UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
------ EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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
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(I.R.S Employer Identification No.)
654 N. Sam Houston Parkway E., Suite 400, Houston, TX 77073-6033
----------------------------------------------------- ----------
(Address of principal executive offices) (Zip code)
(281) 878-1000
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shortened period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark whether the registrant 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)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes No X
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the close of business of May 7, 2009.
$0.001 Par Value Common Stock 27,294,852 shares
2
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2009
TABLE OF CONTENTS
Page
Number
------
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Income for the Three Months
Ended March 31, 2009 and March 31, 2008 4
Condensed Consolidated Balance Sheets at March 31, 2009 and December 31, 2008 5
Condensed Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 2009 and March 31, 2008 6
Notes to Condensed Consolidated Financial Statements 7-13
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14-29
Engineering Segment Results 22
Construction Segment Results 24
Automation Segment Results 26
Land Segment Results 28
Item 3. Quantitative and Qualitative Disclosures About Market Risk 30
Item 4. Controls and Procedures 30
Part II. Other Information
Item 1. Legal Proceedings 31
Item 1A. Risk Factors 31
Item 6. Exhibits 32
Signatures 33
3
PART I. - FINANCIAL INFORMATION
-------------------------------
ITEM 1. FINANCIAL STATEMENTS
-----------------------------
ENGlobal Corporation
Condensed Consolidated Statements of Income
(Unaudited)
(Dollars in Thousands)
For the Three Months Ended
March 31,
----------------------------------------
2009 2008
------------- -------------
Revenues $ 93,489 $ 98,166
Operating costs 83,005 83,820
------------- -------------
Gross profit 10,484 14,346
Selling, general and administrative 7,062 7,226
------------- -------------
Operating income 3,422 7,120
Other income (expense):
Other income 219 26
Interest income (expense), net (211) (483)
------------- -------------
Income before income taxes 3,430 6,663
Provision for federal and state income taxes 1,417 2,660
------------- -------------
Net income $ 2,013 $ 4,003
============= =============
Net income per common share:
Basic $ 0.07 $ 0.15
Diluted $ 0.07 $ 0.15
Weighted average shares used in computing net income
per share (in thousands):
Basic 27,295 27,060
Diluted 27,498 27,527
4
ENGlobal Corporation
Condensed Consolidated Balance Sheets
(Unaudited)
(Dollars in Thousands)
ASSETS
------
March 31, December 31,
2009 2008
--------- ---------
Current Assets:
Cash $ 4,187 $ 1,000
Trade receivables, net 75,273 96,023
Prepaid expenses and other current assets 2,213 2,392
Current portion of notes receivable 59 59
Costs and estimated earnings in excess of billings on uncompleted contracts 7,198 6,913
Deferred tax asset 4,281 4,281
--------- ---------
Total Current Assets $ 93,211 $ 110,668
Property and equipment, net 6,664 5,744
Goodwill 21,453 21,457
Other intangible assets, net 4,616 5,000
Long term notes receivable, net of current portion 8,620 8,636
Deferred tax asset, non-current 153 153
Other assets 878 1,047
--------- ---------
Total Assets $ 135,595 $ 152,705
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable $ 12,048 $ 18,830
Accrued compensation and benefits 15,247 24,432
Notes payable 506 1,058
Current portion of long-term debt and leases 1,736 1,861
Deferred rent 429 416
Billings and estimated earnings in excess of costs on uncompleted contracts 1,592 208
Federal and state income taxes payable 1,320 2,472
Other current liabilities 2,689 2,805
--------- ---------
Total Current Liabilities $ 35,567 $ 52,082
Long-Term Debt and Lease, net of current portion 21,141 23,857
--------- ---------
Total Liabilities $ 56,708 $ 75,939
--------- ---------
Commitments and Contingencies (Note 9)
Stockholders' Equity:
Common stock - $0.001 par value; 75,000,000 shares authorized;
27,294,852 and 27,294,852 shares issued and outstanding at
March 31, 2009 and December 31, 2008, respectively $ 27 $ 27
Additional paid-in capital 36,524 36,415
Retained earnings 42,452 40,439
Accumulated other comprehensive income (loss) (116) (115)
--------- ---------
Total Stockholders' Equity $ 78,887 $ 76,766
--------- ---------
Total Liabilities and Stockholders' Equity $ 135,595 $ 152,705
========= =========
5
ENGlobal Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in Thousands)
For the Three Months Ended
March 31,
-------------------------
2009 2008
------------------------
Cash Flows from Operating Activities:
Net income $ 2,013 $ 4,003
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 1,236 1,111
Share-based compensation expense 148 387
(Gain)/loss on disposal of property, plant and equipment 45 (1)
Deferred income taxes -- (90)
Changes in current assets and liabilities, net of acquisitions:
Trade receivables 20,749 (3,044)
Costs and estimated earnings in excess of billings on uncompleted contracts (284) 230
Prepaid expenses and other assets 203 298
Accounts payable (6,782) (2,851)
Accrued compensation and benefits (9,185) (913)
Billings in excess of costs and estimated earnings 1,384 (41)
Other liabilities (138) (903)
Income taxes receivable/payable (1,152) 2,210
-------- --------
Net cash provided by operating activities $ 8,237 $ 396
-------- --------
Cash Flows from Investing Activities:
Property and equipment acquired (1,673) (445)
Proceeds from note receivable -- 46
Proceeds from sale of other assets 3 1
-------- --------
Net cash used in investing activities $ (1,670) $ (398)
-------- --------
Cash Flows from Financing Activities:
Net borrowings (payments) on line of credit (2,530) 1,843
Proceeds from issuance of common stock -- 23
Borrowing under capital lease 14 --
Long-term debt repayments (863) (705)
-------- --------
Net cash (used in) provided by financing activities $ (3,379) $ 1,161
-------- --------
Effect of Exchange Rate Changes on Cash (1) (48)
-------- --------
Net change in cash 3,187 1,111
Cash, at beginning of period 1,000 908
-------- --------
Cash, at end of period $ 4,187 $ 2,019
======== ========
6
NOTE 1 - BASIS OF PRESENTATION
Our condensed consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United States of
America. Our Company consolidates all of its wholly-owned subsidiaries and
all significant inter-company accounts and transactions have been
eliminated in the consolidation.
