UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
------ EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2009
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
------ EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File No. 001-14217
ENGlobal Corporation
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(Exact name of registrant as specified in its charter)
Nevada 88-0322261
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(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
654 North Sam Houston Parkway East, Suite 400 77060-5914
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (281) 878-1000
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
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Common Stock, $0.001 par value NASDAQ
Securities registered pursuant to Section 12(g) of the Exchange Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act
Yes No X
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Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15 (d) of the Act
Yes No X
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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
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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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
X
-----
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
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Non-accelerated filer Smaller reporting company
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(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
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The aggregate market value of the registrant's common stock held by
non-affiliates of the registrant on March 1, 2010 was $56,821,417 (based upon
the closing price for shares of common stock as reported by the NASDAQ on that
date).
The number of shares outstanding of the registrant's common
stock on March 1, 2010 is as follows:
$0.001 Par Value Common Stock 27,444,659 shares
DOCUMENTS INCORPORATED BY REFERENCE
Responses to Items 10, 11, 12, 13 and 14 of Part III of this report are
incorporated herein by reference to certain information contained in the
Company's definitive proxy statement for its 2010 Annual Meeting of Stockholders
to be filed with the Securities and Exchange Commission on or before April 30,
2010.
2
ENGlobal Corporation
2009 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
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PAGE
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ITEM 1. BUSINESS 4
ITEM 1A. RISK FACTORS 18
ITEM 1B. UNRESOLVED STAFF COMMENTS 23
ITEM 2. PROPERTIES 23
ITEM 3. LEGAL PROCEEDINGS 24
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 25
PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES 25
ITEM 6. SELECTED FINANCIAL DATA 28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 30
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 52
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 53
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE 85
ITEM 9A. CONTROLS AND PROCEDURES 85
PART III
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 86
ITEM 11. EXECUTIVE COMPENSATION 87
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS 87
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 87
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES 87
PART IV
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ITEM 15. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES 87
SIGNATURES
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SIGNATURES 92
3
PART I
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CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K ("Report"), including "Management's Discussion
and Analysis of Financial Condition and Results of Operations," as well as oral
statements made by the Company and its officers, directors or employees,
contains forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). Such
forward-looking statements are based on Management's beliefs, current
expectations, estimates and projections about the industries that the Company
and its subsidiaries' serve, the economy and the Company in general. The words
"expect," "anticipate," "intend," "plan," "believe," "seek," "estimate" and
similar expressions are intended to identify such forward-looking statements;
however, this Report also contains other forward-looking statements in addition
to historical information. Although we believe that the expectations reflected
in the forward-looking statements are reasonable, such forward-looking
statements are not guarantees of future performance and are subject to risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of the Company to differ materially from historical results or
from any results expressed or implied by such forward-looking statements. The
Company cautions readers that the following important factors and the risks
described in the section of this report entitled "Risk Factors," among others,
could cause the Company's actual results to differ materially from the
forward-looking statements contained in this Report: (i) the effect of changes
in the business cycle and downturns in local, regional and national economy and
our ability to respond appropriately to the current worldwide economic financial
situation; (ii) our ability to collect accounts receivable in a timely manner;
(iii) our ability to accurately estimate costs and fees on fixed-price
contracts; (iv) the effect of changes in laws and regulations with which the
Company must comply, and the associated costs of compliance with such laws and
regulations, either currently or in the future, as applicable; (v) the effect of
changes in accounting policies and practices as may be adopted by regulatory
agencies, as well as by the Financial Accounting Standards Board; (vi) the
effect of changes in the Company's organization, compensation and benefit plans;
(vii) the effect on the Company's competitive position within its market area in
view of, among other things, the increasing consolidation within its services
industries, including the increased competition from larger regional and
out-of-state engineering and professional service organizations; (viii) the
effect of increases and decreases in oil prices; (ix) the availability of parts
from vendors; (x) our ability to increase or renew our line of credit; (xi) our
ability to identify attractive acquisition candidates, consummate acquisitions
on terms that are favorable to the Company and integrate the acquired businesses
into our operations; (xii) our ability to hire and retain qualified personnel;
(xiii) our ability to retain existing customers and get new customers; (xiv) our
ability to mitigate losses; (xv) our ability to achieve our business strategy
while effectively managing costs and expenses; (xvi) our ability to estimate
exact project completion dates; (xvii) our ability to effectively monitor
business done outside of the United States; and (xviii) the performance of the
energy sector. The Company cautions that the foregoing list of important factors
is not exclusive. We are under no duty and have no plans to update any of the
forward-looking statements after the date of this Report to conform such
statements to actual results.
ITEM 1. BUSINESS
Overview
--------
ENGlobal Corporation (which may be referred to as "ENGlobal," the "Company,"
"we," "us" or "our"), incorporated in the State of Nevada in June 1994, is a
leading provider of engineering and professional services principally to the
energy sector. ENGlobal's net revenue from continuous operations has grown from
$89.1 million in 2002 to $343.5 million in 2009, a compounded annual growth rate
of approximately 21.3%, even after taking into account significant declines in
2009. We have accomplished this growth by expanding our engineering and
professional service capabilities and our geographic presence through internal
growth, including new initiatives, and through a series of strategic
acquisitions.
We now have about 2,000 full-time equivalent employees in 19 offices and 496,000
square feet of office and manufacturing fabrication space strategically located
in the following cities: Houston, Beaumont, Clear Lake and Freeport, Texas;
4
ITEM 1. BUSINESS (continued)
Baton Rouge and Lake Charles, Louisiana; Tulsa, Cleveland and Blackwell,
Oklahoma; Broomfield, Colorado; Mobile, Alabama; Schaumburg, Illinois; and
Calgary, Alberta, Canada.
The Engineering Segment
-----------------------
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 Engineering segment provides these services to the
upstream, midstream and downstream segments of the oil and gas industry,
utilities, alternative energy developers and governmental entities including
branches of the U.S. military. In some instances, it delivers its services via
in-plant personnel assigned throughout the United States and internationally.
The Construction Segment
------------------------
The Construction segment provides personnel and services primarily in the areas
of inspection, and also in the areas of construction, construction management,
process plant turnaround management, plant asset management, commissioning and
start-up. Its customers include the pipeline, refining, utility, chemical,
petrochemical, alternative energy and power industries throughout the United
States. Construction segment personnel are typically assigned to client
facilities and construction sites throughout the United States.
The Automation Segment
----------------------
The Automation segment provides services related to the design, fabrication, and
implementation of process distributed control and analyzer systems, advanced
automation, information technology, and heat tracing projects. The Automation
segment's customers primarily include domestic and foreign energy related
industries. Automation segment personnel assist in on-site commissioning,
start-up and training for the Company's specialized systems.
The Land Segment
----------------
The Land segment provides land management, right-of-way, environmental
compliance, legislative affairs support and governmental regulatory compliance
services, primarily to pipeline, utility and other owner/operators of
infrastructure facilities throughout the United States and Canada. Land segment
personnel are typically assigned to client projects and facilities throughout
North America.
Available Information
---------------------
We are currently subject to the information reporting requirements of the
Securities Exchange Act and we file annual, quarterly and special reports and
other information with the SEC. Our SEC filings are available to the public over
the Internet at the SEC's web site at http://www.sec.gov. Our SEC filings are
also available at our website at www.englobal.com. You may also read and copy
any document we file at the SEC's public reference room at 100 F. Street, N.E.,
Washington, D.C. 20002. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference room.
ENGlobal Website
----------------
You can find financial and other information about ENGlobal at the Company's
website at the URL address www.englobal.com. Copies of our annual reports on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Exchange Act are provided free of charge through the Company's
website and are available as soon as reasonably practicable after filing
electronically or otherwise furnishing reports to the SEC. Information relating
to corporate governance at ENGlobal, including: (i) our Code of Business Conduct
and Ethics for all of our employees, including our Chief Executive Officer and
Chief Financial Officer; (ii) our Code of Ethics for our Chief Executive Officer
and Senior Financial Officers; (iii) information concerning our Directors and
our Board Committees, including Committee charters; and (iv) information
concerning transactions in ENGlobal securities by Directors and officers, is
5
ITEM 1. BUSINESS (continued)
available on our website under the Investor Relations link. Our website and the
information contained therein or connected thereto are not intended to be
incorporated into this Annual Report on Form 10-K. We will provide any of the
foregoing information, for a reasonable fee, upon written request to Investor
Relations, ENGlobal Corporation, 654 North Sam Houston Parkway East, Suite 400,
Houston, Texas 77060-5914.
Business Segments
-----------------
ENGlobal has four reporting 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. In addition to internal growth, our segments have grown through
strategic acquisitions, which have also served to augment management expertise.
Percentage of Revenue
---------------------------------
Segments 2009 2008 2007
---- ---- ----
Engineering 40.5% 51.0% 61.0%
Construction 29.1% 28.3% 20.2%
Automation 21.1% 12.1% 10.4%
Land 9.3% 8.6% 8.4%
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100.0% 100.0% 100.0%
===== ====== =====
Engineering Segment
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Selected Financial Data
2009 2008 2007
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(amounts in thousands)
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Revenue $ 139,064 $ 251,702 $ 221,787
Operating profit $ 4,090 $ 31,786 $ 28,784
Total assets $ 48,256 $ 71,954 $ 63,265
General
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The Engineering segment provides consulting services relating to the
development, management and execution of projects requiring professional
engineering and related project services. Our Engineering segment offers
engineering consulting services primarily to clients in the petroleum refining,
petrochemical, pipeline, production and alternative energy industries for the
development and management of engineering projects throughout the United States.
The engineering staff has the capability of developing a project from the
initial planning stages through detailed design and construction management. Our
engineering services include:
o conceptual studies;
o project definition;
o cost estimating;
o engineering design;
o environmental compliance;
o material procurement; and
o project management.
The Engineering segment offers a wide range of services from a single source
provider.
The Engineering segment currently operates through ENGlobal's wholly-owned
subsidiaries, ENGlobal Engineering, Inc. ("EEI") and ENGlobal Technical
Services, Inc. ("ETS"). EEI focuses primarily on providing its services to the
upstream, midstream and downstream segments of the oil and gas industry,
utilities and alternative energy developers. In some instances, it delivers its
services via in-plant personnel assigned throughout the United States. ETS
primarily provides automated fuel handling systems and services to branches of
the U.S. military and public sector entities. The Engineering segment derives
revenue primarily from cost-plus fees charged for professional and technical
services. We also enter into contracts providing for the execution of projects
6
ITEM 1. BUSINESS (continued)
on a fixed-price basis, whereby some or all of the project activities related to
engineering, material procurement and construction (EPC) are performed for a
fixed-price amount. As a service-based business, the Engineering segment is more
labor than capital intensive. Our results primarily depend on our ability to
generate revenue and collect cash under cost-plus contracts in excess of any
cost for employees and benefits, material, equipment and subcontracts, plus our
selling, general and administrative (SG&A) expenses.
As a result of dramatic decreases in prices for energy commodities, lower profit
spreads for downstream operators and a more difficult financing environment we
experienced a dramatic decrease in spending by the majority of our clients in
2009. This reduction is most evident in the domestic refining and petrochemical
industries, with much of our work in this area now consisting of maintenance,
small capital retrofit and regulatory and compliance driven work. Competition
has also increased greatly for the limited amount of project work on the market.
However, for the most part, clients are choosing to defer new capital projects
into future years, as opposed to canceling projects outright.
The Engineering segment has existing blanket service contracts under which it
provides clients either with services on a time-and-materials basis or with
services on a fixed-price basis. The Company strives to establish longer term
"alliance" or "preferred provider" relationships with its clients that can be
expected to provide a steadier stream of work. In addition, the Company has
found that the outsourcing of its personnel to client facilities currently
contributes to a stable business mix. Our Engineering segment operates out of
offices in Baton Rouge and Lake Charles, Louisiana; Beaumont, Houston and
Freeport, Texas; Tulsa, Oklahoma; and Broomfield, Colorado.
Competition
-----------
Our Engineering segment competes with a large number of public and private firms
of various sizes, ranging from the industry's largest firms, which operate on a
worldwide basis, to much smaller regional and local firms. Many of our
competitors are larger than we are and have significantly greater financial and
other resources available to them than we do. However, the largest firms in our
industry are sometimes our clients, as they perform as program managers for very
large scale projects and then subcontract a portion of their work to ENGlobal.
Competition is primarily centered on performance and the ability to provide the
engineering, planning and project execution skills required for completing
projects in a timely and cost-efficient manner. The technical expertise of our
management team and technical personnel and the timeliness and quality of our
support services are key competitive factors. Larger projects, especially
international work, typically include pricing alternatives designed to shift
risk to the service provider, or at least to cause the service provider to share
a portion of the risks associated with cost overruns in service delivery. These
alternatives include fixed-price, guaranteed maximum price, not-to-exceed,
incentive fee, competitive bidding and other "value based" pricing arrangements.
Construction Segment
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Selected Financial Data
2009 2008 2007
-----------------------------------------
(amounts in thousands)
-----------------------------------------
Revenue $ 100,118 $ 139,360 $ 73,210
Operating profit $ 5,291 $ 7,459 $ 7,133
Total assets $ 19,674 $ 23,581 $ 17,226
General
-------
Our Construction segment focuses on energy infrastructure projects in the United
States by offering personnel and services primarily in the area of inspection
but also in the areas of construction, construction management, process plant
turnaround management, plant asset management, commissioning and start-up. Our
Construction segment's clients include operators and developers of pipeline,
refining, utility, chemical, petrochemical, alternative energy and power
facilities throughout the United States. The Construction segment operates
through our wholly-owned subsidiary ENGlobal Construction Resources, Inc.
("ECR"). The Construction segment primarily derives revenue from cost-plus fees
charged for professional and technical services. As a service business, the
construction segment is more labor than capital intensive. We also enter into
contracts providing for the execution of projects on a fixed-price basis,
whereby some, or all, of the project activities related to EPC are performed for
a fixed-price amount. Accordingly, our results primarily depend on our ability
to generate revenue and collect cash under cost-plus or fixed-price contracts in
excess of any cost for employees and benefits, material, equipment and
subcontracts, plus our SG&A expenses.
7
ITEM 1. BUSINESS (continued)
In August 2009, the Company acquired the operations PCI Management and
Consulting Company ("PCI"), a private Illinois based power consulting business.
PCI provides engineering, consulting and project management services,
specializing in projects related to the generation, transmission and
distribution of energy. These services complement the other services
historically provided by our Construction segment and we anticipate that PCI's
location in the Chicago, Illinois area, will allow us to expand the Construction
segment's service territory and establish a strong base from which to serve the
power market.
Our Construction segment operates out of offices in Baton Rouge and Lake
Charles, Louisiana; Beaumont, Clear Lake and Freeport, Texas; Schaumburg,
Illinois; and Cleveland, Blackwell and Tulsa, Oklahoma.
Competition
-----------
Our Construction segment competes with a range of mostly private small and
midsize inspection and construction management and alternative energy service
companies. The principal elements of competition among these types of companies
are rates, terms of service and flexibility and reliability of services. The
inspection and construction management business is affected by industry pressure
on costs, fueled by intense competition for contracts. Our Construction segment
believes that its alliances with technology providers, especially in the area of
alternative energy, may enhance its competitive position in the construction
management business.
Competition is primarily centered on performance and the ability to provide
services in a timely and cost-efficient manner. The technical expertise of our
personnel is a key competitive factor. Inspection specialists must have a
thorough understanding of governmental and public regulatory factors. The
Company strives to establish longer term client relationships that can often
provide a stream of work that is less susceptible to competitive pressures. In
addition, the Company has found that the inspection of pipelines and client
facilities are services offered that are less susceptible to competitive
pressures than other services that the Company provides.
Automation Segment
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Selected Financial Data
2009 2008 2007
-----------------------------------------
(amounts in thousands)
-----------------------------------------
Revenue $ 72,322 $ 59,730 $ 37,766
Operating profit (loss) $ 4,568 $ 3,744 $ (58)
Total assets $ 23,523 $ 36,553 $ 17,468
General
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The Automation segment provides services related to the design, fabrication, and
implementation of process distributed control and analyzer systems, advanced
automation, information technology and heat tracing projects. This segment also
designs, assembles, integrates and services control and instrumentation systems
for specific applications in the energy and processing related industries. These
services are offered to clients in the petroleum refining, petrochemical,
pipeline, production, process and pulp and paper industries throughout the
United States and Canada as well as the Middle East and the Caribbean. The
Automation segment currently operates through ENGlobal Automation Group, Inc.
("EAG"), a wholly-owned subsidiary of ENGlobal, and EAG's wholly owned
subsidiaries, ENGlobal Systems, Inc. ("ESI") and ENGlobal Canada ULC ("ECAN").
EAG and ECAN focus primarily on providing automation related design and
engineering services, while ESI primarily provides fabrication, testing and
integration services of automation related enclosures. The Automation segment
derives revenue from both cost-plus fees and fees charged for professional and
technical services on a fixed-price basis. As a service provider, our Automation
segment is more labor than capital intensive. The segment's results primarily
depend on our ability to accurately estimate costs on fixed-price contracts,
generate revenue and collect amounts due under cost-plus contracts in excess of
the cost of employees and benefits, material, equipment and subcontracts, plus
applicable SG&A expenses.
8
ITEM 1. BUSINESS (continued)
Our Automation segment operates out of offices in Baton Rouge, Louisiana;
Beaumont and Houston, Texas; Mobile, Alabama; and Calgary, Alberta.
In September 2008, EAG purchased Advanced Control Engineering, LLC ("ACE"), a
Mobile, Alabama based engineering firm. ACE provides control system and related
technical services to a variety of industries and its geographic location
expands the Automation segment's service territory.
Competition
-----------
Our Automation segment competes with a large number of public and private firms
of various sizes, ranging from the industry's largest firms, which operate on a
worldwide basis, to much smaller regional and local firms. Many of our
competitors are larger than we are and have significantly greater financial and
other resources available to them than we do.
Competition is primarily centered on performance and the ability to provide the
engineering, assembly and integration required to complete projects in a timely
and cost-efficient manner. The technical expertise of our management team and
technical personnel and the timeliness and quality of our support services, are
key competitive factors.
Land Segment
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Selected Financial Data
2009 2008 2007
-----------------------------------------
(amounts in thousands)
-----------------------------------------
Revenue $ 31,958 $ 42,540 $ 30,464
Operating profit $ 2,691 $ 4,114 $ 2,105
Total assets $ 10,468 $ 13,482 $ 15,096
General
-------
Our Land segment provides land management, right-of-way, environmental
compliance, legislative affairs support and governmental regulatory compliance
services primarily to pipeline, utility and other owner/operators of
infrastructure facilities throughout the United States and Canada. The need to
transport new sources of energy is the primary driver that results in demand for
our rights-of-way services (pipelines and electric power transmission lines). As
examples, rights-of-way are required for pipelines that transport oil and gas
from imported sources, and from newly developed oil reserve basins in the U.S.
Rights-of-way are also required for new electric power transmission lines,
needed to decongest circuits near population centers and to transport a growing
amount of wind and solar power located in remote areas.
The Land segment operates through the Company's wholly-owned subsidiary,
ENGlobal Land, Inc. ("ELI"), formerly known as WRC Corporation, and its
wholly-owned subsidiary WRC Canada ("WRC Canada"). ELI provides land management,
environmental compliance and governmental regulatory services to pipeline,
utility and telecom companies and other owner/operators of infrastructure
facilities. WRC Canada provides land management and inspection services. The
Land segment derives revenue from cost-plus fees charged for professional and
technical services. As a service company, ELI is more labor than capital
intensive. Our results primarily depend on our ability to generate revenue and
collect cash under cost-plus contracts in excess of any cost for employees and
benefits, material, equipment and subcontracts, plus our SG&A expenses.
Our Land segment operates out of offices in Houston, Texas; Broomfield,
Colorado; and Calgary, Alberta, as well as other satellite offices across the
United States.
Competition
-----------
The Land segment competes with a range of small and midsize firms that provide
right-of-way mapping, title assistance, appraisals and landowner negotiations.
Competition is primarily centered on retaining experienced landmen and other
qualified professionals. Land and right-of-way specialists must have a thorough
understanding of governmental and public regulatory requirements. These
9
ITEM 1. BUSINESS (continued)
professionals must consider socioeconomic and environmental factors and
coordinate planning for the relocation of utilities, displaced persons and
businesses. Also, they must often assist in developing replacement housing
units, which may involve the expenditure of large sums, condemnation, damages,
restriction of access, and similar complicating factors. Retaining these
qualified, skilled professionals is crucial to the operation of our Land
segment.
Acquisitions and Sales
----------------------
We have grown our business over the past several years through both internal
initiatives and through strategic mergers and acquisitions. These mergers and
acquisitions have allowed us to (i) expand our client base and the range of
services that we provide to our clients; (ii) add new technical capabilities
that can be marketed to our existing client base, (iii) grow our business
geographically, and (iv) capture more of each project's value. We expect to
continue evaluating and assessing acquisition opportunities that will either
complement our existing business base or that will provide ENGlobal with
additional capabilities or geographical coverage. We believe that strategic
acquisitions will enable us to more efficiently serve the technical needs of
national and international clients and strengthen our financial performance. In
2010, we have a stated objective to increase the size of the Company by
approximately 12.5% through various types of acquisitions, although our
acquisition strategy may continue to be negatively impacted by adverse economic
conditions.
The following table lists the businesses we have acquired during the five-year
period ended December 31, 2009.
Name/Location/Business Unit Date Acquired Primary Services
--------------------------- ------------- ----------------
Analyzer Technology International, Inc. January 2006 Process Analyzer Systems
Houston, TX
Operates as a part of ESI
WRC Corporation and WRC Canada May 2006 Integrated Land Management
Denver, CO
Operates as ELI, formerly WRC
PEI Investments May 2006 Real Estate
Beaumont, TX
Watco Management, Inc. October 2006 Turnaround Planning
Clearlake, TX Asset Management
Operates as a Division of ECR Project Commissioning
Construction Management
EMC Design & Consulting, Inc. September 2008 Product Terminals
Houston, TX Engineering and Design
Operates as a Division of EEI
Advanced Control Engineering, LLC September 2008 Control Systems Engineering
Mobile, AL and Design
Operates as a Division of EAG
PCI Management and Consulting Company August 2009 Electric Power Consulting and
Chicago, IL Construction Management
Operates as a Division of ECR
ENGlobal Corporation transitions acquisitions under the ENGlobal brand name as
soon as feasible, given the size and scope of the acquisition, but typically
within two years. This strengthens ENGlobal's market position as a diversified
10
ITEM 1. BUSINESS (continued)
supplier of engineering and related services and focuses on the quality of the
ENGlobal name. Smaller acquisitions are almost immediately identified as a
division of an existing segment.
Business Strategy
-----------------
Our objective is to strengthen the Company's position as a leading full service
provider of services to the energy industry by enhancing our overall range of
capabilities in the areas of engineering, construction, automation, and land
management services. To achieve this objective, we have developed a strategy
comprised of the following key elements:
o Maintain High Quality Service. To maintain high quality service, we
focus on being responsive to our customers, working diligently and
responsibly, and maintaining safety standards, schedules and budgets.
ENGlobal has a quality control and assurance program to maintain
standards and procedures for performance and documentation.
o Improve Utilization of Resources. We have developed a work-sharing
program that gives our staff and our clients' access to technical
resources located in any of our offices and allows for higher
utilization of human and computer resources. We believe the
work-sharing program helps reduce employee turnover and provides for a
more stable work environment. We believe our ongoing program to
standardize all of our processes and procedures among our offices will
enhance our work-sharing ability and provide our clients with more
consistent and higher quality services.
o Enhance and Strengthen Our Ability to Perform Engineering, Procurement
and Construction Projects. We rely heavily on repeat business and
referrals from existing customers, industry members and other business
representatives. One of our Company's goals is to increase revenue by
developing and marketing its ability to perform full service projects,
also called EPC (Engineering, Procurement and Construction), with
contracting strategies that are evaluated and authorized by the
Company. By applying the wide range of capabilities offered by our
four operating segments to any given project, we are able to capture a
greater percentage of the project's total installed cost.
o Recruit and Retain Qualified Personnel. We believe recruiting and
retaining qualified, skilled professionals is crucial to our success
and growth. As a result, we have a dedicated recruiting staff focused
on recruiting qualified personnel with experience in the energy
industry. While the economy has forced us to reduce some of the
employee benefits we previously offered, we believe that our employee
benefits are still competitive with those offered by our competitors
and together with various incentive programs, they have helped us to
retain valued employees.
o Expand and Enhance Technical Capabilities. We believe that it is
important to develop and enhance our overall technical capabilities in
the markets we serve. To achieve this objective in the area of
advanced computer-aided process simulation, design and drafting, we
utilize technical software from numerous suppliers. By being vendor
neutral, ENGlobal is able to provide high quality technology and
platforms for the design of plant systems such as 3D modeling, process
simulation and other technical applications. We find it beneficial to
match the design tools we use with those being utilized by our
clients, many of whom are currently utilizing these design platforms.
o Growth Through Acquisitions. We follow a balanced growth strategy for
our business, utilizing both external acquisitions as well as internal
initiatives. The internal initiatives will continue to include an
active business development program covering all of our business
segments. Our external growth will likely come from relatively small
acquisitions and mergers that allow us to: (i) offer expanded
engineering and professional services to a broad energy complex; (ii)
add new technical capabilities that can be marketed to our existing
client base; (iii) expand our business geographically; and (iv)
capture more of each project's value. In 2010, we have a stated
objective to increase the size of the Company by approximately 12.5%
through various types of acquisitions, although our acquisition
strategy may continue to be negatively impacted by adverse economic
conditions.
11
ITEM 1. BUSINESS (continued)
o Enter New Markets. Given reduced spending by our clients for domestic
midstream and downstream projects, the Company has implemented
strategies to pursue work in additional markets where it believes
project activity is more robust. We plan to utilize our existing
client relationships along with added marketing resources to pursue
projects related to public infrastructure, alternative energy and
electric power, as well as applying our heritage energy related
expertise on international projects.
o Building our Brand. We intend to continue to present a more unified
corporate identity for the Company with our ongoing efforts to enhance
ENGlobal's branding and increase its name recognition. In 2008, we
redesigned our website to highlight our four businesses: Engineering,
Construction, Automation and Land. In the same year, we focused on
branding all of our businesses with the ENGlobal name. Our new image
presents ENGlobal as one company, where our four business segments
work together as a single unit to offer their many products and
services seamlessly, with one consistent message and a continued focus
on better serving our clients.
Sales and Marketing
-------------------
ENGlobal derives revenue primarily from three sources: (1) in-house direct
sales, (2) preferred provider/alliance agreements with strategic clients, and
(3) referrals from existing customers and industry members. We currently employ
29 full-time professional in-house marketers in business development.
