
Non-labor revenue represented approximately 33.7% of the total engineering
revenue for the six months ended June 30, 2005 and increased $12.5 million
to $31.8 million from $19.3 million for the comparable period ended June
30, 2004. This represented approximately 34.4% of the revenue increase.
Gross Profit:
Gross profit increased $3.1 million, or approximately 84.5%, to $6.8
million for the three months ended June 30, 2005 from $3.7 million for the
comparable period in 2004. Gross profit increased $4.7 million, or
approximately 64.8%, to $12.0 million for the six months ended June 30,
2005 from $7.3 million for the comparable period in 2004. Excluding gross
profit from non-labor revenue, gross profit increased $2.1 million, or
68.1%, for the three months ended June 30, 2005 when compared to the three
months ended June 30, 2004, with gross profit from internal growth
accounting for $1.8 million of the increase. Excluding gross profit from
non-labor revenue, gross profit increased $4.0 million, or 62.2%, for the
six months ended June 30, 2005 when compared to the six months ended June
30, 2004, with gross profit from internal growth accounting for $3.4
million of the increase. Gross profit from internal growth for the three
months ended June 30, 2005 represented a 60.9% increase over gross profit
from internal growth for the comparable period ended June 30, 2004. For the
six months ended June 30, 2005, gross profit from internal growth
represented a 54.3% increase over gross profit from internal growth for the
comparable period ended June 30, 2004. We have had an additional influx of
work from both existing contracts and new contracts as compared to the
levels of work for the three months ended June 30, 2005.
As a percentage of revenue, excluding non-labor and acquisition, gross
profit on contract activities increased to 16.7% from 16.6% for the
three-month period ended June 30, 2005 as compared to the prior year
period, and increased to 17.3% from 16.8% for the six-month period ended
June 30, 2005 as compared to the prior year period. Gross profit includes
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. These
costs increased to approximately $914,000 for the three-month period ended
June 30, 2005 from approximately $429,000 for the comparable period ended
June 30, 2004, and to $1.9 million for the six-month period ended June 30,
2005 from approximately $860,000 for the comparable period ended June 30,
2004
Selling, General, and Administrative:
As a percentage of revenue, excluding non-labor revenue, SG&A expense
increased to 6.1% for the three-month period ended June 30, 2005 from 5.3%
for the comparable prior year period and increased to 6.1% for the
six-month period ended June 30, 2005 from 5.4% for the six-month period
ended June 30, 2004. SG&A expense increased $1.0 million overall, or 100%,
to $2.0 million for the three months ended June 30, 2005 from $1.0 million
for the comparable prior year period. This increase was primarily related
to expansion of our office space (rents - $262,000); equipment
21
(depreciation - $139,000) and administrative support staff (salaries -
$402,000), plus $197,000 in other support activities. As a percentage of
revenue, excluding non-labor revenue, SG&A expense increased $1.7 million
overall, or approximately 82.9%, to $3.8 million for the six months ended
June 30, 2005 from $2.1 million for the comparable prior year period
primarily related to expansion of our office space (rents - $396,000);
equipment (depreciation - $337,000 and administrative support staff
(salaries - $713,000), plus $254,000 in other support activities.
Operating Income:
Operating income increased $2.0 million, or approximately 79.3%, to $4.7
million for the three months ended June 30, 2005 and increased $3.0
million, or approximately 57.6%, to $8.2 million for the six months ended
June 30, 2005. As a percentage of revenue, operating income decreased to
8.8% for the three months ended June 30, 2005 from 9.0% for the comparable
prior year period and decreased to 8.7% for the six months ended June 30,
2005 from 9.2% for the comparable prior year period.