The condensed consolidated financial statements of ENGlobal Corporation
(which may be referred to as "ENGlobal," the "Company," "we," "us," or
"our") included herein are unaudited for the three months ended March 31,
2009 and 2008, and 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 believes that the
disclosures made herein are adequate to make the information presented not
misleading.
NOTE 2 - CRITICAL ACCOUNTING POLICIES
A summary of critical accounting policies is disclosed in Note 2 to the
consolidated financial statements included in our 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 Operation in our 2008 Annual
Report on Form 10-K.
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 vest over a
four-year period, one-fifth at grant date and one-fifth at December 31 of
each subsequent year until they are fully vested. Stock options issued to
directors vested quarterly over a one-year period.
Total share-based compensation expense in the amount of $148,000 and
$387,000 was recognized in the three months ended March 31, 2009, and March
31, 2008, respectively, all of which was recorded in selling, general and
administrative expense. We did not have an income tax benefit recognized in
the condensed consolidated statements of income for the share-based
arrangements for the three months ended March 31, 2009, but $90,000 was
recognized for the three months ended March 31, 2008.
Compensation expense related to outstanding non-vested stock option awards
under the Plan of $591,000 had not been recognized at March 31, 2009. This
compensation expense is expected to be recognized over a weighted-average
period of approximately 24 months.
7
The following table summarizes stock option activity for the first 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 March 31, 2009 1,156,104 $ 6.79 6.2 $ 623
========== ======== ===== ==========
Exercisable at March 31, 2009 1,045,504 $ 6.42 6.0 $ 623
========== ======== ===== ==========
*Based on average stock price for the first quarter of 2009 of $3.49 per share.
The average stock price for the same period in 2008 was $9.26 per share. The
total fair value of vested options outstanding as of March 31, 2009 and 2008 was
$0.6 million and $4.6 million, respectively.
The total intrinsic value of options exercised was $86,000 for the three months
ended March 31, 2008. There were no options exercised during the three months
ended March 31, 2009.
Restricted Stock Unit Awards
On August 8, 2008, the Company issued restricted stock units equivalent to 6,420
shares of common stock to each of its three non-employee directors. These
restricted stock units, issued 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 awards was $93,411 per director based on the
market price of $14.55 per share of the Company's stock on the date the award
was granted. Upon vesting, the units are convertible into cash based on the fair
value of the Company's shares at the vesting date or, if shareholder approval is
obtained, the Company may elect to settle the Units either in cash or in common
stock. The units vest in equal quarterly installments beginning on September 30,
2008, so long as the grantee continues to serve as an independent director of
the Company. Recognition of compensation expense related to the restricted stock
units commenced in the third quarter of 2008. At the end of the fourth quarter
2008, the compensation value of the vested units was measured again and the
amount to be settled in cash was classified as a liability. The units that
vested in 2008 were settled on March 15, 2009. At the end of the first quarter
2009, the compensation value of the outstanding vested units was measured again
and the amount to be settled in cash was classified as a liability. The
remaining units are required to be settled by March 15, 2010.
8
NOTE 4 - FIXED FEE CONTRACTS
Costs, estimated earnings and billings on uncompleted contracts consisted
of the following at March 31, 2009 and December 31, 2008:
March 31, December 31,
2009 2008
-----------------------------
(Dollars in Thousands)
----------------------------
Costs incurred on uncompleted contracts $ 23,254 $ 24,893
Estimated earnings (losses) on uncompleted contracts 4,520 5,280
-------- --------
Earned revenues 27,774 30,173
Less: billings to date 22,168 23,468
-------- --------
Net costs and estimated earnings in excess of billings
on uncompleted contracts $ 5,606 $ 6,705
======== ========
Costs and estimated earnings in excess of billings on uncompleted contracts $ 7,198 $ 6,913
Billings and estimated earnings in excess of cost on uncompleted contracts (1,592) (208)
-------- --------
Net costs and estimated earnings in excess of billings
on uncompleted contracts $ 5,606 $ 6,705
======== ========
NOTE 5 - LINE OF CREDIT AND DEBT
March 31, December 31,
2009 2008
------------------------
(Dollars in Thousands)
------------------------
Schedule of Long-Term Debt:
Comerica Credit Facility - Line of credit, prime (3.25% at March 31, 2009),
maturing in August 2010 $ 20,000 $ 22,530
Cleveland Inspection Services, Inc., CIS Technical Services and F.D. Curtis - Notes
payable, discounted at 5% interest, principal payments in installments of
$100,000 due quarterly, maturing in October 2009 197 293
ATI Technologies - Note payable, interest at 6%, principal payments in installments
of $30,422 including interest due monthly, matured in January 2009 -- 30
Michael Lee - Note payable, interest at 5%, principal payments in installments of
$150,000 plus interest due quarterly, maturing in July 2010 750 900
Watco Management, Inc. - Note payable, interest at 4%, principal payments in
installments of $137,745 including interest due annually, maturing in
October 2010 260 260
Frank H McIlwain, PC; James A Walters, PC; William M Bosarge, PC; Matthew R Burton,
PC - Notes payable, discounted at 2.38% interest, payments in installments of
$666,667 including interest due annually, maturing in December 2010 1,294 1,287
-------- --------
Total long-term debt 22,501 25,300
Less: current maturities of long-term debt (1,556) (1,686)
-------- --------
Long-term debt, net of current portion 20,945 23,614
Borrowings under capital leases 376 418
Less: current maturities of capital lease (180) (175)
-------- --------
Total long-term debt $ 21,141 $ 23,857
======== ========
9
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.