Our Senior Vice President of Business Development supervises our in-house sales
managers assigned to our Engineering and Construction segments, clients and
territories within the United States. In addition, our Senior Vice President of
Project Development focuses on partnering with consultants or creating new
business initiatives that allow us to undertake types of projects we did not
pursue in the past. These partnerships include civil infrastructure projects,
such as jails, hospitals, and other municipal projects not previously pursued by
our business development group. We have also formed relationships with
consultants that have an international presence and may be able to involve us on
international projects. However, we will only pursue international opportunities
if we believe the risk profile is appropriate. Additionally, ENGlobal expects to
provide services for international clients from its U.S. offices rather than
opening offices overseas. Finally, since our clients typically consist of large
integrated oil and gas companies with worldwide business operations, we will
attempt to leverage our existing client relationships to showcase our
capabilities for their international projects.
Sales and marketing efforts for our Automation and Land segments are supervised
by the respective entity presidents which we believe results in increased
account penetration and enhanced customer service, which should, in turn, create
and maintain the foundation for long-term customer relationships. In addition,
client relationships can be nurtured by our geographic advantage of having
office locations near our larger customers. By having clients in close
proximity, we are able to provide single, dedicated points of contact. Our
growth depends not only on the world economic situation but also, in large
measure, on our ability to attract and retain qualified business development
managers and business development personnel with a respected reputation in the
energy industry. Management believes that in-house marketing allows for more
accountability and control, thus increasing profitability.
Products and services are also promoted through trade advertising, participation
in industry conferences and online Internet communication via our corporate home
page at www.englobal.com. The ENGlobal site provides information about our four
operating segments and illustrates our Company's full range of services and
capabilities. We use internal and external resources to maintain and update our
website on an ongoing basis. Through the ENGlobal website, we seek to provide
visitors with a single point of contact for obtaining information on ENGlobal's
services.
Our business development focuses on building long-term relationships with
customers and providing our customers and potential clients with solutions
throughout the life-cycle of their facilities. Additionally, we seek to
capitalize on cross-selling opportunities among our various segments -
Engineering, Construction, Automation and Land. Sales leads are often jointly
developed and pursued by the sales personnel from these various segments.
ENGlobal develops preferred provider/alliance agreements with clients in order
to facilitate repeat business. These preferred provider agreements, also known
as master services agreements or umbrella agreements are typically two to three
years in length. Although the agreement is not a guarantee for work under a
certain project, ENGlobal generally offers a slightly reduced billing structure
12
ITEM 1. BUSINESS (continued)
to clients willing to commit to arrangements that are expected to provide a
steady stream of work. With the terms of the contract settled, add-on projects
with these customers are easier to negotiate. Management believes that these
agreements can serve to stabilize project centered operations in the engineering
and construction industry.
Much of our business is repeat business and we are introduced to new customers
in many cases by referrals from existing customers and industry members.
Management believes referral marketing provides the opportunity for increased
profitability because referrals do not involve direct selling. Rather, they
allow satisfied customers to sell our services and products on our behalf.
ENGlobal strives to develop our clients' trust, and then benefits by
word-of-mouth referrals.
Our past acquisition program has provided the benefit of expanding our existing
customer base. Management believes that cross-selling among our businesses is an
effective way to build client loyalty by solidifying the client relationship,
thereby reducing attrition and increasing the lifetime profitability of each
project. The Company also believes that cross-selling can help ensure more
predictable revenue and can be a cost effective way to grow our business.
Customers
---------
Our customer base consists primarily of Fortune 500 companies in the energy
industry. While we do not have continuing dependence on any single client or a
limited group of clients, one or a few clients may contribute a substantial
portion of our revenue in any given year or over a period of several consecutive
years due to major projects. ENGlobal may work for many different subsidiaries
or divisions of our clients, which involves multiple parties to material
contracts. The loss of a single contract award would not likely have a material
impact on our financial statements. In 2010, the Company will continue to focus
substantial attention on improving customer services in order to enhance
satisfaction and increase customer retention.
Revenue generated through sources such as in-plant staffing and preferred
provider relationships are longer-term in nature and are not typically limited
to one project. For example, our Engineering segment provides outsourced
technical and other personnel that are assigned to work at client locations. In
the past, these assignments often span multiple projects and multiple years, and
although these engagements involve a lower margin, they help to contribute to a
steady stream of work.
A major long-term trend among our clients and their industry counterparts has
been toward outsourcing engineering services, and more recently, sole-sourcing.
This trend has fostered the development of ongoing, longer-term client
arrangements, rather than one-time limited engagements. These arrangements vary
in scope, duration and degree of commitment. While there is typically no
guarantee of work that will result from these agreements, often they form the
basis for a longer-term client relationship. Despite their variety, we believe
that these partnering relationships have a stabilizing influence on our revenue.
At December 31, 2009, we maintained some form of partnering or preferred
provider/alliance arrangement with approximately 20 major oil and chemical
companies. These engagements may provide for:
o a minimum number of work man-hours over a specified period;
o the provision of at least a designated percentage of the client's
requirements;
o the designation of the Company as the client's sole or preferred
source of engineering at specific locations; or
o a non-binding preference or intent, or a general contractual
framework, for what the parties expect will be an ongoing
relationship.
Overall, our ten largest customers, who vary from one period to the next,
accounted for 50% of our total revenue for 2009, 62% of total revenue for 2008
and 57% of total revenue for 2007. Most of our projects are specific in nature
and we generally have multiple projects with the same clients. If we were to
lose one or more of our significant clients and were unable to replace them with
other customers or other projects, our business would be materially adversely
affected. Our top three clients in 2009 were ExxonMobil, Spectra Energy and
Enbridge Energy Company. Even though we frequently receive work from repeat
clients, our client list may vary significantly from year to year. We continue
to see a change in our business mix year over year, depending on mid-size or
developer clients' ability to receive funding for their projects. Our potential
revenue in all segments is dependent on continuing relationships with our
customers.
13
ITEM 1. BUSINESS (continued)
Engineering Segment:
In the Engineering segment, our ten largest customers vary from one period to
the next. These customers accounted for 72% of our total revenue for 2009, 77%
of total revenue for 2008 and 74% of total revenue for 2007. Our top three
clients in 2009 were ExxonMobil, BASF Corporation and Motiva.
Though the Engineering segment frequently receives work from repeat clients, its
client list may vary significantly from year to year. In order to generate
revenue in future years, we must continue efforts to obtain new engineering
projects. The majority of the revenue for the Engineering segment is generated
through sources such as in-plant staffing and client relationships that we
consider longer-term in nature and that are not typically limited to one
project.
Construction Segment:
In the Construction segment, our ten largest customers vary from one period to
the next. These customers accounted for 82% of our total revenue for 2009, 91%
of total revenue for 2008 and 82% of total revenue for 2007. Our top three
clients in 2009 were Spectra Energy, Enbridge Energy Company and Magellan
Midstream Partners.
The revenue for the Construction segment is generated through sources such as
providing inspection and construction related personnel at field locations.
While we have ongoing business relationships with many of our clients in the
Construction segment, this business tends to be more cyclical than our
Engineering segment, as it is more project-driven and dependent on field
construction activity, such as pipeline inspection.
Automation Segment:
In the Automation segment, our ten largest customers vary from one period to the
next. These customers accounted for 76% of our total revenue for 2009, 66% of
total revenue for 2008 and 73% of total revenue for 2007. Our top three clients
in 2009 were ExxonMobil, Emerson Process Management and Hovensa, LLC. Total
foreign customers accounted for 16% of our Automation segment revenue for 2009,
14% of Automation segment revenue for 2008 and 22% of Automation segment revenue
for 2007. During 2009, 3% of our revenue came from our Canadian operations
compared to 4% in 2008 and 3% in 2007.
Although the Automation segment frequently receives work from repeat clients,
its client list may vary significantly from year to year. The Automation
Segment's clients are primarily in the downstream process industries, and their
needs result primarily from requirements to upgrade obsolete distributed control
systems or process analytical equipment.
Land Segment:
In the Land segment, our ten largest customers vary from one period to the next.
These customers accounted for 78% of our total revenue for 2009, 72% of total
revenue for 2008 and 70% of total revenue for 2007. Our top three clients in
2009 were TransCanada, Spectra Energy and El Paso Corporation. The Land
segment's clients currently consist primarily of pipeline operators or electric
utilities, with both types of clients having needs to acquire rights-of-way for
pipelines or electric transmission.
Though the Land segment frequently receives work from repeat clients, its client
list may vary significantly from year to year with outsourced right-of-way and
other personnel assigned to work at project sites across the United States and
Canada. Factors affecting our Land business that are beyond our control include
regulatory requirements, title assistance, landowner negotiations and eminent
domain-condemnation proceedings.
14
ITEM 1. BUSINESS (continued)
Contracts
---------
We generally enter into two principal types of contracts with our clients:
time-and-materials contracts and fixed-price contracts. Our mix of net revenue
between time-and-materials and fixed-price contracts is shown in the table
below. Our clients typically determine the type of contract to be utilized for a
particular engagement, with the specific terms and conditions of a contract
resulting from a negotiation process between the Company and our client.
Time-and-material % Fixed-price %
------------------------------------------------
(revenue in thousands)
Engineering $135,278 $ 3,786
Construction 100,028 90
Automation 36,583 35,739
Land 31,855 103
-------- ----- -------- ----
Total company $303,744 88.4% $ 39,718 11.6%
======== ===== ======== ====
o Time-and-Materials. Under our time-and-materials contracts, we are
paid for labor at either negotiated hourly billing rates or we are
reimbursed for allowable hourly rates and other expenses. We are paid
for material and contracted services at an agreed upon multiplier of
our cost, and at times we pass non-labor costs for equipment,
materials and subcontractor services through with no profit.
Profitability on these contracts is driven by billable headcount, the
amount of non-labor related services and cost control. Some of these
contracts may have upper limits, referred to as "not-to-exceed." If
our scope is not defined under a "not-to-exceed" agreement, we are not
under any obligation to provide services beyond the limits of the
contract, but if we generate costs and billings that exceed the
contract ceiling or are not allowable, we will not be able to obtain
reimbursement for the excess cost. Further, the continuation of each
contract partially depends upon the customer's discretionary periodic
assessment of our performance on that contract.
o Fixed-Price. Under a fixed-price contract, sometimes referred to as
"guaranteed maximum," we provide the customer a total project for an
agreed-upon price, subject to project circumstances and changes in
scope. Fixed-price projects vary in scope, including some engineering
activities and related services, and responsibility for procurement of
material and construction. Fixed-price contracts carry certain
inherent risks, including risks of losses from underestimating costs,
delays in project completion, problems with new technologies, the
impact of the economy on labor shortages, increases in equipment and
materials costs, natural disasters, and other events and changes that
may occur over the contract period. Another risk is our ability to
secure written change orders prior to commencing work on contract
changes in scope, without which we may not receive payment for work
performed. Consequently, the profitability of fixed-price contracts
may vary substantially.
Backlog
-------
Backlog represents gross revenue of all awarded contracts that have not been
completed and will be recognized as revenue over the life of the project.
Although backlog reflects business that we consider to be firm, cancellations or
scope adjustments may occur. Further, most contracts with clients may be
terminated at will, in which case the client would only be obligated to us for
services provided through the termination date. We have adjusted backlog to
reflect project cancellations, deferrals and revisions in scope and cost (both
upward and downward) known at the reporting date; however, future contract
modifications or cancellations may increase or reduce backlog and future
revenue. As a result, no assurances can be given that the amounts included in
backlog will ultimately be realized. In addition, it is not clear how our
backlog will be impacted by the current economy.
At December 31, 2009, our backlog was $227.0 million compared to an estimated
$325.7 million at December 31, 2008. We expect a majority of the $227.0 million
in backlog to be completed during 2010.
15
ITEM 1. BUSINESS (continued)
The backlog at December 31, 2009 consists of $201.3 million with commercial
customers and $25.7 million with the United States government. Backlog on
federal programs includes only the portion of the contract award that has been
funded. The backlog for each of our segments at December 31, 2009 was as
follows:
Engineering segment $ 100.4 million
Construction segment 71.4 million
Automation segment 22.5 million
Land segment 32.7 million
Backlog includes gross revenue under two types of contracts: (1) contracts for
which work authorizations have been received on a fixed-price basis or
time-and-material projects that are well defined, and (2) time-and-material
evergreen contracts at an assumed 12 month run-rate, under which we place
employees at our clients' site to perform day-to-day project efforts. There is
no assurance as to the percentage of backlog that will be recognized.
Customer Service and Support
----------------------------
We provide service and technical support to our customers in varying degrees
depending upon the business line and on customer contractual arrangements. The
Company's technical staff provides initial telephone support services for its
customers. These services include isolating and verifying reported failures and
authorizing repair services in support of customer requirements. We also provide
on-site engineering support if a technical issue cannot be resolved over the
telephone. On projects for which we have provided engineering systems, we
provide on-site factory acceptance tests and worldwide start-up and
commissioning services. We also provide the manufacturers' limited warranty
coverage for products we re-sell.
Dependence Upon Suppliers
-------------------------
Our ability to provide clients with services and systems in a timely and
competitive manner depends on the availability of products and parts from our
suppliers at competitive prices and on reasonable terms. Our suppliers are not
obligated to have products on hand for timely delivery nor can they guarantee
product availability in sufficient quantities to meet our demands. There can be
no assurance that we will be able to obtain necessary supplies at prices or on
terms we find acceptable. However, in an effort to maximize availability and
maintain quality control, we generally procure components from multiple
distributors on our clients' behalf and in some cases we can take advantage of
national agreements our clients may have entered into.
For example, all of the product components used by our Automation segment are
fabricated using components and materials that are available from numerous
domestic manufacturers and suppliers. There are approximately five principal
suppliers of distributed control systems, each of which can be replaced by an
equally viable competitor, and our clients typically direct the selection of
their preferred supplier. No one manufacturer or vendor provides products that
account for more than 2% of our revenue. Thus, we anticipate little or no
difficulty in obtaining components in sufficient quantities and in a timely
manner to support our manufacturing and assembly operations. Units produced
through the Automation segment are normally not produced for inventory and
component parts; rather, they are typically purchased on an as-needed basis. By
being relatively vendor neutral, ENGlobal is able to provide quality technology
and platforms for the design of plant systems such as 3D modeling, process
simulation and other technical applications.
Despite the foregoing, some of our subsidiaries rely on certain suppliers for
necessary components and there can be no assurance that these components will
continue to be available on acceptable terms. If a subsidiary or one of its
suppliers terminates a long-standing supply relationship, it may be difficult to
obtain alternative sources of supply without a material disruption in our
ability to provide products and services to our customers. While we do not
believe that such a disruption is likely, if it did occur, it could have a
material adverse effect on our financial condition and results of operations.
16
ITEM 1. BUSINESS (continued)
Patents, Trademarks, Licenses
-----------------------------
Our success depends in part upon our ability to protect our proprietary
technology, which we do primarily through protection of our trade secrets and
confidentiality agreements. In addition, the U.S. Patent and Trademark Office
registered our "Integrated Rack"TM patent application in 2008.
Our trade names are protected by registration as well as by common law trademark
rights. Our trademark for the use of "ENGlobal"(R) in connection with our
products is registered with the U.S. Patent and Trademark Office and we claim
common law trademark rights for "ENGlobal"TM in connection with our services. We
also have pending trademark applications for "Engineered for Growth"(R) and we
claim common law trademark rights for "Global Thinking...Global Solutions"TM,
"CARES - Communicating Appropriate Responses in Emergency Situations"TM,
"Flare-Mon"TM, "Purchased Data"TM, "viMAC" TM, "ENGlobal Vu"TM, and "riFAT"TM.
There can be no assurance that the protective measures we currently employ will
be adequate to prevent the unauthorized use or disclosure of our technology, or
the independent third party development of the same or similar technology.
Although our competitive position to some extent depends on our ability to
protect our proprietary and trade secret information, we believe that other
factors, such as the technical expertise and knowledge base of our management
and technical personnel, as well as the timeliness and quality of the support
services we provide, will also help us to maintain our competitive position.
Government Regulations
----------------------
ENGlobal and certain of our subsidiaries are subject to various foreign,
federal, state, and local laws and regulations relating to our business and
operations, and various health and safety regulations established by the
Occupational Safety and Health Administration (OSHA). The Company and our
professional staff are subject to a variety of state, local and foreign
licensing, registration and other regulatory requirements governing the practice
of engineering and other professional disciplines. For example, OSHA requires
Process Safety Management to prevent the release of hazardous chemicals, the
Department of Transportation (DOT) requires that pipeline operators are in full
compliance with pipeline safety regulations, and the Environmental and
Protection Agency (EPA) provides incentives to reduce chemical emissions.
Currently, we are not aware of any situation or condition relating to the
regulation of the Company, its subsidiaries, or personnel that we believe is
likely to have a material adverse effect on our results of operations or
financial condition.
Employees
---------
As of December 31, 2009, the Company and its subsidiaries employed 1,999
individuals. Of these employees, 716 were employed in engineering and related
positions, 533 were employed as inspectors, 253 were employed as project support
staff, 246 were employed in technical production positions, 223 were employed in
administration, finance and management information systems and 28 were employed
in sales and marketing. We believe that our ability to recruit and retain highly
skilled and experienced technical, sales and management personnel has been and
will continue to be critical to our ability to execute our business plan. None
of our employees is represented by a labor union or is subject to a collective
bargaining agreement. We believe that relations with our employees are good.
Benefit Plans
-------------
ENGlobal sponsors a 401(k) profit sharing plan for its employees. Until January
2009, the Company made matching contributions equal to 66.66% of employee
contributions up to 6% of employee compensation for regular (as distinguished
from project or contract) employees. All other employees except our pipeline
inspectors were matched at 50% of employee contribution up to 6% of
compensation, as defined by the plan. The Company, at the direction of the Board
of Directors, may make other discretionary contributions. Our employees may
elect to make contributions pursuant to a salary reduction agreement upon
meeting age and length-of-service requirements. On January 1, 2009, due to
economic conditions, the Company elected to reduce its match on regular
employees to 50% and all other employees except our pipeline inspectors to
33.33% of employee contributions up to 6% of employee compensation. On April 4,
2009, the Company elected to eliminate its match on all employees. The Company
made contributions of approximately $982,000, $3,049,000, and $2,147,000,
respectively, for the years ended December 31, 2009, 2008, and 2007.
17
ITEM 1. BUSINESS (continued)
Geographic Areas
----------------
In 2005, the Company formed ENGlobal Canada ULC, located in Calgary, Alberta to
expand our Automation segment into Canada. In 2006, we acquired WRC Corporation
and its subsidiary, WRC Canada, to expand our Land segment into Canada. While
this gives us opportunities for expansion, our Canadian operations are small in
comparison to the Company as a whole and have declined in size since their
inception.
2009 2008 2007
-------------------------------------
(dollars in thousands)
-------------------------------------
US operations revenue $341,629 $490,584 $360,309
Canadian operations revenue 1,833 2,748 2,918
-------- -------- --------
Total revenue $343,462 $493,332 $363,227
Long-lived assets consist of property, plant and equipment, net of depreciation
("PPE").
2009 2008 2007
-------------------------------------
(dollars in thousands)
-------------------------------------
US operations PPE $ 5,967 $ 5,703 $ 6,378
Canadian operations PPE 16 41 94
-------- -------- --------
Total PPE $ 5,983 $ 5,744 $ 6,472
ITEM 1A. RISK FACTORS
Set forth below and elsewhere in this Report and in other documents that we file
with the SEC are risks and uncertainties that could cause actual results to
differ materially from the results contemplated by the forward-looking
statements contained in this Report. You should be aware that the occurrence of
any of the events described in these risk factors and elsewhere in this Report
could have a material adverse effect on our business, financial condition and
results of operations and that upon the occurrence of any of these events, the
trading price of our common stock could decline.
Economic downturns could have a negative impact on our businesses.
------------------------------------------------------------------
Demand for the services offered by us has been and is expected to continue to
be, subject to significant fluctuations due to a variety of factors beyond our
control, including demand for engineering services in the energy industry, and
in other industries that we provide services to. During macroeconomic or
industry downturns, our customers' need to engage us may decline significantly
and projects may be delayed or cancelled. We cannot predict how long the current
economic downturn will last or when the various sectors of the energy complex
will recover. However, these factors have caused our profitability to decline
significantly.
Our future revenue depends on our ability to consistently bid and win new
contracts and to maintain and renew existing contracts. Our failure to
effectively obtain future contracts could adversely affect our profitability.
-----------------------------------------------------------------------------
Our future revenue and overall results of operations require us to successfully
bid on new contracts and renew existing contracts. Contract proposals and
negotiations are complex and frequently involve a lengthy bidding and selection
process, which is affected by a number of factors, such as market conditions,
financing arrangements and required governmental approvals. For example, a
client may require us to provide a bond or letter of credit to protect the
client should we fail to perform under the terms of the contract. If negative
market conditions arise, or if we fail to secure adequate financial arrangements
or required governmental approvals, we may not be able to pursue particular
projects, which could adversely affect our profitability.
18
ITEM 1A. RISK FACTORS (continued)
We are engaged in highly competitive businesses and must typically bid against
competitors to obtain engineering and service contracts.
------------------------------------------------------------------------------
We are engaged in highly competitive businesses in which customer contracts are
typically awarded through competitive bidding processes. We compete with other
general and specialty contractors, both foreign and domestic, including large
international contractors and small local and regional contractors. Some
competitors have greater financial and other resources than we do, which, in
some instances, gives them a competitive advantage over us. In addition, smaller
contractors may have lower overhead cost which gives them a competitive
advantage.
If we are unable to collect our receivables, our results of operations and cash
flows could be adversely affected.
-------------------------------------------------------------------------------
Our business depends on our ability to successfully obtain payment from our
clients of the amounts they owe us for work performed and materials supplied. We
bear the risk that our clients will pay us late or not at all. Though we
evaluate and attempt to monitor our clients' financial condition, there is no
guarantee that we will accurately assess their creditworthiness. Even if they
are creditworthy, they may delay payments in an effort to manage their cash
flow. Financial difficulties or business failure experienced by one or more of
our major customers could have a material adverse affect on both our ability to
collect receivables and our results of operations.
The failure to attract and retain key professional personnel could adversely
affect the Company.
----------------------------------------------------------------------------
Our success depends on attracting and retaining qualified personnel in a
competitive environment. We are dependent upon our ability to attract and retain
highly qualified managerial, technical and business development personnel. While
competition for lower level personnel has declined over the last two years,
competition for key management personnel continues to be intense. We cannot be
certain that we will retain our key managerial, technical and business
development personnel or be able to attract or assimilate key personnel in the
future. Failure to attract and retain such personnel would materially adversely
affect our businesses, financial position, results of operations and cash flows.
This is a major risk factor that could materially impact our operating results.
Our dependence on one or a few customers could adversely affect us.
-------------------------------------------------------------------
One or a few clients have in the past and may in the future contribute a
significant portion of our consolidated revenue in any one year or over a period
of several consecutive years. In 2009, our top three clients, ExxonMobil,
Spectra Energy and Enbridge Energy Company, accounted for approximately 16%, 6%
and 5% of our revenue respectively. As our backlog frequently reflects multiple
projects for individual clients, one major customer may comprise a significant
percentage of our backlog at any point in time. Because these significant
customers generally contract with us for specific projects, we may lose them in
other years as their projects with us are completed. If we do not continually
replace them with other customers or other projects, our business could be
materially adversely affected. Also, the majority of our contracts can be
terminated at will. We have long-standing relationships with many of our
significant customers. Our contracts with these customers, however, are on a
project-by-project basis and the customers may unilaterally reduce or
discontinue their purchases at any time. The loss of business from any one of
such customers could have a material adverse effect on our business or results
of operations.
Our business and operating results could be adversely affected by our inability
to accurately estimate the overall risks, revenue or costs on a contract.
-------------------------------------------------------------------------------
We generally enter into two principal types of contracts with our clients:
time-and-materials contracts and fixed-price contracts. Under our fixed-price
contracts, we receive a fixed-price irrespective of the actual costs we incur
and, consequently, we are exposed to a number of risks. These risks include
underestimation of costs, problems with new technologies, unforeseen
expenditures or difficulties, delays beyond our control and economic and other
changes that may occur during the contract period. Our ability to secure change
orders on scope changes and our ability to invoice for such changes poses an
additional risk. In 2006, we suffered significant losses as a result of two
fixed-price contracts. In fiscal 2009, approximately 11.6% of our net revenue
was derived from fixed-price contracts, as compared with 6.0% was in 2008. Given
the economic downturn, it is possible that we will enter into a greater number
of fixed-price contracts in the future as customers shift more risk to their
suppliers.
Under our time-and-materials contracts, we are paid for labor at negotiated
hourly billing rates or reimbursement at specified mark-up hourly rates and
negotiated rates for other expenses. Profitability on these contracts is driven
by billable headcount and cost control. Some time-and-materials contracts are
subject to contract ceiling amounts, which may be fixed or performance-based. If
our costs generate billings that exceed the contract ceiling or are not
19
ITEM 1A. RISK FACTORS (continued)
allowable under the provisions of the contract or any applicable regulations, we
may not be able to obtain reimbursement for all of our costs.
Revenue recognition for a contract requires judgment relative to assessing the
contract's estimated risks, revenue and costs, and technical issues. Due to the
size and nature of many of our contracts, the estimation of overall risk,
revenue and cost at completion is complicated and subject to many variables.
Changes in underlying assumptions, circumstances or estimates may also adversely
affect future period financial performance.
Our backlog is subject to unexpected adjustments and cancellations and is,
therefore, an uncertain indicator of our future revenue or earnings,
particularly in light of the current economy.
--------------------------------------------------------------------------
As of December 31, 2009, our backlog was approximately $227.0 million. We cannot
assure investors that the revenue projected in our backlog will be realized or,
if realized, will result in profits. Projects currently in our backlog may be
cancelled or may remain in our backlog for an extended period of time prior to
project execution and, once project execution begins, it may occur unevenly over
the current and multiple future periods. In addition, project terminations,
suspensions or reductions in scope may occur from time to time with respect to
contracts reflected in our backlog, reducing the revenue and profit we actually
receive from contracts reflected in our backlog. Future project cancellations
and scope adjustments could further reduce the dollar amount of our backlog and
the revenue and profits that we actually earn. These adjustments may be
exacerbated by current economic conditions.
The terms of our contracts could expose us to unforeseen costs and costs not
within our control, which may not be recoverable and could adversely affect our
results of operations and financial condition.
-------------------------------------------------------------------------------
Under fixed-price contracts, we agree to perform the contract for a fixed price
and, as a result, can improve our expected profit by superior contract
performance, productivity, worker safety and other factors resulting in cost
savings. However, we could incur cost overruns above the approved contract
price, which may not be recoverable. Under certain incentive fixed-price
contracts, we may agree to share with a customer a portion of any savings we are
able to generate while the customer agrees to bear a portion of any increased
costs we may incur up to a negotiated ceiling. To the extent costs exceed the
negotiated ceiling price we may be required to absorb some or all of the cost
overruns.