22
Systems
-----------------------
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------ --------------------------------------
2005 2004 2005 2004
---------------- ----------------- ----------------- -----------------
(in thousands) (in thousands)
Revenue:
Systems 5,391 100.0% 2,384 61.5% 9,722 100.0% 4,454 61.3%
Acquisition -- --% 1,495 38.5% -- --% 2,817 38.7%
------- ------- ------- -------
Total revenue $ 5,391 100.0% $ 3,879 100.0% $ 9,722 100.0% $ 7,271 100.0%
======= ======= ======= =======
Gross profit:
Systems 686 12.7% 135 5.7% 1,253 12.9% 378 8.4%
Acquisition -- --% 339 22.7% -- --% 615 21.8%
------- ------- ------- -------
Total gross profit 686 12.7% 474 12.2% 1,253 12.9% 993 13.7%
------- ------- ------- -------
Operating SG&A expense:
Systems 529 9.8% 416 17.5% 992 10.2% 848 19.1%
Acquisition -- --% 393 26.3% -- --% 717 25.5%
------- ------- ------- -------
Total SG&A expense 529 9.8% 809 20.8% 992 10.2% 1,565 21.5%
------- ------- ------- -------
Operating income:
Systems 157 2.9% (281) (11.8)% 261 2.7% (470) (10.6)%
Acquisition -- --% (54) (3.6)% -- --% (102) (3.6)%
------- ------- ------- -------
Total operating income $ 157 2.9% $ (335) (8.6)% $ 261 2.7% $ (572) (7.9)%
------- ------- ------- -------
Overview:
Our systems segment's financial results during the three and six months
ended June 30, 2005 offset the overall loss that had been incurred during
the three and six 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. Higher oil and crude prices have generated clients' ability to
increase capacity and spend on capital projects. New environmental
requirements regarding emissions that clients are required to meet by 2007
have also increased ESI's workload.
Acquisition totals for the three and six months ended June 30, 2004 are
from results of operations related to the purchase of EDG and Senftleber.
There was no acquisition activity for the three and six months ended June
30, 2005.
Revenue:
Revenue increased $1.5 million, or approximately 39.0%, to $5.4 million for
the three months ended June 30, 2005 compared to the prior year period and
increased $2.4 million, or approximately 33.7%, to $9.7 million for the six
months ended June 30, 2005 from $7.3 million for the comparable prior year
period.
Gross Profit:
Gross profit increased $212,000, or approximately 44.7%, to $686,000 for
the three months ended June 30, 2005 from $474,000 for the comparable prior
year period and increased $260,000, or approximately 26.2%, to $1.3 million
for the six months ended June 30, 2005 compared to the prior year period.
As a percentage of revenue, gross profit increased to 12.7% for the three
months ended June 30, 2005 from 12.2% for the comparable prior year period
and decreased to 12.9% for the six months ended June 30, 2005 from 13.7%
for the comparable prior year period.
23
Selling, General, and Administrative:
SG&A expense decreased $280,000, or approximately 34.6%, to $529,000 for
the three months ended June 30, 2005 from $809,000 for the comparable prior
year period and decreased $573,000, or approximately 36.6%, to $1.0 million
for the six months ended June 30, 2005 from $1.6 million for the comparable
prior year period. As a percentage of revenue, SG&A expense decreased to
9.8% for the three months ended June 30, 2005 from 20.8% for the comparable
prior year period and decreased to 10.2% for the six months ended June 30,
2005 from 21.5% 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 $492,000, or approximately 146.9%, to $157,000
for the three months ended June 30, 2005 from an operating loss of $335,000
for the comparable prior year period and increased $833,000, or
approximately 145.6%, to $261,000 for the six months ended June 30, 2005
from an operating loss of $572,000 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"or the "Credit
Facility"). As of June 30, 2005, we had working capital of $13.5 million.
Long-term debt, on June 30, 2005 was $13.4 million, including $10.9 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 the average total outstanding principal balance
of the line of credit to EBITDA; the average total outstanding principal
balance of the line of credit to total liabilities, plus net worth; and the
average total outstanding principal balance of the line of credit to
accounts/unbilled receivables. The Company is also required, as of the end
of each quarter, 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 guarantees, repurchase obligations or other commitments. We have no
off-balance sheet arrangements, other than standby letters of credit.