(Dollars in Thousands) Engineering Construction Automation Land All Other Consolidated
For the three months ended
March 31, 2009
Revenue before eliminations $ 43,115 $ 22,550 $ 20,677 $ 9,086 $ -- $ 95,428
Inter-segment eliminations (540) (1,313) (86) -- -- (1,939)
-------- -------- -------- -------- -------- --------
Revenue 42,575 21,237 20,591 9,086 -- 93,489
Gross profit 4,616 1,640 2,857 1,371 -- 10,484
SG&A 1,326 476 1,240 637 3,383 7,062
-------- -------- -------- -------- -------- --------
Operating income 3,290 1,164 1,617 734 (3,383) 3,422
-------- -------- -------- -------- --------
Other income (expense) 8
Tax provision (1,417)
--------
Net income $ 2,013
========
(Dollars in Thousands)
For the three months ended
March 31, 2008
Revenue before eliminations $ 52,035 $ 27,017 $ 10,557 $ 8,835 $ -- $ 98,444
Inter-segment eliminations (6) (117) (155) -- -- (278)
-------- -------- -------- -------- -------- --------
Revenue 52,029 26,900 10,402 8,835 -- 98,166
Gross profit 9,882 2,028 1,044 1,392 -- 14,346
SG&A 1,295 703 632 677 3,919 7,226
-------- -------- -------- -------- -------- --------
Operating income 8,587 1,325 412 715 (3,919) 7,120
-------- -------- -------- -------- --------
Other income (expense) (457)
Tax provision (2,660)
--------
Net income $ 4,003
========
10
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 recorded at $33,000 as of March 31, 2009, net of accumulated
depreciation, stated in U.S. dollars.
NOTE 7 - FEDERAL AND STATE INCOME TAXES
The components of income tax expense (benefit) for the three months ended
March 31, 2009 and 2008 were as follows:
For the Three Months Ended
March 31,
-----------------------
2009 2008
-----------------------
(Dollars in thousands)
Current $ 1,381 $ 2,750
Deferred 36 (90)
------- -------
Total tax provision $ 1,417 $ 2,660
======= =======
Effective tax rate 41.3% 39.9%
------- -------
The estimated effective tax rates are based on estimates using historical
rates adjusted by recurring and non-recurring book to tax differences.
Estimates at March 31, 2009, are based on results of the 2008 year end and
adjusted for estimates of non-recurring differences from the prior year, as
well as anticipated book to tax differences for 2009.
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").
For the Three Months Ended
March 31,
----------------------
2009 2008
----------------------
(Shares in thousands)
Weighted average shares
outstanding used to
compute basic EPS 27,295 27,060
Effect of share-based plan 203 467
------ ------
Shares used to compute
diluted EPS 27,498 27,527
====== ======
NOTE 9 -COMMITMENTS AND CONTINGENCIES
Employment Agreements
The Company has employment agreements with certain of its executive
officers and other officers. Such agreements provide for minimum salary
levels. 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 up to twelve
months of the employee's salary, and, at its option, an additional six
months at 50% to 100% of the employee's salary in exchange for an extension
of the employee's agreement not to engage in certain competitive
activities. These agreements are renewable for one year at the Company's
option.
Long-term Note Receivable
In the first quarter of 2007, ENGlobal Engineering, Inc. ("EEI") and South
Louisiana Ethanol, LLC ("SLE") executed an agreement for engineering,
procurement and construction (EPC) services relating to the retro-fit of an
ethanol plant in southern Louisiana. 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 in connection with the project. The history
of the SLE project (the "SLE Project") is described in Note 9 to the
Company's condensed consolidated financial statements included in its
Quarterly Report on Form 10-Q for the quarter ended March 31, 2008, and is
discussed further in the Company's Annual Report on Form 10-K for the year
ended December 31, 2007, under Litigation, below, and in Part II, "Item 1 -
Legal Proceedings" of this Quarterly Report on Form 10-Q.
11
Accounts Receivable
On March 13, 2009, the Company entered into a letter agreement (the "letter
agreement") with a significant client resolving the payment of presently
due and past due Accounts Receivable invoices in the amount of $6.8
million. The principle terms of the letter agreement include the recovery
of interest in monthly payments beginning in March 2009 and ending with
final payment due in December 2009. Included in the $6.8 million payment
plan is $4.6 million in sub-contractor obligations which are a part of our
Accounts Payable balances and are scheduled to be paid on a pro-rata basis
similar to the terms of the letter agreement.
Litigation Claims
Due to past due payments on Accounts Receivable invoices for services
provided to Bigler, LP ("Bigler") in the amount of $3,169,000, the Company
exercised its statutory right to file a materialman's and mechanic's lien.
In response, Bigler filed a petition in Harris County Court asking for
relief claiming lack of delivery of notice with respect to the Lien, and
requesting declaratory relief from the Court clearing title of the lien,
and for unspecified monetary damages for breach of contract. ENGlobal
Engineering filed its answer and counterclaim for collection of the fees
due, and for foreclosure on the real property and improvements for which
the services were performed on April 27, 2009. We believe the invoices are
collectible.
In 2007, ENGlobal Engineering, Inc. ("EEI") entered into an Engineering,
Procurement & Construction agreement with South Louisiana Ethanol, LLC
("SLE") to refurbish and upgrade SLE's ethanol facility in Belle Chase, LA.
EEI commenced work in March 2007 but SLE shut down the project in September
2007 after failing to secure permanent financing for the project. Due to
SLE's continued failure to obtain permanent financing, on May 30, 2008, the
Company filed suit in the United States District Court for the Eastern
District of Louisiana, Cause Number 08-3601, seeking damages of $15.8
million and to foreclose on the acquired mechanics liens of its
subcontractors. An independent appraisal, dated March 17, 2008, from the
SLE's bridge lending bank's appraiser, Revpro and Associates, indicated a
fair market value of SLE's assets of $35.8 million, an orderly liquidation
value of $25.3 million, and a forced liquidation value of $20.0 million.
While the Company believes that in the event the collateral is liquidated,
SLE's obligations to the Company would be paid in full pursuant to the
Collateral Mortgage in favor of the Company, collectability is not assured
at this time. However, at this time the Company believes that the ultimate
disposition of the SLE collateral will not materially adversely affect our
liquidity or overall financial position.
From time to time, the Company is involved in various legal proceedings
arising in the ordinary course of business alleging, among other things,
breach of contract or tort in connection with the performance of
professional services, the outcome of which cannot be predicted with
certainty. As of the date of this filing, we are party to several legal
proceedings that we believe have been reserved for or are covered by
insurance, or that, if determined adversely to us individually or in the
aggregate, would not have a material adverse effect on our results of
operations or financial position.
Insurance
The Company carries a broad range of insurance coverage, including general
and business automobile liability, commercial property, professional errors
and omissions, workers' compensation insurance, directors and officers
liability insurance and a general umbrella policy. The Company is not aware
of any claims in excess of insurance recoveries. ENGlobal is partially
self-funded for health insurance claims. Provisions for expected future
payments are accrued based on the Company's experience.