Fixed-price contract prices are established based largely upon estimates and
assumptions relating to project scope and specifications, personnel and material
needs. These estimates and assumptions may be inaccurate or conditions may
change due to factors out of our control, resulting in cost overruns which we
may be required to absorb. This could have a material adverse effect on our
business, financial condition and results of operations. In addition, our
profits from these contracts could decrease and we could experience losses if we
incur difficulties in performing the contracts or are unable to secure
fixed-pricing commitments from our manufacturers, suppliers and subcontractors
at the time we enter into fixed-price contracts with our customers.
Under cost-plus contracts, we perform our services in return for payment of our
agreed upon reimbursable costs plus a profit. The profit component is typically
expressed in the contract either as a percentage of the reimbursable costs we
actually incur or is factored into the rates we charge for labor or for the cost
of equipment and materials, if any, we are required to provide. Some cost-plus
contracts provide for the customer's review of the accounting and cost control
systems used by us to calculate these labor rates and to verify the accuracy of
the reimbursable costs invoiced. These reviews could result in reductions in
amounts previously billed to the customer and in an adjustment to amounts
previously reported by us as our profit on the contract.
Many of our fixed-price or cost-plus contracts require us to satisfy specified
progress milestones or performance standards in order to receive a payment.
Under these types of arrangements, we may incur significant costs for labor,
equipment and supplies prior to receipt of payment. If the customer fails or
refuses to pay us for any reason, there is no assurance that we will be able to
collect amounts due to us for costs previously incurred. In some cases, we may
find it necessary to terminate work on the project. In addition, if the contract
permits, we may attempt to recoup some or all of the cost overruns by entering
into a claims recovery process by retaining a third party consultant to assist
us with necessary due diligence. However, there can be no assurance that we
would be able to recover some or all of the cost overruns through the claims
recovery process or on terms favorable to the Company.
Liability claims could result in losses.
----------------------------------------
Providing engineering and design services involves the risk of contract,
professional errors and omissions and other liability claims, as well as adverse
publicity. Further, many of our contracts require us to indemnify our clients
not only for our negligence, if any, but also for the concurrent negligence and,
in some cases, sole negligence of our clients. We currently maintain liability
20
ITEM 1A. RISK FACTORS (continued)
insurance coverage, including coverage for professional errors and omissions.
However, claims outside of or exceeding our insurance coverage may be made. A
significant claim could result in unexpected liabilities, take management time
away from operations, and have a material adverse impact on our cash flow.
We may incur significant costs in providing services in excess of original
project scope without having an approved change order.
--------------------------------------------------------------------------
After commencement of a contract, we may perform, without the benefit of an
approved change order from the customer, additional services requested by the
customer that were not contemplated in our contract price due to customer
changes or to incomplete or inaccurate engineering, project specifications, and
other similar information provided to us by the customer. Our construction
contracts generally require the customer to compensate us for additional work or
expenses incurred under these circumstances.
A failure to obtain adequate written approvals prior to performing the work or
appropriate reimbursements for the work performed could require us to record an
adjustment to revenue and profit recognized in prior periods under the
percentage-of-completion accounting method. Any such adjustments, if
substantial, could have a material adverse effect on our results of operations
and financial condition, particularly for the period in which such adjustments
are made. We cannot assure you that we will be successful in obtaining, through
negotiation, arbitration, litigation or otherwise, approved change orders in an
amount sufficient to compensate us for our additional, unapproved work or
expenses.
If we are not able to successfully manage changes in the size of our business,
our business and results of operations may be adversely affected.
------------------------------------------------------------------------------
Until recently, we have been known as a rapidly growing company. In the last two
years, our revenues, employees and profits have decreased. Both increases and
decreases in the size of our business present us with numerous managerial,
administrative, operational and other challenges and they require us to
continually adjust the size and scope of our management information systems,
maintain discipline in our internal systems and controls, adjust the size of our
employee pool, and effectively manage our fixed overhead. The inability of our
management to effectively manage changes in the size of our business could have
a material adverse effect on our business.
Failure to maintain adequate internal controls could adversely affect us.
-------------------------------------------------------------------------
Failure to achieve and maintain effective internal controls in accordance with
Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on
our business and stock price. Our internal controls over financial reporting may
not be adequate and our independent auditors may not be able to certify as to
their adequacy.
If we fail to maintain an effective system of internal controls, we may not be
able to accurately report our financial results or prevent fraud. If we identify
deficiencies in our internal control over financial reporting, our business and
our stock price could be adversely affected. We have, in the past, identified
material weaknesses in our internal controls, and while these have been cured,
if we determine that we have further material weaknesses, it could affect our
ability to ensure timely and reliable financial reports and the ability of our
auditors to attest to the effectiveness of our internal controls. If our
independent auditors are not able to certify the adequacy of our internal
controls, it could have a significant adverse effect on our business and
reputation.
If the operating result of any component in one of our segments is adversely
affected, an impairment of goodwill could result in a write down.
----------------------------------------------------------------------------
Based on factors and circumstances impacting ENGlobal and the business climate
in which it operates, the Company may determine that it is necessary to
re-evaluate the carrying value of its goodwill by conducting an impairment test
in accordance with ASC 350, Goodwill and Other Intangible Assets. The Company
has assigned goodwill to its segments based on estimates of the relative fair
value of each of its business segments. If changes in the industry, market
conditions, or government regulation negatively impact any of the Company's
segments resulting in lower operating income, if assets are damaged, if
anticipated synergies or cost savings are not realized with newly acquired
entities, or if any circumstance occurs which results in the fair value of any
segment declining below its carrying value, an impairment to goodwill would be
created. In accordance with ASC 350, the Company would be required to write down
the carrying value of goodwill. For example, in 2007, the Company determined
that goodwill within the Automation segment was impaired in the amount of
$432,000.
21
ITEM 1A. RISK FACTORS (continued)
Our indebtedness could limit our ability to finance future operations or engage
in other business activities.
-------------------------------------------------------------------------------
As of December 31, 2009, we had $6.0 million of total outstanding indebtedness
against our revolving line of credit, which is currently limited to $25.0
million. Significant factors that could increase our indebtedness and/or limit
our ability to finance future operations include:
o our inability to collect accounts receivable within contractual terms;
o client demands for extending contract payment terms;
o material losses and/or negative cash flows on significant projects;
o clients' failure to pay our invoices timely due to economic conditions
or causes; and
o our ability to meet current credit facility financial ratios and
covenants.
Although we are in compliance with all current credit facility covenants and we
believe our line of credit is sufficient to cover current and future business
operating requirements, our indebtedness could limit our ability to finance
future operations or engage in other business activities.
Seasonality of our industry may cause our revenue to fluctuate.
---------------------------------------------------------------
Holidays and employee vacations during our fourth quarter of each calendar year
exert downward pressure on revenue for that quarter, which is only partially
offset by the year-end efforts on the part of many clients to spend any
remaining funds budgeted for services and capital expenditures during the year.
The annual budgeting and approval process under which these clients operate is
normally not completed until after the beginning of each year, which can depress
results for the first quarter. Principally due to these factors, our first and
fourth quarters may be less robust in terms of financial results, billable
hours, and utilization than our second and third quarters.
Unsatisfactory safety performance can affect customer relationships, result in
higher operating costs and result in high employee turnover.
------------------------------------------------------------------------------
Our workers are subject to the normal hazards associated with providing services
on constructions sites and industrial facilities. Even with proper safety
precautions, these hazards can lead to personal injury, loss of life, damage to,
or destruction of property, plant and equipment, and environmental damages. We
are intensely focused on maintaining a safe environment and reducing the risk of
accidents across all of our jobsites. However, poor safety performance may limit
or eliminate potential revenue streams from many of our largest customers and
may materially increase our future insurance and other operating costs. In
hiring new employees, we normally target experienced personnel; however, we also
hire inexperienced employees. Even with thorough safety training, inexperienced
employees have a higher likelihood of injury which could lead to higher
operating costs and insurance rates.
If we are not able to successfully manage internal growth initiatives, our
business and results of operations may be adversely affected.
--------------------------------------------------------------------------
Our growth strategy is to use our technical expertise in conjunction with
industry trends. To support this strategy, the Company may elect to fund
internal growth initiatives targeted at markets that we believe may have
significant potential needs for the Company's services. However, these
initiatives may not be successful. For instance, the Company may misread
industry trends; during economic downturns, the needs of our targeted customers
may decline significantly; it may take an extended period of time before a new
initiative becomes profitable; or the Company may not be able to successfully
execute on these initiatives. In these cases, the internal initiatives could
have a negative impact on earnings.
Additional acquisitions may adversely affect our ability to manage our business.
--------------------------------------------------------------------------------
Acquisitions have contributed to our growth in the past and we plan to continue
making acquisitions on terms management considers favorable to us. The
successful acquisition of other companies involves an assessment of future
revenue opportunities, operating costs, economies and earnings after the
acquisition is complete, and potential industry and business risks and
liabilities beyond our control. This assessment is necessarily inexact and its
accuracy is inherently uncertain. In connection with our assessments, we perform
reviews of the acquisition target that we believe to be generally consistent
with industry practices. These reviews, however, may not reveal all existing or
potential problems, nor will they permit a buyer to become sufficiently familiar
with the target companies to assess fully their deficiencies and capabilities.
We cannot assure you that we will identify, finance and complete additional
suitable acquisitions on acceptable terms or that acquisitions we consummate
will be profitable. In addition, we may not be able to successfully integrate
future acquisitions. Any acquisition may require substantial attention from our
management, which may limit the amount of time that management can devote to
day-to-day operations. Our current annual growth objective through acquisitions
is approximately 12.5%; however, there is no assurance that this objective will
be met. Our inability to find additional attractive acquisition candidates or to
22
ITEM 1A. RISK FACTORS (continued)
effectively manage the integration of businesses we acquire could adversely
affect our profitability.
Our dependence on subcontractors and equipment manufacturers could adversely
affect us.
----------------------------------------------------------------------------
We rely on third party subcontractors as well as third party suppliers and
manufacturers to complete our projects. To the extent that we cannot engage
subcontractors or acquire supplies or materials, our ability to complete a
project in a timely fashion or at a profit may be impaired. If the amount we are
required to pay for these goods and services exceeds the amount we have
estimated in bidding for fixed-price or cost-plus contracts, we could experience
losses on these contracts. In addition, if a subcontractor or supplier is unable
to deliver its services or materials according to the negotiated contract terms
for any reason, including the deterioration of its financial condition or
over-commitment of its resources, we may be required to purchase the services or
materials from another source at a higher price. This may reduce the profit to
be realized or result in a loss on a project for which the services or materials
were needed.
Force majeure events such as natural disasters could negatively impact the
economy and the industries we service, which may negatively affect our financial
condition, results of operations and cash flows.
--------------------------------------------------------------------------------
Force majeure events, such as hurricanes, could negatively impact the economies
of the areas in which we operate. For example, during 2008, Hurricanes Gustav
and Ike caused considerable damage along the Gulf Coast not only to the refining
and petrochemical industry, but also the commercial segment which competes for
labor, materials and equipment resources needed throughout the entire United
States. In some cases, we remain obligated to perform our services after such a
natural disaster even though our contracts may contain force majeure clauses. In
those cases, if we are not able to react quickly and/or negotiate contractual
relief on favorable terms to the Company, our operations may be significantly
and adversely effected, which would have a negative impact on our financial
condition, results of operations and cash flows.
Our Board of Directors may authorize future sales of ENGlobal common stock,
which could result in a decrease in the market value to existing stockholders of
the shares they hold.
--------------------------------------------------------------------------------
Our Articles of Incorporation authorize our Board of Directors to issue up to an
additional 44,209,716 shares of common stock and an additional 2,000,000 shares
of blank check preferred stock as of the date of filing. These shares may be
issued without stockholder approval unless the issuance is 20% or more of our
outstanding common stock, in which case the NASDAQ requires stockholder
approval. We may issue shares of stock in the future in connection with
acquisitions or financings. In addition, we may issue restricted stock or
options under our 2009 Equity Incentive Plan. Future issuances of substantial
amounts of common stock, or the perception that these sales could occur, may
affect the market price of our common stock. In addition, the ability of the
Board of Directors to issue additional stock may discourage transactions
involving actual or potential changes of control of the Company, including
transactions that otherwise could involve payment of a premium over prevailing
market prices to holders of our common stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
Facilities
----------
We lease space in 19 buildings in the U.S. and Canada totaling approximately
496,000 square feet. The leases have remaining terms ranging from monthly to
nine years and are on terms that we consider commercially reasonable. ENGlobal
has no major encumbrances related to these properties. A discussion of the
locations of the various segments is included in Item 7. On May 26, 2006, the
Company entered into an exclusive agreement with a third party, national real
estate firm for tenant representation services that covers most of our
facilities.
Our principal office locations are in Houston and Beaumont, Texas; and Tulsa,
Oklahoma. We have other offices in Clear Lake and Freeport, Texas; Baton Rouge
and Lake Charles, Louisiana; Cleveland and Blackwell, Oklahoma; Broomfield,
Colorado; Mobile, Alabama; Schaumburg, Illinois; and Calgary, Alberta, Canada.
Approximately 380,000 square feet of our total office space is designated for
our professional, technical and administrative personnel.
23
ITEM 2. PROPERTIES (continued)
We believe that our office and other facilities are well maintained and adequate
for existing and planned operations at each operating location.
Our Automation segment performs fabrication assembly in two shop facilities. One
facility is in Houston, Texas with approximately 81,000 square feet of space and
a second facility is in Beaumont, Texas with approximately 30,000 square feet of
space. In March 2009, the Houston facility was moved from a 63,000 square foot
location to our current facility.
In May 2008, the Company sold the land on which our Beaumont, Texas office
building, destroyed by Hurricane Rita in 2005, was located to a third party
developer and entered into a build-to-suit lease agreement for a new office
building. In February 2009, the Company occupied the new 52,500 square foot
facility.
On March 2, 2007, the Company, through its wholly-owned subsidiary, ENGlobal
Automation Group, Inc. ("EAG"), entered into a 39-month lease agreement for
approximately 4,500 square feet of office space in Alpharetta, Georgia, a suburb
of Atlanta. On January 27, 2009, EAG closed this operation and subleased the
space for the remaining term to an unrelated third party.
On June 28, 2007, the Company, through its wholly-owned subsidiary, RPM
Engineering, Inc. ("RPM"), sold the Company's property located in Baton Rouge,
Louisiana. The purchase price was approximately $1.9 million with 20% of the
purchase price being paid at closing and the balance self-financed for a period
of 60 months. On July 24, 2008 the purchaser of the Baton Rouge building paid
all outstanding principal owed on the note. The Company has leased approximately
34,000 square feet of space in two separate facilities to house its Engineering
and Automation operations in Baton Rouge.
On September 29, 2008, the Company, through its wholly-owned subsidiary ENGlobal
Automation, Group ("EAG"), acquired the operations of ACE Management and
Consulting Company. As a part of this acquisition, the Company assumed the
facility lease of approximately 17,600 square feet in Mobile, Alabama.
On August 14, 2009, the Company, through its wholly-owned subsidiary ENGlobal
Construction Resources, Inc. ("ECR"), acquired the operations of PCI Management
and Consulting Company ("PCI"), a private Illinois based power consulting
business. As part of this acquisition the Company assumed the facility lease of
approximately 4,000 square feet of office space in Schaumburg, Illinois.
ITEM 3. LEGAL PROCEEDINGS
From time to time, ENGlobal or one or more of its subsidiaries is involved in
various legal proceedings or are subject to claims that arise in the ordinary
course of business alleging, among other things, claims of breach of contract or
negligence in connection with the performance or delivery of goods and/or
services, and the outcome of any such claims or proceedings cannot be predicted
with certainty. As of the date of this filing, all such active proceedings and
claims of substance that have been raised against any subsidiary business entity
have been adequately reserved for, or are covered by insurance, such that, if
determined adversely to those entities, individually or in the aggregate, they
would not have a material adverse effect on our results of operations or
financial position.
In June 2008, ENGlobal filed an action in the United States District Court for
the Eastern District of Louisiana; Cause No. 08-3601, against South Louisiana
Ethanol LLC ("SLE") entitled ENGlobal Engineering, Inc. and ENGlobal
Construction Resources, Inc. v. South Louisiana Ethanol, LLC. The lawsuit seeks
to enforce collection of $15.8 million owed to ENGlobal and its affiliates for
services performed on an ethanol plant in Louisiana. In August 2009, SLE filed
for Chapter 11 protection in the United States Bankruptcy Court for the Eastern
District of Louisiana, Case number 09-12676.
In November 2009, the Company filed a petition entitled ENGlobal Engineering,
Inc. v. Alon USA, L.P., Alon USA GP, LLC and Alon USA Refining, Inc. in the
162nd District Court of Dallas County, Case Number 09-15915-I. The lawsuit seeks
to enforce the collection of the $3.0 million owed to ENGlobal for services
performed for a refinery rebuild project that is remaining as amounts due on a
letter payment agreement between ENGlobal and Alon USA, LP ("Alon") and to
foreclose on its lien. The Company had previously filed a materialman's and
24
ITEM 3. LEGAL PROCEEDINGS (continued)
mechanic's lien on February 13, 2009. In Alon's answer, Alon has pled that the
Company is not entitled to any recovery because it committed a prior material
breach, has not given offsets for deficient work, has billed for work that it
did not perform or was not authorized to perform and is obligated to furnish
Alon a recoupment of previous monies paid in offset of the current debt.
Due to past due payments on accounts receivable invoices for services provided
to Bigler, LP ("Bigler") in the amount of $3.0 million, 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 v. ENGlobal Engineering, Inc.
in the 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, preserving ENGlobal's secured status. On October 30,
2009, Bigler filed a petition in U.S. Bankruptcy Court for the Southern District
of Texas (Houston), Bankruptcy Petition #09-38188. The bankruptcy has stayed
ENGlobal's collection proceedings. ENGlobal has been listed by Bigler as a
disputed, un-liquidated secured creditor. All the other lien claimants have been
listed by Bigler as disputed.
ENGlobal was named as a defendant in a lawsuit entitled EcoProduct Solutions,
L.P. v. ENGlobal Engineering and Swenson Technology, Inc. The lawsuit was filed
on October 8, 2009 in the 270th Judicial District Court of Harris County, Texas,
Case Number 2009-64881, and was based on a contract for engineering services
performed between November 2004 and August 2005 and for which ENGlobal received
approximately $700,000. EcoProduct claimed that it incurred actual damages of
$45 million and sought to recover actual, consequential and punitive damages. On
January 28, 2010, the court granted ENGlobal's Motion for Summary Judgment and
dismissed with prejudice EcoProduct's claims against ENGlobal in their entirety.
This judgment is subject to appeal. Based on information available to us at this
time, we do not believe this litigation will have a material adverse effect on
our financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of stockholders during the quarter
ended December 31, 2009.
PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information and Holders
The Company's common stock has been quoted on the NASDAQ Global Stock Market
(NASDAQ) since December 18, 2007, and is traded under the symbol "ENG." From
June 16, 1998 to December 18, 2007, the Company's stock was traded on the
American Stock Exchange. Newspaper stock listings identify us as "ENGlobal."
The following table sets forth the high and low sales prices of our common stock
for the periods indicated.
Fiscal Year Ended December 31
-------------------------------------
2009 2008
-------------- ----------------
High Low High Low
-------------- ----------------
First quarter $4.95 $2.44 $ 10.61 $ 8.35
Second quarter 6.34 4.42 14.24 8.74
Third quarter 5.15 3.97 17.85 11.58
Fourth quarter 4.13 2.78 12.30 2.35
The foregoing figures, based on information published by NASDAQ, do not reflect
retail mark-ups or markdowns and may not represent actual trades.
25
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES (continued)
As of December 31, 2009, approximately 240 stockholders of record held the
Company's common stock. We do not have current information regarding the number
of holders of beneficial interest holding our common stock.
A new class of capital stock of ENGlobal, consisting of 2,000,000 shares of
Preferred Stock, par value $0.001 per share (the "Preferred Stock") was approved
by the Company's stockholders at its June 2006 meeting. The Board of Directors
has the authority to approve the issuance of all or any of these shares of
Preferred Stock in one or more series, to determine the number of shares
constituting any series and to determine any voting powers, conversion rights,
dividend rights, and other designations, preferences, limitations, restrictions
and rights relating to such shares without any further action by the
stockholders. The designations, preferences, limitations, restrictions and
rights of any series of Preferred Stock designated by the Board of Directors
will be set forth in an amendment to the Amended and Restated Articles of
Incorporation ("Amended Articles") filed in accordance with Nevada law.
The Preferred Stock is referred to as a "blank check" because the Board of
Directors, in its discretion, is authorized to provide for the issuance of all
or any shares of the stock in one or more classes or series, specifying the
terms of the shares, subject to the limitations of Nevada law. The Board of
Directors would make a determination as to whether to approve the terms and
issuance of any shares of Preferred Stock based on its judgment as to the best
interests of the Company and its stockholders.
The reason for authorizing blank check Preferred Stock is to provide the Company
with flexibility in connection with its future growth. Although the Company
presently has no intentions of issuing shares of Preferred Stock, opportunities
may arise that require the Board to act quickly, such as businesses becoming
available for acquisition or favorable market conditions for the sale of a
particular type of Preferred Stock. The Board believes that the authorization to
issue Preferred Stock enhances the Company's ability to respond to these and
similar opportunities.
Performance Graph
The following graph compares the five-year cumulative total stockholder return
of ENGlobal Corporation as compared to the NASDAQ Market Index (US Companies) and a
self-instructed peer group index, consisting of the following companies:
Furmanite Corporation (formerly Xanser Corporation), Michael Baker Corporation,
Matrix Service Company, Tetra Tech, Inc., Willbros Group, and VSE Corporation.
The graph assumes an investment of $100.00 in our common stock and each index
(including reinvestment of dividends) on December 31, 2004 and shown through
December 31, 2009.
THE STOCK PRICE PERFORMANCE SHOWN ON THE GRAPH BELOW REPRESENTS HISTORICAL PRICE
PERFORMANCE AND IS NOT NECESSARILY INDICATIVE OF ANY FUTURE STOCK PRICE
PERFORMANCE.
(Graphic On File)
********************************************************************************
COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN
AMONG ENGLOBAL,
NASDAQ MARKET INDEX (U.S.) AND PEER GROUP INDEX
2004 2005 2006 2007 2008 2009
------ ------ ------ ------ ------ ------
ENGLOBAL CORP. 100.00 270.97 207.42 366.44 104.83 100.93
NASDAQ MARKET INDEX (U.S.) 100.00 102.13 112.18 121.67 58.64 84.30
PEER GROUP INDEX 100.00 93.70 113.50 180.19 111.86 136.74
ASSUMES $100 INVESTED ON DECEMBER 31, 2004
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING DECEMBER 31, 2009
********************************************************************************
26
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES (continued)
Notwithstanding anything to the contrary set forth in any of the Company's
previous filings under the Securities Act of 1933, as amended, or the Exchange
Act, which might incorporate future filings made by the Company under those
statutes, the Company's Stock Performance Graph will not be incorporated by
reference into any of those prior filings, nor will such report or graph be
incorporated by reference into any future filings made by the Company under
those Acts.
Equity Compensation Plan Information
The following table sets forth certain information concerning the Company's
equity compensation plans as of December 31, 2009. See Note 13 in the attached
financial statements.
Number of Securities
Remaining Available for
Number of Securities to Weighted-Average Future Issuance Under
be Issued Upon Exercise Exercise Price of Equity Compensation Plans
of Outstanding Options, Outstanding Options, [Excluding Securities in
Warrants and Rights (a) Warrants and Rights (b) Column (a)] (c)
----------------------- ----------------------- -------------------------
Equity compensation plan
approved by security
holders 1,091,104 (1) $7.12 0
----------------------- ----------------------- -------------------------
Equity incentive plan
approved by security
holders 23,439 (2) $5.12 433,125
----------------------- ----------------------- -------------------------
The Company's 1998 Incentive Plan expired in June 2008. At the June 18, 2009
Annual Meeting of Stockholders, the Company's stockholders voted to approve the
adoption of the ENGlobal Corporation 2009 Equity Incentive Plan authorizing
480,000 shares, the equivalent number of shares that remained under the expired
ENGlobal Corporation 1998 Incentive Plan.
Dividend Policy
The Company has never declared or paid a cash dividend on its common stock. The
Company intends to retain any future earnings for reinvestment in its business
and does not intend to pay cash dividends in the foreseeable future. In
addition, restrictions contained in our loan agreements governing our credit
facility with Wells Fargo Bank limit the amount of dividends that can be paid on
our common stock. The payment of dividends in the future will depend on numerous
factors, including the Company's earnings, capital requirements, and operating
and financial position as well as general business conditions.
Stock Repurchase Policy
Restrictions contained in our loan agreements governing our credit facility with
Wells Fargo Bank limit the amount of our common stock that we can repurchase.
------------------
(1) Includes options issued through our 1998 Incentive Plan. For a brief
description of the material features of the Plan, see Note 13 of the Notes to
the Consolidated Financial Statements.
(2) Includes unvested restricted stock awards issued through our 2009 Incentive
Plan. For a brief description of the material features of the Plan, see Note 13
of the Notes to the Consolidated Financial Statements.
27
ITEM 6. SELECTED FINANCIAL DATA
Summary Selected Historical Consolidated Financial Data
The following tables set forth our selected financial data. The data for the
years ended December 31, 2009, 2008, and 2007 have been derived from the audited
financial statements appearing elsewhere in this document. The data as of
December 31, 2006 and 2005 have been derived from audited financial statements
not appearing in this document. You should read the selected financial data set
forth below in conjunction with our financial statements and the notes thereto
included in Part II, Item 8; Part II, Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations;" and other financial
information appearing elsewhere in this document.
