Attached files
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 September 30, 2009
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.)
654 N. Sam Houston Parkway E., 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 has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T during the
preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files).
Yes No
----- -----
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer," and smaller
reporting company in Rule 12b-2 of the Exchange Act. (check one):
Large Accelerated Filer Accelerated Filer X
--- ---
Non-Accelerated Filer Smaller Reporting Company
--- ---
(Do not check if a smaller reporting company)
1
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes No X
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the close of business of November 4, 2009.
$0.001 Par Value Common Stock 27,352,159 shares
2
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2009
TABLE OF CONTENTS
Page
Number
------
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Income for the Three Months and
Nine Months Ended September 30, 2009 and September 30, 2008 4
Condensed Consolidated Balance Sheets at September 30, 2009 and December 31, 2008 5
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2009 and September 30, 2008 6
Notes to Condensed Consolidated Financial Statements 7-16
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 17-39
Engineering Segment Results 28
Construction Segment Results 31
Automation Segment Results 34
Land Segment Results 37
Item 3. Quantitative and Qualitative Disclosures About Market Risk 40
Item 4. Controls and Procedures 40
Part II. Other Information
Item 1. Legal Proceedings 41
Item 1A. Risk Factors 41
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 41
Item 3. Defaults Upon Senior Securities 42
Item 4. Submission of Matters to a Vote of Security Holders 42
Item 5. Other Information 42
Item 6. Exhibits 42
Signatures 43
3
PART I. - FINANCIAL INFORMATION
-------------------------------
ITEM 1. FINANCIAL STATEMENTS
ENGlobal Corporation
Condensed Consolidated Statements of Income
(Unaudited)
(Dollars in thousands)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------------------- -------------------------------
2009 2008 2009 2008
------------- ------------- ------------- -------------
Revenues $ 87,271 $ 123,167 $ 260,639 $ 357,344
Operating costs 80,103 109,533 235,940 309,063
------------- ------------- ------------- -------------
Gross profit 7,168 13,634 24,699 48,281
Selling, general and administrative 6,980 7,449 20,838 23,376
------------- ------------- ------------- -------------
Operating income 188 6,185 3,861 24,905
Other income (expense):
Other income (expense) 31 49 182 134
Interest income (expense), net (148) (360) (479) (1,256)
------------- ------------- ------------- -------------
Income before income taxes 71 5,874 3,564 23,783
Provision for federal and state income taxes 140 2,379 1,570 9,583
------------- ------------- ------------- -------------
Net income (loss) $ (69) $ 3,495 $ 1,994 $ 14,200
============= ============= ============= =============
Net income per common share:
Basic $ 0.00 $ 0.13 $ 0.07 $ 0.52
Diluted $ 0.00 $ 0.13 $ 0.07 $ 0.51
Weighted average shares used in computing net income
per share (in thousands):
Basic 27,305 27,272 27,299 27,143
Diluted 27,305 27,956 27,573 27,704
See accompanying notes to interim condensed consolidated financial statements.
4
ENGlobal Corporation
Condensed Consolidated Balance Sheets
(Unaudited)
(Dollars in thousands)
ASSETS
------
September 30, December 31,
2009 2008
------------- ------------
Current Assets:
Cash $ 449 $ 1,000
Trade receivables, net 62,558 96,023
Prepaid expenses and other current assets 2,612 2,392
Notes receivable 3,124 --
Current portion of long term notes receivable 30 59
Costs and estimated earnings in excess of billings on uncompleted contracts 6,002 6,913
Federal and state income taxes receivable 1,391 --
Deferred tax asset 4,281 4,281
--------- ---------
Total Current Assets $ 80,447 $ 110,668
Property and equipment, net 6,566 5,744
Goodwill 22,283 21,457
Other intangible assets, net 4,532 5,000
Long term notes receivable, net of current portion 8,620 8,636
Deferred tax asset, non-current 153 153
Other assets 876 1,047
--------- ---------
Total Assets $ 123,477 $ 152,705
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable $ 11,151 $ 18,830
Accrued compensation and benefits 16,111 24,432
Notes payable -- 1,058
Current portion of long-term debt and leases 11,039 1,861
Deferred rent 578 416
Billings and estimated earnings in excess of costs on uncompleted contracts 3,523 208
Federal and state income taxes payable -- 2,472
Other current liabilities 852 2,805
--------- ---------
Total Current Liabilities $ 43,254 $ 52,082
Long-Term Debt and Leases, net of current portion 1,001 23,857
--------- ---------
Total Liabilities $ 44,255 $ 75,939
--------- ---------
Commitments and Contingencies (Note 9)
Stockholders' Equity:
Common stock - $0.001 par value; 75,000,000 shares authorized; 27,352,159
and 27,294,852 shares issued and outstanding at September 30, 2009 and
December 31, 2008, respectively $ 27 $ 27
Additional paid-in capital 36,866 36,415
Retained earnings 42,434 40,439
Accumulated other comprehensive income (loss) (105) (115)
--------- ---------
Total Stockholders' Equity $ 79,222 $ 76,766
--------- ---------
Total Liabilities and Stockholders' Equity $ 123,477 $ 152,705
========= =========
See accompanying notes to interim condensed consolidated financial statements.
5
ENGlobal Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
For the Nine Months Ended
September 30,
-------------------------
2009 2008
-------------------------
Cash Flows from Operating Activities:
Net income $ 1,994 $ 14,200
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Depreciation and amortization 3,713 3,393
Share-based compensation expense 514 1,063
(Gain)/Loss on disposal of property, plant and equipment 45 (85)
Deferred income taxes -- (204)
Changes in current assets and liabilities, net of acquisitions:
Trade accounts and other receivables 30,341 (19,622)
Costs and estimated earnings in excess of billings on uncompleted contracts 911 1,735
Prepaid expenses and other assets (467) 520
Accounts payable (7,679) 1,023
Accrued compensation and benefits (8,321) 1,783
Billings in excess of costs and estimated earnings 3,315 (522)
Other liabilities (1,978) (1,107)
Income taxes receivable/payable (3,863) (1,192)
-------- --------
Net cash provided by operating activities $ 18,525 $ 985
-------- --------
Cash Flows from Investing Activities:
Property and equipment acquired (3,165) (1,570)
Proceeds from note receivable 44 1,480
Business acquisitions, net of cash acquired (1,050) (2,844)
Proceeds from sale of other assets 3 383
-------- --------
Net cash used in investing activities $ (4,168) $ (2,551)
-------- --------
Cash Flows from Financing Activities:
Net borrowings (payments) on line of credit (12,530) 2,284
Proceeds from issuance of common stock -- 1,327
Borrowing (repayments) under capital lease (130) 459
Other long-term debt repayments (2,258) (1,967)
-------- --------
Net cash (used in) provided by financing activities $(14,918) $ 2,103
-------- --------
Effect of Exchange Rate Changes on Cash 10 (75)
-------- --------
Net change in cash (551) 462
Cash, at beginning of period 1,000 908
-------- --------
Cash, at end of period $ 449 $ 1,370
======== ========
See accompanying notes to interim condensed consolidatd financial statements.
6
Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
NOTE 1 - BASIS OF PRESENTATION
Our condensed consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United States of
America. The Company consolidates all of its subsidiaries and all
significant inter-company accounts and transactions have been eliminated in
the consolidation.
The condensed consolidated financial statements of ENGlobal Corporation
(which may be referred to as "ENGlobal," the "Company," "we," "us," or
"our") included herein are unaudited for the three month and nine month
periods ended September 30, 2009 and 2008, have been prepared from the
books and records of the Company pursuant to the rules and regulations of
the Securities and Exchange Commission, and in the case of the condensed
balance sheet as of December 31, 2008, have been derived from the audited
financial statements. These financial statements reflect all adjustments
(consisting of normal recurring adjustments), which are, in the opinion of
management, necessary to fairly present the results for the periods
presented. Certain information and note disclosures, normally included in
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America, have been condensed or
omitted pursuant to rules and regulations of the Securities and Exchange
Commission. It is suggested that these condensed financial statements be
read in conjunction with the Company's audited financial statements for the
year ended December 31, 2008, included in the Company's Annual Report on
Form 10-K filed with the Securities and Exchange Commission. The Company
has assessed subsequent events through November 9, 2009, the date of filing
these condensed consolidated financial statements with the Securities and
Exchange Commission and believes that the disclosures made herein are
adequate to make the information presented not misleading.
NOTE 2 - CRITICAL ACCOUNTING POLICIES AND NEW ACCOUNTING PRONOUNCEMENTS
A summary of critical accounting policies is disclosed in Note 2 to the
consolidated financial statements included in our 2008 Annual Report on
Form 10-K. Our critical accounting policies are further described under the
caption "Critical Accounting Policies" in Management's Discussion and
Analysis of Financial Condition and Results of Operations in our 2008
Annual Report on Form 10-K.
On July 1, 2009, the FASB issued the authoritative version of the
Accounting Standards Codification (TM) (Codification or ASC) as the single
source of authoritative nongovernmental U.S. generally accepted accounting
principles (U.S. GAAP). The Codification is effective for interim and
annual periods ended after September 15, 2009 and all previous level
(a)-(d) U.S. GAAP standards issued by a standard setter are superseded. The
Company has adopted the provisions of the Codification with its reporting
period ended September 30, 2009. Adoption of the new guidance did not
materially impact the Company's financial statements.
NOTE 3 - SHARE-BASED COMPENSATION
The Company's 1998 Incentive Plan ("Option Plan") that provided for the
issuance of options to acquire up to 3,250,000 shares of common stock
expired in June 2008. The Option Plan provided for grants of non-statutory
options, incentive stock options, restricted stock awards and stock
appreciation rights. All stock option grants were for a ten-year term.
Stock options issued to executives and management generally vested over a
four-year period, one-fifth at grant date and one-fifth at December 31 of
each year until they are fully vested. Stock options issued to directors
under the option Plan vested quarterly over a one-year period. As of
November 4, 2009, 1,156,104 shares of Common Stock remained subject to
outstanding awards previously granted under the Option Plan.
The Company's stockholders approved a new 2009 Equity Incentive Plan
("Equity Plan") in June 2009 that provides for the issuance of up to
480,000 shares of common stock. The Equity Plan provides for grants of
non-statutory options, incentive stock options, restricted stock awards,
performance shares, performance units, restricted stock units and other
stock-based awards. Grants to employees, if any, will vest over a four-year
period, one-fifth at grant date and one-fifth at December 31 of each year
until they are fully vested. Grants to non-employee directors will vest
quarterly over a one-year period. The Company anticipates that the shares
available in the Equity Plan will be used primarily to compensate
non-employee directors.
7
Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
Total share-based compensation expense in the amount of $169,000 and
$247,000 was recognized during the three months ended September 30, 2009
and 2008, respectively. Total share-based compensation expense in the
amount of $514,000 and $1,063,000 was recognized during the nine months
ended September 30, 2009 and 2008, respectively. Share-based compensation
expense is reported in selling, general and administrative expense.
Stock Options
Compensation expense related to outstanding non-vested stock option awards
under the Option Plan of $372,000 had not been recognized at September 30,
2009. This compensation expense is expected to be recognized over a
weighted-average period of approximately 25 months.
The following table summarizes stock option activity through the third
quarter of 2009:
Weighted Weighted Average
Average Remaining Aggregate
Number of Exercise Contractual Intrinsic
Options Price Term (Years) Value (000's)*
---------- --------- ---------------- ------------
Balance at December 31, 2008 1,173,206 $ 6.82 5.4 $ 626
Granted -- -- -- --
Exercised -- -- -- --
Canceled or expired (17,102) 8.89 -- --
---------- -------- ---------- ----------
Balance at September 30, 2009 1,156,104 $ 6.79 5.7 $ 1,071
---------- -------- ---------- ----------
Exercisable at September 30, 2009 1,045,504 $ 6.42 5.5 $ 1,071
========== ======== ========== ==========
*Based on average stock price through the third quarter of 2009 of $4.43
per share. The average stock price for the same period in 2008 was $14.28
per share. The total fair value of vested options outstanding as of
September 30, 2009 and 2008 was $1.1 million and $7.9 million,
respectively.
The total intrinsic value of options exercised was $2.1 million for the
nine months ended September 30, 2008. There were no options exercised
during the nine months ended September 30, 2009.
Restricted Stock Unit Awards
On August 8, 2008, the Company granted restricted stock units equivalent to
6,420 shares of common stock to each of its three non-employee directors.
These restricted stock units, granted outside of the Option Plan, were
intended to compensate and retain the directors over the one-year service
period commencing July 1, 2008. The fair value of the award was $93,411 per
director based on the market price of $14.55 per share on the date granted.