12
NOTE 10 - ACQUISITIONS
The Company had no acquisitions during the three months ended March 31,
2009.
13
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 revenue and business sources; 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 ended March 31, 2009, compared to the
corresponding period in 2008.
During the three months
ended March 31, 2009
------------------------------
Revenues Decreased 4.8%
Gross profit Decreased 26.6%
Operating income Decreased 52.1%
SG&A expense Decreased 1.4%
Net income Decreased 50.0%
14
Management's Discussion and Analysis (continued)
------------------------------------------------
As of As of As of
Selected Balance Sheet Comparisons March 31, December 31, March 31,
---------------------------------- --------- ------------ ---------
2009 2008 2008
-------- -------- --------
(Dollars in Thousands)
------------------------------------
Working capital $ 57,644 $ 58,585 $ 49,317
Total assets $135,595 $152,705 $122,715
Long-term debt and capital leases, net of current portion $ 21,141 $ 23,857 $ 30,884
Stockholders' equity $ 78,887 $ 76,766 $ 60,162
Long-term debt and capital leases, net of current portion, decreased
11.7%, or $2.8 million, to $21.1 million at March 31, 2009 from $23.9
million at December 31, 2008. As a percentage of stockholders' equity,
long-term debt decreased to 26.8% from 31.1% at these dates. The
decrease in long-term debt primarily relates to a $2.5 million pay down
on our line of credit. On average, our days sales outstanding increased
to 72 days for the three-month period ended March 31, 2009 from 64 days
for the twelve-month period ended December 31, 2008 and 62 days for the
three-month period ended March 31, 2008. Past due account balances
totaling $11.9 million for three significant clients contributed 11
days to our days sales outstanding for the three-month period ended
March 31, 2009. The Company manages its billing and client collection
processes toward reducing days of 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 2.7%, or $2.1 million, from $76.8
million as of December 31, 2008 to $78.9 million as of March 31, 2009.
15
Management's Discussion and Analysis (continued)
------------------------------------------------
Consolidated Results of Operations for the Three Months
Ended March 31, 2009 and 2008
(Unaudited)
For the three months ended
March 31, 2009
(Dollars in Thousands) Engineering Construction Automation Land All Other Consolidated
Revenue before eliminations $ 43,115 $ 22,550 $ 20,677 $ 9,086 $ -- $ 95,428
Inter-segment eliminations (540) (1,313) (86) -- -- (1,939)
-------- -------- -------- -------- -------- --------
Revenue 42,575 21,237 20,591 9,086 -- 93,489
Gross profit 4,616 1,640 2,857 1,371 -- 10,484
SG&A 1,326 476 1,240 637 3,383 7,062
-------- -------- -------- -------- -------- --------
Operating income 3,290 1,164 1,617 734 (3,383) 3,422
-------- -------- -------- -------- --------
Other income (expense) 8
Tax provision (1,417)
--------
Net income $ 2,013
========
For the three months ended
March 31, 2008
(Dollars in Thousands)
Revenue before eliminations $ 52,035 $ 27,017 $ 10,557 $ 8,835 $ -- $ 98,444
Inter-segment eliminations (6) (117) (155) -- -- (278)
-------- -------- -------- -------- -------- --------
Revenue 52,029 26,900 10,402 8,835 -- 98,166
Gross profit 9,882 2,028 1,044 1,392 -- 14,346
SG&A 1,295 703 632 677 3,919 7,226
-------- -------- -------- -------- -------- --------
Operating income 8,587 1,325 412 715 (3,919) 7,120
-------- -------- -------- -------- --------
Other income (expense) (457)
Tax provision (2,660)
--------
Net income $ 4,003
========
16
Management's Discussion and Analysis (continued)
------------------------------------------------
We recorded net income of $2.0 million, or $0.07 per diluted share, for the
three months ended March 31, 2009, compared to net income of $4.0 million, or
$0.15 per diluted share, for the corresponding period last year.
The decline in net income during the three months ended March 31, 2009 was
due in part to lower energy commodity prices, lower oil and gas processing
margins, and the generally weak economy. These factors have led our clients
to spend less through the deferral or cancellation of both capital and
maintenance projects. Competition has increased greatly 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 and 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 a majority of our
fabrication and turnkey EPC projects revenue 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. 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:
In the past, many ENGlobal offices have 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 and
lower refinery utilization. The Company expects a continuation of
compliance-driven refining projects, such as EPA environmental initiatives,
DOT pipeline integrity requirements, and OSHA safety-related projects,
which may result from increased audits of U.S.-based refineries. Also, the
Company is seeing opportunities 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. While not currently as robust as the refining
market, we have seen a steady level of both maintenance and small capital
projects from this industry. We believe that major grassroots petrochemical
17
Management's Discussion and Analysis (continued)
------------------------------------------------
projects will continue to be undertaken overseas, either closer to product
demand in emerging economies, or located closer to less expensive feed
stocks. We expect that future petrochemical work undertaken in the U.S.
primarily will consist of smaller capital projects or will be maintenance
related.
Despite past downturns in the industry, pipeline 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. The drivers we see behind growth in domestic
pipeline activity include: (1) natural gas transportation away from the
Rocky Mountain area and new gas fields in other parts of the country, (2)
natural gas transportation related to LNG import facilities, (3) movement
of heavy Canadian crude oil into the United States, and (4) movement of
refined products from Gulf Coast refineries to the Midwest and Northeast.
The country's focus on alternative energy has presented the Company with
many new project opportunities. The North American Industrial Project
Spending Index has recently indicated that capital spending for all
alternative energy projects exceeds that for refining and pipeline. 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 and other
feedstocks as an energy source. In addition, the Company has begun 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,
rather than our larger, traditional clients.
Tightening credit markets have triggered substantial uncertainty with
respect to the funding of capital expenditures by our customers, and oil
and natural gas prices have fallen substantially from their highs in summer
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.
Although we are not immune to the current financial and economic events as
evidenced by lower revenues in our Engineering and Construction segments,
as well as by our lower consolidated net profits, we believe each of
ENGlobal's business segments is well positioned within the industry 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. Also, the Investment Tax Credit for these renewable energy
projects was due to expire on December 31, 2008, but was extended as
part of the recent stimulus legislation. We believe these two factors,
working together will serve to drive demand for alternative energy
projects in the future.