Years Ended December 31,
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2009 2008 2007 2006 2005
--------------------------------------------------------------------
(in thousands, except per share amounts)
--------------------------------------------------------------------
Statement of Operations
Revenue
Engineering $ 139,064 $ 251,702 $ 221,787 $ 215,306 $ 193,376
Construction 100,118 139,360 73,210 36,128 21,898
Automation 72,322 59,730 37,766 34,888 18,311
Land 31,958 42,540 30,464 16,768 -
------------ ------------ ------------ ------------ ------------
Total revenue $ 343,462 $ 493,332 $ 363,227 $ 303,090 $ 233,585
------------ ------------ ------------ ------------ ------------
Costs and expenses
Engineering 128,616 212,833 181,821 199,645 169,773
Construction 92,993 128,908 63,486 32,403 19,483
Automation 63,619 52,245 34,382 30,400 16,056
Land 27,181 35,539 25,921 14,378 -
Selling, general and administrative 28,027 32,208 34,291 29,884 19,689
------------ ------------ ------------ ------------ ------------
Total costs and expenses $ 340,436 $ 461,733 $ 339,901 $ 306,710 $ 225,001
------------ ------------ ------------ ------------ ------------
Operating income (loss) $ 3,026 $ 31,599 $ 23,326 $ (3,620) $ 8,584
Interest income (expense), net (573) (1,636) (2,514) (1,312) (800)
Other income (expense), net 173 64 (138) 652 116
Foreign currency gain (loss) 1 (4) (1) (19) (2)
------------ ------------ ------------ ------------ ------------
Income (loss) from continuing operations before
provision for income taxes $ 2,627 $ 30,023 $ 20,673 $ (4,299) $ 7,898
Provision for income taxes 1,394 11,765 8,209 (813) 3,116
------------ ------------ ------------ ------------ ------------
Net income (loss) $ 1,233 $ 18,258 $ 12,464 $ (3,486) $ 4,782
============ ============ ============ ============ ============
28
ITEM 6. SELECTED FINANCIAL DATA (continued)
Years Ended December 31,
--------------------------------------------------------------------
2009 2008 2007 2006 2005
--------------------------------------------------------------------
(in thousands, except per share amounts)
--------------------------------------------------------------------
Per Share Data
Basic earnings (loss) per share
Continuing operations $ 0.05 $ 0.67 $ 0.46 $ (0.13) $ 0.20
Discontinued operations - - - - -
------------ ------------ ------------ ------------ ------------
Net income (loss) per share $ 0.05 $ 0.67 $ 0.46 $ (0.13) $ 0.20
============ ============ ============ ============ ============
Weighted average common
shares outstanding - basic (000's) 27,330 27,180 26,916 26,538 24,300
Diluted earnings (loss) per share
Continuing operations $ 0.04 $ 0.66 $ 0.45 $ (0.13) $ 0.19
Discontinued operations - - - - -
------------ ------------ ------------ ------------ ------------
Net income (loss) per share $ 0.04 $ 0.66 $ 0.45 $ (0.13) $ 0.19
============ ============ ============ ============ ============
Weighted average common
shares outstanding - diluted (000's) 27,567 27,672 27,435 26,538 25,250
Cash Flow Data
Operating activities, net $ 23,002 $ 8,346 $ (1,980) $ (8,953) $ (920)
Investing activities, net (4,205) (2,871) (1,614) (9,330) (2,418)
Financing activities, net (19,673) (5,273) 3,074 19,553 3,493
Exchange rate changes 19 (110) 25 (26) (4)
------------ ------------ ------------ ------------ ------------
Net change in cash and cash equivalents $ (857) $ 92 $ (495) $ 1,244 $ 151
============ ============ ============ ============ ============
Balance Sheet Data
Working capital $ 36,308 $ 58,586 $ 42,915 $ 35,187 $ 21,825
Property and equipment, net $ 5,983 $ 5,744 $ 6,472 $ 8,725 $ 6,861
Total assets $ 110,635 $ 152,705 $ 119,590 $ 106,227 $ 75,936
Long-term debt, net of current portion $ 6,098 $ 23,614 $ 29,318 $ 27,162 $ 5,228
Long-term capital leases, net of current portion $ 51 $ 243 $ - $ - $ -
Stockholders' equity $ 78,711 $ 76,766 $ 55,797 $ 40,862 $ 39,864
Material Events and Uncertainties
---------------------------------
The Company is currently seeking to recover $15.8 million due from South
Louisiana Ethanol ("SLE") relating to work performed in 2007. The Company
believes that, given the value of the collateral securing this debt and its
collateral position, the amount due is collectible. However, collectability is
not assured and failure to collect the amount due could have a negative impact
on future earnings which is estimated (based on the current year's tax rate) to
be approximately $0.02 cents per share per million of unrecovered exposure. More
information relating to the SLE matter is included under "Legal Proceedings."
The Company is currently seeking to recover $3.0 million from Alon USA, LP
("Alon") under a letter agreement entered into on March 13, 2009. Based on
information currently available, the Company believes this amount is
collectible. However, collectability is not assured and failure to collect the
amount due could have a negative impact on future earnings which is estimated
(based on the current year's tax rate) to be approximately $0.06 per share. More
information relating to the Alon matter is included under "Legal Proceedings."
29
ITEM 6. SELECTED FINANCIAL DATA (continued)
The Company is currently seeking to recover $3.0 million from Bigler, LP
("Bigler") relating to work performed in 2008. Bigler has filed for protection
under the United States bankruptcy laws, but the Company believes that, given
the value of the collateral securing this debt and its collateral position, the
amount due is collectible. However, collectability is not assured and failure to
collect the amount due could have a negative impact on future earnings which is
estimated (based on the current year's tax rate), to be approximately $0.06 per
share. More information relating to the Bigler matter is included under "Legal
Proceedings."
Current Efforts to Mitigate Losses
----------------------------------
The Company will continue to monitor all of the above mentioned proceedings and
vigorously defend our position in all legal matters. We will pursue all
available remedies to recover its claims.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion is qualified in its entirety by, and should be read in
conjunction with, our Consolidated Financial Statements including the Notes
thereto, included elsewhere in this Annual Report on Form 10-K. Note 17 to the
Financial Statements contain segment information.
Overview
Results of Operations
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, construction,
construction management, process plant turnaround management, plant asset
management, commissioning and start-up. The Automation segment provides services
related to the design, fabrication, and implementation of process distributed
control and analyzer systems, advanced automation, information technology and
heat tracing projects. The Land segment provides land management, right-of-way,
environmental compliance, legislative affairs support and governmental
regulatory compliance services primarily to pipeline, utility and other
owner/operators of infrastructure facilities throughout the United States and
Canada.
The Company's revenue is composed of engineering, procurement and construction
service revenue and engineered systems sales. The Company recognizes service
revenue as soon as the services are performed. The majority of the Company's
engineering services have historically been provided through cost-plus contracts
whereas a majority of the Company's engineered system sales are earned on
fixed-price contracts.
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, these 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 costs and fees are included in revenue. The use of subcontractor services
can change significantly from project to project; therefore, changes in revenue
may not be indicative of 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 client contracts, but directly related
to the support of a segment's operation.
Corporate SG&A expense is comprised primarily of marketing costs, as well as
costs related to executive, governance/investor relations, finance, accounting,
safety, human resources, project controls and information technology departments
and other costs generally unrelated to specific client projects. Corporate SG&A
expense may vary as costs are incurred to support corporate activities and
initiatives.
30
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
The following table sets forth, for the periods indicated, certain financial
data derived from our consolidated statements of operations.
Consolidated Results of Operations for the Twelve Months
Ended December 31, 2009, 2008 and 2007
For the twelve months ended
December 31, 2009
(dollars in thousands) Engineering Construction Automation Land Corporate Consolidated
Revenue before eliminations $ 139,652 $ 101,808 $ 72,418 $ 31,958 $ -- $ 345,836
Inter-segment eliminations (588) (1,690) (96) -- -- (2,374)
--------- --------- --------- --------- --------- ---------
Revenue 139,064 100,118 72,322 31,958 -- 343,462 100.0%
--------- --------- --------- --------- --------- ---------
Gross profit 10,448 7,125 8,703 4,777 -- 31,053 9.1%
SG&A 6,358 1,834 4,135 2,086 13,614 28,027 8.2%
--------- --------- --------- --------- --------- ---------
Operating income 4,090 5,291 4,568 2,691 (13,614) 3,026 0.9%
--------- --------- --------- --------- ---------
Other income (expense) 174 0.1%
Interest income (expense) (573) (0.2%)
Tax provision (1,394) (0.4%)
---------
Net income $ 1,233 0.4%
=========
Diluted earnings per share $ 0.04
For the twelve months ended
December 31, 2008
(dollars in thousands) Engineering Construction Automation Land Corporate Consolidated
Revenue before eliminations $ 252,711 $ 147,714 $ 60,372 $ 42,540 $ -- $ 503,337
Inter-segment eliminations (1,009) (8,354) (642) -- -- (10,005)
--------- --------- --------- --------- --------- ---------
Revenue 251,702 139,360 59,730 42,540 -- 493,332 100.0%
--------- --------- --------- --------- --------- ---------
Gross profit 38,869 10,452 7,485 7,001 -- 63,807 12.9%
SG&A 7,083 2,993 3,741 2,887 15,504 32,208 6.5%
--------- --------- --------- --------- --------- ---------
Operating income 31,786 7,459 3,744 4,114 (15,504) 31,599 6.4%
--------- --------- --------- --------- ---------
Other income (expense) 60 0.0%
Interest income (expense) (1,636) (0.3%)
Tax provision (11,765) (2.4%)
---------
Net income $ 18,258 3.7%
=========
Diluted earnings per share $ 0.66
Increase/(Decrease) in 2009
to 2008 Operating Results
(dollars in thousands) Engineering Construction Automation Land Corporate Consolidated
Revenue before eliminations $(113,059) $ (45,906) $ 12,046 $ (10,582) $ -- $(157,501)
Inter-segment eliminations 421 6,664 546 -- -- 7,631
--------- --------- --------- --------- --------- ---------
Revenue (112,638) (39,242) 12,592 (10,582) -- (149,870) (30.4%)
--------- --------- --------- --------- --------- ---------
Gross profit (28,421) (3,327) 1,218 (2,224) -- (32,754) (51.3%)
SG&A (725) (1,159) 394 (801) (1,890) (4,181) (13.0%)
--------- --------- --------- --------- --------- ---------
Operating income (27,696) (2,168) 824 (1,423) 1,890 (28,573) (90.4%)
--------- --------- --------- --------- ---------
Other income (expense) 114 190.0%
Interest income (expense) 1,063 65.0%
Tax provision 10,371 (88.2%)
---------
Net income $ (17,025) (93.2%)
=========
Diluted earnings per share $ (0.62)
31
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
For the twelve months ended
December 31, 2007
(dollars in thousands) Engineering Construction Automation Land Corporate Consolidated
Revenue before eliminations $ 221,802 $ 86,811 $ 39,115 $ 30,464 $ -- $ 378,192
Inter-segment eliminations (15) (13,601) (1,349) -- -- (14,965)
--------- --------- --------- --------- --------- ---------
Revenue 221,787 73,210 37,766 30,464 -- 363,227 100.0%
--------- --------- --------- --------- --------- ---------
Gross profit 39,966 9,724 3,384 4,543 -- 57,617 15.9%
SG&A 11,182 2,591 3,442 2,438 14,638 34,291 9.5%
--------- --------- --------- --------- --------- ---------
Operating income 28,784 7,133 (58) 2,105 (14,638) 23,326 6.4%
--------- --------- --------- --------- ---------
Other income (expense) (139) 0.0%
Interest income (expense) (2,514) (0.7%)
Tax provision (8,209) (2.3%)
---------
Net income $ 12,464 3.4%
=========
Diluted earnings per share $ 0.45
Increase/(Decrease) in 2008
to 2007 Operating Results
(dollars in thousands) Engineering Construction Automation Land Corporate Consolidated
Revenue before eliminations $ 30,909 $ 60,903 $ 21,257 $ 12,076 $ -- $ 125,145
Inter-segment eliminations (994) 5,247 707 -- -- 4,960
--------- --------- --------- --------- --------- ---------
Revenue 29,915 66,150 21,964 12,076 -- 130,105 35.8%
--------- --------- --------- --------- --------- ---------
Gross profit (1,097) 728 4,101 2,458 -- 6,190 10.8%
SG&A (4,099) 402 299 449 866 (2,083) (6.1%)
--------- --------- --------- --------- --------- ---------
Operating income 3,002 326 3,802 2,009 (866) 8,273 35.5%
--------- --------- --------- --------- ---------
Other income (expense) 199 143.2%
Interest income (expense) 878 34.9%
Tax provision (3,556) 43.3%
---------
Net income $ 5,794 46.5%
=========
Diluted earnings per share $ 0.21
OVERALL COMPARISONS
-------------------
Revenue
-------
Of the $149.9 million overall decrease in revenue for the twelve months ended
December 31, 2009, approximately $112.6 million was attributable to our
Engineering segment, $39.3 million to our Construction segment and $10.6 million
to our Land segment, offset by an increase of $12.6 million in our Automation
segment. Of our overall revenue in 2009, $6.7 million, or 2.0% was a result of
the incremental revenue contribution from the August 2009 acquisition of PCI
Management and Consulting, and the September 2008 acquisition of Advance Control
Engineering. We had decreases in revenue in 2009 of $29.6 million, or 19.8%,
related to material and subcontractor purchases. Revenue also decreased in 2009
as a result of our clients' continued cancellation or delay of scheduled capital
projects due to the economy in general, lower energy commodity prices and lower
energy processing margins. Our clients are continuing to perform "run and
maintain" type smaller projects which focus on work for required maintenance to
keep the plant up and running but not on new capital expansions. Competition has
also increased greatly for the amount of project work on the market.
Approximately 39% of our revenue growth from 2007 to 2008 was due to additional
work created by Hurricane Ike and from a refinery rebuild project. Both of these
projects included large amounts of material and subcontractor purchases and were
32
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
completed by the first quarter of 2009. The balance of the revenue growth from
2007 to 2008 was due to an overall higher level of project activity in the
markets we serve and in particular from the increased capital spending in the
pipeline area which affected our construction, engineering and land segments.
Gross Profit
------------
The decrease in gross profit as a percentage of revenue in 2009 relative to 2008
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.
The major factor that contributed to lower gross profit margins in 2008 relative
to 2007 was an increase of $24.6 million in revenues related to low-margin and
pass-through procurement and subcontracted construction revenue. The remaining
decline was due to increased work on lower margin services such as pipeline
inspection.
Selling, General and Administrative ("SG&A") Expenses
-----------------------------------------------------
The decrease in operating SG&A expense for the twelve months ended December 31,
2009, as compared to the comparable 2008 period, primarily consisted of
decreases in bad debt expense of $1.9 million, $1.3 million in incentive bonus
accruals for cancelled or modified plans, $0.2 million in salaries and employee
related expenses and $0.4 million in office and marketing expenses, offset by
increases of $1.2 million in facilities expense and $0.3 million in depreciation
and amortization expense.
The decrease in operating SG&A expense for the twelve months ended December 31,
2008, as compared to the comparable 2007 period, primarily consisted of
decreases in bad debt expense of $2.3 million, $0.8 million in salaries and
employee related expenses, $0.5 million in depreciation and amortization
expense, and $0.1 million in professional services, offset by increases of $0.2
million in facilities expense. In 2007, the bad debt expense increased due to
the creation of the reserve on the notes receivable for the SLE project and
amortization increased by $432,000 due to the goodwill impairment in the
Automation segment. In 2007, we also realized a gain of $484,000 from the sale
of our building in Baton Rouge. Even though we did not have the significant
increase in bad debt due to the SLE project in 2008, we did have increased
amounts of general bad debt expense due to the economic instability that has
caused some customers to file bankruptcy or to otherwise be unable to pay.
The decrease in corporate SG&A expense for the twelve months ended December 31,
2009, as compared to the comparable 2008 period, was primarily the result of
decreases of $1.0 million in incentive bonus accruals for cancelled or modified
plans, $0.6 million in salaries and employee related expenses, $0.5 million in
stock compensation expense and $0.2 million in depreciation and amortization
expense, offset by increases of $0.2 million in facilities expenses and $0.2
million in office expenses. As a percentage of revenue, all other SG&A expense
increased to 4.0% for the twelve months ended December 31, 2009, from 3.2% for
the comparable prior year period.
The increase in corporate SG&A expense for the twelve months ended December 31,
2008, as compared to the comparable period in 2007, was primarily the result of
increases of $0.7 million in salaries and employee-related expenses, $0.2
million in facilities expense, $0.1 million in professional services for items
such as Sarbanes-Oxley ("SOX") compliance and professional consulting services,
and $0.2 million in amortization and depreciation expense. These increases were
offset by a decrease in stock compensation expense of $0.3 million. As a
percentage of revenue, corporate SG&A decreased from 4.0% in 2007 to 3.2% in
2008.
Operating Profit
----------------
The decrease in operating income for the twelve months ended December 31, 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. These increased
costs contributed to lower operating income as a percentage of revenue as well
as decreased contract margins in response to market pressures.
33
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
The increase in operating income for the twelve months ended December 31, 2008,
as compared to the comparable 2007 period, was primarily the result of higher
levels of project activity in the markets we serve, along with savings in SG&A.
Other Income (Expense)
----------------------
Other income in 2009 mainly consisted of $315,000 from insurance proceeds
related to Hurricane Ike 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 not related to
operations, $55,000 of reimbursements for surplus of government tax funds,
offset by expense of $56,000 in investment losses and $18,000 in tax penalties.
Other income in 2007 was derived mainly from a loss of $104,000 on the sale of
assets from the closing of our Dallas office.
Interest Income (Expense)
-------------------------
Interest expense decreased between 2009 and 2008 and between 2008 and 2007 due
to the lower balances on our line of credit and a favorable LIBOR rate option in
our Credit Agreement.
Net Income
----------
As a result of changes detailed above, Net Income decreased $17.1 million to
$1.2 million in 2009 from $18.3 million in 2008, decreasing as a percentage of
total revenue from 3.7% in 2008 to 0.4% in 2009. Net Income increased $5.8
million to $18.3 million in 2008 from $12.5 million in 2007, increasing as a
percentage of total revenue from 3.4% in 2007 to 3.7% in 2008.
34
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
2009 Compared to 2008 and 2008 Compared to 2007
Engineering Segment:
Twelve Months Ended
December 31,
------------------------------------------------------------------
2009 2008 Increase/(Decrease)
----------------- ----------------- -------------------
(dollars in thousands)
Revenue before eliminations $ 139,652 $ 252,711 $(113,059)
Inter-segment eliminations (588) (1,009) 421
--------- --------- ---------
Total revenue $ 139,064 $ 251,702 $(112,638)
========= ========= =========
Detailed revenue:
Detail-design $ 92,000 66.2% $ 168,079 66.8% $ (76,079) (45.3%)
Field services 42,879 30.8% 50,647 20.1% (7,768) (15.3%)
Procurement services 399 0.3% 30,038 11.9% (29,639) (98.7%)
Fixed-price 3,786 2.7% 2,938 1.2% 848 28.9%
--------- --------- ---------
Total revenue: $ 139,064 100.0% $ 251,702 100.0% $(112,638) (44.8%)
Gross profit: 10,448 7.5% 38,869 15.4% (28,421) (73.1%)
Operating SG&A expense: 6,358 4.6% 7,083 2.8% (725) (10.2%)
--------- --------- ---------
Operating income: $ 4,090 2.9% $ 31,786 12.6% $ (27,696) (87.1%)
========= ========= =========
Twelve Months Ended
December 31,
------------------------------------------------------------------
2008 2007 Increase/(Decrease)
----------------- ---------------- -------------------
(dollars in thousands)
Revenue before eliminations $ 252,711 $ 221,802 $ 30,909
Inter-segment eliminations (1,009) (15) (994)
--------- --------- ---------
Total revenue $ 251,702 $ 221,787 $ 29,915
========= ========= =========
Detailed revenue:
Detail-design $ 168,079 66.8% $ 132,210 59.6% $ 35,869 27.1%
Field services 50,647 20.1% 56,379 25.4% (5,732) (10.2%)
Procurement services 30,038 11.9% 16,011 7.2% 14,027 87.6%
Fixed-price 2,938 1.2% 17,187 7.8% (14,249) (82.9%)
--------- --------- ---------
Total revenue: $ 251,702 100.0% $ 221,787 100.0% $ 29,915 13.5%
Gross profit: 38,869 15.4% 39,966 18.0% (1,097) (2.7%)
Operating SG&A expense: 7,083 2.8% 11,182 5.0% (4,099) (36.7%)
--------- --------- ---------
Operating income: $ 31,786 12.6% $ 28,784 13.0% $ 3,002 10.4%
========= ========= =========
35
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Revenue
-------
Engineering revenue accounted for 40.5% of our total revenue for 2009. 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 energy commodity prices, as
well as lower energy processing margins. Our clients are continuing to perform
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 domestic chemical,
refining and pipeline sectors, but to also expand into other markets within the
energy and infrastructure sector. Renewable energy and applying Engineering's
capabilities on international projects appear to be areas of potential growth.
The Engineering segment's estimated backlog at December 31, 2009 was $100.4
million.
The increase in engineering revenue in 2008, as compared to 2007, was primarily
brought about by increased midstream and downstream capital spending in the
energy industry. Refining related activity was particularly strong, including
projects to satisfy environmental mandates, expand existing facilities and
utilize heavier sour crude. Capital spending in the pipeline area also trended
higher.
Our detail design services have been affected the most by the current economy.
After a 27.1% increase from 2007 to 2008, these revenues decreased in 2009 by
45.3%. The decrease in 2009 is mainly due to 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. In 2008, the increase was mainly due to a refinery rebuild
project.
Our field services revenues decreased by 10.2% from 2007 to 2008 and again by
15.3% from 2008 to 2009 due to general decreases in demand from our existing
customers for in-plant resources. We are beginning to see some new opportunities
for growth in this area and are exploring the possibility of acquiring new
clients.
Revenue from procurement services decreased 98.7% in 2009 but had increased by
87.6% in 2008. Both the significant decrease in 2009 and increase in 2008 is
primarily related to a large project to rebuild a client facility which was
completed in 2008. The level of procurement services varies over time depending
on the volume of procurement activity our customers choose to do themselves as
opposed to using our services.
Fixed-price revenues increased 28.9% in 2009, as compared to 2008, but had
decreased 82.9% in 2008, as compared with 2007. The decrease in 2008 was the
result of the Company's decision to be more selective in the fixed-price
contracts it undertakes due to the risk of loss if the contract costs are not
estimated accurately. However, 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 total gross profit decreased 73.1% in 2009, as
compared with 2008, and decreased 2.7% in 2008, as compared with 2007. Of the
overall decrease in gross profit for 2009, $11.0 million was attributable to
increased costs, while decreased revenues contributed to $17.4 million of the
overall decrease. As a percentage of the Engineering revenue, the Engineering
segment's gross profit decreased from 18.0% in 2007 to 15.4% in 2008 and to 7.5%
in 2009. The decrease in 2009 is partially 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 accounted for 3.4%
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 4.5% of the overall gross profit
percentage decline.
36
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
The decrease in total gross profit percentages for 2008 was due to the increase
in low margin procurement services revenue. We earn a lower margin on
procurement services than we earn on our core engineering services. For example,
procurement services for 2008 produced a 7.6% gross profit margin, whereas core
engineering services produced a gross profit margin of 20.7%. If the Company's
business shifts away from predominantly engineering projects to EPC projects
which include material procurement and construction responsibility, engineering
gross profit as a percentage of revenue will be negatively impacted. This shift
would precipitate lower gross profit because higher cost-plus margins on
engineering labor, recognized during the period in which it was earned, would be
combined with the lower margins on procurement services and construction
subcontractor charges and recorded throughout the duration of the projects. In
addition, if our business shifts more to fixed-price work, our risk assessment
and project management tools will be critical to our continued successful
operations.
Operating Selling, General and Administrative ("SG&A") Expenses
---------------------------------------------------------------
The decrease in the Engineering segment's SG&A expense in 2009 from 2008 was
mainly attributable to decreases of $1.3 million in bad debt expense, $0.2
million in professional expenses, $0.2 million in office expenses and $0.1
million in salaries and employee related expenses, offset by increases of $0.9
million in facilities expenses and $0.1 million in depreciation and amortization
expenses. The decrease in the Engineering segment's SG&A expenses in 2008 from
2007 was a result of decreases of $3.1 million in bad debt expense almost
entirely related to the creation of the reserve against the SLE notes receivable
in 2007. Also, amortization and depreciation decreased $0.2 million, salaries
and related employee expenses decreased $1.2 million, and we realized a gain of
$484,000 from the sale of our building in Baton Rouge.
Operating Income
----------------
Of the overall decrease in the Engineering segment's operating income for 2009
stated as a percent of revenues, 3.4 percentage points of change was due to
lower margin work because of client pressures for competitive bidding, 4.5
percentage points of change was due to the costs of carrying under-utilized
employees and 1.8 percentage points of change was due to increased SG&A
expenses.
Of the overall decrease in the Engineering segment's operating income for 2008
stated as a percent of revenues, 1.7 percentage points of change was due to
lower margin procurement work, 0.9 percentage points of change was due to the
additional costs of proposal work, offset by 2.2 percentage points of change due
to decreased SG&A expenses.
37
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Construction Segment:
Twelve Months Ended
December 31,
--------------------------------------------------------------------------
2009 2008 Increase/(Decrease)
---------------------- ---------------------- ---------------------
(dollars in thousands)
Revenue before eliminations $ 101,808 $ 147,714 $ (45,906)
Inter-segment eliminations (1,690) (8,354) 6,664
------------ ------------ ------------
Total revenue $ 100,118 $ 139,360 $ (39,242)
============ ============ ============
Detailed revenue:
Inspection $ 85,507 85.4% $ 125,731 90.2% $ (40,224) (32.0%)
Construction services 14,611 14.6% 13,629 9.8% 982 7.2%
------------ ------------ ------------
Total revenue: $ 100,118 100.0% $ 139,360 100.0% $ (39,242) (28.2%)
Gross profit: 7,125 7.1% 10,452 7.5% (3,327) (31.8%)
Operating SG&A expense: 1,834 1.8% 2,993 2.1% (1,159) (38.7%)
------------ ------------ ------------
Operating income: $ 5,291 5.3% $ 7,459 5.4% $ (2,168) (29.1%)
============ ============ ============
Twelve Months Ended
December 31,
--------------------------------------------------------------------------
2008 2007 Increase/(Decrease)
---------------------- ---------------------- ---------------------
(dollars in thousands)
Revenue before eliminations $ 147,714 $ 86,811 $ 60,903
Inter-segment eliminations (8,354) (13,601) 5,247
------------ ------------ ------------
Total revenue $ 139,360 $ 73,210 $ 66,150
============ ============ ============
Detailed revenue:
Inspection $ 125,731 90.2% $ 60,430 82.5% $ 65,301 108.1%
Construction services 13,629 9.8% 12,780 17.5% 849 6.7%
------------ ------------ ------------
Total revenue: $ 139,360 100.0% $ 73,210 100.0% $ 66,150 90.4%
Gross profit: 10,452 7.5% 9,724 13.3% 728 7.5%
Operating SG&A expense: 2,993 2.1% 2,591 3.5% 402 15.5%
------------ ------------ ------------
Operating income: $ 7,459 5.4% $ 7,133 9.8% $ 326 4.6%
============ ============ ============
On August 14, 2009, the Construction segment purchased the consulting operations
of PCI Management and Consulting (PCI). PCI provides consulting and project
management services specializing in projects relating to the generation,
transmission and distribution of energy. These services complement the other
services provided by our Construction segment and we anticipate that PCI's
location, in the Chicago, Illinois area, will allow us to expand the
Construction segment's service territory and that PCI will produce EPC power
project opportunities for the Company.
38
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
As a result of the acquisition, ENGlobal expects to offer expanded services in
the Chicago and surrounding areas. Results of operations are included in the
construction segment beginning August 15, 2009.