Upon vesting, which was equally at quarterly intervals, the units became
convertible into cash based on the then market price of the Company's
shares at each respective vesting date. Each director's vested units were
settled for the cash value of $41,698 on or before July 17, 2009.
Restricted Stock Awards
On June 18, 2009, the Company granted restricted stock awards of 15,625
shares of common stock to each of its three non-employee directors. These
restricted stock awards are intended to compensate and retain the directors
over the one-year service period commencing July 1, 2009. The fair value of
the awards was $80,000 per director based on the market price of $5.12 per
share of the Company's stock on the date the awards were granted. The
restricted stock awards vest in equal quarterly installments beginning on
September 30, 2009, so long as the grantee continues to serve as a director
of the Company. Recognition of compensation expense related to the
restricted stock awards commenced during the three months ended September
30, 2009. The amount of compensation expense related to these restricted
stock awards that had not been recognized at September 30, 2009, totaled
$180,000.
8
Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
NOTE 4 - FIXED FEE CONTRACTS
Costs, estimated earnings and billings on uncompleted contracts consisted
of the following at September 30, 2009 and December 31, 2008:
September 30, December 31,
2009 2008
------------------------------
(Dollars in thousands)
------------------------------
Costs incurred on uncompleted contracts $ 30,216 $ 24,893
Estimated earnings (losses) on uncompleted contracts 5,903 5,280
-------- --------
Earned revenues 36,119 30,173
Less: billings to date 33,640 23,468
-------- --------
Net costs and estimated earnings in excess of billings
on uncompleted contracts $ 2,479 $ 6,705
======== ========
Costs and estimated earnings in excess of billings on uncompleted contracts $ 6,002 $ 6,913
Billings and estimated earnings in excess of cost on uncompleted contracts (3,523) (208)
-------- --------
Net costs and estimated earnings in excess of billings
on uncompleted contracts $ 2,479 $ 6,705
======== ========
NOTE 5 - LINE OF CREDIT AND DEBT
September 30, December 31,
2009 2008
----------------------------
(Dollars in thousands)
----------------------------
Schedule of Long-Term Debt and Leases:
Comerica Credit Facility $ 10,000 $ 22,530
Cleveland Inspection Services, Inc., CIS Technical Services and F.D. Curtis -- 293
ATI Technologies -- 30
Michael Lee -- 900
Watco Management, Inc. 260 260
ICP Transco 182 --
FH McIlwain, PC; JA Walters, PC; WM Bosarge, PC; MR Burton, PC 1,310 1,287
-------- --------
Total long-term debt 11,752 25,300
-------- --------
Less: current maturities of long-term debt (10,851) (1,686)
-------- --------
Long-term debt, net of current portion 901 23,614
Borrowings under capital lease 288 418
Less: current maturities of capital lease (188) (175)
-------- --------
Total long-term debt and leases, net of current portion $ 1,001 $ 23,857
======== ========
As of August 2009, our existing credit facility with Comerica Bank, by its
terms, was required to be classified as a current liability. The company is
reviewing options for replacing this credit facility (see Liquidity and
Capital Resources in the Management's Discussion and Analysis section).
During the three months ended September 30, 2009 final payments totaling
approximately $99,000 were made on the Cleveland Inspection Services Inc.,
CIS Technical and F.D. Curtis notes payable.
On August 14, 2009, a subsidiary of the Company, acquired the consulting
business of PCI Management and Consulting Company ("PCI") (see Note 10 -
Acquisitions). Consideration for the acquisition included unsecured,
non-interest bearing deferred payments in the aggregate principal amount of
$200,000, payable in two equal installments.
9
Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
NOTE 6 - SEGMENT INFORMATION
ENGlobal has four reportable segments: Engineering, Construction,
Automation and Land. Our segments are strategic business units that offer
different services and products and therefore require different marketing
and management strategies. Our segments have grown through strategic
acquisitions, which have also served to augment management expertise.
The Engineering segment provides consulting services relating to the
development, management and execution of projects requiring professional
engineering and related project services. Services provided by the
Engineering segment include feasibility studies, engineering, design,
procurement, and construction management.
The Construction segment provides construction management personnel and
services in the areas of inspection, mechanical integrity, vendor and
turnaround surveillance, field support, construction, quality assurance and
plant asset management.
The Automation segment provides services related to the design, fabrication
and implementation of process distributed control and analyzer systems,
advanced automation and information technology projects.
The Land segment provides land management, right-of-way, environmental
compliance and governmental regulatory compliance services primarily to
pipeline, utility and telecom companies and other owner/operators of
infrastructure facilities throughout the United States and Canada.
The accounting policies of each of the segments are the same as those
described in the summary of critical accounting policies referenced in Note
2 above. The Company evaluates performance based on profit or loss from
operations before interest, income taxes and other income or loss, but
after selling, general and administrative expenses attributable to the
reportable segments. Transactions between reportable segments are at market
rates comparable to terms available from unrelated parties.
10
Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
NOTE 6 - SEGMENT INFORMATION (continued)
For the three months ended Engineering Construction Automation Land All Other Consolidated
September 30, 2009
(Dollars in thousands)
Revenue before eliminations $ 32,041 $ 28,526 $ 19,545 $ 7,250 $ -- $ 87,362
Inter-segment eliminations (33) (53) (5) -- -- (91)
--------- --------- --------- --------- --------- ---------
Revenue 32,008 28,473 19,540 7,250 -- 87,271
--------- --------- --------- --------- --------- ---------
Gross profit 1,569 1,802 2,748 1,049 -- 7,168
SG&A 1,662 477 1,065 473 3,303 6,980
--------- --------- --------- --------- --------- ---------
Operating income (93) 1,325 1,683 576 (3,303) 188
--------- --------- --------- --------- ---------
Other income (expense) 31
Interest income (expense) (148)
Tax provision (140)
---------
Net loss $ (69)
=========
For the three months ended
September 30, 2008
(Dollars in thousands)
Revenue before eliminations $ 63,170 $ 44,481 $ 7,912 $ 11,251 $ -- $ 126,814
Inter-segment eliminations (60) (3,571) (16) -- -- (3,647)
--------- --------- --------- --------- --------- ---------
Revenue 63,110 40,910 7,896 11,251 -- 123,167
--------- --------- --------- --------- --------- ---------
Gross profit 8,864 2,765 154 1,851 -- 13,634
SG&A 1,446 794 720 660 3,829 7,449
--------- --------- --------- --------- --------- ---------
Operating income 7,418 1,971 (566) 1,191 (3,829) 6,185
--------- --------- --------- --------- ---------
Other income (expense) 49
Interest income (expense) (360)
Tax provision (2,379)
---------
Net income $ 3,495
=========
11
Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
NOTE 6 - SEGMENT INFORMATION (continued)
For the nine months ended Engineering Construction Automation Land All Other Consolidated
September 30, 2009
(Dollars in thousands)
Revenue before eliminations $ 108,631 $ 73,740 $ 55,800 $ 24,748 $ -- $ 262,919
Inter-segment eliminations (594) (1,594) (92) -- -- (2,280)
--------- --------- --------- --------- --------- ---------
Revenue 108,037 72,146 55,708 24,748 -- 260,639
--------- --------- --------- --------- --------- ---------
Gross profit 8,938 5,231 6,822 3,708 -- 24,699
SG&A 4,626 1,371 3,284 1,475 10,082 20,838
--------- --------- --------- --------- --------- ---------
Operating income 4,312 3,860 3,538 2,233 (10,082) 3,861
--------- --------- --------- --------- ---------
Other income (expense) 182
Interest income (expense) (479)
Tax provision (1,570)
---------
Net income $ 1,994
=========
For the nine months ended
September 30, 2008
(Dollars in thousands)
Revenue before eliminations $ 192,685 $ 110,356 $ 29,880 $ 31,928 $ -- $ 364,849
Inter-segment eliminations (67) (6,892) (546) -- -- (7,505)
--------- --------- --------- --------- --------- ---------
Revenue 192,618 103,464 29,334 31,928 -- 357,344
--------- --------- --------- --------- --------- ---------
Gross profit 31,525 8,781 2,560 5,415 -- 48,281
SG&A 5,003 2,255 2,101 2,219 11,798 23,376
--------- --------- --------- --------- --------- ---------
Operating income 26,522 6,526 459 3,196 (11,798) 24,905
--------- --------- --------- --------- ---------
Other income (expense) 134
Interest income (expense) (1,256)
Tax provision (9,583)
---------
Net income $ 14,200
=========
Financial information about geographic areas
--------------------------------------------
Revenue from the Company's non-U.S. operations is not material. Long-lived
assets (principally leasehold improvements and computer equipment) located
in Canada were valued at $23,000 as of September 30, 2009, net of
accumulated depreciation, stated in U.S. dollars.
12
Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
NOTE 7 - FEDERAL AND STATE INCOME TAXES
The components of income tax expense (benefit) for the three months and
nine months ended September 30, 2009 and 2008 were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2009 2008 2009 2008
---- ---- ---- ----
(Dollars in thousands)
-----------------------------------------------------------
Current $ 64 $ 2,403 $ 1,321 $ 9,787
Deferred 76 (24) 249 (204)
------- ------- ------- -------
Total tax provision (benefit) $ 140 $ 2,379 $ 1,570 $ 9,583
======= ======= ======= =======
Effective tax rate 197.2% 40.5% 44.1% 40.3%
------- ------- ------- -------
As required by ASC 740 the Company makes its interim tax allocation by
applying estimated fiscal year effective tax rates to estimated fiscal year
ordinary income together with unusual or infrequently occurring activity
for the year-to-date period. The computed effective tax rate for the
three-month period ended September 30, 2009 is higher than the customary
relationship between income tax expense and pretax accounting income
because we revised our estimate of fiscal year effective tax rates upward
to reflect estimated proportionate changes in components of fiscal year
pretax income.
NOTE 8 - EARNINGS PER SHARE
The following table reconciles the number of shares used to compute basic
earnings per share to the number of shares used to compute diluted earnings
per share ("EPS").
Three Months Ended Nine Months Ended
September 30, September 30,
2009 2008 2009 2008
---- ---- ---- ----
(Shares in thousands)
---------------------------------------------------------
Weighted average shares outstanding 27,305 27,272 27,299 27,143
used to compute basic EPS
Effect of share-based compensation plans - 684 274 561
------------ ------------ ------------ -----------
Shares used to compute diluted EPS 27,305 27,956 27,573 27,704
============ ============ ============ ===========
The Company excluded potentially issuable shares of 638,000 from the
computation of diluted EPS, as the effect of including the shares would
have been anti-dilutive for the three and nine month periods ended
September 30, 2009. There were no shares that were anti-dilutive for the
three and nine month periods ended September 30, 2008.
NOTE 9 -COMMITMENTS AND CONTINGENCIES
Employment Agreements
The Company has employment agreements with certain of its officers and key
employees. Such agreements provide for minimum salary levels, with the
severance terms ranging from three to twelve months. Generally, if the
Company terminates the employment of the employee for any reason other than
(1) for cause, as defined in the employment agreement, (2) voluntary
resignation, or (3) the employee's death, the Company is obligated to
provide a severance benefit equal to three, six or twelve months, depending
on the terms of the agreement, of the employee's salary, and, at its
option, an additional three or six months at 50% to 100% of the employee's
salary in exchange for an extension of the employee's agreement not to
engage in certain competitive activities. Most of these agreements are
renewable for one year at the Company's option. The Company entered into
employment agreements with two employees as a result of the PCI acquisition
in August 2009.
13
Notes To Condensed Consolidated Financial Statements
----------------------------------------------------
Long-term Note Receivable
In the first quarter of 2007, ENGlobal Engineering, Inc. ("EEI") and South
Louisiana Ethanol, LLC ("SLE") executed an agreement for engineering,
procurement and construction ("EPC") services relating to the retro-fit of
an ethanol plant in southern Louisiana (the "SLE project"). In October
2007, SLE executed a promissory note, or "Hand Note," payable to the
Company and having a principal balance of approximately $12.3 million,
constituting amounts then due to the Company for its work performed in
connection with the project. The history of the SLE Project is described in
Note 12 to the Company's condensed consolidated financial statements
included in its Quarterly Report on Form 10-Q for the quarter ended
September 30, 2007, and is discussed further in the Company's Annual
Reports on Form 10-K for years ended December 31, 2007 and December 31,
2008, under Litigation, below, and in Part II, "Item 1 - Legal Proceedings"
of this Quarterly Report on Form 10-Q.