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 our Company.
o ENGlobal has served many of our valued clients over a long period of
time, and these strong alliance relationships are the foundation of
our business. While some clients are basing their purchasing decisions
on overall costs rather than existing relationships, we are seeing
continued 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. As a
result, although we have been affected by delayed or cancelled capital
project work and by clients awarding new capital project work based on
18
Management's Discussion and Analysis (continued)
------------------------------------------------
price, the impact on our business has not been as significant as it
might otherwise have been. In addition, we anticipate that our entry
into the renewable energy market will create potential for future
growth.
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. We
expect to benefit as manufacturers are currently phasing out their
support for heritage DCS platforms with a large installed based, and
our clients will therefore need to migrate to newer DCS platforms. We
are focusing our efforts on improving operational efficiencies that
will allow us to fully capitalize on these opportunities.
The specific segment information contained in this Item provides further
detail regarding the reasons for changes in our financial performance from
period to period.
Revenue:
Revenue decreased $4.7 million, or 4.8%, to $93.5 million for the three
months ended March 31, 2009, from $98.2 million for the comparable
prior-year period. Of the decrease, approximately $9.5 million is
attributable to our Engineering segment and $5.7 million to our
Construction segment, while we had increases in our Land segment of $0.3
million and our Automation segment of $10.2 million. Many of our clients
have delayed or canceled scheduled capital projects due to the economy in
general as well as lower oil prices. They are focusing more on run and
maintain type smaller projects. Competition has increased greatly for the
amount of project work on the market.
Gross Profit:
Gross profit decreased $3.8 million, or 26.6%, to $10.5 million for the
three months ended March 31, 2009, from $14.3 million for the comparable
prior-year period. The $3.8 million decrease in gross profit is
attributable to approximately $3.1 million in higher costs and increased
procurement services and a $0.7 million decrease in revenue.
As a percentage of revenue, gross profit decreased 3.4% from 14.6% for the
three months ended March 31, 2008, to 11.2% for the three months ended
March 31, 2009. The decrease in gross profit margin as a percentage of
revenue primarily relates to renegotiations of existing contracts to lower
margins, increased overhead costs to retain employees even though our level
of work has decreased, and increased overhead costs to expand our marketing
to new sectors and new clients.
Selling, General, and Administrative:
As a percentage of revenue, total SG&A expense increased 0.2% to 7.6% for
the three months ended March 31, 2009, from 7.4% for the comparable period
in 2008. Total expense for SG&A decreased $0.1 million, or 1.4%, to $7.1
million for the three months ended March 31, 2009, from $7.2 million for
the comparable prior-year period.
Operating Income:
Operating income decreased approximately $3.7 million, or 52.1%, to $3.4
million for the three months ended March 31, 2009, from $7.1 million for
the same period in 2008. As a percentage of revenue, operating income
decreased 3.6% to 3.6% for the three months ended March 31, 2009, from 7.2%
for the comparable prior-year period. Operating income decreased due to the
lower revenue levels as well as increased costs for both new sales efforts
and maintaining core employees during a time of decreasing projects.
19
Management's Discussion and Analysis (contined)
-----------------------------------------------
Other Expense, net:
Other expense decreased $465,000 to an income of $8,000 for the three
months ended March 31, 2009. We had other expense of $457,000 for the
comparable prior-year period. This is due to our expected receipt in 2009
of $300,000 from our Hurricane Ike insurance claim, with the remainder of
the expense reduction due to lower interest expense.
Tax Provision:
Income tax expense decreased $1.3 million, or 48.1%, to $1.4 million for
the three months ended March 31, 2009, from $2.7 million for the comparable
prior-year period. The estimated effective tax rate was 41.3% for the three
months ended March 31, 2009, compared to 39.9% for the comparable
prior-year period.
The estimated effective tax rates are based on estimates using historical
rates adjusted by recurring and non-recurring book to tax differences.
Estimates at March 31, 2009 are based on results of the 2008 year end and
adjusted for estimates of non-recurring differences from the prior year, as
well as anticipated book to tax differences for 2009.
Net Income:
Net income for the three months ended March 31, 2009 decreased $2.0
million, or 50.0%, to $2.0 million from $4.0 million for the comparable
prior-year period. As a percentage of revenue, net income decreased 2.0% to
2.1% for the three months ended March 31, 2009, from 4.1% for the three
months ended March 31, 2008.
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
March 31, 2009 was borrowings under our senior revolving credit facility.
Cash on hand at March 31, 2009 totaled $4.2 million and availability under
the credit facility totaled $29.1 million, resulting in cash and previously
arranged borrowing capacity to meet additional liquidity needs of $33.3
million. As of March 31, 2009, management believes the Company is
positioned to meet its liquidity requirements for the next 12 months.
At March 31, 2009, the amount outstanding on the Company's line of credit
was $20.0 million compared to $29.7 million at March 31, 2008.
We are a growth company and we manage our business to achieve reasonable
growth objectives that are commensurate with profitable operations given
existing and anticipated economic conditions. The outlook for our continued
organic growth is generally favorable. We also expect opportunities to make
strategic acquisitions. We intend to continue to meet our incremental
liquidity needs through internally generated profits and existing borrowing
arrangements.
The competitive contracting environment exposes us to situations where our
clients may become unable or unwilling to complete a contract and meet
their obligations to us in the normal course of business. These situations
cause unexpected liquidity requirements, lower than expected profits and
even losses. We currently are financing more than $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. While this situation has caused the Company to incur higher interest
costs than would otherwise have been incurred, our liquidity remains
sufficient to meet our objectives.
20
Management's Discussion and Analysis (continued)
------------------------------------------------
Despite the Company's favorable liquidity situation, cash and the
availability of cash could be materially restricted if:
(1) circumstances prevent the timely internal processing of invoices,
(2) amounts billed are not collected or are not collected in a timely
manner,
(3) project mix shifts from cost-reimbursable to fixed-price contracts,
(4) the Company loses one or more of its major customers,
(5) the Company experiences material cost overruns on fixed-price
contracts,
(6) our client mix shifts from our historical owner-operator client base
to more developer-based clients,
(7) acquisitions are not accretive or are not integrated timely, or
(8) we are unable to meet 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.
Cash Flows from Operating Activities:
Operations generated approximately $8.2 million in net cash for the three
months ended March 31, 2009, compared with net cash used by operations of
$0.4 million during the same period in 2008.