Revenue
-------
The Construction segment contributed 29.1% of our total revenue for 2009. Our
Construction segment has been adversely affected by the current economic
conditions. As a result of the lower commodity prices, narrowing of energy
processing margins and a difficult project financing environment, the
Construction segment's clients have chosen to defer and cancel significant
capital projects and reduce maintenance spending. These factors have contributed
to our decrease in revenues for 2009. Increased capital spending in the pipeline
area in 2008, particularly in inspection services, contributed to the overall
increase in revenues for 2008.
The Construction segment's estimated backlog at December 31, 2009 was $71.4
million but the backlog and previously anticipated growth expected for pipeline
and OSHA plant inspections, as well as plant turnaround and construction
management support projects and high-tech maintenance services, may be
negatively impacted by current economic conditions.
The revenue from this segment comes entirely from field services that are not
typically limited to one project. The Company's past experience with this
activity is that the term of these assignments on average spans multiple
projects and multiple years.
Gross Income
------------
Of the overall decrease in our Construction segment's gross profit for 2009,
$0.4 million was attributable to increased costs, while decreased revenues
contributed to $2.9 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. Competitive pressures to lower margins has also contributed to the
decrease in gross profit as well as increased employee related costs.
Gross profit as a percentage of the Construction segment's revenue decreased in
2008 while revenues increased significantly due to the changing mix of work
being performed in this segment. The main increase in work was in pipeline
inspection related revenues which typically carry lower margins than our other
revenues.
Operating Selling, General and Administrative ("SG&A") Expenses
---------------------------------------------------------------
The overall decrease in our Construction segment's SG&A expense for 2009 was
mainly attributable to decreases of $225,000 in bad debt expense, $801,000 in
incentive bonus accruals for cancelled or modified plans and $136,000 in
depreciation and amortization expenses.
The overall increase in our Construction segment's SG&A expense for 2008 was
mainly due to increases in salaries and related employee expenses of $239,000,
amortization and depreciation expense of $128,000 and allowances for bad debt of
$174,000. These increases were offset by savings of $120,000 in professional
services and $24,000 in facilities expense.
Operating Income
----------------
The overall decrease in our Construction segment's operating income for 2009 was
primarily attributable to the increased direct and indirect costs of
approximately 0.4%, offset by a savings in SG&A expenses of 0.3%.
The overall decrease in our Construction segment's operating income for 2008 was
primarily attributable to the lower margin pipeline work of approximately 5.8%,
offset by a savings in SG&A expenses of 1.4%.
39
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Automation Segment:
Twelve Months Ended
December 31,
------------------------------------------------------------------------
2009 2008 Increase/(Decrease)
--------------------- ---------------------- ----------------------
(dollars in thousands)
Revenue before eliminations $ 72,418 $ 60,372 $ 12,046
Inter-segment eliminations (96) (642) 546
------------ ------------ -------------
Total revenue $ 72,322 $ 59,730 $ 12,592
============ ============ =============
Detailed revenue:
Fabrication $ 35,792 49.5% $ 28,266 47.3% $ 7,526 26.6%
Non-fabrication 36,530 50.5% 31,464 52.7% 5,066 16.1%
------------ ------------ -------------
Total revenue: $ 72,322 100.0% $ 59,730 100.0% $ 12,592 21.1%
Gross profit: 8,703 12.0% 7,485 12.6% 1,218 16.3%
Operating SG&A expense: 4,135 5.7% 3,741 6.3% 394 10.5%
------------ ------------ -------------
Operating income: $ 4,568 6.3% $ 3,744 6.3% $ 824 22.0%
============ ============ =============
Twelve Months Ended
December 31,
------------------------------------------------------------------------
2008 2007 Increase/(Decrease)
--------------------- ---------------------- ----------------------
(dollars in thousands)
Revenue before eliminations $ 60,372 $ 39,115 $ 21,257
Inter-segment eliminations (642) (1,349) 707
------------ ------------ -------------
Total revenue $ 59,730 $ 37,766 $ 21,964
============ ============ =============
Detailed revenue:
Fabrication $ 28,266 47.3% $ 22,814 60.4% $ 5,452 23.9%
Non-fabrication 31,464 52.7% 14,952 39.6% 16,512 110.4%
------------ ------------ -------------
Total revenue: $ 59,730 100.0% $ 37,766 100.0% $ 21,964 58.2%
Gross profit: 7,485 12.6% 3,384 9.0% 4,101 121.2%
Operating SG&A expense: 3,741 6.3% 3,442 9.1% 299 8.7%
------------ ------------ -------------
Operating income: $ 3,744 6.3% $ (58) (0.1%) $ 3,802 6555.2%
============ ============ =============
Revenue
-------
The Automation segment contributed 21.1% of our total revenue for the year. Of
the overall increase in our Automation segment's revenue from 2008 to 2009,
approximately $5.6 million was derived from non-fabrication services that we
were able to provide as a result of the September 2008 acquisition of Advanced
Control Engineering LLC. This acquisition also allowed the Automation segment to
expand its geographic reach and customer base to include specialty chemicals and
pulp and paper markets. The remainder of the 2009 increase is due to new work
acquired as a result of our increased sales effort. Unlike our other segments,
our Automation segment is currently benefiting from greater capital spending on
international downstream projects.
40
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Of the overall increase in our Automation segment's revenue from 2007 to 2008,
approximately $8.9 million was a result of the Hurricane Ike rebuilding project.
The Automation segment's estimated backlog at December 31, 2009 was $22.5
million, but the backlog could be negatively impacted by the current and
possible future economic conditions.
Gross Profit
------------
The overall increase in our Automation segment's gross profit from 2008 to 2009
is entirely attributable to increased revenues. Of the total gross profit
percentage decrease, 0.3 percentage points were attributable to indirect costs
associated with salaries and employee related expenses as a percentage of
revenue being higher than the comparable prior year period, while the remainder
of the decrease is due to higher direct costs, as a percentage of revenue.
Of the total gross profit percentage increase from 2007 to 2008, 2.0 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, associated with more efficiently managing
projects. In 2007, an unanticipated shortage of available experienced labor
caused an increase in labor hourly rates.
Selling, General and Administrative ("SG&A") Expenses
-----------------------------------------------------
The overall increase in our Automation segment's SG&A expense from 2008 to 2009
was attributable to increases of $327,000 in depreciation and amortization
expenses, $298,000 in facilities expenses due to the relocation of the Houston
manufacturing facility, $119,000 in salaries and employee related expenses and
the remainder in professional services expense offset by savings in bad debt of
$439,000.
The overall increase in our Automation segment's SG&A expense from 2007 to 2008
was mainly due to increases in allowances for bad debt of $452,000, facilities
expense of $138,000 and stock compensation expense of $129,000. These increases
were offset by savings in amortization and depreciation expense of $365,000 due
to the goodwill impairment of $432,000 that was taken in 2007. In 2008, $100,000
of amortization was recorded in connection with the intangible assets created
from the acquisition of Advance Control Engineering, LLC and additional savings
of $61,000 was recognized in professional services.
Operating Income
----------------
The overall increases in our Automation segment's operating income for both 2009
and 2008 are mainly due to the increased levels of work along with the better
project management.
41
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Land Segment:
Twelve Months Ended
December 31,
-------------------------------------------------------------------------
2009 2008 Increase/(Decrease)
-------------------- ---------------------- -----------------------
(dollars in thousands)
Revenue before eliminations $ 31,958 $ 42,540 $ (10,582)
Inter-segment eliminations - - -
------------ ------------ -------------
Total revenue $ 31,958 100.0% $ 42,540 100.0% $ (10,582) (24.9%)
============ ============ =============
Gross profit: 4,777 14.9% 7,001 16.5% (2,224) (31.8%)
Operating SG&A expense: 2,086 6.5% 2,887 6.8% (801) (27.7%)
------------ ------------ -------------
Operating income: $ 2,691 8.4% $ 4,114 9.7% $ (1,423) (34.6%)
============ ============ =============
Twelve Months Ended
December 31,
-------------------------------------------------------------------------
2008 2007 Increase/(Decrease)
-------------------- ----------------------- -----------------------
(dollars in thousands)
Revenue before eliminations $ 42,540 $ 30,464 $ 12,076
Inter-segment eliminations - - -
------------ ------------ -------------
Total revenue $ 42,540 100.0% $ 30,464 100.0% $ 12,076 39.6%
============ ============ =============
Gross profit: 7,001 16.5% 4,543 14.9% 2,458 54.1%
Operating SG&A expense: 2,887 6.8% 2,438 8.0% 449 18.4%
------------ ------------ -------------
Operating income: $ 4,114 9.7% $ 2,105 6.9% $ 2,009 95.4%
============ ============ =============
Revenue
-------
The Land segment contributed 9.3% of our total revenues for 2009. The overall
decrease in our Land segment's revenue from 2008 to 2009 was primarily
attributable to clients delaying capital projects and competitive pricing
pressures as a result of the economic downturn.
In 2008, a general increase in capital spending by our clients contributed to
the increase in Land segment revenue as compared to its 2007 revenue. We were
also able to increase our client base in 2008.
The Land segment's estimated backlog at December 31, 2009 was $32.7 million.
However, the backlog may be negatively impacted by current and possible future
economic conditions.
Gross Profit
------------
Due to current economic conditions, we are experiencing client demands for lower
costs. As a result, some of our contracts provide lower margins than we have
earned in the past. This trend is adversely affecting gross profit in our Land
segment.
42
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Of the overall decrease in our Land segment's gross profit from 2008 to 2009,
$0.5 million was attributable to increased costs, while decreased revenues
contributed to $1.7 million of the decrease. Lower margins resulting from
competitive pressures account for approximately 0.6% of the gross profit
decrease. The remaining 1.0% decrease is attributable to increased non-billable
and indirect costs associated with compensating employees who are between
projects.
The overall increase in gross profit from 2007 to 2008 is attributed to the
ability to renegotiate our existing contracts to cover our increased costs.
Also, as a percent of revenue, gross profit increased by 1.6% from 14.9% in 2007
to 16.5% in 2008.
Selling, General and Administrative ("SG&A") Expenses
-----------------------------------------------------
The overall decrease in our Land segment's SG&A expense for 2009 was
attributable to decreases of $205,000 in marketing expenses, $628,000 in
incentive bonus accruals for cancelled or modified plans and $117,000 in
salaries and employee related expenses offset by an increase in bad debt expense
of $141,000.
The overall increase in our Land segment's SG&A expense for 2008 was primarily
due to increases of $227,000 in salaries and related employee expenses, $100,000
in allowance for bad debt, and $80,000 in marketing expenses with the remainder
of the increase occurring in facilities, professional and insurance expense.
Operating Income
----------------
The overall $1.4 million decrease in our Land segment's operating income for
2009, as compared to 2008, was due to the delayed and canceled work as well as
increased costs due to competitive pressures.
The overall $2.0 million increase in our Land segment's operating income for
2008, as compared to 2007, was due to the increased sales volume as well as
better negotiations on contract terms.
Liquidity and Capital Resources
Overview
The Company defines liquidity as its ability to pay liabilities as they become
due, fund business operations and meet monetary contractual obligations. Our
primary source of liquidity at December 31, 2009 was borrowings under our senior
revolving credit facility with Wells Fargo Bank, discussed under "Senior
Revolving Credit Facility" below (the "Wells Fargo Credit Facility"). Cash on
hand at December 31, 2009 totaled $143,000 and availability under the Wells
Fargo Credit Facility totaled $18.4 million resulting in total liquidity of
$18.5 million. We believe that we have sufficient available cash required for
operations for the next 12 months. However, cash and the availability of cash
could be materially restricted if:
(i) revenues decline as a result of the decline in the price of oil
or other economic factors,
(ii) amounts billed are not collected or are not collected in a timely
manner,
(iii) circumstances prevent the timely internal processing of invoices,
(iv) project mix shifts from cost-reimbursable to fixed-price
contracts during significant periods of growth,
(v) the Company loses one or more of its major customers,
(vi) the Company experiences cost overruns on fixed-price contracts,
(vii) our client mix shifts from our historical owner-operator client
base to more developer based clients,
(viii) future acquisitions are not integrated timely, or
(ix) we are not able to meet the covenants of the Wells Fargo Credit
Facility.
If any such event occurs, we would be forced to consider alternative financing
options.
43
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Cash Flows from Operating Activities
Operating activities provided $23.0 million and $8.4 million in net cash in 2009
and 2008 respectively but required the use of $2.0 million in net cash in 2007.
For the year ended December 31, 2009, the changes in working capital were
primarily due to the decreased trade receivables of $48.3 million, decreased
accounts payable of $10.6 million and decreased accrued compensation and
benefits of $12.9 million. The decrease in trade receivables was primarily the
result of an overall decline in operating activity. Our days sales outstanding
has decreased from 64 days for the twelve month period ended December 31, 2008
to 55 days for the twelve month period ended December 31, 2009. In June 2009,
$4.9 million of accounts receivable were reclassified to a current note
receivable based upon a letter agreement with a significant client. Therefore,
the remaining amount on the current note receivable of $3.0 million is no longer
included in our days sales outstanding calculation. 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. The decrease in
accounts payable was primarily the result of payouts of vendor and subcontractor
charges incurred by our Automation segment due to the increased activity during
the three months ended December 31, 2008, payments of $2.7 million in
subcontractor obligations related to a note receivable and the overall decline
in operating activity. The decrease in accrued compensation and benefits was
primarily due to timing of bi-weekly payroll.
In 2007, the note receivable re-classification on the SLE project was related to
the client's obligation in the principal amount of $12.3 million.
Cash Flows from Investing Activities
Investing activities used cash totaling $4.2 million in 2009, compared to $2.9
million in 2008 and $1.6 million in 2007. In 2009, investing activities were
primarily used for capital additions and the investment made to acquire the
operations of PCI. In 2008, investing activities were primarily used for capital
additions and the investment made to acquire ACE. In 2007, our investing
activities consisted of capital additions primarily for computers and technical
software applications.
Future investing activities are anticipated to remain consistent with prior
years and include capital additions for leasehold improvements, technical
applications software, and equipment, such as upgrades to computers. The Wells
Fargo Credit Facility discussed under "Senior Revolving Credit Facility" below
limits annual capital expenditures to $3.5 million.
Cash Flows from Financing Activities
Financing activities used cash totaling $19.7 million and $5.3 million in 2009
and 2008, respectively, but provided cash totaling $3.1 million in 2007. During
2009, our primary financing mechanism was our line of credit under the Comerica
Credit Facility. The line of credit was used principally to finance working
capital requirements. During 2009, our borrowings on the line of credit were
$92.8 million in the aggregate, and we repaid an aggregate of $115.4 million on
our short-term and long-term bank and other debt. During 2008, our borrowings on
the line of credit were $296.0 million in the aggregate, and we repaid an
aggregate of $301.3 million on our short-term and long-term bank and other debt.
On December 29, 2009, the Comerica Credit Facility was replaced by the Wells
Fargo Credit Facility. Our borrowings on the new line of credit were $6.0
million in the aggregate for 2009.
We anticipate that future cash flows from financing activities will be
borrowings, payments on the line of credit and payments on long-term debt
instruments. Line of credit fluctuations are a function of timing related to
operations, obligations and payments received on accounts receivable. We
estimate that payments on long-term debt, including interest for the coming
year, will be $1.2 million.
Senior Revolving Credit Facility
Historically, we have satisfied our cash requirements through operations and
borrowings under a revolving credit facility. During December 2009, the Company
entered into a new credit agreement with Wells Fargo Bank, which provides a
twenty-eight month, $25 million senior secured revolving credit facility ("Wells
44
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Fargo Credit Facility"). The Wells Fargo Credit Facility is guaranteed by
substantially all of Company's subsidiaries, is secured by substantially all of
the Company's assets, and positions Wells Fargo as senior to all other debt. The
Wells Fargo Facility replaced a $50 million senior revolving credit facility
with Comerica Bank that would have expired in August 2010. The outstanding
balance on the Wells Fargo Credit Facility as of December 31, 2009 was $6.0
million at a fluctuating rate per terms of the Wells Fargo Credit Facility. The
remaining borrowings available under the Wells Fargo Credit Facility as of
December 31, 2009 were $18.4 million after consideration of loan covenant
restrictions.
At the Company's option, amounts borrowed under the Wells Fargo Credit Facility
will bear interest at either a fluctuating rate per annum two percent (2%) above
the Daily One Month LIBOR Rate in effect from time to time or a fixed rate per
annum determined by Wells Fargo to be two percent (2%) above LIBOR in effect on
the first day of an applicable fixed rate term. The Wells Fargo Credit Facility
includes a commitment fee of 30 basis points for the unused portion of the $25
million credit facility.
At any time any portion of the debt under the Wells Fargo Credit Facility bears
interest determined in relation to LIBOR for a Fixed Rate Term, it may be
continued by the Company at the end of the Fixed Rate Term applicable thereto so
that all or a portion thereof bears interest determined in relation to the Daily
One Month LIBOR Rate or to LIBOR for a new Fixed Rate Term designated by the
Company.
The Company's Credit Facility requires the Company to maintain certain financial
covenants as of the end of each calendar quarter, including the following:
o Total Liabilities to Tangible Net Worth Ratio not greater than 2.25 to
1.00;
o Asset Coverage Ratio not less than 2.00 to 1.00; and
o Fixed Charge Coverage Ratio not less than 1.75 to 1.00;
"Total Liabilities" is defined as the aggregate of current liabilities and
non-current liabilities. "Tangible Net Worth" is defined as the aggregate of
total stockholders' equity less any intangible assets and less any loans or
advances to, or investments in, any related entities or individuals. "Asset
Coverage Ratio" is defined as accounts receivable divided by revolver balance.
"Fixed Charge Coverage Ratio" is determined on a rolling four-quarter basis and
is defined as EBITDA minus cash taxes, divided by interest expense, plus the
current maturity of long term debt, where EBITDA is net income, plus interest
expense, plus income taxes, plus depreciation and amortization, plus stock
compensation expense.
The Company was in compliance with all covenants under the Credit Facility as of
December 31, 2009. During the previous quarterly reporting period our Total
Liabilities to Tangible Net Worth Ratio ranged from 1.07 to 0.61; our Asset
Coverage Ratio ranged from 3.76 to 8.45; and our Fixed Charge Ratio ranged from
8.47 to 2.91. During the twelve month period ended December 31, 2009 we expended
or committed approximately 92%, or $3.2 million, of the $3.5 million fiscal year
covenant limitation on capital expenditures. Our office expansion in Beaumont
and the relocation of our manufacturing facility in Houston account for $1.1
million and $1.6 million respectively in leasehold and equipment costs. The $0.5
million balance of our capital expenditures for the twelve month period has been
for normal operating requirements including office furniture, computers,
software and vehicles.
For the quarterly period ended December 31, 2009 our Total Liabilities to
Tangible Net Worth Ratio and Asset Coverage Ratio covenant levels improved over
their respective average ratios for the three previous quarterly periods. The
Company's Fixed Charge Coverage Ratio for the quarterly period ended December
31, 2009 declined 53% from the average ratio of the three previous quarterly
periods.
The Wells Fargo Credit Facility also contains covenants that place certain
limitations on the Company including limits on capital expenditures, other
indebtedness, mergers, asset sales, investments, guaranties, restrictions on
certain distributions and pledges of assets. The Company was in compliance with
all covenants under the Wells Fargo Credit Facility as of December 31, 2009.
45
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Letters of Credit
As of December 31, 2009, the Company had outstanding letters of credit totaling
$611,000 primarily to cover self-insured deductibles under both our general
liability and workers' compensation insurance policies.
Long-term Debt
Our total long-term debt outstanding on December 31, 2009 was $7.2 million (see
Note 10 to Consolidated Financial Statements), a decrease from $25.7 million as
of December 31, 2008.
The following table summarizes our contractual obligations as of December 31,
2009:
Payments Due by Period
---------------------------------------------------------
2014 and
2010 2011 2012 2013 thereafter Total
------- ------- ------- ------- ---------- -------
(in thousands)
---------------------------------------------------------
Long-term debt $ 874 $ 96 $ 6,000 $ $ $ 6,970
Capital Lease 190 53 243
Contractual interest
and discount on certain notes(1) 178 140 45 363
------- ------- ------- ------- ------- -------
Subtotal long-term debt 1,242 289 6,045 7,576
Operating leases 5,583 4,539 3,022 1,553 5,227 19,924
------- ------- ------- ------- ------- -------
Total contractual cash obligations $ 6,825 $ 4,828 $ 9,067 $ 1,553 $ 5,227 $27,500
======= ======= ======= ======= ======= =======
(1)Future interest consists primarily of interest on the line of credit under
the Wells Fargo Credit Facility. The rate applicable to debt outstanding at
December 31, 2009 was 2.25% and fluctuates with the prime rate. Interest and
discount rates on the remainder of the Company's notes payable vary from 2.38%
to 6.25%, with the weighted average being 3.28% at December 31, 2009.
2009 Non-Cash Transactions
In 2009, non-cash transactions included $0.2 million discounted notes payable in
connection with the acquisition of PCI's operations. In 2008, non-cash
transactions included $1.9 million discounted notes payable issued in connection
with the acquisition of ACE. In 2007, non-cash transactions included a $1.5
million note receivable issued upon the sale of a building the Company owned in
Baton Rouge, Louisiana and a note receivable in the principal amount of $12.3
million issued to South Louisiana Ethanol ("SLE") and evidenced by a hand note.
To see details of the hand note, see Exhibits 10.19, 10.20 and 10.21 filed with
the 2007 10-K. We also acquired insurance with notes payable of $1.6 million and
$1.2 million in 2008 and 2007, respectively.
Derivative Financial Instruments
We do not hold any derivative financial instruments for trading purposes or
otherwise. Furthermore, we have not engaged in energy or commodity trading
activities and do not anticipate doing so in the future, nor do we have any
transactions involving unconsolidated entities or special purpose entities.
Long-term Notes Receivable
In the first quarter of 2007, ENGlobal Engineering, Inc. ("EEI") and South
Louisiana Ethanol, LLC ("SLE") executed an agreement for EPC services relating
to the retro-fit of an ethanol plant in southern Louisiana. The history of the
SLE project (the "Project") is described in Note 12 to the Company's financial
statements included in its Quarterly Report on Form 10-Q for the quarter ended
September 30, 2007.
After funding certain initial stages of the Project with cash, SLE obtained
temporary financing from its bridge lending bank in the amount of $20 million
until it could obtain permanent financing for the Project. The parties
anticipated that permanent financing would be obtained from other lenders no
46
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
later than August 31, 2007. SLE had engaged a major commercial bank to assist
with finding permanent financing. Further, SLE informed EEI that this commercial
bank had obtained permanent financing for numerous other ethanol facilities.
Based on this, as well as on conversations between the Company's Chief Executive
Officer and representatives of this commercial bank, EEI expected the financing
for the Project to be consummated on a timely basis. Given this expectation,
together with the favorable prices for corn and for ethanol, and the robust
credit markets, EEI believed that the Project would be successful and commenced
work in the fourth quarter of 2006.
In the late summer of 2007, although SLE was current in its payments it had not
obtained permanent financing, corn prices began to increase and ethanol prices
began to decline. Accordingly the Company decided that it was advisable to
obtain security for the amount due. On August 31, 2007, SLE executed a
collateral mortgage, a collateral note, and a promissory note in the amount of
up to $15 million, securing payment of the amount due, and the Company
re-classed the amounts receivable from SLE to a Note Receivable. In connection
with this promissory note, and as provided for under Louisiana law, SLE executed
another promissory note (the "Hand Note") on or about October 22, 2007. The Hand
Note had a principal balance of approximately $12.3 million, constituting all
amounts then due.
SLE was current on all invoices through September 18, 2007. However, on
September 20, 2007, SLE requested that EEI immediately demobilize its activity
and instruct its subcontractors to do the same. EEI complied with this request.
Because collectability was not assured, the Company reserved the amounts which
were in excess of the Hand Note. As a result, in the fourth quarter of 2007 the
Company recorded a valuation reserve and subsequent charge against bad debt
expense in the amount of $3.2 million to reduce the book value of the Note
Receivable. In the fourth quarter of 2008, the Company increased the valuation
reserve and subsequent charge against Bad Debt expense in the amount of
$559,000. As of December 31, 2008, the Company performed its impairment analysis
for the asset group classified as long-term notes receivable, particularly Notes
Receivable - South Louisiana Ethanol, of $8.6 million.
In August 2009, SLE filed for Chapter 11 protection in the U.S. Bankruptcy Court
in New Orleans. Due to the ongoing discovery and analysis currently in process
on our SLE litigation we cannot yet determine the actual proceeds that would be
generated for ENGlobal when the courts determine the status of each asset and
the relative lien priorities of SLE's creditor's, and then such assets are sold.
However, at this time management believes that, given the Company's lien
position as documented in public records, the value of the collateral will cover
the current balance sheet exposure. Any additional charge, or negative
determination by the courts, could have a negative impact on future earnings
estimated at 2.1 cents per share per million of un-recovered exposure as a
result of a non-cash charge to operations. 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.
The Company will continue to evaluate the SLE situation and, if required in the
future, make adjustments to the reserve as necessary to remain in compliance
with generally accepted accounting principles.
On March 13, 2009, the Company entered into a letter agreement (the "letter
agreement") with Alon USA, LP ("Alon") resolving the payment of due and past due
accounts receivable invoices 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.
The Company received all scheduled payments from March 2009 through September
2009, but did not receive the full amount of the scheduled $800,000 monthly
payment due on October 20, 2009, nor did the Company receive what would have
been the final payments scheduled per the letter agreement during the months of
November and December. Instead, Alon 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. As of December 31, 2009, the Company's note and its subcontractor
obligations were $3.0 million and $2.0 million respectively. 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 but,
due to the legal claim, we have reclassified this note from current to
long-term.
47
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Contingent Liabilities and Commitments
To our knowledge, the Company is not exposed to any environmental liability.
The Company does not have any product liability issues. Lease commitments are
included in Footnote 11 of the consolidated financial statements. The Company
leases all of its office space.
The Company has no off-balance sheet financing arrangements.
Income Tax Provision
On July 13, 2006, the FASB issued FIN 48, "Accounting for Uncertainty in Income
Taxes, and Related Implementation Issues," which is now codified under ASC 740,
Income Taxes. This standard provides guidance on the financial statement
recognition, measurement, presentation and disclosure of uncertain tax positions
that a company has taken or expects to take on a tax return. Under ASC 740,
financial statements should reflect expected future tax consequences of such
positions presuming the taxing authorities have full knowledge of the position
and all relevant facts. This interpretation also revises the disclosure
requirements and was adopted by the Company effective as of January 1, 2007.
There are currently no material tax positions identified as uncertain for the
Company or its subsidiaries.
We recognize interest related to uncertain tax positions in interest expense and
penalties related to uncertain tax positions in governmental penalties. As of
December 31, 2009, we have not recognized interest or penalties relating to any
uncertain tax positions.