Note Receivable
On March 13, 2009, the Company entered into a letter agreement (the "letter
agreement") with a significant client resolving the payment of due and past
due accounts receivable invoice's in the aggregate amount of $6.8 million.
The principal terms of the letter agreement include the recovery of amounts
due in monthly payments beginning in March 2009 and ending with final
payment in December 2009. The $6.8 million payment plan included $4.6
million in subcontractor obligations which are included in our Accounts
Payable balances. As of September 30, 2009, receipts against the note and
payments of subcontractor obligations were current with balances remaining
of $3.1 million and $2.1 million respectively. However, the Company did not
receive the full amount of the scheduled $800,000 monthly payment due on
October 20, 2009. Instead, the client notified the Company that it had a
claim against the Company relating to a separate, completed project, in the
amount of the balance due under the letter agreement and further, that it
was offsetting the amount of its claim against the amount it owed the
Company under the letter agreement. At this time, the note balance
following the partial payment is approximately $3.3 million. The Company
had previously filed a materialman's and mechanic's lien on February 13,
2009, from the facts determinable at present, we believe all amounts are
collectible.
Litigation
Due to past due payments on accounts receivable invoices for services
provided to Bigler, LP ("Bigler") in the amount of $2,988,000, the Company
filed a materialman's and mechanic's lien on the property on which the
services were performed. In response, Bigler filed a petition entitled
Bigler, L.P. f/k/a Bigler Trading Company, Inc. and Bigler Land, LLC vs
ENGlobal Engineering, Inc. in 234th District Court of Harris County, Case
Number 2009-15676, asking for declaratory relief clearing title of the
lien, and seeking unspecified monetary damages. ENGlobal Engineering has
filed a counterclaim for collection of the fees due, and foreclosure of its
lien. The court has denied Bigler's pre-trial motion to vacate the lien. On
October 30, 2009, Bigler filed a petition in U.S. Bankruptcy Court for the
Southern District of Texas (Houston), Bankruptcy Petition #09-38188. As of
the date of this Quarterly Report, we have not had an opportunity to assess
lien priorities and other matters related to distribution of assets from
the bankruptcy estate.
In 2006 and 2007, ENGlobal Engineering, Inc. entered into a series of
agreements with Southern Louisiana Ethanol, L.L.C. ("SLE") to refurbish and
upgrade SLE's ethanol facility in Belle Chase, LA. EEI commenced work in
approximately December 2006. In September 2007, SLE ceased work on the
project after failing to secure permanent financing. On May 30, 2008, the
Company filed suit in the United States District Court for the Eastern
District of Louisiana, Case Number 08-3601, seeking damages of $15.8
million, and to foreclose on the acquired mechanic's liens of its
subcontractors. On August 25, 2009, SLE filed a voluntary petition and
notice of bankruptcy for protection under the Bankruptcy Code, Title 11
United States Code, Chapter 11, in the United States Bankruptcy Court for
the Eastern District of Louisiana, Case number 09-12676.
14
Notes To Condensed Consolidated Financial Statements
----------------------------------------------------
Since filing the lawsuit, the Company has written the book value of the SLE
receivable down to $8.6 million and, at this time, the Company believes it
is likely to obtain a judgment against SLE for substantially this amount.
However, collection is not assured. Rather it is subject to the
determination of the Bankruptcy court as to amount, priority, ownership of
liens and claims and other issues, some of which have been raised by the
debtor in a counterclaim filed in the Bankruptcy court. In addition,
collectability will depend on the value of the collateral, which will only
be finally ascertained on its actual sale. An independent appraisal
conducted in December 2008 concluded that, based on a number of
assumptions, the property has a fair market value of $22.1 million, an
orderly liquidation value of $14.9 million, and a forced liquidation value
of $11.7 million. The Company believes the ultimate disposition of the SLE
litigation will not materially adversely affect our liquidity or overall
financial position.
ENGlobal was named as a defendant in a lawsuit entitled Ecoproduct
Solutions, L.P. vs. ENGlobal Engineering and Swenson Technology, Inc., but
has not been served with process. The lawsuit, filed on October 8, 2009, is
pending in the 270th Judicial District Court of Harris County, Texas, Case
Number 2009-64881, and is based on a contract for engineering services
performed between November 2004 and August 2005 and for which ENGlobal
received approximately $700,000. Ecoproduct claims that it has incurred
actual damages of $45 million and is seeking to recover actual,
consequential and punitive damages. However, Ecoproduct has requested that
the court abate the lawsuit and compel ENGlobal to submit to a pending
arbitration between Ecoproduct and Swenson, even though a similar request
was denied by the arbitrators. ENGlobal believes Ecoproduct's claims are
entirely without merit and that they are barred by applicable statutes of
limitations. If served, we will vigorously defend ourselves in this
proceeding. We do not anticipate that the outcome of this matter will have
a material adverse effect on our financial condition.
As of the date of these interim financial statements, we are party to
several legal proceedings arising in the ordinary course of business that
we believe have been reserved for, are covered by insurance or if
determined adversely to us, whether individually or in the aggregate, would
not have a material adverse effect on our results of operations or
financial position. However, we cannot predict the ultimate outcomes of
these matters with certainty. In addition, the Company has filed suit
against a number of its clients for payment of accounts receivable.
Although the Company believes it will receive favorable judgments in these
collection matters, due to impact of the downturn of the business and
credit climate on its clients' businesses, it may not be able to fully
collect on judgments it receives.
Insurance
The Company carries a broad range of insurance coverage, including general
and business automobile liability, commercial property, professional errors
and omissions, workers' compensation insurance, director's and officer's
liability insurance and a general umbrella policy. The Company is not aware
of any claims in excess of insurance recoveries. The Company is partially
self-funded for health insurance claims. Provisions for expected future
payments are accrued based on the Company's experience. The self-insurance
liability, which is included in the Accrued Compensation and Benefits line
of the balance sheet, was $1.1 million as of September 30, 2009 and $1.4
million as of December 31, 2008.
NOTE 10 - ACQUISITIONS
A subsidiary of the Company acquired the operations of PCI Management and
Consulting Company ("PCI"), a private Illinois based power consulting
business, through an immaterial business combination which closed August
14, 2009. Consideration approximated $1.0 million in cash and $0.2 million
in the form of a note. PCI provides engineering, consulting and project
management services, specializing in projects related to the generation,
transmission and distribution of energy. PCI complements the other business
of our Construction segment and is situated geographically to expand the
Construction segment's service territory. In addition, its location will
establish a strong base from which to serve the power market. Results of
operations are included in the Construction segment beginning August 15,
2009.
15
Notes To Condensed Consolidated Financial Statements
----------------------------------------------------
The acquisition, which was structured as a taxable transaction that
excluded all monetary assets and liabilities and all contingencies of the
acquired business, was accounted for following the requirements of ASC 805.
The Company recognized customer relationships and non-compete contracts as
intangible assets. The intangible asset's were recognized at their fair
values on the acquisition date of $0.3 million and $0.2 million
respectively, and are being amortized over five years. The fair values were
determined by management using an income approach methodology that is
consistent with previous similar acquisitions.
The residual portion of consideration $0.7 million was recognized as
goodwill, all of which is deductible for income tax purposes. Goodwill
represents management's estimate of the cost associated with acquiring
PCI's power consulting reputation, technical expertise, workforce and the
potential synergies with our other energy infrastructure consulting
businesses. Acquisition cost of $6,000 was incurred and expensed as general
and administrative expenses during the nine months ended September 30,
2009.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking Statements
--------------------------
Certain information contained in this Quarterly Report on Form 10-Q,
the Company's Annual Report on Form 10-K, as well as other written and
oral statements made or incorporated by reference from time to time by
the Company and its representatives in other reports, filings with the
Securities and Exchange Commission, press releases, conferences or
otherwise, may be deemed to be forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934. This
information includes, without limitation, statements concerning the
Company's future financial position and results of operations, planned
capital expenditures, business strategy and other plans for future
operations, the future mix of revenues and business, customer
retention, project reversals, commitments and contingent liabilities
and future demand and industry conditions. Although the Company
believes that the expectations reflected in such forward-looking
statements are reasonable, it can give no assurance that such
expectations will prove to have been correct. We undertake no
obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise.
Generally, the words "anticipate," "believe," "estimate," "expect,"
"may" and similar expressions, identify forward-looking statements,
which generally are not historical in nature. Actual results could
differ materially from the results described in the forward-looking
statements due to the risks and uncertainties set forth in this
Quarterly Report on Form 10-Q, the specific risk factors identified in
the Company's Annual Report on Form 10-K for the year ended December
31, 2008, and those described from time to time in our future reports
filed with the Securities and Exchange Commission.
The following discussion is qualified in its entirety by, and should be
read in conjunction with, the Company's condensed consolidated
financial statements, including the notes thereto, included in this
Quarterly Report on Form 10-Q and the Company's Annual Report on Form
10-K for the year ended December 31, 2008.
MD&A Overview
-------------
The following list sets forth a general overview of certain significant
changes in the Company's financial condition and results of operations
for the three months and nine months ended September 30, 2009, compared
to the corresponding periods in 2008.
During the three months During the nine months
ended September 30, 2009 ended September 30, 2009
------------------------ ------------------------
Revenues Decreased 29.1% Decreased 27.1%
Gross profit Decreased 47.4% Decreased 48.8%
Operating income Decreased 97.0% Decreased 84.5%
SG&A expense Decreased 6.3% Decreased 10.9%
Net income Decreased 102.0% Decreased 86.0%
17
Management's Discussion and Analysis (continued)
------------------------------------------------
Selected Balance Sheet Comparisons As of As of As of
September 30, December 31, September 30,
2009 2008 2008
------------------ ---------------- -----------------
(Dollars in thousands)
----------------------------------------------------------
Working capital $ 37,193 $ 58,586 $ 61,516
Total assets $ 123,477 $ 152,705 $ 140,191
Long-term debt and capital leases, net of current $ 32,403
portion $ 1,001 $ 23,857
Stockholders' equity $ 79,222 $ 76,766 $ 72,312
Days sales outstanding 65 64 61
Long-term debt and capital leases, net of current portion, decreased
95.8%, or $22.9 million, from $23.9 million at December 31, 2008 to
$1.0 million at September 30, 2009. As a percentage of stockholders'
equity, long-term debt decreased to 1.3% from 31.1% over this
nine-month period due primarily to a $12.5 million pay down on our line
of credit, plus the reclassification of $10.0 million to a current
liability. The past due payments on Accounts Receivable invoices for
services provided to one customer negatively impacted our average days
sales outstanding for the three-month period ended September 30, 2009
by three days. The Company manages its billing and client collection
processes toward reducing days sales outstanding to the extent
practicable. We believe that our allowance for bad debt is adequate to
cover any potential non-payment by our customers.
Total stockholders' equity increased 3.1%, or $2.4 million, from $76.8
million as of December 31, 2008 to $79.2 million as of September 30,
2009. The increase in stockholders' equity compared to September 30,
2008 was 9.5%, or $6.9 million.