The primary changes in working capital accounts during the period were:
o Decreased Trade Receivables - The decrease of $20.7 million from
December 31, 2008, was primarily the result of an overall decline in
operating activity. Our collections on past due Accounts Receivable
balances continue to improve although our days sales outstanding has
increased from 62 days for the three-month period ended March 31, 2008
and 64 days for the twelve-month period ended December 31, 2008 to 72
days at the end of the three-month period ended March 31, 2009. The
primary reasons for the increase in our days sales outstanding were
three past due client accounts totaling $11.9 million which added 11
days to our days sales outstanding for the three-month period ending
March 31, 2009.
o Decreased Accounts Payable - The decrease of $6.8 million from
December 31, 2008, was primarily the result of payouts of vendor and
sub-contractor charges incurred by our Automation segment due to
increased operating activity during the three months ended December
31, 2008.
o Decreased Accrued Compensation and Benefits - The decrease of $9.2
million from December 31, 2008 was primarily due to timing of
bi-weekly payroll and benefits payments at March 31, 2009 as well as a
decrease of approximately 200 employees.
21
Management's Discussion and Analysis (continued)
------------------------------------------------
Engineering Segment Results
---------------------------
Three Months Ended
March 31,
-------------------------------------------
2009 2008
------------------- -------------------
Dollars in Thousands)
-------------------------------------------
Revenue before eliminations $ 43,115 $ 52,035
Inter-segment eliminations (540) (6)
-------- ---------
Total revenue $ 42,575 $ 52,029
======== ========
Detailed revenue:
Detail-design $ 30,506 71.7% $ 37,935 72.9%
Field services 10,493 24.6% 12,988 25.0%
Procurement services 309 0.7% 34 0.1%
Fixed-price 1,267 3.0% 1,072 2.0%
-------- --------
Total revenue: 42,575 100.0% 52,029 100.0%
Gross profit: 4,616 10.8% 9,882 19.0%
Operating SG&A expense: 1,326 3.1% 1,295 2.5%
-------- --------
Operating income: $ 3,290 7.7% $ 8,587 16.5%
======== ========
Overview of Engineering Segment:
Our Engineering segment has been 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. They are focusing more on run and
maintain type smaller projects. Competition has increased greatly for the
amount of project work on the market. We still have certain clients that
have been particularly strong for us from whom we continue to receive
project awards. We are also focusing on increased marketing efforts not
only to expand our opportunities in the chemical, refining and pipeline
sectors, but to also grow into other markets within the energy and
infrastructure sector.
Revenue:
Engineering segment revenue decreased $9.4 million, or 18.1%, to $42.6
million for the three months ended March 31, 2009, from $52.0 million for
the comparable prior-year period.
The decrease in Engineering segment revenue resulted primarily from
decreased demand for engineering and related professional services for
energy related projects. Generally, the first quarter of the year is slower
due to client budgeting processes. However, we have also been affected by
delayed or canceled capital project work by our clients in reaction to the
current economy. Renewable energy appears to be an emerging area of
activity and potential growth, with the Company currently focused on
biofuels, gasification of various feedstocks, and other biomass processes.
Our detail-design services decreased 19.5%, or $7.4 million, to $30.5
million for the three months ended March 31, 2009, from $37.9 million for
the comparable period in 2008. As a percentage of the total Engineering
segment revenue during these periods, detail-design revenue decreased 1.2%
to 71.7% in 2009 from 72.9% in 2008. The decrease is related to the lower
amount of capital project work available for the reasons described above.
22
Management's Discussion and Analysis (continued)
------------------------------------------------
Our field services revenues decreased 19.2%, or $2.5 million, to $10.5
million for the three months ended March 31, 2009, from $13.0 million for
the comparable period in 2008. As a percentage of the total Engineering
segment revenue during these periods, field services revenue decreased 0.4%
to 24.6% in 2009 from 25.0% in 2008.
Revenue from procurement services increased 808.8%, or $275,000, to
$309,000 for the three months ended March 31, 2009, from $34,000 for the
comparable period in 2008. As a percentage of the total Engineering segment
revenue, procurement services revenue increased 0.6% to 0.7% for the three
months ended March 31, 2009, from 0.1% for the comparable period in 2008.
The increase is directly related to rebuilding a single refinery. We do not
anticipate that a similar project will replace this project on its
completion. Procurement services include subcontractor placements,
equipment purchases, and other procurement activities necessary to rebuild
the damaged facilities.
Fixed-price revenue increased 18.2%, or $0.2 million, to $1.3 million for
the three months ended March 31, 2009, from $1.1 million for the comparable
period in 2008. As a percentage of the total Engineering segment revenue,
fixed-price revenue increased 1.0% to 3.0% for the three months ended March
31, 2009, from 2.0% for the comparable period in 2008. 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:
Our Engineering segment's gross profit decreased $5.3 million, or 53.5%, to
$4.6 million for the three months ended March 31, 2009, from $9.9 million
for the comparable period in 2008. As a percentage of the total Engineering
segment revenue, gross profit decreased by 8.2% to 10.8% from 19.0% for the
three months ended March 31, 2009 and 2008, respectively. Of the overall
$5.3 million decrease in gross profit, $3.5 million was attributable to
increased costs, while decreased revenues contributed to $1.8 million of
overall decrease. Generally, clients are awarding new work based on
competitive bidding. 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.
Selling, General, and Administrative:
Our Engineering segment's SG&A expense remained stable at $1.3 million for
the three months ended March 31, 2009 and the comparable period in 2008. As
a percentage of the total Engineering segment revenue, due to the decline
in revenue, the segment's SG&A costs increased by 0.6% to 3.1% from 2.5%
for the three months ended March 31, 2009 and 2008, respectively.
Operating Income:
Operating income for the Engineering segment decreased $5.3 million, or
61.6%, to $3.3 million for the three months ended March 31, 2009, from $8.6
million for the comparable prior-year period. As a percentage of the total
Engineering segment revenue, operating income decreased by 8.8% to 7.7% for
the three months ended March 31, 2009, from 16.5% for the comparable
prior-year period.