The Company is subject to federal and state income tax audits from time to time
that could result in proposed assessments. The Company cannot predict with
certainty the timing of such audits, how these audits would be resolved and
whether the Company would be required to make additional tax payments, which may
or may not include penalties and interest.
The Company is not currently the subject of any examination by the Internal
Revenue Service, and the open years subject to audit are tax years 2006-2008.
For most states where the Company conducts business, the Company is subject to
examination for the preceding three to six years.
Asset Management
We typically sell our products and services on short-term credit and seek to
minimize our credit risk by performing credit checks and conducting our own
collection efforts. Our trade accounts receivable decreased to $47.7 million
from $96.0 million as of December 31, 2009 and 2008, respectively. The number of
days sales outstanding for trade accounts receivable decreased from 64 days at
December 31, 2008, to 55 days at December 31, 2009. In June 2009, $4.9 million
of accounts receivable were reclassified to a current note receivable based upon
a letter agreement with a significant client. Therefore, the remaining amount on
the current note receivable of $3.0 million is no longer included in our days
sales outstanding calculation. This reclassification affected the days sales
outstanding by three days. The remaining reduction was due to improved billing
and collection processes. Bad debt expense was approximately 0.2% and 0.5% of
revenue for the years ended December 31, 2009 and 2008. We decreased our
allowance for doubtful accounts from $2.3 million to $1.9 million or 2.4% and
4.0% of trade accounts receivable balance for each of the years 2008 and 2009,
respectively. While we continue to manage this portion of our business very
carefully, it is possible that our days sales outstanding, bad debt expense and
allowance for doubtful accounts will deteriorate if the economy continues to
decline.
Risk Management
In performing services for our clients, we could potentially face liability for
breach of contract, personal injury, property damage or negligence, including
professional errors and omissions. We often agree to indemnify our clients for
48
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
losses and expenses incurred as a result of our negligence and, in certain
cases, the sole or concurrent negligence of our clients. Our quality control and
assurance program includes a control function to establish standards and
procedures for performance and for documentation of project tasks, and an
assurance function to audit and to monitor compliance with procedures and
quality standards. We maintain liability insurance for bodily injury and third
party property damage, professional errors and omissions, and workers
compensation coverage, which we consider sufficient to insure against these
risks, subject to self-insured amounts.
Seasonality
Holidays and employee vacations during our fourth quarter exert downward
pressure on revenues for that quarter, which is only partially offset by the
year-end efforts on the part of many clients to spend any remaining funds
budgeted for services and capital expenditures during the year. The annual
budgeting and approval process under which these clients operate is normally not
completed until after the beginning of each year, which can depress results for
the first quarter. Principally due to these factors, our first and fourth
quarters may be less robust than our second and third quarters.
Critical Accounting Policies
Revenue Recognition
-------------------
Because the majority of the Company's revenue is recognized under cost-plus
contracts, significant estimates are generally not involved in determining
revenue recognition.
Most of our contracts are with Fortune 500 companies. As a result, collection
risk is generally not a relevant factor in the recognition of revenue. However,
timing of accounts receivable collections could have a serious impact in the
Company's liquidity. Also, the Company is engaging in more development contracts
with smaller companies. We anticipate that collection risk will be greater on
these projects and have instituted new policies relating to ascertaining the
creditworthiness of new customers. It is not clear how changes in the economy
will impact smaller companies' ability to undertake and finance these projects.
Our revenue is largely composed of engineering service revenue and product
sales. The majority of our services are provided through time-and-material
contracts (also referred to as cost-plus contracts). Some contracts have
not-to-exceed provisions that place a cap on the revenue that we may receive
under a particular contract. The contract is awarded with the maximum aggregate
revenue, referred to as the not-to-exceed amount. The Company does not earn
revenue over the not-to-exceed amount unless we obtain a change order. The
Company is not obligated to complete the contract once the not-to-exceed amount
has been reached. However, if the Company performs work over the not-to-exceed
amount prior to obtaining a valid change order, it could impact our gross profit
margins. Billings on time-and-material contracts are produced every two weeks.
On occasion, we serve as purchasing agent by procuring subcontractors, material
and equipment on behalf of a client and passing the cost on to the client with
no mark-up or profit. In accordance with ASC 605-35, "Revenue Recognition for
Construction type contracts," revenue and cost for these types of purchases are
not included in total revenue and cost. For financial reporting this
"pass-through" type of transaction is reported net. During 2007, pass-through
transactions totaled $0.5 million. We had no pass-through transactions in 2008
and 2009.
Profits and losses on fixed-price contracts are recorded on the
percentage-of-completion method of accounting, measured by the percentage of
contract costs incurred to date to estimated total contract costs for each
contract. Contract costs include amounts paid for materials, equipment and
subcontractors. Anticipated losses on uncompleted construction contracts are
charged to operations as soon as such losses can be estimated. Changes in job
performance, job conditions, estimated profitability and final contract
settlements may result in revisions to costs and income and are recognized in
the period in which the revisions are determined.
49
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
The asset, "costs and estimated earnings in excess of billings on uncompleted
contracts," represents revenue recognized in excess of amounts billed on
fixed-price contracts. The Company's inability to manage significant levels or
increases in "costs and estimated earning in excess of billings on uncompleted
contracts" could have a serious impact on the Company's cash flow. The liability
"billings in excess of costs and estimated profits on uncompleted contracts"
represents amounts billed in excess of revenue recognized on fixed-price
contracts.
Change Orders
-------------
Change orders are modifications of an original contract that effectively change
deliverables under a contract without adding new provisions. Either we or our
clients may initiate change orders. Change orders may include changes in
specifications or design, manner of performance, equipment, materials, scope of
work, and/or the period of completion of the project.
Change orders occur when changes are experienced once a contract is begun.
Change orders are sometimes documented and in most cases the terms of change
orders are agreed upon with the client before the work is performed. Other
times, circumstances may require that work progress without the client's written
agreement before the work is performed. In those cases, we are taking a risk
that the customer will not sign a change order or at a later time the customer
will seek to negotiate the pricing of the additional work. Costs related to
change orders are recognized when they are incurred. Change orders are included
in the total estimated contract revenue when it is more likely than not that the
change orders will result in a bona fide addition to value that can be reliably
estimated.
We have a favorable history of negotiating and collecting for work performed
under change orders and our bi-weekly billing cycle has proven to be timely
enough to properly account for change orders.
Goodwill
--------
Goodwill and intangible assets with indefinite useful lives are not amortized
and are tested at least annually for impairment. We perform our annual analysis
as of the fourth quarter of each fiscal year and in any period in which
indicators of impairment warrant an additional analysis. Goodwill represents the
excess of the purchase price of acquisitions over the fair value of the net
assets acquired. Reporting units for the purpose of goodwill impairment
calculations are components one level below our reportable operating segments.
Goodwill is tested for impairment using a two-step process. In step 1 of the
goodwill impairment test, the fair value of each reporting unit is determined
and compared to the carrying value of the reporting unit. In step 2, if the fair
value of the reporting unit is less than the carrying value, including goodwill,
then the goodwill is written down to the implied fair value of the goodwill
through a charge to expense.
Management utilizes a discounted cash flow analysis to determine the estimated
fair value of our reporting units. Significant judgments and assumptions
including determination of an appropriate discount rate, projecting revenue
growth and gross margins, estimating operating and interest expense and
projecting capital expenditure levels are involved in making these fair value
estimates, with the most critical estimates being projected growth rate and
discount rate. The projected growth rate incorporates the Company's 2010 budget
and management's estimate of the long-term growth rate of the Company based on
certain internal estimates and external data. The discount rate utilized in the
analysis was a weighted average cost of capital (WACC). WACC is an estimate of
the overall after-tax rate of return required by equity and debt market
participants of a business enterprise, with the weighting of returns based on
the capitalization of comparable companies. While we use the best available
information to prepare our cash flow projections and WACC assumptions, actual
future cash flows, costs of capital or market conditions could differ
significantly resulting in future impairment and charges related to recorded
goodwill balances.
Our methodologies for performing our goodwill impairment analysis have not
changed from the prior year. However, we did incorporate changes relating to
growth rate in response to current economic condition. The discount rate
increased approximately 1% for the current year analysis. Except for Automation,
the fair value of all of our reporting units substantially exceeded their
50
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
carrying value. The fair value for Automation, which has $1.8 million of
goodwill recorded as of December 31, 2009, exceeded carrying value by 7%.
Deterioration in our expected operating results or increases in our cost of
capital could have a negative effect on fair value and lead to an impairment in
the future.
A 20% decrease in our projected growth rate (holding all other assumptions
constant) would have the following impact on the estimated fair value of our
reporting units, summarized by segment:
Engineering ($6.2 million)
Construction ($1.2 million)
Automation ($0.6 million)
Land ($0.1 million)
These hypothetical changes would not cause step 2 of the goodwill impairment
test to be required for any of our reporting units.
A 1% increase in our assumed discount rate (holding all other assumptions
constant) would have the following impact on the estimated fair value of our
reporting units, summarized by segment:
Engineering ($4.0 million)
Construction ($3.0 million)
Automation ($1.6 million)
Land ($0.4 million)
These hypothetical changes would not cause step 2 of the goodwill impairment
test to be required for the reporting units within the Engineering, Construction
or Land segments. However, step 2 of the goodwill impairment test would be
required for the Automation segment.
The results of our annual goodwill impairment analysis for the years ended
December 31, 2009 and December 31, 2008 indicated no impairment to the recorded
value of our goodwill assets. The Company recognized $432,000 of impairment in
our Automation segment in 2007. If the economic downturn causes the value of one
or more of the Company's subsidiaries to decline, the Company might have
goodwill impairment in future years.
Deferred Tax
The Company had net deferred tax asset balances of $3.9 million and $4.4 million
as of December 31, 2009 and December 31, 2008, respectively. These net deferred
tax assets are identified in Footnote 15 to the financial statements.
The Company had a federal net operating loss carry-forward at December 31, 2009
of approximately $18,000. Earlier utilization of the net operating loss on the
Company's 2002 and 2003 consolidated tax returns was disallowed by the IRS which
resulted in a reinstated carry-forward that will be available for utilization
from 2008 through 2010.
The Company also has a foreign net operating loss carry-forward at December 31,
2009 of approximately $1.4 million. This loss is available for utilization from
2008 through 2017; however, application of the net operating loss is restricted
to the income of ENGlobal Canada. The Company is unsure of its ability to fully
utilize the foreign net operating loss. Therefore, the Company has set up a
valuation allowance of $567,000 against the entire net operating loss.
Recent Accounting Pronouncements
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 was 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
51
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
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.
On May 28, 2009, the FASB issued FAS 165, Subsequent Events, now codified as ASC
855, Subsequent Events, which provides guidance on management's assessment of
subsequent events. Historically, management had relied on U.S. auditing
literature for guidance on assessing and disclosing subsequent events. ASC 855
represents the inclusion of guidance on subsequent events in the accounting
literature and is directed specifically to management, since management is
responsible for preparing an entity's financial statements. ASC 855 clarifies
that management must evaluate, as of each reporting period, events or
transactions that occur after the balance sheet date through the date that the
financial statements are issued. ASC 855 was effective prospectively for interim
and annual financial periods ending after June 15, 2009. The Company has adopted
the provisions of ASC 855 effective with its reporting period ending June 30,
2009. The adoption of ASC 855 did not have a material impact on the Company's
financial condition or results of operations. The Company has evaluated
subsequent events up through the date of the filing of this report with the SEC.
In December 2007, the FASB issued FAS 141(R), Business Combinations, now
codified as ASC 805, Business Combinations. ASC 805 significantly changes the
accounting for business combinations. Under ASC 805, an acquiring entity is
required to recognize, with limited exceptions, all the assets acquired and
liabilities assumed in a transaction at the acquisition-date fair value. ASC 805
changes the accounting treatment for certain specific acquisition related items
including, among other items: (1) expensing acquisition related costs as
incurred, (2) valuing non-controlling interests at fair value at the acquisition
date, and (3) expensing restructuring costs associated with an acquired
business. ASC 805 also includes a substantial number of new disclosure
requirements. The Company adopted the provisions of ASC 805 on January 1, 2009.
The full impact to the Company, which could be material, will be dependent upon
any individual transactions consummated.
Inflation and Changing Prices
The Company is planning to incorporate certain provisions in its future
fixed-price contracts that would allow the Company to recover a portion of
certain unforeseen price changes in materials and labor that are not in the
range of normally expected inflation.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of December 31, 2009 and 2008, the Company did not participate in any
derivative financial instruments or other financial and commodity instruments
for which fair value disclosure would be required under ASC 825, Financial
Instruments or ASC 815, Derivatives and Hedging. There are no material
investments at December 31, 2009. Accordingly, the Company has no quantitative
information concerning the market risk of participating in such investments.
The Company's primary interest rate risk relates to its variable-rate line of
credit debt obligation, which totaled $6.0 million and $22.5 million as of
December 31, 2009 and 2008, respectively. Assuming a 10% increase in the
interest rate on this variable-rate debt obligation i.e., an increase from the
actual average interest rate of 2.25% as of December 31, 2009, to an average
interest rate of 2.48%, annual interest expense would have been approximately
$28,300 higher in 2009 based on our annual average line of credit obligation.
Due to the current credit market, a greater concern might be the impact of a
material violation of certain financial covenants in our Credit Agreement
resulting in a re-pricing of that agreement. This could not only result in the
increased annual interest expense but also a renewal or origination fee of equal
proportion on a similar Credit Agreement. The Company does not have any interest
rate swap or exchange agreements.
The Company has no market risk exposure in the areas of interest rate risk from
investments because the Company did not have an investment portfolio as of
December 31, 2009.
52
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (continued)
Currently, the Company does not engage in foreign currency hedging activities.
Transactions in Canadian dollars in our Canadian subsidiary have been translated
into U.S. dollars using the current rate method, such that assets and
liabilities are translated at the rates of exchange in effect at the balance
sheet date and revenue and expenses are translated at the average rates of
exchange during the appropriate fiscal period. As a result, the carrying value
of the Company's investments in Canada is subject to the risk of foreign
currency fluctuations. Additionally, any revenue received from the Company's
international operations in other than U.S. dollars will be subject to foreign
exchange risk. The percentage of revenue received from foreign customers is
identified in the discussion of segment revenue. Most revenue received from
foreign customers is paid to the Company in U. S. currency, except for revenue
collected by our Canadian subsidiaries. The Canadian dollar is not subject to
volatile price fluctuations compared to the U.S. dollar.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The audited consolidated balance sheets for ENGlobal Corporation, as of December
31, 2009 and 2008 and statements of income, cash flows and stockholders' equity
for the three-year period ended December 31, 2009, are attached hereto and made
part hereof.
INDEX
PAGE
------------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
CONSOLIDATED FINANCIAL STATEMENTS 54
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
INTERNAL CONTROL OVER FINANCIAL REPORTING 55
CONSOLIDATED BALANCE SHEETS
December 31, 2009 and 2008 56
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2009, 2008 and 2007 57
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 2009, 2008 and 2007 58
CONSOLIDATED STATEMENTS OF CASH FLOW
Years Ended December 31, 2009, 2008 and 2007 59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 60
SCHEDULE II
Valuation and Qualifying Accounts 85
53
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
CONSOLIDATED FINANCIAL STATEMENTS
Board of Directors
ENGlobal Corporation
Houston, Texas
We have audited the accompanying consolidated balance sheets of ENGlobal
Corporation and subsidiaries (the "Company") as of December 31, 2009 and 2008,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the years in the three year period ended December 31,
2009. We have also audited the schedule listed in the accompanying Item 8. These
consolidated financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements and schedule are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements and
schedule, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the
consolidated financial statements and schedule. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of ENGlobal Corporation
and subsidiaries at December 31, 2009 and 2008, and the results of their
operations and their cash flows for each of the years in the three year period
ended December 31, 2009 in conformity with accounting principles generally
accepted in the United States of America.
Also, in our opinion, the schedule presents fairly, in all material respects,
the information set forth, therein in relation to the financial statements taken
as a whole.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the Company's internal control over
financial reporting as of December 31, 2009, based on the criteria established
in Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission, and our report dated March 8, 2010,
expressed an unqualified opinion on the Company's internal control over
financial reporting.
/s/ Hein & Associates LLP,
Hein & Associates LLP
Houston, Texas
March 8, 2010
54
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER
FINANCIAL REPORTING
To the Board of Directors and Stockholders
ENGlobal Corporation
We have audited ENGlobal Corporation's internal control over financial reporting
as of December 31, 2009, based on criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). ENGlobal Corporation's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting included in the accompanying Management's
Report on Internal Control over Financial Reporting. Our responsibility is to
express an opinion on the company's internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, ENGlobal Corporation maintained effective internal control over
financial reporting as of December 31, 2009, based on criteria established in
Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
ENGlobal Corporation as of December 31, 2009 and 2008, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 2009, of ENGlobal and
our report dated March 8, 2010 expressed an unqualified opinion thereon.
/s/ Hein & Associates LLP,
Hein & Associates LLP
Houston, Texas
March 8, 2010
55
ENGLOBAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2009 AND 2008
(dollars in thousands)
ASSETS
------
Current Assets 2009 2008
--------- ---------
Cash and cash equivalents $ 143 $ 1,000
Trade receivables, net of allowances of $1,868 and $2,288 47,715 96,023
Prepaid expenses and other current assets 2,182 2,392
Current portion of notes receivable 15 59
Costs and estimated earnings in excess of billings on uncompleted contracts 6,557 6,913
Federal and state income taxes receivable 2,221 --
Deferred tax asset 3,250 4,281
--------- ---------
Total current assets $ 62,083 $ 110,668
Property and equipment, net 5,983 5,744
Goodwill 22,291 21,457
Other intangible assets, net 4,238 5,000
Long-term trade and notes receivable, net of current portion and allowances 14,621 8,636
Deferred tax asset, non-current 607 153
Other assets 812 1,047
--------- ---------
Total assets $ 110,635 $ 152,705
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities
Accounts payable $ 8,252 $ 18,830
Accrued compensation and benefits 11,511 24,432
Notes payable -- 1,058
Current portion of long-term debt and leases 1,064 1,861
Deferred rent 613 416
Billings in excess of costs and estimated earnings on uncompleted contracts 3,601 208
Federal and state income taxes payable -- 2,472
Other 734 2,805
--------- ---------
Total current liabilities $ 25,775 $ 52,082
Long-Term Debt, net of current portion 6,098 23,614
Long-Term Leases, net of current portion 51 243
--------- ---------
Total liabilities $ 31,924 $ 75,939
--------- ---------
Commitments and Contingencies (Notes 3, 10, 11, 15, and 18)
Stockholders' Equity
Common stock - $0.001 par value; 75,000,000 shares authorized; 27,407,159 and
27,294,852 shares outstanding issued at December 31, 2009 and 2008, respectively 27 27
Additional paid-in capital 37,108 36,415
Retained earnings 41,672 40,439
Accumulated other comprehensive income (loss) (96) (115)
--------- ---------
Total stockholders' equity $ 78,711 $ 76,766
--------- ---------
Total liabilities and stockholders' equity $ 110,635 $ 152,705
========= =========
See accompanying notes to these consolidated financial statements.
56
ENGLOBAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
-----------------------------------------
(dollars in thousands)
-----------------------------------------
2009 2008 2007
----------- ----------- -----------
Operating Revenue $ 343,462 $ 493,332 $ 363,227
----------- ----------- -----------
Operating Costs and Expenses:
Operating Costs 312,409 429,525 305,610
Selling, General, and Administrative Expenses 28,027 32,208 34,291
----------- ----------- -----------
Total Operating Costs and Expenses 340,436 461,733 339,901
----------- ----------- -----------
Operating Income (Loss) $ 3,026 $ 31,599 $ 23,326
Interest income/(expense), net (573) (1,636) (2,514)
Other income/(expense), net 174 60 (139)
----------- ----------- -----------
Income (loss) before provision for income taxes $ 2,627 $ 30,023 $ 20,673
Provision for Income Taxes 1,394 11,765 8,209
----------- ----------- -----------
Net Income (Loss) $ 1,233 $ 18,258 $ 12,464
=========== =========== ===========
Basic earnings (loss) per common share $ 0.05 $ 0.67 $ 0.46
Weighted average common shares outstanding 27,330 27,180 26,916
=========== =========== ===========
Diluted earnings (loss) per common share $ 0.04 $ 0.66 $ 0.45
Weighted average common shares outstanding 27,567 27,672 27,435
=========== =========== ===========
See accompanying notes to these consolidated financial statements.
57
ENGLOBAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
(in thousands)
2009 2008 2007
-------- -------- --------
Common Stock
Balance at beginning of year $ 27 $ 28 $ 28
Common stock issued -- -- --
Retirement of treasury stock -- (1) --
-------- -------- --------
Balance at end of year 27 27 28
-------- -------- --------
Paid-in Capital
Balance at beginning of year 36,415 33,593 31,147
Common stock issued 136 1,338 1,007
Stock based compensation 557 1,171 1,439
Deferred tax adjustment -- 313 --
-------- -------- --------
Balance at end of year 37,108 36,415 33,593
-------- -------- --------
Retained Earnings
Balance at beginning of year 40,439 22,181 9,717
Net income (loss) 1,233 18,258 12,464
-------- -------- --------
Balance at end of year 41,672 40,439 22,181
-------- -------- --------
Accumulated Other Comprehensive Income (Loss), net of taxes
Balance at beginning of year (115) (5) (30)
Foreign currency translation adjustment 19 (110) 25
-------- -------- --------
Balance at end of year (96) (115) (5)
-------- -------- --------
Total Stockholders' Equity $ 78,711 $ 76,766 $ 55,797
======== ======== ========
See accompanying notes to these consolidated financial statements.
58
ENGLOBAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
Years Ended December 31,
-----------------------------------
(in thousands)
-----------------------------------
2009 2008 2007
--------- --------- ---------
Cash Flows from Operating Activities
Net income (loss) $ 1,233 $ 18,258 $ 12,464
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities -
Depreciation and amortization 4,795 4,642 4,550
Goodwill impairment -- -- 432
Stock based compensation 683 1,233 1,439
Deferred income tax expense 577 (1,276) (1,962)
(Gain) Loss on disposal of property, plant and equipment 47 (100) (408)
Changes in current assets and liabilities, net of acquisitions -
Trade receivables 48,307 (30,145) (3,894)
Notes receivable (3,013) -- (12,329)
Reserve on notes receivable -- 558 3,150
Costs and estimated earnings in excess of billings 356 68 (1,591)
Prepaid expenses and other assets (127) (716) (1,652)
Long term trade receivables (2,988) -- --
Accounts payable (10,578) 8,185 (4,190)
Accrued compensation and benefits (12,921) 7,729 3,375
Billings in excess of costs and estimated earnings 3,393 (755) 423
Other liabilities (2,069) (844) (3,416)
Income taxes receivable (payable) (4,693) 1,509 1,629
--------- --------- ---------
Net cash provided by (used in) operating activities 23,002 8,346 (1,980)
--------- --------- ---------
Cash Flows from Investing Activities
Purchase of property and equipment (3,217) (1,920) (2,195)
Additional consideration for acquisitions -- -- 18
Acquisitions of businesses, net of cash acquired (1,050) (2,843) --
Proceeds from asset sales 4 398 470
Proceeds from note receivable 58 1,494 93
--------- --------- ---------
Net cash (used in) investing activities (4,205) (2,871) (1,614)
--------- --------- ---------
Cash Flows from Financing Activities
Borrowings on line of credit 98,827 295,982 175,674
Payments on line of credit (115,357) (301,287) (171,802)
Proceeds from issuance of common stock 72 1,650 1,007
Borrowings (payments) on capital lease (175) 418 --
Payments on other long-term debt (3,040) (2,036) (1,805)
--------- --------- ---------
Net cash provided by (used in) financing activities (19,673) (5,273) 3,074
--------- --------- ---------
Effect of Exchange Rate Changes on Cash 19 (110) 25
--------- --------- ---------
Net change in cash and cash equivalents (857) 92 (495)
Cash and Cash Equivalents - beginning of year 1,000 908 1,403
--------- --------- ---------
Cash and Cash Equivalents - end of year $ 143 $ 1,000 $ 908
========= ========= =========
See accompanying notes to these consolidated financial statements.
59
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
Organization and Operations
---------------------------
ENGlobal Corporation is a Nevada corporation formed in 1994. Unless the context
requires otherwise, references to "we", "us", "our", "the Company" or "ENGlobal"
are intended to mean the consolidated business and operations of ENGlobal
Corporation.
Our business operations consist of providing engineering and other professional
project services related to design, fabrication, procurement, maintenance,
environmental and other governmental compliance and construction management,
primarily with respect to energy sector infrastructure facilities throughout the
United States and Canada. Please see "Note 17-Segment Information" for a
description of our segments and segment operations.
Basis of Presentation
---------------------
The accompanying consolidated financial statements and related notes present our
consolidated financial position as of December 31, 2009 and 2008, and the
results of our operations, cash flows and changes in stockholders' equity for
the years ended December 31, 2009, 2008 and 2007. They are prepared in
accordance with accounting principles generally accepted in the United States of
America. Certain amounts for prior periods have been reclassified to conform to
the current presentation. In preparing financial statements, management makes
informed judgments and estimates that affect the reported amounts of assets and
liabilities as of the date of the financial statements and affect the reported
amounts of revenues and expenses during the reporting periods. On an ongoing
basis, management reviews its estimates, including those related to
percentage-of-completion contracts in progress, litigation, income taxes,
impairment of long-lived assets and fair values. Changes in facts and
circumstances or discovery of new information may result in revised estimates.
Actual results could differ from these estimates.
NOTE 2 -ACCOUNTING POLICIES AND NEW ACCOUNTING PRONOUNCEMENTS
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.
Cash and cash equivalents
-------------------------
Cash and cash equivalents include all cash on hand, demand deposits, and
investments with original maturities of three months or less. We consider cash
equivalents to include short-term, highly liquid investments that are readily
convertible to known amounts of cash and which are subject to an insignificant
risk of changes in value.
The company utilizes a cash management system whereby bank accounts are swept
daily to reduce outstanding balances on the Company's line of credit. Major
operating bank accounts are automatically replenished daily to meet
check-clearing requirements. Outstanding checks are recorded as a reduction of
cash when they are issued. Our checks that have not yet been paid by banks at a
reporting date are reclassified to accounts payable in the financial statements.
Amounts reclassified to accounts payable for outstanding checks were $1.3
million and $3.0 million as of December 31, 2009 and 2008 respectively.
Consolidation Policy
--------------------
Our consolidated financial statements include our accounts and those of our
majority-owned subsidiaries in which we have a controlling interest after the
elimination of all material inter-company accounts and transactions. Currently,
all of our subsidiaries are wholly-owned. We also consolidate other entities and
ventures in which we possess a controlling interest. We evaluate our financial
interests in business enterprises to determine if they represent variable
60
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
interest entities where we are the primary beneficiary. If such criteria are
met, we consolidate the financial statements of such businesses with those of
our own. We do not currently hold such interests.