18
Management's Discussion and Analysis (continued)
------------------------------------------------
Consolidated Results of Operations for the Three Months
Ended September 30, 2009 and 2008
(Unaudited)
For the three months ended
September 30, 2009
(Dollars in thousands) Engineering Construction Automation Land All Other Consolidated
Revenue before eliminations $ 32,041 $ 28,526 $ 19,545 $ 7,250 $ -- $ 87,362
Inter-segment eliminations (33) (53) (5) -- -- (91)
--------- --------- --------- --------- --------- ---------
Revenue 32,008 28,473 19,540 7,250 -- 87,271 100.0 %
--------- --------- --------- --------- --------- ---------
Gross profit 1,569 1,802 2,748 1,049 -- 7,168 8.2 %
SG&A 1,662 477 1,065 473 3,303 6,980 8.0 %
--------- --------- --------- --------- --------- ---------
Operating income (93) 1,325 1,683 576 (3,303) 188 0.2 %
--------- --------- --------- --------- ---------
Other income (expense) 31 0.1 %
Interest income (expense) (148) (0.2 %)
Tax provision (140) (0.2 %)
---------
Net loss $ (69) (0.1 %)
=========
Diluted earnings per share $ 0.00
For the three months ended
September 30, 2008
(Dollars in thousands)
Revenue before eliminations $ 63,170 $ 44,481 $ 7,912 $ 11,251 $ -- $ 126,814
Inter-segment eliminations (60) (3,571) (16) -- -- (3,647)
--------- --------- --------- --------- --------- ---------
Revenue 63,110 40,910 7,896 11,251 -- 123,167 100.0 %
--------- --------- --------- --------- --------- ---------
Gross profit 8,864 2,765 154 1,851 -- 13,634 11.1 %
SG&A 1,446 794 720 660 3,829 7,449 6.1 %
--------- --------- --------- --------- --------- ---------
Operating income 7,418 1,971 (566) 1,191 (3,829) 6,185 5.0 %
--------- --------- --------- --------- ---------
Other income (expense) 49 0.0 %
Interest income (expense) (360) (0.3 %)
Tax provision (2,379) (1.9 %)
---------
Net income $ 3,495 2.8 %
=========
Diluted earnings per share $ 0.13
Increase/(Decrease)
in Operating Results
(Dollars in thousands)
Revenue before eliminations $ (31,129) $ (15,955) $ 11,633 $ (4,001) $ -- $ (39,452)
Inter-segment eliminations 27 3,518 11 -- -- 3,556
--------- --------- --------- --------- --------- ---------
Revenue (31,102) (12,437) 11,644 (4,001) -- (35,896) (29.1 %)
--------- --------- --------- --------- --------- ---------
Gross profit (7,295) (963) 2,594 (802) -- (6,466) (47.4 %)
SG&A 216 (317) 345 (187) (526) (469) (6.3 %)
--------- --------- --------- --------- --------- ---------
Operating income (7,511) (646) 2,249 (615) 526 (5,997) (97.0 %)
--------- --------- --------- --------- ---------
Other income (expense) (18) (36.7 %)
Interest income (expense) 212 (58.9 %)
Tax provision 2,239 (94.1 %)
---------
Net income $ (3,564) (102.0 %)
=========
Diluted earnings per share $ (0.13)
19
Management's Discussion and Analysis (continued)
------------------------------------------------
Consolidated Results of Operations for the Nine Months
Ended September 30, 2009 and 2008
(Unaudited)
For the nine months ended
September 30, 2009
(Dollars in thousands) Engineering Construction Automation Land All Other Consolidated
Revenue before eliminations $ 108,631 $ 73,740 $ 55,800 $ 24,748 $ -- $ 262,919
Inter-segment eliminations (594) (1,594) (92) -- -- (2,280)
--------- --------- --------- --------- --------- ---------
Revenue 108,037 72,146 55,708 24,748 -- 260,639 100.0 %
--------- --------- --------- --------- --------- ---------
Gross profit 8,938 5,231 6,822 3,708 -- 24,699 9.5 %
SG&A 4,626 1,371 3,284 1,475 10,082 20,838 8.0 %
--------- --------- --------- --------- --------- ---------
Operating income 4,312 3,860 3,538 2,233 (10,082) 3,861 1.5 %
--------- --------- --------- --------- --------
Other income (expense) 182 0.1 %
Interest income (expense) (479) (0.2 %)
Tax provision (1,570) (0.6 %)
---------
Net income $ 1,994 0.8 %
=========
Diluted earnings per share $ 0.07
For the nine months ended
September 30, 2008
(Dollars in thousands)
Revenue before eliminations $ 192,685 $ 110,356 $ 29,880 $ 31,928 $ -- $ 364,849
Inter-segment eliminations (67) (6,892) (546) -- -- (7,505)
--------- --------- --------- --------- --------- ---------
Revenue 192,618 103,464 29,334 31,928 -- 357,344 100.0 %
--------- --------- --------- --------- --------- ---------
Gross profit 31,525 8,781 2,560 5,415 -- 48,281 13.5 %
SG&A 5,003 2,255 2,101 2,219 11,798 23,376 6.5 %
--------- --------- --------- --------- --------- ---------
Operating income 26,522 6,526 459 3,196 (11,798) 24,905 7.0 %
--------- --------- --------- --------- ---------
Other income (expense) 134 0.0 %
Interest income (expense) (1,256) (0.3 %)
Tax provision (9,583) (2.7 %)
---------
Net income $ 14,200 4.0 %
=========
Diluted earnings per share $ 0.51
Increase/(Decrease)
in Operating Results
(Dollars in thousands)
Revenue before eliminations $ (84,054) $ (36,616) $ 25,920 $ (7,180) $ -- $(101,930)
Inter-segment eliminations (527) 5,298 454 -- -- 5,225
--------- --------- --------- --------- --------- ---------
Revenue (84,581) (31,318) 26,374 (7,180) -- (96,705) (27.1 %)
--------- --------- --------- --------- --------- ---------
Gross profit (22,587) (3,550) 4,262 (1,707) -- (23,582) (48.8 %)
SG&A (377) (884) 1,183 (744) (1,716) (2,538) (10.9 %)
--------- --------- --------- --------- --------- ---------
Operating income (22,210) (2,666) 3,079 (963) 1,716 (21,044) (84.5 %)
--------- --------- --------- --------- ---------
Other income (expense) 48 35.8 %
Interest income (expense) 777 (61.9 %)
Tax provision 8,013 (83.6 %)
---------
Net income $ (12,206) (86.0 %)
==========
Diluted earnings per share $ (0.44)
20
Management's Discussion and Analysis (continued)
------------------------------------------------
The decline in net income during the three months ended September 30,
2009 compared to the three months ended September 30, 2008 was due in
part to the effect of lower energy commodity prices, lower oil and gas
processing margins, the uncertainty created by proposed U.S. government
regulation in the oil and gas industry, the unavailability of project
financing, and the generally weak economy. These factors have led our
clients to spend less for our services through the deferral or
cancellation of both capital and maintenance projects. Primarily in the
Engineering segment, delays in down-sizing of staffing levels with
declining backlog resulted in lower utilization rates and materially
impacted gross profit margin. Competition has increased for the amount
of project work on the market, putting pressure on our billing rate
structures and profit margins. In response to the economic pressures,
we have also increased our sales efforts, therefore increasing costs,
to focus on winning new work, expanding into new markets and increasing
our client base.
The Company recognizes service revenue as soon as the services are
performed. The majority of the Company's service revenue historically
has been provided through cost-plus contracts, whereas revenue from a
majority of our fabrication and turnkey EPC projects has been earned on
fixed-price contracts.
Revenue on fixed-price contracts is recorded primarily using the
percentage-of-completion (cost-to-cost) method. Under this method,
revenue on long-term contracts is recognized in the ratio that contract
costs incurred bear to total estimated contract costs. Revenue and
gross margin on fixed-price contracts are subject to revision
throughout the lives of the contracts and any required adjustments are
made in the period in which the revisions become known. Gains and
losses on contracts are recorded in full as they are identified.
In the course of providing our services, we routinely provide
engineering, materials, and equipment and may provide construction
services on a direct hire or subcontractor basis. Generally, the
materials, equipment and subcontractor costs are passed through to our
clients and reimbursed, along with fees, which in total are at margins
lower than those of our normal core business. In accordance with
industry practice and generally accepted accounting principles, all
such costs and fees are included in reported revenue. The use of
subcontractor services can change significantly from project to
project; therefore, changes in revenue and gross profit, SG&A expense
and operating income as a percent of revenue may not be indicative of
the Company's core business trends.
Operating SG&A expense includes management and staff compensation,
office costs such as rents and utilities, depreciation, amortization,
travel and other expenses generally unrelated to specific contracts,
but directly related to the support of a segment's operations.
All other SG&A expense is comprised primarily of business development
costs, as well as costs related to the executive, investor
relations/governance, finance, accounting, safety, human resources,
project controls, legal and information technology departments, and
other costs generally unrelated to specific projects, but which are
incurred to support corporate activities and initiatives.
Industry Overview:
Macroeconomic conditions, which have been declining for the past year,
are creating uncertainty regarding demand in the markets in which we
sell our services. Large integrated oil and gas companies, which
comprise many of our engineering services customers, have reduced
spending because the price of energy related products adversely impacts
the financial viability of their projects. Our developer clients have
been negatively impacted by unavailability of funding for projects in
which we could participate. Also, we have experienced a slow-down in
payments of accounts receivable which we believe is an indication that
the risk of non-collection has also increased.
We believe that our year-to-date revenues have been adversely affected
by recent macroeconomic conditions, including the factors noted above,
and our revenue for the remainder of fiscal year 2009 may continue to
decline unless these conditions improve. Future adverse changes in
market conditions or poor operating results could result in losses or
an increased inability to recover our accounts receivable. The extent
to which these conditions will persist and the overall impact they will
have on our customer spending is not clear.
21
Management's Discussion and Analysis (continued)
------------------------------------------------
In the past, ENGlobal has benefited from significant capital projects
in the downstream refinery market, primarily related to increasing
capacity, utilizing heavy or sour crude oil, and rebuilding facilities
damaged by accidents or natural disasters. While some such projects are
currently underway, some refiners have now chosen to defer significant
new spending given the recent economic conditions, lower refining
margins, lower refinery utilization and uncertainty created by proposed
government regulation. The Company expects that once market conditions
improve, there will be a continuation of compliance-driven refining
projects, such as EPA environmental initiatives and OSHA safety-related
projects, which may result from increased audits of U.S.-based
refineries. Also, the Company is seeing opportunities to participate in
projects to upgrade obsolete automation and control systems at existing
refineries and to plan and manage turnaround projects.
The downstream petrochemical industry has historically been a good
source of projects for ENGlobal. We continue to see a fairly steady
level of both maintenance and small capital projects from this
industry. In the past, ENGlobal has performed large domestic capital
project work for major integrated oil and gas companies in addition to
tier one engineering and construction firms. However, we believe that
major grassroots petrochemical projects will continue to be undertaken
overseas, located either closer to product demand in emerging economies
or closer to less expensive feedstocks. We expect that future
petrochemical work undertaken in the U.S. primarily will consist of
smaller capital projects or will be maintenance related.
Despite downturns in the downstream sector, pipeline and other
midstream projects have remained fairly constant. Although pipeline
projects tend to require fewer engineering man-hours than similarly
sized downstream projects, ENGlobal may also provide a pipeline client
with several additional services, such as right-of-way acquisition,
regulatory permitting, inspection and construction management. Our
clients are able to take advantage of our 'all in' capabilities in this
sector. The drivers we see behind growth in domestic pipeline activity
include: (1) natural gas transportation away from shale discoveries in
various parts of the country, (2) natural gas transportation related to
LNG import facilities, (3) movement of heavy Canadian crude oil into
the United States, (4) movement of refined products from Gulf Coast
refineries to the Midwest and Northeast, and (5) repairs and upgrades
to the aging pipeline infrastructure which is driven by DOT pipeline
integrity requirements.
Once credit market conditions improve, the country's focus on
alternative energy may present the Company with new project
opportunities. To date, ENGlobal has mainly focused its efforts on
biomass processes, such as those related to coal-to-liquids projects,
the production of ethanol and biofuels, and the gasification of
refinery petroleum coke, municipal waste and other feedstocks as an
energy source. In addition, the Company has been pursuing business on
electric transmission and distribution projects, as a large amount of
capital spending is expected for transporting renewable electric energy
produced in remote areas to population centers. In many cases,
alternative energy projects are being developed by new and smaller
firms that expect to benefit from government grants and tax incentives,
rather than our larger, traditional clients. While credit conditions
have improved somewhat in the second half of 2009, credit availability
for alternative energy projects continues to be a challenge for these
clients.
ENGlobal expects that a majority of the large capital energy-related
projects will be built overseas. Therefore, the Company is forming
business relationships with operating companies and other service
providers that may result in an increased amount of engineering and
related service work on international projects. The Company is also
performing engineering services on a small number of domestic civil
infrastructure projects, as a means of offsetting reduced large capital
project work from our heritage clients.
Tightening credit markets have triggered substantial uncertainty with
respect to the funding of capital expenditures by our developer
customers, and oil and natural gas prices have fallen substantially
from their highs in spring 2008. These changes have impacted general
business conditions and may continue to reduce demand for certain of
our products and services. As mentioned above, some refiners have
chosen to defer and cancel significant new spending given the recent
narrowing of energy processing margins. We are not immune to the
current financial and economic events as evidenced by lower revenues in
22
Management's Discussion and Analysis (continued)
------------------------------------------------
our Engineering, Construction and Land segments, as well as by our
lower consolidated net profits. However, we believe each of the
Company's business segments is well positioned for growth when market
conditions improve for the following reasons:
o About half of the states in the U.S. have enacted Renewable
Portfolio Standards, which mandate a timeline and percentage for
electricity generation from renewable sources, such as wind,
solar, geothermal and biomass. We believe that this factor,
together with the U.S. focusing on energy independence,
environmental concerns and government stimulus, should work
together to drive demand for alternative and sustainable sources
of energy.
o Facilities in the energy industry, as well as in many other
industries, are aging. No grass roots refinery has been built in
the U.S. since 1976, and many of the country's large pipelines
were installed over 50 years ago. We anticipate that maintaining
and rebuilding this aging infrastructure - an ENGlobal core
competency - will benefit the Company.
o ENGlobal has served many of our valued clients over a long period
of time, and these strong relationships are the foundation of our
business. While some clients are basing their purchasing
decisions on overall costs rather than existing relationships, we
continue to see project awards from our long-term clients.
o Our business relies primarily on small to mid-sized projects,
many of which fall into the "run and maintain" category. We are
not as dependent on large capital projects as many of our
competitors, such as the tier one engineering and construction
companies. Many of the projects we work on are driven by
regulatory compliance requirements (i.e. EPA, DOT, OSHA) that are
required to be completed in a certain timeline regardless of
economic conditions.
o We believe that new pipelines and storage facilities will be
required in the U.S. as a result of the need to transport crude
oil and natural gas from developing basins and shale plays, such
as the Bakken, Haynesville, Marcellus and Rocky Mountain areas.