23
Management's Discussion and Analysis (continued)
------------------------------------------------
Construction Segment Results
----------------------------
Three Months Ended
March 31,
------------------------------------------
2009 2008
------------------ ------------------
Dollars in Thousands)
------------------------------------------
Revenue before eliminations $ 22,550 $ 27,017
Inter-segment eliminations (1,313) (117)
-------- --------
Total revenue $ 21,237 $ 26,900
======== ========
Detailed revenue:
Inspection $ 18,203 85.7% $ 23,394 87.0%
Construction services 3,034 14.3% 3,506 13.0%
-------- --------
Total revenue: 21,237 100.0% 26,900 100.0%
Gross profit: 1,640 7.7% 2,028 7.5%
Operating SG&A expense: 476 2.2% 703 2.6%
-------- --------
Operating income: $ 1,164 5.5% $ 1,325 4.9%
======== ========
Overview of Construction Segment:
The construction group provides construction management personnel and
inspection services in the areas of mechanical integrity, vendor and
turnaround surveillance, field support, construction, and high-tech
maintenance. Our construction management business provides project
managers, instrument technicians, clerical staff, and construction
personnel.
Revenue:
Our Construction segment's revenue decreased $5.7 million, or 21.2%, to
$21.2 million for the three months ended March 31, 2009, from $26.9 million
for the comparable prior-year period.
Due to the current economic environment, we have experienced decline in our
inspection related revenue as a result of project delays, primarily in the
area of pipeline construction. We expect that the work for this area will
remain down through most of the remainder of this year. Inspection related
revenues decreased $5.2 million, or approximately 22.2%, to $18.2 million
for the three months ended March 31, 2009, from $23.4 million for the
comparable prior-year period.
Construction services revenues decreased $0.5 million, or 14.3%, to $3.0
for the three months ended March 31, 2009, from $3.5 million for the
comparable period in 2008. Revenue in this area decreased slightly due to
the delay or cancellation of projects by our clients in response to the
current economy. However, we have been focusing on some new opportunities
with both biofuels technology providers and gasification technology
providers.
The Construction segment has taken action to develop new business by adding
new sales personnel.
24
Management's Discussion and Analysis (continued)
------------------------------------------------
Gross profit:
Our Construction segment's gross profit decreased approximately $0.4
million, or 20.0%, to $1.6 million for the three months ended March 31,
2009, from $2.0 million for the comparable prior-year period and, as a
percentage of the total Construction segment revenue, gross profit
increased by 0.2% to 7.7% from 7.5% for the respective periods. The
decrease in gross profit is primarily attributable to the overall decrease
in available work and increased costs incurred in connection with our
efforts to win new work resulting in higher overhead costs.
Selling, General, and Administrative:
Our Construction segment's SG&A expense decreased $0.2 million, or 28.6%,
to $0.5 million for the three months ended March 31, 2009, from $0.7
million for the same period in 2008. As a percentage of the total
Construction segment revenue, SG&A expense decreased by 0.4% to 2.2% from
2.6% for the respective periods. The decrease in SG&A expense was related
to reductions in salaries and related employee expenses.
Operating Income:
Our Construction segment's operating income decreased $0.1 million, or
7.7%, to $1.2 million for the three months ended March 31, 2009, from $1.3
million for the comparable prior-year period. The decrease in operating
income is primarily attributable to decreased revenue in our inspection
services and our increased costs to win new work. As a percentage of the
total Construction segment revenue, operating income increased by 0.6% to
5.5% for the three months ended March 31, 2009, from 4.9% for the
comparable prior-year period.
25
Management's Discussion and Analysis (continued)
------------------------------------------------
Automation Segment Results
--------------------------
Three Months Ended
March 31,
----------------------------------------------
2009 2008
-------------------- --------------------
(Dollars in Thousands)
----------------------------------------------
Revenue before eliminations $ 20,677 $ 10,557
Inter-segment eliminations (86) (155)
-------- --------
Total revenue $ 20,591 $ 10,402
======== ========
Detailed revenue:
Fabrication $ 7,194 34.9% $ 6,683 64.3%
Non-fabrication 13,397 65.1% 3,719 35.7%
-------- --------
Total revenue: 20,591 100.0% 10,402 100.0%
Gross profit: 2,857 13.9% 1,044 10.0%
Operating SG&A expense: 1,240 6.0% 632 6.1%
-------- --------
Operating income: $ 1,617 7.9% $ 412 4.0%
======== ========
Overview of Automation Segment:
Our Automation group 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 engineering,
procurement, and construction projects. By focusing on such large-scope
projects, we intend to pursue Distributed Control Systems (DCS) conversion
and new installation projects by utilizing our own resources as well as
resources from our engineering and systems businesses. 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.
Revenue:
Our Automation segment's revenue increased approximately $10.2 million, or
98.1%, to $20.6 million for the three months ended March 31, 2009, from
$10.4 million for the comparable prior-year period. This increase was
primarily attributable to increased work due to Hurricane Ike recovery
projects that included high levels of purchased materials. In addition,
approximately $2.1 million of our revenue increase came from the
acquisition of Advanced Control Engineering LLC in September 2008. Our
Automation segment has put a new focus on marketing not only to our
existing client base, but also expanding our client base outside of the
energy sector. We will also be focusing on both domestic and international
clients to expand our revenue base.
Gross profit:
The Automation segment's gross profit increased approximately $1.9 million,
or 190.0%, to $2.9 million for the three months ended March 31, 2009, from
$1.0 million for the comparable prior-year period. As a percentage of the
total Automation segment revenue, gross profit increased by 3.9% to 13.9%,
from 10.0% for the three months ended March 31, 2009 and 2008,
respectively.
26
Management's Discussion and Analysis (continued)
------------------------------------------------
Selling, General, and Administrative:
Our Automation segment's SG&A expense increased $0.6 million, or 100.0%, to
$1.2 million for the three months ended March 31, 2009 from $0.6 million
for the three months ended March 31, 2008. Increases in salaries and
related employee expenses of $0.3 million and facilities expenses of $0.2
million make up the primary increase, with the remainder based on increases
in associate relations, professional services and taxes. As a percentage of
the total Automation segment revenue, SG&A expense decreased by 0.1% to
6.0%, from 6.1% for the three months ended March 31, 2009 and 2008,
respectively.
Operating Income:
Operating income increased $1.2 million, or 300.0%, to $1.6 million for the
three months ended March 31, 2009 from $0.4 million for the three months
ended March 31, 2008. As a percentage of the total Automation segment
revenue, operating income also increased by 3.9% to 7.9% for the three
months ended March 31, 2009, from 4.0% for the comparable prior-year
period.