While we do not currently own any significant equity interests in unconsolidated
affiliates and do not frequently conduct our business through such entities, it
is our policy to follow the equity method of accounting if our ownership
interest is between 20% and 50% and we exercise significant influence over the
operating and financial policies of an entity. Our proportionate share of
profits and losses from transactions with equity method unconsolidated
affiliates is eliminated in consolidation to the extent such amounts are
material and remain on our equity method investees' balance sheet in inventory
or similar accounts.
If our ownership interest in an investee does not provide us with either control
or significant influence over the investee, we account for the investment using
the cost method.
Comprehensive Income
--------------------
Comprehensive income includes net income and other comprehensive income.
Currently our other comprehensive income is comprised of unrealized foreign
exchange gains and losses.
Accumulated other comprehensive income is as follows:
2009 2008 2007
-------- -------- --------
(in thousands)
-------- -------- --------
Net income (loss) $ 1,233 $ 18,258 $ 12,464
Foreign currency translation adjustment (96) (115) (5)
-------- -------- --------
Comprehensive income (loss) $ 1,137 $ 18,143 $ 12,459
======== ======== ========
Concentration of Credit Risk
----------------------------
Financial instruments which potentially subject ENGlobal to concentrations of
credit risk consist primarily of trade accounts and notes receivable. Although
our services are provided largely to the energy sector, management believes the
risk due to this concentration is limited because a significant portion of our
services are provided under contracts with major integrated oil and gas
companies and other industry leaders. To the extent that the Company has entered
into contracts with smaller customers, it has incurred an increased credit risk.
We extend credit to customers and other parties in the normal course of
business. We have established various procedures to manage our credit exposure,
including initial credit approvals, credit limits and terms, letters of credit,
and occasionally through rights of offset. We also use prepayments and
guarantees to limit credit risk to ensure that our established credit criteria
are met. Our most significant exposure to credit risks relates to situations
under which we provide services early in the life of a project that is dependent
on financing. Certain of these development projects are susceptible to
unforeseen delays and other issues that expose us to reduced margins and
possible losses. Risks increase in times of general economic crisis and under
conditions that threaten project feasibility.
Estimated losses on accounts receivable are provided through an allowance for
doubtful accounts. In evaluating the level of established reserves, we make
judgments regarding each party's ability to make required payments, economic
events and other factors. As the financial condition of any party changes,
circumstances develop or additional information becomes available, adjustments
to the allowance for doubtful accounts may be required.
Earnings per share
------------------
The Company's basic earnings per share (EPS) amounts have been computed based on
the average number of shares of common stock outstanding for the period. Diluted
EPS amounts include the effect of our outstanding stock options, restricted
stock awards and restricted stock units under the treasury stock method, if
including such potential shares of common stock is dilutive. See Note 5.
61
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Debt Issue Costs
----------------
Costs incurred in connection with the issuance of long-term debt are capitalized
and charged to interest expense over the term of the related debt on a
straight-line basis, which approximates the interest method.
Goodwill and other intangible assets
------------------------------------
Goodwill represents the excess of the purchase price of acquisitions over the
fair value of the assets acquired and liabilities assumed. The Company assesses
the carrying amount of goodwill by testing the goodwill for impairment annually.
We perform a test for impairment as of the fourth quarter of each fiscal year
and in any period in which impairment indicators arise. The impairment test
requires allocating goodwill and all other assets and liabilities to business
units referred to as reporting units. The fair value of each reporting unit is
determined and compared to the carrying value of the reporting unit. If the fair
value of the reporting unit is less than the carrying value, including goodwill,
then the goodwill is written down to the implied fair value of the goodwill
through a charge to expense. Reporting units for the purpose of goodwill
impairment calculations are components one level below our operating segments.
Changes in goodwill may result from, among other things, changes in deferred
income tax liabilities related to previous acquisitions, impairments, future
acquisitions or future divestitures.
Intangible assets are comprised primarily of non-compete covenants and customer
relationships acquired through acquisitions and are amortized using the
straight-line method based on the estimated useful life of the intangible
assets.
We review intangible assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of such assets may not be
recoverable. This review consists of comparing the carrying value of the asset
with the asset's expected future undiscounted cash flows. Estimates of expected
future cash flows represent management's best estimate based on reasonable and
supportable assumptions. If such a review should indicate that the carrying
amount of intangible assets is not recoverable, we reduce the carrying amount of
such assets to fair value.
Property and Equipment
----------------------
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets. The estimated service lives of our asset
groups are as follows:
Range of
Asset Group Years
-------------------------------------- --------
Machinery and equipment 7-10
Furniture and fixtures 5-7
Computing equipment and automobiles 3-5
Software 3-5
Leasehold improvements are amortized over the term of the related lease. See
Note 7 for details related to property and equipment and related depreciation.
Expenditures for maintenance and repairs are expensed as incurred. Upon
disposition or retirement of property and equipment, any gain or loss is charged
to operations.
The Company reviews property and equipment and identifiable intangible assets
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. An impairment loss is
recognized when estimated future cash flows expected to result from the use of
an asset and its eventual disposition is less than its carrying amount.
Pre-Contract Costs
------------------
The Company expenses pre-contract costs as they are incurred. Pre-contract
costs, otherwise called Proposal costs, are recorded in accordance with ASC
605-35, "Revenue Recognition-Construction-Type Contracts", which requires that
costs that are incurred for a specific anticipated contract and that will result
62
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
in no future benefits unless the contract is obtained should not be included in
contract costs or inventory before the receipt of the contract. Costs related to
anticipated contracts are charged to expenses as incurred because their recovery
is not considered probable and they are not reinstated by a credit to income on
the subsequent receipt of the contract.
Income Taxes
------------
The Company accounts for deferred income taxes in accordance with the asset and
liability method, whereby deferred income taxes are recognized for the tax
consequences of temporary differences by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the respective tax basis of its assets and liabilities. The
provision for income taxes represents the current taxes payable or refundable
for the period plus or minus the tax effect of the net change in the deferred
tax assets and liabilities during the period. Valuation allowances are provided
for deferred tax assets when their recovery is doubtful.
The Company files income tax returns in federal, state and foreign jurisdictions
as more fully described in Note 15. It has not taken an uncertain tax position
as defined by authoritative accounting literature and does not expect to take
such a position on a tax return not yet filed.
Revenue Recognition
-------------------
Our revenue is comprised of engineering, construction management and procurement
service fees and sales of control systems that we design and fabricate. In
general, we recognize revenues when all of the following criteria are met: (1)
persuasive evidence of an exchange arrangement exists, if applicable, (2)
delivery has occurred or services have been rendered, (3) the price is fixed or
determinable, and (4) collection is reasonably assured. The Company recognizes
service revenue as the services are performed. The majority of the Company's
engineering services are provided under cost-plus contracts. A majority of sales
of fabricated systems are under fixed-price contracts that may also include a
service element covered under that contract price.
We also sometimes serve as purchasing agent by procuring subcontractors,
materials and equipment on behalf of a client and pass the cost on to the client
with no mark-up or profit. In accordance with ASC 605-35, revenues and costs for
these types of "pass-through" transactions are reported net. During 2009 and
2008, we had no pass-through transactions but in 2007, pass-through transactions
totaled $0.5 million.
Profits and losses on our fixed-price contracts are recognized on the
percentage-of-completion method of accounting, measured by the
percentage-of-contract cost incurred to date relative to estimated total
contract cost. Contract costs used for estimating percentage-of-completion
factors include professional compensation and related benefits, materials,
subcontractor services and other direct cost of projects. Freight charges and
inspection costs are charged directly to the projects to which they relate.
Costs recognized for labor include all actual employee compensation plus a
burden factor to cover estimated variable labor expenses. These variable labor
expenses consist of payroll taxes, self-insured medical plan expenses, workers
compensation insurance, general liability insurance, and paid time off. These
estimated amounts are adjusted to actual costs incurred at the end of each
quarter.
Under the percentage-of-completion method, revenue recognition is dependent upon
the accuracy of a variety of estimates, including the progress of engineering
and design efforts, material installation, labor productivity, cost estimates
and others. These estimates are based on various professional judgments and are
difficult to accurately determine until projects are significantly underway. Due
to uncertainties inherent to the estimation process, it is possible that actual
percentage-of-completion may vary materially from our estimates. Estimating
errors may cause errors in revenue recognition on uncompleted contracts and may
even result in losses on the contracts. Anticipated losses on uncompleted
contracts are charged to operations as soon as such losses can be estimated.
Changes in job performance, job conditions, estimated profitability and final
contract settlements may result in revisions to costs and revenues and are
recognized in the period in which the revisions are determined.
Occasionally, it is appropriate for us to combine or segment contracts in order
to meet requirements of ASC 605-35. Contracts are combined in those limited
circumstances when they are negotiated as a package in the same economic
63
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
environment with an overall profit margin objective and constitute, in essence,
an agreement to do a single project. In such cases, we recognize revenue and
cost over the performance period of the combined contracts as if they were one.
Contracts may be segmented if the customer has the right to accept separate
elements of a contract and the total economic returns and risks of the separate
contract elements are similar to the economic returns and risks of the overall
contract. For segmented contracts, we recognize revenue as if they were separate
contracts over the performance periods of the individual elements or phases.
Software Development Costs
--------------------------
ENGlobal capitalizes costs associated with software developed or acquired for
internal use when these criteria are met - the preliminary project stage is
completed, management authorizes funding for the project and the project is
deemed probable of completion. Capitalized costs include external costs of
materials and services incurred in obtaining and developing the software and
payroll and payroll related costs for employees in proportion to time devoted to
the project. Capitalization of these costs ceases no later than the point at
which the project is substantially complete and the software is ready for its
intended use. Software development costs are included in property and equipment
and are amortized on the straight-line basis over five years.
Stock-Based Compensation
------------------------
The Company accounts for stock-based compensation at fair value. The company
grants various types of stock-based awards including stock options and
non-vested equity shares (restricted stock awards and units). The fair value of
stock option awards is determined using the Black-Scholes option pricing model.
Restricted stock awards and units are valued using the market price of ENGlobal
common stock on the grant date. The Company records compensation cost for
stock-based compensation awards over the requisite service period (usually a
vesting period). Compensation expense is recognized net of estimated
forfeitures. As each award vests, adjustments are made to compensation cost for
any difference between estimated forfeitures and the actual forfeitures related
to the awards.
Significant Commercial Relationships
------------------------------------
The following table lists the percentage of our consolidated sales by customer,
which accounted for 10% or more of our consolidated revenues for the years
indicated:
2009 2008 2007
---- ---- ----
ExxonMobil 16% 7% 9%
Spectra Energy 6% 10% 4%
Conoco Phillips 4% 6% 10%
Motiva 3% 8% 11%
Alon USA <1% 10% <1%
Impairment of Long-Lived Assets
-------------------------------
Management reviews property and equipment for impairment whenever events or
changes in circumstances indicate that the carrying amount of such assets may
not be recoverable. The carrying amount is deemed not recoverable if it exceeds
the undiscounted sum of the cash flows expected to result from the use and
eventual disposition of the asset. Estimates of expected future cash flows
represent management's best estimate based on reasonable and supportable
assumptions. If the carrying amount is not recoverable, the impairment loss is
measured as the excess of the asset's carrying value over its fair value.
Management assesses the fair value of long-lived assets using commonly accepted
techniques, and may use more than one method, including, but not limited to,
recent third party comparable sales, internally developed discounted cash flow
analysis and analysis from outside advisors.
Recent Accounting Pronouncements
--------------------------------
Certain recently issued accounting standards that apply to our business are
discussed below in terms of their effect on the Company's financial statements.
On May 28, 2009, the FASB issued FAS 165, Subsequent Events, now codified as ASC
855, Subsequent Events, which provides guidance on management's assessment of
subsequent events. Historically, management had relied on U.S. auditing
64
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
literature for guidance on assessing and disclosing subsequent events. ASC 855
represents the inclusion of guidance on subsequent events in the accounting
literature and is directed specifically to management, since management is
responsible for preparing an entity's financial statements. ASC 855 clarifies
that management must evaluate, as of each reporting period, events or
transactions that occur after the balance sheet date through the date that the
financial statements are issued. ASC 855 is effective prospectively for interim
and annual financial periods ending after June 15, 2009. The Company has adopted
the provisions of ASC 855 effective with its reporting period ending June 30,
2009. The adoption of ASC 855 did not have a material impact on the Company's
financial condition or results of operations. The Company has evaluated
subsequent events up through the date of the filing of this report with the SEC.
In December 2007, the FASB issued FAS 141(R), Business Combinations, now
codified as ASC 805, Business Combinations. ASC 805 significantly changes the
accounting for business combinations. Under ASC 805, an acquiring entity is
required to recognize, with limited exceptions, all the assets acquired and
liabilities assumed in a transaction at the acquisition-date fair value. ASC 805
changes the accounting treatment for certain specific acquisition related items
including, among other items: (1) expensing acquisition related costs as
incurred, (2) valuing non-controlling interests at fair value at the acquisition
date, and (3) expensing restructuring costs associated with an acquired
business. ASC 805 also includes a substantial number of new disclosure
requirements. The Company adopted the provisions of ASC 805 on January 1, 2009.
The full impact to the Company, which could be material, will be dependent upon
any individual transactions consummated.
NOTE 3 - ACQUISITIONS
PCI Management and Consulting Company
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 $1,050,000 in cash and $200,000 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's services complement the services historically
provided by our Construction segment, and the Company anticipates that PCI's
location in the Chicago, Illinois area will allow the Company to establish a
strong regional base from which to serve the power market. Results of operations
are included in the Construction segment beginning August 15, 2009.
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 covenants as intangible assets. The
intangible assets were recognized at their fair values on the acquisition date
of $353,000 and $177,000 respectively, and are being amortized over five years.
The fair values were determined using an income approach methodology that is
consistent with previous similar acquisitions.
The residual portion of consideration $702,000 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.
Advanced Control Engineering, LLC
On September 29, 2008, we acquired all of the business of Advanced Control
Engineering, LLC ("ACE") for $4,484,000, including acquisition related costs.
Advanced Control provides control systems and related technical services for a
broad range of industries including the mid-stream oil and gas and refining
industry. We acquired ACE to complement the services of our existing Automation
Segment and to expand our technical intellectual talent base and geographical
and industry coverage. ACE is included in our consolidated results of operations
65
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
from October 1, 2008. We accounted for this acquisition in accordance with ASC
805, Business Combinations. The purchase price was allocated to assets acquired
and liabilities assumed based on estimated fair values of the respective assets
and liabilities at the time of closing. Amounts allocated to non-compete
covenants and customer relationships were recorded at their estimated fair
values of approximately $471,000 and $1,568,000, respectively, resulting in
approximately $1,017,000 of the purchase price being allocated to goodwill. The
allocation is summarized below.
(in thousands)
----------------
Current assets $ 1,948
Property and equipment 244
Other assets 2
Intangible assets 2,039
Goodwill 1,017
Current liabilities (689)
Deferred tax liability (77)
-------
Total $ 4,484
=======
Amounts allocated to non-compete covenants and customer relationships are
subject to amortization with an amortization period of five years and no
estimated residual values. All of the intangible assets and goodwill are
deductible for income tax purposes.
The following table presents summarized pro forma information for ENGlobal as if
the ACE acquisition occurred on January 1, 2008 and 2007.
2008 2007
------------ ------------
(in thousands except per share amounts)
Total Revenue $500,391 $372,759
Net Income $ 18,177 $ 12,408
EPS (Diluted) $ 0.66 $ 0.45
The pro forma information is presented for illustration purposes only, in
accordance with the assumptions set forth below, and is not necessarily
indicative of the operating results that would have occurred had the acquisition
been completed at the assumed date, nor is it necessarily indicative of future
operating results of the combined enterprise. The pro forma information does not
reflect any cost savings or other synergies that might be anticipated or any
future acquisition-related expenses. The pro forma adjustments are based on
estimates and assumptions.
The pro forma information for 2008 and 2007 is a result of combining the income
statement of ENGlobal with the pre-acquisition results from January 1, 2008 and
2007 of ACE adjusted for 1) recording pro forma interest expense on debt
incurred to acquire ACE; 2) amortization expense for intangible assets
recognized in applying the purchase method of accounting; and 3) the related
income tax effects of these adjustments and recognition of income taxes not
previously recognized by ACE because of its status as a limited liability
company, based on applicable statutory tax rates.
NOTE 4 - GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
--------
The Company recognized goodwill of $702,000 associated with the acquisition of
PCI Management and Consulting Company during 2009 and $1,017,000 associated with
the acquisition of Advanced Control Engineering during 2008 as discussed in Note
3.
66
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Changes in the carrying amount of goodwill by segment for 2008 and 2009 are
summarized in the following table.
Engineering Automation Construction Land Total
----------- ---------- ------------ ------- -------
(in thousands)
Balance at December 31, 2007 $13,187 $ 699 $ 2,116 $ 3,924 $19,926
Contingent consideration paid 231 -- 284 -- 515
Acquisition additions -- 1,017 -- -- 1,017
------- ------- ------- ------- -------
Balance at December 31, 2008 $13,418 $ 1,716 $ 2,400 $ 3,924 $21,458
Contingent consideration paid -- 46 85 -- 131
Acquisition additions -- -- 702 -- 702
------- ------- ------- ------- -------
Balance at December 31, 2009 $13,418 $ 1,762 $ 3,187 $ 3,924 $22,291
======= ======= ======= ======= =======
Our annual goodwill impairment analysis for the years ended December 31, 2009
and 2008 indicated that no goodwill impairments were required for any of our
reporting units for the period. Our methodologies for performing our goodwill
impairment analysis have not changed from the prior year. However, we did
incorporate changes relating to growth rate in response to current economic
condition, and the discount rate increased approximately 1% for the current year
analysis. Except for Automation, the fair value of all of our reporting units
substantially exceeded their carrying value. The fair value for Automation,
which has $1.8 million of goodwill recorded as of December 31, 2009, exceeded
carrying value by 7%. Deterioration in our expected operating results or
increases in our cost of capital could have a negative effect on fair value and
lead to an impairment in the future.
The results of our annual goodwill impairment analysis for the year ended
December 31, 2007 indicated impairment to goodwill recorded in our Automation
segment. As a result, the Company recorded an impairment charge of $432,000
during the fourth quarter of 2007. The impairment stemmed primarily from a
continuing decline in the reporting unit cash flows. The charge was a full
impairment of the goodwill recorded as a result of the merger between Industrial
Data Systems Corporation and Petrocon Engineering, Inc. in December 2001.
Intangible Assets
-----------------
The Company recognized $530,000 of intangible assets during 2009 in connection
with the acquisition of PCI Management and Consulting Company. The Company
recognized $2,039,000 of intangible assets during 2008 in connection with the
acquisition of Advanced Control Engineering. Our identifiable intangible assets
are comprised primarily of non-compete covenants and customer relationships
acquired through acquisitions. All are being amortized. The following table
summarizes the cost and accumulated amortization for each of our identifiable
intangible asset groups as of December 31, 2009 and 2008. See Note 17 for the
reportable segments to which intangible assets are assigned.
Non-Compete Customer
Covenants Relationships Total
--------- ------------- ------
(in thousands)
As of December 31, 2009
Intangible assets $4,531 $4,833 $9,364
Less: accumulated amortization 2,854 2,272 5,126
------ ------ ------
Intangible assets, net $1,677 $2,561 $4,238
====== ====== ======
As of December 31, 2008
Intangible assets $4,626 $4,486 $9,112
Less: accumulated amortization 2,737 1,375 4,112
------ ------ ------
Intangible assets, net $1,889 $3,111 $5,000
====== ====== ======
67
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Intangible assets are amortized using the straight-line method based on their
estimated useful lives. Expected amortization expense related to our amortizable
intangible assets is as follows:
Non-Compete Customer
Years Ending December 31 Covenants Relationships Total
------------------------ --------- ------------- -----
(in thousands)
2010 $ 709 $ 933 $1,642
2011 706 885 1,591
2012 129 384 513
2013 106 306 412
2014 27 53 80
------ ------ ------
$1,677 $2,561 $4,238
====== ====== ======
Weighted average amortization
period remaining at December 31, 2009 (years) 3.1 2.8
Amortization expense was $1,779,000, $1,846,000 and $1,630,000 for the three
years 2009, 2008 and 2007, respectively.
NOTE 5 - EARNINGS PER SHARE
Earnings per share were computed as follows:
Reconciliation of Earnings per Share Calculation
-------------------------------------------------------------------
2009 2008 2007
------------------- --------------------- ---------------------
Basic Diluted Basic Diluted Basic Diluted
-------- -------- --------- --------- --------- ---------
(in thousands, except per share amounts)
Net Income (Loss) $ 1,233 $ 1,233 $ 18,258 $ 18,258 $ 12,464 $ 12,464
======== ======== ========= ========= ========= =========
Weighted average number of shares
outstanding for basic 27,330 -- 27,180 -- 26,916 --
Weighted average number of shares
outstanding for diluted -- 27,567 -- 27,672 -- 27,435
Net income (loss) per share available
for common stock $ 0.05 $ 0.04 $ 0.67 $ 0.66 $ 0.46 $ 0.45
Diluted earnings per share are computed including the impact of all
potentially dilutive securities. The following table sets forth the shares
outstanding for the earnings per share calculations for the years ended
December 31, 2009, 2008 and 2007.
2009 2008 2007
------ ------ ------
(in thousands)
Common stock issued - beginning of year 27,295 27,052 26,807
Weighted average common stock issued (repurchased) 35 128 109
------ ------ ------
Shares used in computing basic earnings per share 27,330 27,180 26,916
Assumed conversion of dilutive stock options 237 492 519
------ ------ ------
Shares used in computing diluted earnings per share 27,567 27,672 27,435
====== ====== ======
The Company excluded potentially issuable shares of 788,000 and 673,000
from the computation of diluted EPS, as the effect of including the shares
would have been anti-dilutive for the three and twelve month periods ended
December 31, 2009 and 2008, respectively.
68
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - STATEMENT OF CASH FLOWS SUPPLEMENTAL INFORMATION
The following table presents a listing of the Company's significant non-cash
transactions and amounts of cash paid for interest and income taxes.
Years Ended December 31,
---------------------------
2009 2008 2007
(in thousands)
---------------------------
Non-Cash Transactions:
Acceptance of notes for asset sales $ -- $ -- $ 1,480
Issuance of note for insurance -- 1,595 1,296
Issuance of notes in connection with acquisitions-
ACE -- 1,942 --
PCI 182 -- --
Cash paid:
Interest $ 958 $ 1,703 $ 2,575
State and federal income taxes 5,474 11,256 9,025
NOTE 7 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 2009 and 2008:
2009 2008
-------- --------
(in thousands)
Computer equipment and software $ 10,600 $ 12,612
Shop equipment 1,379 1,439
Furniture and fixtures 1,590 964
Building and leasehold improvements 3,364 2,229
Autos and trucks 433 466
-------- --------
$ 17,366 $ 17,710
Accumulated depreciation and amortization (11,763) (12,115)
-------- --------
$ 5,603 $ 5,595
Leasehold Improvements and Software Implementations in process 380 149
-------- --------
Property and equipment, net $ 5,983 $ 5,744
======== ========
Depreciation expense has been $2,996,000, $2,804,000 and $2,911,000 for the
three years 2009, 2008 and 2007, respectively.
NOTE 8 - DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
The components of trade receivables as of December 31, 2009 and 2008 are as
follows:
2009 2008
-------- --------
(in thousands)
--------------------
Amounts billed $ 38,381 $ 63,765
Amounts unbilled 10,864 34,157
Retainage 338 389
Less: Allowance for uncollectible accounts (1,868) (2,288)
-------- --------
Trade receivables, net $ 47,715 $ 96,023
======== ========
69
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Subject to our reserve for uncollectible accounts, all amounts listed are
believed to be collectible within a year. The billed accounts receivable amount
includes $716,000 in claims subject to uncertainty concerning their
determination or ultimate realization due to bankruptcy issues. These claims are
fully accounted for in our reserve for uncollectible accounts. There are no
amounts unbilled representing claims or other similar items subject to
uncertainty concerning their determination or ultimate realization. In
estimating the allowance for uncollectible accounts, we consider the length of
time receivable balances have been outstanding, historical collection
experience, current economic conditions and customer specific information. When
we ultimately conclude that a receivable is uncollectible, the balance is
charged against the allowance for uncollectible accounts.
The components of long-term receivables as of December 31, 2009 and 2008 are as
follows:
2009 2008
-------- --------
(in thousands)
--------------------
Notes receivable - South Louisiana Ethanol ("SLE") $ 12,329 $ 12,329
Less: Reserve on long-term notes receivable (3,709) (3,709)
Other notes and claims receivable 6,001 16
-------- --------
$ 14,621 $ 8,636
======== ========
On August 31, 2007, SLE executed a Collateral Mortgage, a Collateral Note, and a
Promissory Note in the amount of up to $15 million, securing payment of the
amounts due. In connection with this Promissory Note, and as provided for under
Louisiana law, SLE executed another promissory note (the "Hand Note") on or
about October 22, 2007. The Hand Note had a principal balance of approximately
$12.3 million, constituting all amounts then due.
As a result, in the fourth quarter of 2007, the Company recorded a valuation
reserve and subsequent charge against Bad Debt expense in the amount of $3.2
million to reduce the book value of the Note Receivable. In the fourth quarter
of 2008, the Company increased the valuation reserve and subsequent charge
against Bad Debt expense in the amount of $559,000. As of December 31, 2008, the
Company performed its impairment analysis for the asset group classified as
long-term notes receivable, particularly Notes Receivable - South Louisiana
Ethanol, of $8.6 million.
In August 2009, SLE filed for Chapter 11 protection in the U.S. Bankruptcy Court
in New Orleans. Due to the ongoing discovery and analysis currently in process
on our SLE litigation, we cannot yet determine the actual proceeds that would be
generated for ENGlobal when the courts determine the status of each asset and
the relative lien priorities of SLE's creditors, and then such assets are sold.
However, at this time, management believes that, given the Company's lien
position as documented in public records, the value of the collateral will cover
the current balance sheet exposure. Any additional charge, or negative
determination by the courts, could have a negative impact on future earnings
estimated at 2.1 cents per share per million of un-recovered exposure as a
result of a non-cash charge to operations. 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.
The Company continues to believe that, because of the potential liquidation
value of the Collateral and the Company's favorable lien status, the Note
Receivable should be substantially collectible. Specifically, an appraisal in
December 2008 from the bridge lending bank's appraiser indicates 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 has reclassified the notes receivable of $3.0 million related to the
Alon USA, LP litigation to a long-term notes receivable. From the facts
determinable at present, we believe all amounts are collectible. However, if the
Company is unsuccessful in collecting the entire amount due, based on the
current year's tax rate, the future financial impact to EPS would be
approximately $0.06 per share.
70
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has reclassified the accounts receivable balance of $3.0 million
related to the Bigler, L.P. litigation and subsequent bankruptcy filing to a
long term claims receivable. The Company believes the lien position is favorable
and there is sufficient collateral to cover any amounts due to the Company.