We also see continued need for pipelines to transport imported
sources of energy, such as Canadian crude, liquefied natural gas
and refined products.
o A significant part of our Automation segment's work is driven by
our clients' need to replace aging and obsolete distributed
control system ("DCS") and analytical equipment. While some of
these expenditures can be deferred, the need to replace DCS and
other equipment has historically provided a reliable and
recurring source of projects for us. We expect to benefit as
certain manufacturers are currently phasing out their support for
heritage DCS platforms. With such a large installed base, our
clients will be required to migrate to newer DCS platforms. Our
Automation segment also benefits through its ability to sell work
to larger E&C firms, thus gaining access to major international
projects. We are focusing our efforts on improving Automation's
operational efficiencies that will allow us to fully capitalize
on these opportunities.
Specific segment information contained below in this section provides
further detail regarding the reasons for changes in our financial
performance from period to period.
Revenue:
Of the overall decrease in revenue for the three months ended September
30, 2009, approximately $31.1 million was attributable to our
Engineering segment, $12.4 million to our Construction segment and $4.0
million to our Land segment, offset by an increase of $11.6 million in
our Automation segment. $7.6 million, or 21.2%, of the total decrease
in revenue for the three months ended September 30, 2009 was related to
lower pass thru procurement revenue.
Of the overall decrease in revenue for the nine months ended September
30, 2009, approximately $84.6 million was attributable to our
Engineering segment, $31.3 million to our Construction segment and $7.2
million to our Land segment, offset by an increase of $26.4 million in
our Automation segment. $24.7 million, or 25.5%, of the total decrease
in revenue for the nine months ended September 30, 2009 was related to
lower pass thru procurement revenue.
23
Management's Discussion and Analysis (continued)
------------------------------------------------
Many of our clients continue to delay or cancel scheduled capital
projects due to the economy in general and lower oil prices. They are
focusing more on "run and maintain" type smaller projects. These types
of projects focus on work for required maintenance to keep the plant up
and running but not on new capital expansions. Competition has
increased greatly for the amount of project work on the market.
Gross Profit:
The overall $6.4 million decrease in gross profit for the three months
ended September 30, 2009, was attributable to approximately $2.4
million in increased costs and approximately $4.0 million in decreased
revenue. As a percentage of revenue, gross profit decreased from 11.1%
to 8.2% for the three months ended September 30, 2009 compared to the
same period in 2008.
The overall $23.6 million decrease in gross profit for the nine months
ended September 30, 2009, was attributable to approximately $10.5
million in increased costs and approximately $13.1 million in
decreased revenue. As a percentage of revenue, gross profit decreased
from 13.5% to 9.5% for the nine months ended September 30, 2009
compared to the same period in 2008.
The decrease in gross profit as a percentage of revenue was caused by
several factors including lower utilization of our billable resources
resulting in increased overhead costs to retain employees, increased
overhead costs to expand our marketing to new sectors and new clients,
increased per-employee costs of benefits and market pressure to
renegotiate some of our existing contracts, resulting in lower margins.
Selling, General, and Administrative:
The increase in operating SG&A expense for the three months ended
September 30, 2009, as compared to the comparable 2008 period,
primarily consisted of increases of $289,000 in facilities expense,
$434,000 in bad debt expense and $66,000 in depreciation and
amortization, offset by decreases of $183,000 in incentive bonus
accruals that were for plans cancelled or modified, $264,000 in
salaries and employee related expenses, $220,000 in office and
marketing expenses, $29,000 in stock compensation expense and $41,000
in professional services. Operating SG&A is discussed in further detail
in each of the segment sections.
The decrease in all other SG&A expense for the three months ended
September 30, 2009, as compared to the comparable 2008 period, was
primarily the result of decreases of $298,000 in incentive bonus
accruals that were for plans cancelled or modified, $124,000 in
salaries and employee related expenses, $50,000 in professional
services, $49,000 in stock compensation expense and $70,000 in
depreciation and amortization expense, offset by an increase of $69,000
in facilities expenses. As a percentage of revenue, all other SG&A
expense increased to 3.8% for the three months ended September 30,
2009, from 3.1% for the comparable prior-year period.
The decrease in operating SG&A expense for the nine months ended
September 30, 2009, as compared to the comparable 2008 period,
primarily consisted of decreases in bad debt expense of $1.0 million,
$0.2 million in incentive bonus accruals that were for plans cancelled
or modified, $0.7 million in salaries and employee related expenses and
$0.3 million in office and marketing expenses offset by increases of
$1.0 million in facilities expense and $0.4 million in depreciation and
amortization.
The decrease in all other SG&A expense for the nine months ended
September 30, 2009, as compared to the comparable 2008 period, was
primarily the result of decreases of $898,000 in incentive bonus
accruals that were for plans cancelled or modified, $380,000 in
salaries and employee related expenses, $246,000 in professional
services, $484,000 in stock compensation expense and $146,000 in
depreciation and amortization expense, offset by increases of $289,000
in facilities expenses and $159,000 in office expenses. As a percentage
of revenue, all other SG&A expense increased to 3.9% for the nine
months ended September 30, 2009, from 3.3% for the comparable
prior-year period.
Operating Income:
The decrease in operating income for the three months ended September
30, 2009, as compared to the comparable 2008 period, was attributable
to lower revenue levels as well as increased costs for both new sales
efforts and maintaining core employees at a time when the Company had
fewer projects.
24
Management's Discussion and Analysis (continued)
------------------------------------------------
The decrease in operating income for the nine months ended September
30, 2009, as compared to the comparable 2008 period, was attributable
to lower revenue levels as well as increased costs for both new sales
efforts and maintaining core employees at a time when the Company had
fewer projects.
Other Income/Expense, net:
Other income for the three months ended September 30, 2009 consisted of
$15,000 from insurance proceeds related to Hurricane Ike and $16,000
related to a payroll tax refund, while other income for the same period
in 2008 mainly consisted of a $79,000 rebate program payment, offset by
expense of $32,000 in investment losses.
Other income for the nine months ended September 30, 2009, consisted of
$315,000 from insurance proceeds related to Hurricane Ike and $16,000
related to a payroll tax refund offset by expense of $145,000 in losses
from an investment in a Costa Rican company. Other income for the same
period in 2008 mainly consisted of an $84,000 gain on the sale of land,
$55,000 of reimbursements for surplus of government tax funds and
$79,000 from a rebate program, offset by expense of $56,000 in
investment losses and $18,000 in tax penalties.
Interest Income/Expense, net:
Interest expense has decreased for both the three and nine months ended
September 30, 2009 due to the lower balances on our line of credit and
a favorable LIBOR rate option in our Credit Agreement.
Tax Provision:
Income tax expense for the three months ended September 30, 2009
decreased generally in proportion to the decrease in operating income.
Our estimated effective tax rate for the fiscal year was revised upward
during the period to reflect the revised proportions of components of
pretax income which resulted in a distorted relationship between pretax
accounting income and income tax expense for the period as explained in
Note 7 to the accompanying condensed consolidated financial statements.
Income tax expense for the nine months ended September 30, 2009
decreased in proportion to the decrease in operating income for the
nine months ended September 30, 2009, compared to the comparable
prior-year period.
Net Income:
As a result of the changes detailed above, net income for the three
months ended September 30, 2009 decreased $3,564,000, or 102.0%, to a
loss of $69,000 from income of $3,495,000 for the comparable prior year
period.
As a result of the changes detailed above, net income for the nine
months ended September 30, 2009 decreased $12.2 million, or 86.0%, to
$2.0 million from $14.2 million for the comparable prior year period.
Liquidity and Capital Resources
-------------------------------
Overview
The Company defines liquidity as its ability to pay liabilities as they
become due, fund our operations and meet monetary contractual
obligations. Our primary source of funds to meet liquidity needs during
the period ended September 30, 2009 was borrowings under our senior
revolving credit facility. Cash on hand at September 30, 2009 totaled
$0.4 million and availability under the credit facility totaled $39.4
million, resulting in cash and previously arranged borrowing capacity
to meet additional liquidity needs of $39.8 million. As of September
30, 2009, management believes the Company is positioned to meet its
liquidity requirements for the next 12 months.
At September 30, 2009, the amount outstanding on the Company's line of
credit was $10.0 million compared to $30.1 million at September 30,
2008.
Although our revenues, profits and opportunities have contracted over
the past year, we still believe we are a growth company positioned to
expand when general economic conditions improve. We expect to continue
to manage our business to achieve reasonable growth objectives that are
commensurate with profitable operations given existing and anticipated
economic conditions. We believe that when market conditions improve, we
25
Management's Discussion and Analysis (continued)
------------------------------------------------
will, once again, experience organic growth. In the meantime, we expect
to target opportunities to make strategic acquisitions and we intend to
continue to meet our incremental liquidity needs through internally
generated profits and borrowing arrangements similar to those currently
in place.
The current competitive contracting environment exposes us to
situations where our clients may become unable or unwilling to complete
a contract and meet their obligations to us in the normal course of
business. These situations cause unexpected liquidity requirements,
lower than expected profits and even losses. We currently are financing
more than $8.6 million relating to the SLE Project, described more
fully in Note 9 to the condensed consolidated financial statements
included in this Quarterly Report on Form 10-Q. We are also financing a
$3.1 million current note receivable related to a customer account.
While these situations have caused the Company to incur higher interest
costs than would otherwise have been incurred, our liquidity remains
sufficient to meet our objectives. Even though the Company believes it
will receive favorable judgments in legal proceedings regarding these
situations, due to the current business and credit climate, just
prevailing in disputes may not assure that cash or assets will be
realized and that the Company will not be left with assets it cannot
employ.
Despite the Company's favorable liquidity situation, cash and the
availability of cash could be materially restricted if:
(1) the Company performs work without prior authorization,
(2) circumstances prevent the timely internal processing of
invoices,
(3) amounts billed are not collected or are not collected in a
timely manner,
(4) project mix shifts from cost-reimbursable to fixed-price
contracts,
(5) the Company loses one or more of its major customers,
(6) the Company experiences material cost overruns on
fixed-price contracts,
(7) our client mix shifts from our historical owner-operator
client base to more developer-based clients,
(8) acquisitions are not accretive or are not integrated timely,
or
(9) we are unable to meet or renew the covenants of the Credit
Facility.
If any such event occurs, we would be forced to consider alternative
financing options, if such options are available given current market
conditions.
As of August 2009 our existing credit facility, by its terms, was
required to be classified as a current liability. We are reviewing our
options for replacing this credit facility primarily due to current
covenant limitations and our lender's unwillingness to fund larger
fixed-price contracts that include construction in the contract scope.
We estimate that the initial costs to replace our credit facility will
be approximately $0.5 million to $1.0 million and that the interest
rates will likely increase to a range between 3.25% and 4.25%.
The Company's Credit Facility requires the Company to maintain certain
financial covenants as of the end of each calendar month, including the
following:
o Leverage Ratio not to exceed 3.00 to 1.00;
o Asset Coverage Ratio less than 1.00 to 1.00; and
o Net Worth greater than the sum of $40.1 million plus 75% of
positive Net Income earned in each fiscal quarter after January
1, 2007 plus 100% of the net proceeds of any offering, sale or
other transfer of any capital stock or any equity securities.
The Credit Facility also contains covenants that place certain
limitations on the Company, including limits on new debt, mergers,
asset sales, investments, fixed-price contracts, capital expenditures
and restrictions on certain distributions.