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Management's Discussion and Analysis (continued)
------------------------------------------------
Land Segment Results
--------------------
Three Months Ended
March 31,
----------------------------------------
2009 2008
---------------- ------------------
(Dollars in Thousands)
----------------------------------------
Revenue before eliminations $9,086 $8,835
Inter-segment eliminations -- --
------ ------
Total revenue 9,086 100.0% 8,835 100.0%
Gross profit: 1,371 15.1% 1,392 15.8%
Operating SG&A expense: 637 7.0% 677 7.7%
------ ------
Operating income: $ 734 8.1% $ 715 8.1%
====== ======
Overview of Land Segment:
Our Land segment possesses a long, reputable history of land management
expertise in title research, permitting and acquisition. We provide land
and right of way consulting services and 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 was formed out of our acquisition of WRC Corporation in
May 2006, which was renamed ENGlobal Land, Inc. in January 2008. The Land
segment provides services to a cross-section of clients in the energy
markets. 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.
Revenue:
The Land segment's revenue increased approximately $0.3 million, or 3.4%,
to $9.1 million for the three months ended March 31, 2009, from $8.8
million for the comparable prior-year period. This increase in Land segment
revenue is primarily attributable to expanded market opportunities in the
energy and alternative energy industries, as well as expansion
geographically with services being provided throughout the United States.
Gross profit:
The Land segment's gross profit remained stable at $1.4 million for the
three months ended March 31, 2009 and March 31, 2008. As a percentage of
the total Land segment revenue, gross profit decreased by 0.7% to 15.1%,
from 15.8% for the three months ended March 31, 2009 and 2008,
respectively.
Selling, General, and Administrative:
The Land segment's SG&A expense decreased approximately $40,000, or 5.9%,
to $637,000 for the three months ended March 31, 2009, from $677,000 for
the same period in 2008. As a percentage of the total Land segment revenue,
SG&A expense decreased by 0.7% to 7.0%, from 7.7% for the three months
ended March 31, 2009 and 2008, respectively. Decreases in SG&A costs for
the three months ended March 31, 2009 were related to a reduction of bad
debt expense in the amounts of $25,000 and $19,000 for office expenses.
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Management's Discussion and Analysis (continued)
------------------------------------------------
Operating Income:
The Land segment recorded an operating income of $0.7 million for both the
three months ended March 31, 2009 and the three months ended March 31,
2008. As a percentage of the total Land segment revenue, operating income
was 8.1% for both the three months ended March 31, 2009 and for the same
period in 2008.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our financial instruments include cash and cash equivalents, accounts
receivable, accounts payable, notes and capital leases payable, and debt
obligations. The book value of cash and cash equivalents, accounts
receivable, accounts payable and short-term notes payable are considered to
be representative of fair value because of the short maturity of these
instruments.
We do not utilize financial instruments for trading purposes and we do not
hold any derivative financial instruments that could expose us to
significant market risk. In the normal course of business, our results of
operations are exposed to risks associated with fluctuations in interest
rates and currency exchange rates.
Our exposure to market risk for changes in interest rates relates primarily
to our obligations under the Comerica Credit Facility (the "Credit
Facility"). As of March 31, 2009, $20.0 million had been borrowed under the
Credit Facility, accruing interest at an average rate of 2.92% per year,
excluding amortization of prepaid financing costs. If it becomes necessary
for the Company to replace the Credit Facility in the current economic
environment, it 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
SFAS No. 52 - "Foreign Currency Translation" in preparing our condensed
consolidated financial statements. Currently, we do not engage in foreign
currency hedging activities.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures of a
registrant 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 processes to
accumulate and evaluate relevant information and communicate such
information to a registrant's management, including its Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow for timely
decisions regarding required disclosures.
We evaluated the effectiveness of the design and operation of our
disclosure controls and procedures as of March 31, 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 March 31, 2009, our disclosure controls and procedures were
effective to ensure that information required to be disclosed by us in the
reports we file or submit under the Exchange Act is recorded, processed,
summarized, and reported, within the time periods specified in the SEC's
rules and forms.
Changes in Internal Control over Financial Reporting
No changes in our internal control over financial reporting occurred during
the three months ended March 31, 2009, that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
30
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 Chemical on which
ENGlobal Engineering, Inc. ("EEI") had filed a statutory mechanics lien
statement in the amount of $3,169,000 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.
As discussed in Note 9 above, in the first quarter of 2007 ENGlobal Engineering,
Inc. and South Louisiana Ethanol, LLC ("SLE") executed an agreement for EPC
services relating to the retro-fit of an ethanol plan in southern Louisiana. The
history of the SLE Project is described in Note 12 to the Company's condensed
consolidated financial statements included in its Quarterly Report on Form 10-Q
for the quarter ended March 31, 2008, and is discussed further in the Company's
Annual Report on Form 10-K for the year ended December 31, 2007. Due to the
continued failure of SLE to obtain permanent financing, on May 30, 2008, the
Company filed suit in the United States District Court for the Eastern District
of Louisiana, Cause Number 08-3601. The Company is seeking damages of $15.8
million.
From time to time, the Company and its subsidiaries become parties to various
legal proceedings arising in the ordinary course of normal business activities.
While we cannot predict the outcome of these proceedings, in our opinion and
based on reports of counsel, any liability arising from such matters,
individually or in the aggregate, is not expected to have a material effect upon
the consolidated financial position or operations of the Company.
ITEM 1A. RISK FACTORS
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 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
additional 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.
31
ITEM 6. EXHIBITS
Incorporated by Reference to:
-------------------------------------------------
Exhibit No. Form or Filing Date SEC File
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.
*10.1 Fifth Amendment to the ENGlobal 401(K) Plan
effective January 1, 1009.
*31.1 Certifications Pursuant to Rule 13a - 14(a) of
the Securities Exchange Act of 1934 for the First
Quarter 2009
*31.2 Certifications Pursuant to Rule 13a - 14(a) of
the Securities Exchange Act of 1934 for the First
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
First Quarter 2009
*Filed herewith
32
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ENGlobal Corporation
Dated: May 11, 2009
By: /s/ Robert W. Raiford
-------------------------------------
Robert W. Raiford
Chief Financial Officer and Treasurer
33