The Company has been awarded a significant project with a central states
refining company 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 the client 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 June 30, 2005, letters of
credit totaling $1.6 million were outstanding attributable to the
Coffeyville project.
As of June 30, 2005, we had the following long-term debt:
o $218,000 in two notes of $105,000 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.
24
o $391,102 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 and repurchase of ENGlobal stock into treasury.
o $1,605,442 in notes of $1,324,490, $40,136 and $240,816, 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.
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 June 30, 2005, management believes the Company's cash position is
sufficient to meet its working capital requirements. However, the Company
is exploring options to increase its available cash for acquisitions,
internal expansion and working capital in case a future decrease in demand
for the Company's services or products was to reduce the availability of
funds through operations.
The following table summarizes our contractual obligations as of June 30,
2005:
Payments Due by Period
---------------------------------------------------------
2005 2006 2007 2008 2009 and Total
thereafter
------- ------- ------- ------- ------- -------
(in thousands)
---------------------------------------------------------
Long-term debt (1) $ 1,092 $ 1,426 $12,165 542 $ 479 $15,704
Capital leases 1 -- -- -- -- 1
Operating leases(2) 3,060 6,076 6,066 5,233 5,141 25,576
------- ------- ------- ------- ------- -------
Total contractual cash obligations $ 4,153 $ 7,502 $18,231 5,775 $ 5,620 $41,281
======= ======= ======= ======= ======= =======
(1)Long-term debt includes future interest payments assuming the existing
long-term debt and revolving credit facility remain outstanding with the
interest rate in effect at December 31, 2004. The Company's interest rate
on its revolving credit facility fluctuates with the prime rate.
(2)These operating leases are predominantly real estate leases.
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 the 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 $3.9 million for the
six-month period ended June 30, 2005, compared to $62,000 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
half of 2005. During the period, the line of credit decreased from $13.5
million as of December 31, 2004 to $10.9 million as of June 30, 2005. Net
income was the primary driver of the Company's positive cash flows from
operations in the first half of 2005. Though a decline in revenues would be
likely to adversely impact our cash flow from operations, we believe that
future cash flows, our ability to manage the timing of acquisitions, and
our borrowing capacity under our line of credit will allow us to meet cash
requirements in 2005 and beyond. Future uses of cash in operations will
continue to be primarily for labor and material costs required in
connection with contract performance.
25
Investing activities:
Net cash used in investing activities was $398,000 for the six-month period
ended June 30, 2005, compared with net cash used of $591,000 in the same
period in 2004. In the first half 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 six months of
2005 and 2004 primarily for computers and software. Future investing
activities are anticipated to remain consistent with prior years and
include capital additions for leasehold improvements, technical
applications software, and equipment, such as upgrades to computers. Annual
capital expenditures are limited to $1.3 million under the line of credit
agreement. The Company does not expect to exceed $1.3 million in capital
expenditures over the next twelve months.
Financing activities:
Net cash used in financing activities was $3.5 million for the six-month
period ended June 30, 2005, compared with $500,000 provided in the same
period in 2004. In the first half of 2005, the Company reduced the
outstanding line of credit by $2.6 million using cash generated from
working capital as compared to a net $1.6 million increase in the
outstanding line of credit in the same period in 2004. Future cash flows
from financing activities are anticipated to be borrowings, payments on the
line of credit and payments on long-term debt instruments. Line of credit
fluctuations are a function of timing related to operations obligations and
payments received on accounts receivable. Payments on long-term debt,
including interest for the coming year, are estimated to be $1,092,000.
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 $32.4 million and $30.8 million at June 30, 2005 and December
31, 2004, respectively. The number of days sales outstanding in trade
accounts receivables was 55 days and 62 days at June 30, 2005 and December
31, 2004, respectively.