The Company was in compliance with all covenants under the Credit
Facility as of September 30, 2009. During the previous trailing twelve
month reporting period our Leverage Ratio has averaged .75 to 1.00 and
our Asset Coverage Ratio has averaged .26 to 1.00. During the nine
month period ended September 30, 2009 we have expended or committed
approximately 97%, or $3.165 million, of the $3.250 million fiscal year
covenant limitation on capital expenditures. Our office expansion in
Beaumont and the relocation of our manufacturing facility in Houston
account for $1.069 million and $1.642 million respectively in leasehold
26
Management's Discussion and Analysis (continued)
------------------------------------------------
and equipment costs. The $454,000 balance of our capital expenditures
for the nine month period has been for normal operating requirements
including office furniture, computers, software and vehicles. The
Company does not expect to exceed the covenant limitation during the
balance of current fiscal year.
During the three month period ended September 30, 2009 our monthly
Leverage Ratio and Asset Coverage Ratio covenant levels have been below
their respective trailing twelve month averages. The Company's Net
Worth exceeds its covenant requirement by approximately $14.6 million.
Cash Flows from Operating Activities:
Operations generated approximately $18.5 million in net cash during the
nine months ended September 30, 2009, compared with net cash generated
from operations of $1.0 million during the same period in 2008.
Operations generated approximately $4.5 million in net cash during the
three months ended September 30, 2009, compared to the $3.5 million
used for the three months ended September 30, 2008.
The primary changes in working capital accounts during the nine months
ended September 30, 2009 were:
o Decreased Trade Receivables - The decrease of $33.5 million from
December 31, 2008, was primarily the result of an overall decline
in operating activity. Our days sales outstanding has increased
from 61 days for the three month period ended September 30, 2008
and 64 days for the twelve month period ended December 31, 2008
to 65 days at the end of the three month period ended September
30, 2009. The past due balance on Accounts Receivable invoices
for services provided to one customer negatively impacted our
average days sales outstanding for the three-month period ended
September 30, 2009 by three days. The Company manages its billing
and client collection processes toward reducing days sales
outstanding to the extent practicable. We believe that our
allowance for bad debt is adequate to cover any potential
non-payment by our customers.
o Decreased Accounts Payable - The decrease of $7.7 million from
December 31, 2008, was primarily the result of payouts of vendor
and subcontractor charges incurred by our Automation segment due
to increased operating activity during the three months ended
December 31, 2008, payments of $2.5 million in subcontractor
obligations related to a note receivable and the overall decline
in operating activity.
o Decreased Accrued Compensation and Benefits - The decrease of
$8.3 million from December 31, 2008 was primarily due to timing
of bi-weekly payroll and payout of accrued benefits primarily due
to staff reductions in our Engineering segment.
o Increased Current Maturities of Long-term Debt and Leases - The
increase of $9.2 million from December 31, 2008 was primarily due
to our existing credit facility being required to be classified
as a current liability, because by its terms it became due within
one year as of August 2009.
27
Management's Discussion and Analysis (continued)
------------------------------------------------
Engineering Segment Results
---------------------------
Three Months Ended
September 30,
-----------------------------------------------------------------------------
2009 2008 Increase/(Decrease)
------------------------ ---------------------- --------------------
(Dollars in thousands)
-----------------------------------------------------------------------------
Revenue before eliminations $ 32,041 $ 63,170 $ (31,129)
Inter-segment eliminations (33) (60) 27
---------- --------- ----------
Total revenue $ 32,008 $ 63,110 $ (31,102)
========== ========= ==========
Detailed revenue:
Detail-design $ 20,599 64.4% $ 43,236 68.5% $ (22,637) (52.4%)
Field services 10,907 34.1% 12,055 19.1% (1,148) (9.5%)
Procurement services 14 0.0% 7,607 12.1% (7,593) (99.8%)
Fixed-price 488 1.5% 212 0.3% 276 130.2%
---------- --------- ----------
Total revenue: $ 32,008 100.0% $ 63,110 100.0% $ (31,102) (49.3%)
Gross profit: 1,569 4.9% 8,864 14.0% (7,295) (82.3%)
Operating SG&A expense: 1,662 5.2% 1,446 2.3% 216 14.9%
---------- --------- ----------
Operating income: $ (93) (0.3%) $ 7,418 11.7% $ (7,511) (101.3%)
========== ========= ==========
Nine Months Ended
September 30,
-----------------------------------------------------------------------------
2009 2008 Increase/(Decrease)
------------------------ ---------------------- --------------------
(Dollars in thousands)
-----------------------------------------------------------------------------
Revenue before eliminations $ 108,631 $ 192,685 $ (84,054)
Inter-segment eliminations (594) (67) (527)
---------- --------- ----------
Total revenue $ 108,037 $ 192,618 $ (84,581)
========== ========= ==========
Detailed revenue:
Detail-design $ 73,245 67.8% $ 127,212 66.1% $ (53,967) (42.4%)
Field services 31,344 29.0% 38,112 19.8% (6,768) (17.8%)
Procurement services 394 0.4% 25,107 13.0% (24,713) (98.4%)
Fixed-price 3,054 2.8% 2,187 1.1% 867 39.6%
---------- --------- ----------
Total revenue: $ 108,037 100.0% $ 192,618 100.0% $ (84,581) (43.9%)
Gross profit: 8,938 8.3% 31,525 16.4% (22,587) (71.6%)
Operating SG&A expense: 4,626 4.3% 5,003 2.6% (377) (7.5%)
---------- --------- ----------
Operating income: $ 4,312 4.0% $ 26,522 13.8% $ (22,210) (83.7%)
========== ========= ==========
28
Management's Discussion and Analysis (continued)
------------------------------------------------
Overview of Engineering Segment:
The Company's Engineering segment provides development, management and
turnkey execution of engineered projects. ENGlobal also provides
in-plant staffing, and other field services throughout the United
States. Among various subsidiaries, the Engineering segment provides
engineering and field services primarily to the midstream and
downstream energy industries.
Our Engineering segment has been significantly affected by the current
economic conditions. Many of our clients have delayed or canceled
scheduled capital projects due to the economy in general and lower
commodity prices, as well as lower energy processing margins. Instead,
they are focusing more on maintenance ("run and maintain") projects
which are smaller than many of the other projects we have historically
been involved in. Competition has increased greatly for the amount of
project work on the market. Although some of our clients have chosen
different vendors, we still have a base of significant clients who
continue to award projects to us. We are also focusing on increased
marketing efforts not only to expand our opportunities in the chemical,
refining and pipeline sectors, but to also expand into other markets
within the energy and infrastructure sector.
Revenue:
The decrease in Engineering segment revenue resulted primarily from
decreased demand for engineering and related professional services for
energy related projects. We have also been affected by delayed or
cancelled capital project work by clients in reaction to the current
economy.
Of the overall decrease in revenue from detail-design services for the
three months ended September 30, 2009, $7.0 million was related to the
completion of two major projects while the remainder of the decrease is
accounted for by lower availability of work due to client delays or
cancellation of projects.
Of the overall decrease in revenue from detail-design services for the
nine months ended September 30, 2009, $23.9 million was related to the
completion of two major projects while the remainder of the decrease is
accounted for by lower availability of work due to client delays or
cancellation of projects.
Of the overall decrease in revenue from field services for the three
months ended September 30, 2009, $2.2 million was due to the loss of a
material client relationship, offset by the addition of new on-site
assignments in the Beaumont, Lake Charles and Houston areas.
Of the overall decrease in revenue from field services for the nine
months ended September 30, 2009, $7.6 million was due to the loss of a
material client relationship, offset by the addition of new on-site
assignments in the Beaumont, Lake Charles and Houston areas.
The overall decrease in revenue from procurement services of $7.6
million for the three months ended September 30, 2009 and $24.7 million
for the nine months ended September 30, 2009 was primarily due to the
completion in 2008 of a refinery-rebuild project. Procurement services
included subcontractor placements, equipment purchases and other
procurement activities necessary to rebuild the damaged facilities.
The overall increase in revenue from fixed-price services for both the
three months ended and nine months ended September 30, 2009, was due to
the current economy. More clients are requesting work to be performed
on a fixed price basis to control their costs and shift risk to their
contractors.
Gross Profit:
Of the overall decrease in gross profit for the three months ended
September 30, 2009, $2.9 million was attributable to increased costs,
while decreased revenues contributed to $4.3 million of the overall
decrease. The decrease is the result of clients awarding new work based
on competitive bidding, resulting in lower margins. These lower margins
along with increased per employee costs of benefits have accounted for
6.7% of the overall decrease in gross profit percentage. In response to
the decrease in work, we have decreased our number of employees.
However, realization of the cost savings associated with reducing our
workforce lags a period of increased overhead costs associated with
employees being removed from projects and being carried as non-billable
employees prior to termination. The additional costs of carrying these
extra employees accounts for 2.4% of the overall gross profit
percentage decline.
29
Management's Discussion and Analysis (continued)
------------------------------------------------
Of the overall decrease in gross profit for the nine months ended
September 30, 2009, $8.8 million was attributable to increased costs,
while decreased revenues contributed to $13.8 million of the overall
decrease. The decrease is the result of clients awarding new work based
on competitive bidding, resulting in lower margins. These lower margins
along with increased per employee costs of benefits have accounted for
5.4% of the overall decrease in gross profit percentage. In response to
the decrease in work, we have decreased our number of employees.
However, realization of the cost savings associated with reducing our
workforce lags a period of increased overhead costs associated with
employees being removed from projects and being carried as non-billable
employees prior to termination. The additional costs of carrying these
extra employees accounts for 2.7% of the overall gross profit
percentage change.
Selling, General, and Administrative:
The increase in the Engineering segment's SG&A expense for the three
months ended September 30, 2009 was mainly attributable to increases of
$155,000 in bad debt expense and $173,000 in facilities expenses,
offset by decreases of $127,000 in office expenses.
The decrease in the Engineering segment's SG&A expense for the nine
months ended September 30, 2009 was mainly attributable to decreases of
$770,000 in bad debt expense, $169,000 in office expenses and $46,000
in salaries and employee related expenses, offset by increases of
$536,000 in facilities expenses and $91,000 in depreciation and
amortization expenses.
Operating Income:
Of the overall decrease in the Engineering segment's operating income
for the three months ended September 30, 2009 stated as a percent of
revenues, 6.7 percentage points of change was due to lower margin work
because of client pressures for competitive bidding, 2.4 percentage
points of change was due to the additional costs of carrying extra
employees and 2.9 percentage points of change was due to increased SG&A
expenses for increased facilities expense and bad debt expenses.
Of the overall decrease in the Engineering segment's operating income
for the nine months ended September 30, 2009 stated as a percent of
revenues, 5.4 percentage points of change was due to lower margin work
because of client pressures for competitive bidding, 2.7 percentage
points of change was due to the additional costs of carrying extra
employees and 1.7 percentage points of change was due to increased SG&A
expenses for increased facilities expenses net of savings in bad debt
expense.
30
Management's Discussion and Analysis (continued)
------------------------------------------------
Construction Segment Results
----------------------------
Three Months Ended
September 30,
--------------------------------------------------------------------------------
2009 2008 Increase/(Decrease)
---------------------- ----------------------- ---------------------
(Dollars in thousands)
--------------------------------------------------------------------------------
Revenue before eliminations $ 28,526 $ 44,481 $ (15,955)
Inter-segment eliminations (53) (3,571) 3,518
--------- --------- ----------
Total revenue $ 28,473 $ 40,910 $ (12,437)
========= ========== ==========
Detailed revenue:
Inspection $ 24,823 87.2% $ 38,800 94.8% $ (13,977) (36.0%)
Construction services 3,650 12.8% 2,110 5.2% 1,540 73.0%
--------- ---------- ----------
Total revenue: $ 28,473 100.0% $ 40,910 100.0% $ (12,437) (30.4%)
Gross profit: 1,802 6.3% 2,765 6.7% (963) (34.8%)
Operating SG&A expense: 477 1.7% 794 1.9% (317) (39.9%)
--------- ---------- ----------
Operating income: $ 1,325 4.6% $ 1,971 4.8% $ (646) (32.8%)
========= ========== ==========
Nine Months Ended
September 30,
--------------------------------------------------------------------------------
2009 2008 Increase/(Decrease)
---------------------- ----------------------- ---------------------
(Dollars in thousands)
--------------------------------------------------------------------------------
Revenue before eliminations $ 73,740 $ 110,356 $ (36,616)
Inter-segment eliminations (1,594) (6,892) 5,298
--------- ---------- ----------
Total revenue $ 72,146 $ 103,464 $ (31,318)
========= ========== ==========
Detailed revenue:
Inspection $ 61,175 84.8% $ 93,220 90.1% $ (32,045) (34.4%)
Construction services 10,971 15.2% 10,244 9.9% 727 7.1%
--------- ---------- ----------
Total revenue: $ 72,146 100.0% $ 103,464 100.0% $ (31,318) (30.3%)
Gross profit: 5,231 7.3% 8,781 8.5% (3,550) (40.4%)
Operating SG&A expense: 1,371 1.9% 2,255 2.2% (884) (39.2%)
--------- ---------- ----------
Operating income: $ 3,860 5.4% $ 6,526 6.3% $ (2,666) (40.9%)
========= ========== ==========
31
Management's Discussion and Analysis (continued)
------------------------------------------------
Overview of Construction Segment:
The Construction group provides a complete portfolio of construction
management services to the pipeline, refining, petrochemical, oil and gas,
petroleum, chemical, utility, renewable fuels, power and energy industries.
We offer clients tailored levels of full service construction, turnaround
management, asset management, commissioning and start-up, inspection,
instrumentation and electrical and mechanical integrity. ENGlobal is
capable of delivering turnkey construction solutions throughout the full
cycle of the construction process. Our construction management business
provides project managers, instrument technicians, CADD operators, clerical
staff and inspectors.
Our Construction segment has been adversely affected by the current
economic conditions. Some refiners have chosen to defer and cancel
significant turnaround activities given the recent narrowing of energy
processing margins. In addition, we have experienced decline in our
inspection related work.
On August 14, 2009, a subsidiary of the Company purchased the consulting
operations of PCI. PCI provides engineering, consulting and project
management services, specializing in projects relating to the generation,
transmission and distribution of energy. As a result of the acquisition,
ENGlobal expects to offer expanded services in this geographical area.
Results of operations are included in the construction segment beginning
August 15, 2009.
Revenue:
Due to the current economic environment, we have experienced decline in
our inspection related revenue as a result of project delays and
competitive pricing pressure, primarily in the area of pipeline
construction. We have seen an increase in work for this area in the
third quarter and expect that the work for this area will continue to
increase in the fourth quarter of 2009, but that it will remain below
the highest levels achieved during 2008 for at least the remainder of
this year.
Of the overall decrease in revenue from inspection related services for
the three months ended September 30, 2009, $14.0 million was related to
project delays and competitive pricing pressures mentioned above.
Of the overall decrease in revenue from inspection related services for
the nine months ended September 30, 2009, $32.0 million was related to
project delays and competitive pricing pressures mentioned above.
The overall increase in revenue from construction services for the
three months ended September 30, 2009 was due to the addition of new
projects in the third quarter. We continue to focus on new
opportunities for both alternative and conventional energy facilities.
The overall increase in revenue from construction services for the nine
months ended September 30, 2009 was due to the addition of new projects
in the current third quarter. We continue to focus on new opportunities
for both alternative and conventional energy facilities.
Gross profit:
Of the overall decrease in our Construction segment's gross profit for
the three months ended September 30, 2009, $0.1 million was
attributable to increased costs, while decreased revenues contributed
to $0.8 million of the overall decrease. The decrease in gross profit
is primarily attributable to the overall decrease in available work and
competitive pressures to lower margins.
Of the overall decrease in our Construction segment's gross profit for
the nine months ended September 30, 2009, $0.8 million was attributable
to increased costs, while decreased revenues contributed to $2.7
million of the overall decrease. The decrease in gross profit is
primarily attributable to the overall decrease in available work and
increased overhead costs incurred in connection with our efforts to win
new work. The increased overhead costs for sales effort account for
0.9% of the overall gross profit percentage change, while the remainder
is due to higher employee related costs and competitive pressures to
lower margins.
32
Management's Discussion and Analysis (continued)
------------------------------------------------
Selling, General, and Administrative:
The overall decrease in our Construction segment's SG&A expense for the
three months ended September 30, 2009 was mainly attributable to
decreases of $269,000 in salaries and related employee expenses and
$59,000 in depreciation and amortization expenses.
The overall decrease in our Construction segment's SG&A expense for the
nine months ended September 30, 2009 was mainly attributable to
decreases of $137,000 in bad debt expense, $665,000 in salaries and
employee related expenses and $79,000 in depreciation and amortization
expenses.
Operating Income:
The overall decrease in our Construction segment's operating income for
the three months ended September 30, 2009 was primarily attributable to
the increased direct and indirect costs of approximately 0.4%, offset
by a savings in SG&A expenses of 0.2%.
The overall decrease in our Construction segment's operating income for
the nine months ended September 30, 2009 was primarily attributable to
the increased direct and indirect costs of approximately 1.2%, offset
by a savings in SG&A expenses of 0.3%.
33
Management's Discussion and Analysis (continued)
------------------------------------------------
Automation Segment Results
--------------------------
Three Months Ended
September 30,
------------------------------------------------------------------------------
2009 2008 Increase/(Decrease)
-------------------- ------------------- ------------------------
(Dollars in thousands)
------------------------------------------------------------------------------
Revenue before eliminations $ 19,545 $ 7,912 $ 11,633
Inter-segment eliminations (5) (16) 11
--------- ----------- -------------
Total revenue $ 19,540 $ 7,896 $ 11,644
========= =========== ============
Detailed revenue:
Fabrication $ 11,098 56.8% $ 4,446 56.3% $ 6,652 149.6%
Non-fabrication 8,442 43.2% 3,450 43.7% 4,992 144.7%
--------- ----------- ------------
Total revenue: $ 19,540 100.0% $ 7,896 100.0% $ 11,644 147.5%
Gross profit: 2,748 14.1% 154 1.9% 2,594 1684.4%
Operating SG&A expense: 1,065 5.5% 720 9.1% 345 47.9%
--------- ----------- ------------
Operating income: $ 1,683 8.6% $ (566) (7.2)% $ 2,249 397.3%
========= =========== ============
Nine Months Ended
September 30,
------------------------------------------------------------------------------
2009 2008 Increase/(Decrease)
-------------------- ------------------- ------------------------
(Dollars in thousands)
------------------------------------------------------------------------------
Revenue before eliminations $ 55,800 $ 29,880 $ 25,920
Inter-segment eliminations (92) (546) 454
--------- ----------- ------------
Total revenue $ 55,708 $ 29,334 $ 26,374
========= =========== ============
Detailed revenue:
Fabrication $ 27,122 48.7% $ 18,067 61.6% $ 9,055 50.1%
Non-fabrication 28,586 51.3% 11,267 38.4% 17,319 153.7%
--------- ----------- ------------
Total revenue: $ 55,708 100.0% $ 29,334 100.0% $ 26,374 89.9%
Gross profit: 6,822 12.3% 2,560 8.7% 4,262 166.5%
Operating SG&A expense: 3,284 5.9% 2,101 7.1% 1,183 56.3%
--------- ----------- ------------
Operating income: $ 3,538 6.4% $ 459 1.6% $ 3,079 670.8%
========= =========== ============
34
Management's Discussion and Analysis (continued)
------------------------------------------------
Overview of Automation Segment:
The Automation segment designs, assembles, programs, installs and services
process control and analytical systems for specific applications in the
energy and processing related industries. The Automation segment provides
control and instrumentation system design, engineering, fabrication,
assembly and testing in-house, as well as similar services for online
process analyzer systems. Our Automation group also provides services
relating to the implementation of process controls, advanced automation and
information technology projects. We provide clients with a full range of
services including front-end engineering feasibility studies and the
execution of active large scope engineering, procurement, and construction
projects. By focusing on large-scope projects, we intend to pursue
Distributed Control Systems (DCS) conversion and new installation projects
by utilizing the Automation segment resources as well as resources from our
Engineering segment. ENGlobal has proven capabilities for plant automation
services and products to respond to an industry progression toward
replacing obsolete technology with new open system architecture DCS. Our
Automation segment is focusing significant efforts not only on marketing to
our existing client base, but also to expanding our client base outside of
the energy sector both domestically and internationally.
Our Automation segment has been somewhat affected by the current economic
conditions. A significant part of our Automation segment's work is driven
by our clients' need to replace aging and obsolete DCS and analytical
equipment. While some of these expenditures can be deferred, the need to
replace DCS and other equipment has historically provided a reliable and
recurring source of projects. We expect to benefit as certain manufacturers
are currently phasing out their support for heritage DCS platforms. With
such a large installed base, our clients will be required to migrate to
newer DCS platforms. We are focusing our efforts on improving Automation's
operational efficiencies in order to fully capitalize on these
opportunities.
Revenue:
Of the overall increase in our Automation segment's revenue for the
three months ended September 30, 2009, approximately $2.3 million was
derived from non-fabrication services resulting from the acquisition of
Advanced Control Engineering LLC completed in late September 2008. The
remainder of the increase is due to new work acquired as a result of
our increased sales effort. The 150% increase in fabrication revenue,
as compared to the prior-year comparable quarter, came primarily from
two large projects in the current quarter compared against the three
months ended September 30, 2008 which were impacted by productivity and
interruptions due to hurricanes Gustav and Ike.
Of the overall increase in our Automation segment's revenue for the
nine months ended September 30, 2009, approximately $5.9 million was
derived from non-fabrication services resulting from the acquisition of
Advanced Control Engineering LLC in late September 2008 and
approximately $9.3 million was derived from the Ike Recovery project
during the first quarter of the year. The remainder of the increase is
due to new work acquired as a result of our increased sales effort. Of
the 50% increase in fabrication revenue for the year approximately 74%
of the growth came in the current quarter. In evaluating this increase,
it is important to note that the comparable prior year quarter was
materially adversely impacted by Hurricanes Gustav and Ike.
Gross profit:
Of the overall increase in our Automation segment's gross profit for
the three months ended September 30, 2009, $2.2 million was
attributable to decreased costs, while increased revenues contributed
to $0.3 million of the overall increase. Of the total gross profit
percentage increase, 5.2 percentage points were attributable to
indirect costs associated with salaries and employee related expenses
as a percentage of revenue being lower than the comparable prior year
period, while the remainder of the increase is due to lower direct
costs as a percentage of revenue and an increased volume of work.
Of the overall increase in our Automation segment's gross profit for
the nine months ended September 30, 2009, $1.9 million was attributable
to decreased costs, while increased revenues contributed to $2.3
million of the overall increase. Of the total gross profit percentage
increase, 2.5 percentage points were attributable to indirect costs
associated with salaries and employee related expenses as a percentage
of revenue being lower than the comparable prior year period, while the
remainder of the increase is due to lower direct costs, as a percentage
of revenue, and an increased volume of work.
35
Management's Discussion and Analysis (continued)
------------------------------------------------
Selling, General, and Administrative:
The overall increase in our Automation segment's SG&A expense for the
three months ended September 30, 2009 was attributable to increases of
$101,000 in depreciation and amortization expenses, $92,000 in
facilities expenses due to the relocation of the Houston manufacturing
facility, $75,000 in bad debt expenses and the remainder in salaries
and employee related expenses net of a decrease in stock compensation
expenses.
The overall increase in our Automation segment's SG&A expense for the
nine months ended September 30, 2009 was attributable to increases of
$314,000 in depreciation and amortization expenses, $412,000 in
facilities expenses due to the relocation of the Houston manufacturing
facility, $433,000 in salaries and employee related expenses and the
remainder in professional services expense offset by savings in bad
debt and stock compensation expenses.
Operating Income:
The overall $2.2 million increase in our Automation segment's operating
income for the three months ended September 30, 2009 was due to the
factors discussed above.
The overall $3.1 million increase in our Automation segment's operating
income for the nine months ended September 30, 2009 was due to the
factors discussed above.