Income Taxes Payable
- --------------------
Due to the results of a recent audit by the Internal Revenue Service of the
Company's Form 1120 filing for the tax-year ended December 31, 2003, the
Company recorded an additional income tax payable (for tax-years 2002, 2003
and 2004) and a deferred tax asset equaling $590,000. The re-classification
of the tax liability and deferred tax asset were the result of a
re-calculation on the limitation of the net operating loss ("NOL")
carry-forwards occurring prior to the merger in 2001. The additional
deferred tax asset will be available to offset income in tax-years 2005
through 2009. Interest was assessed in the amount of $56,200, although no
penalties were assessed as a result of the audit. During August 2005, the
Company expects to pay the United States Treasury Department approximately
$622,000 for the additional tax liability and interest charges and close
the audit.
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
interest rates relates primarily to our obligations under the Comerica
Credit Facility. As of June 30, 2005, $10.9 million had been borrowed under
the Credit Facility, accruing interest at 6.25% per year, excluding
amortization of prepaid financing costs. A 10% increase in the short-term
borrowing rates on the Credit Facility outstanding as of June 30, 2005
would be 62.5 basis points. Such an increase in interest rates would
increase our annual interest expense by approximately $68,000, assuming the
amount of debt outstanding remains constant.
26
The Company has no market risk exposure in the areas of interest rate risk
from investments because the Company did not have an investment portfolio
as of June 30, 2005. Currently, the Company does not engage in foreign
currency hedging activities nor is the Company exposed to currency exchange
rate fluctuation. All foreign receivables are denominated in U.S. dollars.
Accordingly, there are no foreign exchange gains or losses.
ITEM 4. CONTROLS AND PROCEDURES
As of June 30, 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 June 30, 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 June 30, 2005 that materially affected, or are
reasonably likely to materially affect, our internal controls over
financial reporting.
27
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.
In our Form 10-K for the year ended December 31, 2004, we reported that the
Company and its subsidiaries had been successful in getting dismissals in
all but one of the lawsuits that had been filed in Louisiana on behalf of
former employees of Bernard and Burk, Inc. The Company has now received a
release from the remaining petition.
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
On June 16, 2005, the Company held its Annual Meeting of Stockholders. The
Company's stockholders elected the following five persons as directors,
each to serve until the next Annual Meeting of Stockholders or until his
successor is elected or appointed: Michael L. Burrow, P.E., William A.
Coskey, P.E., David W. Gent, P.E., Randall B. Hale, and David C. Roussel.
The Company's stockholders also voted to approve an amendment to the
Company's 1998 Incentive Plan to increase the number of shares reserved for
issuance under the Plan from 2,200,000 to 2,650,000.
The number of shares voted and withheld with respect to each director were
as follows:
Election of Directors For Withheld
--------------------- --- --------
Michael L. Burrow, P.E. 21,396,111 190,609
William A. Coskey, P.E. 21,376,495 210,225
David W. Gent, P.E. 21,396,970 189,750
Randall B. Hale 21,375,954 210,766
David C. Roussel 21,377,361 209,359
The number of shares voted with respect to the approval of an amendment to
the Company's 1998 Incentive Plan to increase the number of shares reserved
for issuance under the Plan from 2,200,000 to 2,650,000 was as follows:
For Against Abstain
--- ------- -------
14,692,798 824,077 33,091
ITEM 5. OTHER INFORMATION
None.
28
ITEM 6. EXHIBITS
31.1 Certifications Pursuant to Rule 13a - 14(a) of the Exchange Act
for 2002 for the Second Quarter 2005
31.2 Certifications Pursuant to Rule 13a - 14(a) of the Exchange Act
for 2002 for the Second 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 Second Quarter 2005
29
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 11, 2005
By: /s/ Robert W. Raiford
-------------------------
Robert W. Raiford
Chief Financial Officer and Treasurer
30