36
Management's Discussion and Analysis (continued)
------------------------------------------------
Land Segment Results
--------------------
Three Months Ended
September 30,
--------------------------------------------------------------------------------
2009 2008 Increase/(Decrease)
---------------------- ------------------- --------------------
(Dollars in thousands)
-------------------------------------------------------------------------------
Revenue before eliminations $ 7,250 $ 11,251 $ (4,001)
Inter-segment eliminations -- -- --
---------- --------- ---------
Total revenue $ 7,250 100.0% $ 11,251 100.0% $ (4,001) (35.6%)
========== ========= =========
Gross profit: $ 1,049 14.5% $ 1,851 16.5% $ (802) (43.3%)
Operating SG&A expense: 473 6.5% 660 5.9% (187) (28.3%)
---------- --------- ---------
Operating income: $ 576 8.0% $ 1,191 10.6% $ (615) (51.6%)
========== ========= =========
Nine Months Ended
September 30,
--------------------------------------------------------------------------------
2009 2008 Increase/(Decrease)
---------------------- ------------------- --------------------
(Dollars in thousands)
-------------------------------------------------------------------------------
Revenue before eliminations $ 24,748 $ 31,928 $ (7,180)
Inter-segment eliminations -- -- --
---------- -------- ---------
Total revenue $ 24,748 100.0% $ 31,928 100.0% $ (7,180) (22.5%)
========== ======== =========
Gross profit: $ 3,708 15.0% $ 5,415 17.0% $ (1,707) (31.5%)
Operating SG&A expense: 1,475 6.0% 2,219 7.0% (744) (33.5%)
---------- -------- ---------
Operating income: $ 2,233 9.0% $ 3,196 10.0% $ (963) (30.1%)
========== ======== =========
37
Management's Discussion and Analysis (continued)
------------------------------------------------
Overview of Land Segment:
Like our Engineering and Construction segments, our Land segment provides
right-of-way acquisition and permitting, environmental compliance,
governmental regulatory and related services to the power, energy,
transportation, telecommunications and governmental sectors. We provide (1)
land management expertise in title research, permitting and acquisition,
(2) land and right of way consulting services, and (3) a broad menu of
complementary solutions primarily to the energy, utility, transportation,
electric power and government sectors. We have successfully built a
reputation for quality, budget management and focused objectives, as long
term alliance partners with our clients. The Land segment provides services
to a cross-section of clients in the energy markets. As the country
attempts to shift its dependence on foreign energy to reliance on domestic
sources, we anticipate that the Land segment will have additional project
opportunities.
Our Land segment has been adversely affected by the current economic
conditions. Pipeline and other midstream projects have remained fairly
constant. Although pipeline projects tend to require fewer engineering
man-hours than similarly sized downstream projects, ENGlobal may also
provide a pipeline client with several additional services, such as
right-of-way acquisition, regulatory permitting, inspection and
construction management. Our clients are able to take advantage of our 'all
in' capabilities in the midstream sector. The drivers we see behind growth
in domestic pipeline activity include: (1) natural gas transportation away
from the shale discoveries in various parts of the country, (2) natural gas
transportation related to LNG import facilities, (3) movement of heavy
Canadian crude oil into the United States, (4) movement of refined products
from Gulf Coast refineries to the Midwest and Northeast, and (5) repairs
and upgrades to the aging pipeline infrastructure which is driven by DOT
pipeline integrity requirements.
Revenue:
At the beginning of the year, the Land segment was able to sustain its
revenue. However, Land segment revenues are now being impacted by the
economic downturn.
The overall decrease in our Land segment's revenue for the three months
ended September 30, 2009 was primarily attributable to clients delaying
capital projects and competitive pricing pressures as a result of the
economic downturn.
The overall decrease in our Land segment's revenue for the nine months
ended September 30, 2009 was primarily attributable to clients delaying
capital projects and competitive pricing pressures as a result of the
economic downturn.
Gross profit:
Due to current economic conditions, we are experiencing higher client
demands for lower costs. As a result, some of our contracts provide
lower margins than we have been able to earn in the past. This trend is
adversely affecting our gross profit.
Of the overall decrease in our Land segment's gross profit for the
three months ended September 30, 2009, $0.1 million was attributable to
increased costs, while decreased revenues contributed to $0.7 million
of the decrease. Lower margins resulting from competitive pressures
account for approximately 2.1% of the gross profit decrease offset by
an increase of 0.1% which is attributable to decreased non-billable and
indirect costs associated with carrying employees between projects.
Of the overall decrease in our Land segment's gross profit for the nine
months ended September 30, 2009, $0.5 million was attributable to
increased costs, while decreased revenues contributed to $1.2 million
of the decrease. Lower margins resulting from competitive pressures
account for approximately 1.8% of the gross profit decrease. The
remaining 0.2% decrease is attributable to increased non-billable and
indirect costs associated with compensating employees who are between
projects.
Selling, General, and Administrative:
The overall decrease in our Land segment's SG&A expense for the three
months ended September 30, 2009 was mainly attributable to decreases of
$104,000 in marketing expenses and $294,000 in salaries and employee
related expenses offset by an increase of $204,000 in bad debt
expenses.
38
Management's Discussion and Analysis (continued)
------------------------------------------------
The overall decrease in our Land segment's SG&A expense for the nine
months ended September 30, 2009 was attributable to decreases of
$140,000 in marketing expenses and $570,000 in salaries and employee
related expenses.
Operating Income:
The overall $0.6 million decrease in our Land segment's operating
income for the three months ended September 30, 2009 was due to the
factors discussed above.
The overall $1.0 million decrease in our Land segment's operating
income for the nine months ended September 30, 2009 was due to the
factors discussed above.
39
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our financial instruments include cash and cash equivalents, accounts and
notes receivable, accounts payable, notes and capital leases payable, and
debt obligations. The book value of cash and cash equivalents, accounts
receivable, accounts payable and short-term notes payable are considered to
be representative of fair value because of the short maturity of these
instruments.
We do not utilize financial instruments for trading purposes and we do not
hold any derivative financial instruments that could expose us to
significant market risk. In the normal course of business, our results of
operations are exposed to risks associated with fluctuations in interest
rates and, to a minor extent, currency exchange rates.
Our exposure to market risk for changes in interest rates relates primarily
to our obligations under the Comerica Credit Facility (the "Credit
Facility"). As of September 30, 2009, $10.0 million was outstanding under
the Credit Facility, and accrues interest at 3.00% per year under the prime
rate option or between 1.50% and 2.54% under the LIBOR option, excluding
amortization of prepaid financing costs. If it becomes necessary for the
Company to replace the Credit Facility in the current economic environment,
we may not be able to obtain as favorable a rate structure as the existing
arrangement.
In general, our exposure to fluctuating exchange rates relates to the
effects of translating the financial statements of our Canadian subsidiary
from the Canadian dollar to the U.S. dollar. We follow the provisions of
ASC 830-30, "Foreign Currency Translation" in preparing our condensed
consolidated financial statements. Currently, we do not engage in foreign
currency hedging activities.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures of a
registrant that are designed to ensure that information required to be
disclosed by the registrant in the reports that it files or submits under
the Exchange Act is properly recorded, processed, summarized and reported,
within the time periods specified in the Securities and Exchange
Commission's ("SEC") rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure
that information required to be disclosed by a registrant in the reports
that it files or submits under the Exchange Act is accumulated and
communicated to the registrant's management, including its principal
executive and principal financial officers, or persons performing similar
functions, as appropriate, to allow for timely decisions regarding required
disclosure.
We evaluated the effectiveness of the design and operation of our
disclosure controls and procedures as of September 30, 2009, as required by
Rule 13a-15 of the Exchange Act. Based on the evaluation described above,
our Chief Executive Officer and Chief Financial Officer have concluded
that, as of September 30, 2009, our disclosure controls and procedures were
effective insofar as they are designed to ensure that information required
to be disclosed by us in the reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported, within the
time periods specified in the Commission's rules and forms. Our disclosure
controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by
us in the reports that we file or submit under the Exchange Act is
accumulated and communicated to our management, including our principal
executive and principal financial officers, or persons performing similar
functions, as appropriate to allow timely decisions regarding required
disclosure.
Changes in Internal Control over Financial Reporting
No changes in our internal control over financial reporting occurred during
the nine months ended September 30, 2009, that materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
40
PART II. - OTHER INFORMATION
----------------------------
ITEM 1. LEGAL PROCEEDINGS
The Company received notice of an action filed in the 234th District Court
for Harris County, TX on or about March 20, 2009, seeking declaratory
relief to clear title to real property and improvements owned by Bigler, LP
("Bigler") on which ENGlobal Engineering, Inc. ("EEI") filed a statutory
mechanics lien statement in the amount of $2,988,000 on or about February
18, 2009. Bigler also claims breach of contract by EEI and monetary
damages. The Company filed its Answer and Counterclaim for damages on
breach of contract, for its attorneys' fees and costs, and to foreclose on
its lien interest on April 27, 2009. The court has denied Bigler's
pre-trial motion to vacate the lien. On October 30, 2009, Bigler filed a
petition in U.S. Bankruptcy Court for the Southern District of Texas
(Houston), Bankruptcy Petition #09-38188. As of the date of this Quarterly
Report, we have not had an opportunity to assess lien priorities and other
matters related to distribution of assets from the bankruptcy estate and
therefore, we are not able to make an assessment regarding collection of
this receivable.
As discussed in Note 9 above, in 2006 and 2007 ENGlobal Engineering, Inc.
entered into a series of agreements to refurbish and upgrade SLE's ethanol
facility in Belle Chase, LA. The history of the SLE Project is described in
Note 12 to the Company's condensed consolidated financial statements
included in its Quarterly Report on Form 10-Q for the quarter ended
September 30, 2007, and is discussed further in the Company's Annual Report
on Form 10-K for the year ended December 31, 2007. On May 30, 2008, the
Company filed suit in the United States District Court for the Eastern
District of Louisiana, Case Number 08-3601, seeking damages of $15.8
million, and to foreclose on the acquired mechanics liens of its
subcontractors. On August 25, 2009, SLE filed a voluntary petition and
notice of bankruptcy for protection under the Bankruptcy Code, Title 11
United States Code, Chapter 11, in the United States Bankruptcy Court for
the Eastern District of Louisiana, Case number 09-12676. The Company is
subject to the determination of the Bankruptcy court as to amount,
priority, ownership of liens and claims and other issues, some of which
have been raised by the debtor in a counterclaim filed in the Bankruptcy
court. There have been no substantive rulings or orders from the Court at
this time.
ENGlobal was named as a defendant in a lawsuit entitled Ecoproduct
Solutions, L.P. vs. ENGlobal Engineering and Swenson Technology, Inc., but
has not been served with process. The lawsuit, filed on October 8, 2009, is
pending in the 270th Judicial District Court of Harris County, Texas, and
is based on a contract for engineering services performed between November
2004 and August 2005 and for which ENGlobal received approximately
$700,000. Ecoproduct claims that it has incurred actual damages of $45
million and is seeking to recover actual, consequential and punitive
damages. However, Ecoproduct has requested that the court abate the lawsuit
and compel ENGlobal to submit to a pending arbitration between Ecoproduct
and Swenson, even though a similar request was denied by the arbitrators.
ENGlobal believes Ecoproduct's claims are entirely without merit and that
they are barred by applicable statutes of limitations. If served, we will
vigorously defend ourselves in this proceeding. We do not anticipate that
the outcome of this matter will have a material adverse effect on our
financial condition.
From time to time, the Company and its subsidiaries become parties to
various legal proceedings arising in the ordinary course of normal business
activities. While we cannot predict the outcome of these proceedings, in
our opinion and based on reports of counsel, any liability arising from
such matters, individually or in the aggregate, is not expected to have a
material effect upon the consolidated financial position or operations of
the Company.
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this Quarterly Report on
Form 10-Q, you should carefully consider the factors discussed in Part I,
"Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year
ended December 31, 2008, which outlines factors that could materially
affect our business, financial condition or future results. The risks
described, in our Annual Report on Form 10-K, are not the only risks facing
our Company. Additional risks and uncertainties not currently known to us
or that we currently deem to be immaterial also may materially adversely
affect our business, financial conditions or operating results.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
41
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
Incorporated by Reference to:
----------------------------------------------------
Form or Filing Date SEC File
Exhibit No. Description Schedule Exhibit No. with SEC Number
----------- ----------- -------- ----------- ----------- --------
3.1 Restated Articles of Incorporation of Registrant 10-Q 3.1 11/14/02 001-14217
dated August 8, 2002
3.2 Amendment to the Restated Articles of 8-A12B 3.1 12/17/07 001-14217
Incorporation of the Registrant, filed with the
Nevada Secretary of State on June 2, 2006
3.3 Amended and Restated Bylaws of Registrant dated 10-K 3.3 03/28/08 001-14217
November 6, 2007
3.4 Amendments to Amended and Restated Bylaws of 10-Q 3.2 05/07/08 001-14217
Registrant dated April 29, 2008.
*31.1 Certifications Pursuant to Rule 13a - 14(a) of
the Securities Exchange Act of 1934 for the Third
Quarter 2009
*31.2 Certifications Pursuant to Rule 13a - 14(a) of
the Securities Exchange Act of 1934 for the Third
Quarter 2009
*32.0 Certification Pursuant to Rule 13a - 14(b) of
the Securities Exchange Act of 1934 and 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 for the Third
Quarter 2009
* Filed herewith
42
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: November 9, 2009
By: /s/ Robert W. Raiford
--------------------------------------
Robert W. Raiford
Chief Financial Officer and Treasurer
43