However, the company continues to assess its lien priorities and other matters
related to the distribution of assets. A failure to collect a material portion
of this claim could have a material financial impact, but should not impact the
Company's liquidity position as charge-backs would be non-cash in nature. If the
Company was unsuccessful in collecting the entire amount of the current balance
of $3.0 million, based on the current year's tax rate, the future financial
impact to EPS would be approximately $0.06 per share. The Company plans to
closely monitor the bankruptcy claims and will continue to pursue all available
remedies to recover on its claims. At this time, the Company considers the claim
to be collectible. The Company has not recorded a reserve against the account
balance but has created a reserve to cover its anticipated legal expenses.
The components of other current liabilities as of December 31, 2009 and 2008 are
as follows:
2009 2008
------ ------
(in thousands)
-------------------
Reserve for known contingencies $ 676 $2,266
Accrued interest 2 255
Other 56 284
------ ------
Other current liabilities $ 734 $2,805
====== ======
Our reserve for known contingencies consists primarily of litigation accruals
and related legal fees and earnout amounts that may become due under the terms
of acquisition agreements.
NOTE 9 - FIXED-PRICE CONTRACTS
Costs, estimated earnings and billings on uncompleted contracts consisted of the
following at December 31, 2009 and 2008:
2009 2008
-------- --------
(in thousands)
--------------------
Costs incurred on uncompleted contracts $ 32,984 $ 24,893
Estimated earnings (losses) on uncompleted contracts 5,784 5,280
-------- --------
Earned revenue 38,768 30,173
Less: Billings to date 35,812 23,468
-------- --------
Net costs and estimated earnings in excess of
billings on uncompleted contracts $ 2,956 $ 6,705
======== ========
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 6,557 $ 6,913
Billings in excess of costs and estimated
earnings on uncompleted contracts (3,601) (208)
-------- --------
Net costs and estimated earnings in excess of
billings on uncompleted contracts $ 2,956 $ 6,705
======== ========
NOTE 10 - LINE OF CREDIT AND DEBT
Effective December 29, 2009, the Company entered into a new credit agreement
with Wells Fargo Bank, which provides a twenty-eight month, $25 million senior
secured revolving credit facility ("Wells Fargo Credit Facility"). The Wells
Fargo Credit Facility is guaranteed by substantially all of the Company's
subsidiaries, is secured by substantially all of the Company's assets, and
positions Wells Fargo as senior to all other debt. The Wells Fargo Facility
replaced a $50 million senior revolving credit facility with Comerica Bank that
would have expired in August 2010. The outstanding balance on the Wells Fargo
71
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Credit Facility as of December 31, 2009 was $6.0 million borrowed at a
fluctuating rate per the terms of the Wells Fargo Credit Facility. The remaining
borrowings available under the Wells Fargo Credit Facility as of December 31,
2009 were $18.4 million after consideration of loan covenant restrictions.
At the Company's option, amounts borrowed under the Wells Fargo Credit Facility
will bear interest at either a fluctuating rate per annum two percent (2%) above
the Daily One Month LIBOR Rate in effect from to time to time or a fixed rate
per annum determined by Wells Fargo to be two percent (2%) above LIBOR in effect
on the first day of an applicable fixed rate term. The Wells Fargo Credit
Facility includes a commitment fee of 30 basis points for the unused portion of
the $25 million credit facility.
At any time any portion of the debt under the Wells Fargo Credit Facility bears
interest determined in relation to LIBOR for a Fixed Rate Term, it may be
continued by the Company at the end of the Fixed Rate Term applicable thereto so
that all or a portion thereof bears interest determined in relation to the Daily
One Month LIBOR Rate or to LIBOR for a new Fixed Rate Term designated by the
Company.
The Company's Credit Facility requires the Company to maintain certain financial
covenants as of the end of each calendar quarter, including the following:
o Total Liabilities to Tangible Net Worth Ratio not greater than 2.25 to
1.00;
o Asset Coverage Ratio not less than 2.00 to 1.00; and
o Fixed Charge Coverage Ratio not less than 1.75 to 1.00;
"Total Liabilities" is defined as the aggregate of current liabilities and
non-current liabilities. "Tangible Net Worth" is defined as the aggregate of
total stockholders' equity less any intangible assets and less any loans or
advances to, or investments in, any related entities or individuals. "Asset
Coverage Ratio" is defined as accounts receivable divided by revolver balance.
"Fixed Charge Coverage Ratio" is determined on a rolling four-quarter basis and
is defined as EBITDA minus cash taxes, divided by interest expense, plus the
current maturity of long term debt, where EBITDA is net income, plus interest
expense, plus income taxes, plus depreciation and amortization, plus stock
compensation expense.
The Company was in compliance with all covenants under the Credit Facility as of
December 31, 2009. During the previous quarterly reporting period our Total
Liabilities to Tangible Net Worth Ratio ranged from 1.07 to 0.61; our Asset
Coverage Ratio ranged from 3.76 to 8.45; and our Fixed Charge Ratio ranged from
8.47 to 2.91. During the twelve month period ended December 31, 2009, we
expended or committed approximately 92%, or $3.2 million, of the $3.5 million
fiscal year covenant limitation on capital expenditures. Our office expansion in
Beaumont and the relocation of our manufacturing facility in Houston account for
$1.1 million and $1.6 million respectively in leasehold and equipment costs. The
$0.5 million balance of our capital expenditures for the twelve month period has
been for normal operating requirements including office furniture, computers,
software and vehicles.
For the quarterly period ended December 31, 2009, our Total Liabilities to
Tangible Net Worth Ratio and Asset Coverage Ratio covenant levels improved over
their respective average ratios for the three previous quarterly periods. The
Company's Fixed Charge Coverage Ratio for the quarterly period ended December
31, 2009 declined 53% from the average ratio of the three previous quarterly
periods.
The Wells Fargo Credit Facility also contains covenants that place certain
limitations on the Company including limits on capital expenditures, other
indebtedness, mergers, asset sales, investments, guarantees, restrictions on
dividends and certain distributions and pledges of assets. The Company was in
compliance with all covenants under the Wells Fargo Credit Facility as of
December 31, 2009.
Letters of Credit
-----------------
As of December 31, 2009, the Company had outstanding letters of credit totaling
$611,000 primarily to cover self-insured deductibles under both our general
liability and our workers' compensation insurance policies.
72
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Long-term debt consisted of the following at December 31, 2009 and 2008:
2009 2008
-------- --------
(in thousands)
--------------------
Comerica Credit Facility $ -- $ 22,530
Wells Fargo Credit Facility 6,000 --
The following notes are subordinate to the credit facility
and are unsecured:
Cleveland Inspection Services, Inc., CIS Technical Services and
F.D. Curtis -- 293
ATI Technologies -- 30
Michael Lee -- 900
Watco Management, Inc. 132 260
Frank H McIlwain, PC; James A Walters, PC; William M Bosarge, PC;
Matthew R Burton, PC 651 1,287
IPC Transco 187 --
-------- --------
Total long-term debt 6,970 25,300
Less: Current maturities of long-term debt (872) (1,686)
-------- --------
Long-term debt, net of current portion $ 6,098 $ 23,614
Borrowings under capital lease 243 418
Less: Current maturities of capital lease (192) (175)
-------- --------
Total long-term $ 6,149 $ 23,857
======== ========
Maturities of long-term debt as of December 31, 2009, are as follows:
Maturities
--------------
(in thousands)
--------------
Years Ending December 31,
2010 $ 1,064
2011 149
2012 6,000
---------
Total long-term debt $ 7,213
=========
73
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - OPERATING LEASES
The Company leases equipment and office space under long-term operating lease
agreements. The future minimum lease payments on leases (with initial or
remaining non-cancelable terms in excess of one year) as of December 31, 2009
are as follows:
Operating
--------------
(in thousands)
--------------
Years Ending December 31,
2010 $ 5,583
2011 4,539
2012 3,022
2013 1,553
2014 and after 5,227
----------
Total minimum lease payments $ 19,924
==========
Rent expense for the years ended December 31, 2009, 2008 and 2007 was
$5,939,000, $4,311,000 and $3,875,000, respectively. Certain of our lease
agreements may include items such as abated lease payments, capital improvement
funding, step rent provisions and escalation clauses that affect the lease
payment schedule and do not qualify as contingent rentals. These items have been
included in the minimum lease payment amount on a straight-line basis over the
minimum lease term. Any lease payments that are dependent on a factor related to
the future use of the property have been excluded from the minimum lease payment
amount and are recognized as incurred.
NOTE 12 - EMPLOYEE BENEFIT PLANS
ENGlobal sponsors a 401(k) profit sharing plan for its employees. Until January
2009, the Company made matching contributions equal to 66.66% of employee
contributions up to 6% of employee compensation for regular (as distinguished
from project or contract) employees. All other employees except our pipeline
inspectors were matched at 50% of employee contribution up to 6% of
compensation, as defined by the plan. The Company, at the direction of the Board
of Directors, may make other discretionary contributions. Our employees may
elect to make contributions pursuant to a salary reduction agreement upon
meeting age and length-of-service requirements. On January 1, 2009 due to the
current economic conditions, the Company elected to reduce its match on regular
employees to 50% and all other employees except our pipeline inspectors to
33.33% of employee contributions up to 6% of employee compensation. On April 4,
2009, the Company elected to eliminate its match on all employees. The Company
made contributions of approximately $982,000, $3,049,000, and $2,147,000,
respectively, for the years ended December 31, 2009, 2008, and 2007.
NOTE 13 - STOCK COMPENSATION PLANS
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 year until they are fully vested. Stock options
issued to directors under the Option Plan vested quarterly over a one-year
period. In 2008, options were granted to employees to acquire 140,000 shares. In
2007, no stock options were granted to employees. At the 2007 Annual Meeting of
Directors, grants of stock options were approved for 50,000 shares to each
non-employee director. All stock options granted had a strike price equal to the
market value of the Company's stock on the date of the grant by the Compensation
Committee of the Board of Directors.
In June 2009, the Company's stockholders approved a new 2009 Equity Incentive
Plan ("Equity Plan") that provides for the issuance of up to 480,000 shares of
common stock. The Equity Plan provides for grants of non-statutory options,
74
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Stock Options
-------------
Consistent with ASC 718, Stock Compensation, the Company recognizes stock
compensation expense relating to share-based payments in net income using the
fair-value measurement method. Under the fair value method, the estimated fair
value of awards is charged to expense over the requisite service period, which
is generally the vesting period.
The fair value of the 2008 and 2007 options granted to employees is estimated on
the date of grant using the Black-Scholes option-pricing model as follows:
2008 2007
------------- -------------
Series $ 9.44 $ 10.93
------------- -------------
Grant date 3/12/2008 6/14/2007
Number of options granted 140,000 150,000
Strike Price $ 9.44 $ 10.93
Market price - date of grant $ 9.44 $ 10.93
Total compensation at grant date 766,784 1,058,361
Weighted average fair value
at grant date 5.48 7.06
Assumptions
Expected life (months) 70.8 75
Risk-free rate of return 2.49% 4.93%
Expected volatility 71.1141% 76.275%
Expected dividend yield 0.00% 0.00%
Expected forfeiture rate 9.39% 9.10%
The Company did not grant any stock options in 2009.
We estimate the volatility of our stock price by using historical volatility
looking back 156 weeks. We have considered using a combination of historical and
implied volatility derived from traded options on our stock but do not believe
that it would materially impact the company's estimates of future volatility
over the expected life of the options. The expected term of options granted has
been derived from the simplified method, due to changes in vesting terms and
contractual lives of current options compared to our historical grants. We base
the estimate of the risk-free interest rate on the United States Treasury
zero-coupon yield curve in effect at the time of grant. We have never paid cash
dividends and do not currently intend to pay cash dividends; accordingly, we
have assumed a 0% dividend yield.
75
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes total aggregate stock option activity for the
period December 31, 2006 through December 31, 2009:
Vested & Weighted
Exercisable Number of Shares Average
Balance Outstanding Exercise Price
----------- ----------- --------------
Balance at December 31, 2006 1,072,294 1,422,494 5.16
Granted 150,000 10.93
Exercised (244,306) 3.05
Canceled or expired (21,688) 2.38
----------
Balance at December 31, 2007 1,099,300 1,306,500 6.26
Granted 140,000 9.44
Exercised (243,086) 5.52
Canceled or expired (30,208) 5.24
----------
Balance at December 31, 2008 1,050,606 1,173,206 6.82
Granted - -
Exercised (55,000) 1.32
Canceled or expired (27,102) 6.07
----------
Balance at December 31, 2009 1,043,104 1,091,104 7.12
=========== ===========
The following table summarizes information concerning outstanding and
exercisable Company common stock options at December 31, 2009.
Average Options
Exercise Options Remaining Fully-Vested Un-Vested Options
Prices(1) Outstanding at Contractual And Exercisable at Balance at
(series) December 31, 2009 Life December 31, 2009 December 31, 2009
-------- ----------------- ----------- ----------------- -----------------
$ 0.96 51,104 0.8 51,104 -
$ 1.00 20,000 1.2 20,000 -
$ 1.81 40,000 4.5 40,000 -
$ 1.87 20,000 3.3 20,000 -
$ 2.05 57,000 4.2 57,000 -
$ 2.32 40,000 3.4 40,000 -
$ 2.50 75,000 5.2 75,000 -
$ 3.75 150,000 5.5 150,000 -
$ 6.83 25,000 6.9 25,000 -
$ 9.15 150,000 6.4 150,000 -
$ 11.97 193,000 6.3 193,000 -
$ 10.93 150,000 7.5 150,000 -
$ 9.44 120,000 8.2 72,000 48,000
-------------- --------------- -----------------
1,091,104 1,043,104 48,000
============== =============== =================
(1)The exercise price indicates the market value at grant date and is the strike
price at exercise. For each series, the exercise price is the weighted average
exercise price of the series.
76
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31,
---------------------------------
2009 2008 2007
(dollars in thousands)
---------------------------------
Total intrinsic value of options:
Outstanding $ 737 $ 1,060 $ 6,775
Exercisable 737 1,060 6,463
Exercised during the year 107 1,416 1,605
Available for grant at December 31, 2009 433,125
Weighted-average remaining life of all options outstanding at December 31, 2009 3.6 years
Restricted Stock Units
----------------------
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 awards 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 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.
The following is a summary of the Company's restricted stock awards for the year
ended December 31, 2009:
Number of Weighted-
restricted average fair
shares value
------- --------
Unvested restricted shares at December 31, 2008 -- $ --
Granted in 2009 46,875 $ 5.12
Vested in 2009 (23,436) $ 3.63
Forfeited in 2009 -- $ --
------- --------
Unvested restricted shares at December 31, 2009 23,439 $ 5.12
The total fair value of the restricted stock that vested in the year end
December 31, 2009 was $85,000. The weighted-average remaining life of restricted
stock awards outstanding at December 31, 2009 was 0.5 years.
Compensation Expense
--------------------
The Company recognized non-cash compensation expense related to its stock
compensation plans of $0.7 million, $1.3 million and $1.4 million for the fiscal
years ended December 31, 2009, 2008 and 2007, respectively. As of December 31,
2009, unrecognized compensation expense was approximately $383,000. The weighted
average period over which total compensation related to stock options and
restricted stock awards is expected to be recognized in 18 months.
77
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 -REDEEMABLE PREFERRED STOCK AUTHORIZED
During 2006, a new class of capital stock of the Company, consisting of
2,000,000 shares of Preferred Stock, par value $0.001 per share (the "Preferred
Stock"), was approved by the Company's stockholders to replace previously
authorized but not issued preferred shares. The Board of Directors has the
authority to approve the issuance of all or any portion of these shares of
Preferred Stock in one or more series, to determine the number of shares
constituting any series and to determine any voting powers, conversion rights,
dividend rights, and other designations, preferences, limitations, restrictions
and rights relating to such shares without any further action by the
stockholders. The designations, preferences, limitations, restrictions and
rights of any series of Preferred Stock designated by the Board of Directors
will be set forth in an amendment to the Amended and Restated Articles of
Incorporation ("Amended Articles") filed in accordance with Nevada law.
The reason for authorizing this Preferred Stock is to provide the Company with
flexibility in connection with its future growth. Although the Company presently
has no intentions of issuing shares of Preferred Stock, opportunities may arise
that require the Board to act quickly, such as businesses becoming available for
acquisition or favorable market conditions for the sale of a particular type of
Preferred Stock. The Board believes that the authorization to issue Preferred
Stock is advisable in order to enhance the Company's ability to respond to these
and similar opportunities.
NOTE 15 - FEDERAL AND STATE INCOME TAXES
The components of income tax expense (benefit) from continuing operations for
the years ended December 31, 2009, 2008 and 2007 were as follows:
2009 2008 2007
-------- -------- --------
(in thousands)
--------------------------------
Current
Federal $ (91) $ 10,853 $ 8,619
Foreign 70 30 42
State 838 2,158 1,510
-------- -------- --------
817 13,041 10,171
-------- -------- --------
Deferred
Federal 524 (1,125) (1,890)
Foreign (3) 16 4
State 56 (167) (76)
-------- -------- --------
577 (1,276) (1,962)
-------- -------- --------
Total tax provision $ 1,394 $ 11,765 $ 8,209
======== ======== ========
78
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of the deferred tax asset (liability) consisted of the following
at December 31, 2009 and 2008:
2009 2008
------- -------
(in thousands)
------------------
Deferred tax asset
Allowance for doubtful accounts $ 2,063 $ 2,280
Net operating loss carry-forward 573 680
Accruals not yet deductible for tax purposes 2,074 2,632
Stock options 1,063 1,073
------- -------
Deferred tax assets 5,773 6,665
------- -------
Less: Valuation allowance (567) (553)
Deferred tax assets 5,206 6,112
------- -------
Deferred tax liabilities
Depreciation (369) (358)
Prepaid expenses (670) (601)
Goodwill (310) (719)
------- -------
Deferred tax liability (1,349) (1,678)
------- -------
Deferred tax asset, net $ 3,857 $ 4,434
======= =======
The following is a reconciliation of expected to actual income tax expense from
continuing operations:
2009 2008 2007
-------- -------- --------
(in thousands)
--------------------------------
Federal income tax expense at 35% for 2009, 35% for 2008 and $ 891 $ 10,507 $ 7,235
35% for 2007, respectively
State and foreign taxes, net of federal income tax effect 585 1,296 935
Nondeductible expenses 122 105 106
Stock compensation expense 116 133 (268)
Foreign investment 21 -- --
Valuation allowance 14 37 208
Prior year provision to return (302) -- --
Domestic production activity deduction -- (366) --
Other, net (53) 53 (7)
-------- -------- --------
Total tax provision $ 1,394 $ 11,765 $ 8,209
======== ======== ========
The Company had a federal net operating loss carry-forward at December 31, 2009
of approximately $18,000. Earlier utilization of the net operating loss on the
Company's 2002 and 2003 consolidated tax returns was disallowed by the IRS which
resulted in a reinstated carry-forward that will be available for utilization
from 2008 through 2010.
The Company also has a foreign net operating loss carry-forward at December 31,
2009 of approximately $1.4 million. This loss is available for utilization from
2008 through 2017; however, application of the net operating loss is restricted
to the income of ENGlobal Canada. The Company is unsure of its ability to fully
utilize the foreign net operating loss. Therefore, the Company has set up a
valuation allowance of $567,000 against the entire net operating loss.
On July 13, 2006, the FASB issued FIN 48, "Accounting for Uncertainty in Income
Taxes, and Related Implementation Issues," which is now codified under ASC 740,
Income Taxes. This standard provides guidance on the financial statement
recognition, measurement, presentation and disclosure of uncertain tax positions
that a company has taken or expects to take on a tax return. Under ASC 740,
financial statements should reflect expected future tax consequences of such
positions presuming the taxing authorities have full knowledge of the position
and all relevant facts. This interpretation also revises the disclosure
requirements and was adopted by the Company effective as of January 1, 2007.
There are currently no material tax positions identified as uncertain for the
Company or its' subsidiaries.
79
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We recognize interest related to uncertain tax positions in interest expense and
penalties related to uncertain tax positions in governmental penalties. As of
December 31, 2009, we have not recognized interest or penalties relating to any
uncertain tax positions.
During 2007, the Company's subsidiary, ENGlobal Land, Inc. was audited for the
pre-acquisition fiscal year ended September 30, 2005. There was no material
adjustment as a result of this audit, and it has been closed. The Company is
currently not the subject of any examination by the Internal Revenue Service,
and the open years subject to audit are currently tax years 2006-2008. In most
states where the Company conducts business, the Company is subject to
examination for the preceding three to six years.
NOTE 16 - SALE OF ASSET
During May 2008, the Company received cash proceeds of $382,000 upon completion
of the sale of property owned through, PEI Investments. The Company recognized a
gain of $84,000 on the transaction.
During June 2007, the Company completed the sale of a building in Baton Rouge,
Louisiana and recognized a gain of $483,000 on the transaction. The total sales
price was $1.85 million consisting of cash of $370,000 and a Note Receivable for
the remaining $1.48 million. During July 2008, the note was paid in full.
NOTE 17 - 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.
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, vendor and
turnaround management, plant asset management, commissioning and start-up,
instrumentation and electrical, mechanical integrity, field support and quality
assurance. The Automation segment provides services related to the design,
fabrication, and implementation of process distributed control and analyzer
systems, advanced automation, information technology and heat tracing projects.
The Land segment provides land management, right-of-way, environmental
compliance, legislative affairs support and governmental regulatory compliance
services primarily to the pipeline, utility and telecom companies and other
owner/operators of infrastructure facilities throughout the United States and
Canada.
Sales, operating income, identifiable assets, capital expenditures and
depreciation for each segment are set forth in the following table. The amount
identified as Corporate includes those activities that are not allocated to the
operating segments and include costs related to business development, executive
functions, finance, accounting, safety, human resources and information
technology that are not specifically identifiable with the segments. The
Corporate function supports all business segments and therefore cannot be
specifically assigned to any specific segment. A significant portion of
corporate costs are allocated to each segment based on each segment's revenue
and subsequently eliminated in consolidation.
Financial information about geographic areas
--------------------------------------------
Revenue from the Company's non-U.S. operations is currently not material.
Long-lived assets located in Canada are currently not material.
80
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Segment information for 2009, 2008 and 2007 is as follows:
Engineering Construction Automation Land Corporate Total
----------- ------------ ---------- ---- --------- -----
(in thousands)
------------------------------------------------------------------------------
2009
Net sales from external customers $ 139,064 $ 100,118 $ 72,322 $ 31,958 $ - $ 343,462
Inter-segment sales 588 1,690 96 - - 2,374
Operating profit (loss) 4,090 5,291 4,568 2,691 (13,614) 3,026
Depreciation and amortization 1,589 497 1,208 664 817 4,775
Tangible assets 34,791 15,983 19,273 5,345 8,714 84,106
Goodwill 13,418 3,187 1,762 3,924 - 22,291
Other intangible assets 48 504 2,488 1,198 - 4,238
Capital expenditures 1,090 25 1,797 88 217 3,217
2008
Net sales from external customers $ 251,702 $ 139,360 $ 59,730 $ 42,540 $ - $ 493,332
Inter-segment sales 1,009 8,354 642 - - 10,005
Operating profit (loss) 31,786 7,459 3,744 4,114 (15,504) 31,599
Depreciation and amortization 1,557 580 848 646 1,019 4,650
Tangible assets 58,416 21,101 31,834 7,761 7,136 126,248
Goodwill 13,418 2,400 1,716 3,924 - 21,458
Other intangible assets 120 80 3,003 1,797 - 5,000
Capital expenditures 684 166 103 52 915 1,920
2007
Net sales from external customers $ 221,787 $ 73,210 $ 37,766 $ 30,464 $ - $ 363,227
Inter-segment sales 15 13,601 1,349 - - 14,965
Operating profit (loss) 28,784 7,133 (58) 2,105 (14,638) 23,326
Depreciation and amortization 1,910 436 1,186 640 801 4,973
Tangible assets 50,077 14,928 15,393 8,775 6,379 95,552
Goodwill 13,187 2,116 699 3,924 - 19,926
Other intangible assets 1 182 1,376 2,397 - 3,956
Capital expenditures 1,123 24 420 7 621 2,195
The Engineering segment contributed 40.5% of our total revenue for 2009, as its
revenue decreased $112.6 million, or 44.8%, from $251.7 million in 2008 to
$139.1 million in 2009. The revenue in 2008 for this segment increased 13.5%, or
$29.9 million, from $221.8 million in 2007.
2009 2008 2007
----------------- ------------------- -------------------
(dollars in thousands)
Total Engineering revenue:
Detail-design 92,000 66.2% 168,079 66.8% 132,210 59.6%
Field services 42,879 30.8% 50,647 20.1% 56,379 25.4%
Procurement services 399 0.3% 30,038 11.9% 16,011 7.2%
Fixed-price 3,786 2.7% 2,938 1.2% 17,187 7.8%
---------- ------------ -----------
Total Engineering revenue: $ 139,064 100.0% $ 251,702 100.0% $ 221,787 100.0%
========== ============ ===========
81
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Construction segment contributed 29.1% of our total revenue for 2009, as its
revenue decreased $39.3 million, or 28.2%, from $139.4 million in 2008 to $100.1
million in 2009. The revenue in 2008 for this segment increased 90.4%, or $66.2
million, from $73.2 million in 2007.
2009 2008 2007
------------------ ------------------ -----------------
(dollars in thousands)
Total Construction revenue:
Pipeline 85,507 85.4% 125,731 90.2% 60,430 82.5%
Non-pipeline 14,611 14.6% 13,629 9.8% 12,780 17.5%
----------- ----------- ----------
Total Construction revenue: $ 100,118 100.0% $ 139,360 100.0% $ 73,210 100.0%
=========== =========== ==========
The Automation segment contributed 21.1% of our total revenue for 2009, as its
revenue increased $12.6 million, or 21.1%, from $59.7 million in 2008 to $72.3
million in 2009. The revenue in 2008 for this segment increased 58.2%, or $21.9
million, from $37.8 million in 2007.
2009 2008 2007
------------------- ------------------ -----------------
(dollars in thousands)
Total Automation revenue:
Fabrication 35,792 49.5% 28,266 47.3% 22,814 60.4%
Non-fabrication 36,530 50.5% 31,464 52.7% 14,952 39.6%
----------- ----------- ----------
Total Automation revenue: $ 72,322 100.0% $ 59,730 100.0% $ 37,766 100.0%
=========== =========== ==========
Tangible assets include cash, accounts receivable, costs in excess of billings,
prepaid expenses, income tax receivables, deferred tax assets, property and
equipment and deferred financing. Goodwill, other intangible assets, investments
in subsidiaries, and inter-company accounts receivables and payables are
excluded.
NOTE 18 - COMMITMENTS AND CONTINGENCIES
Employment Agreements
---------------------
The Company has employment agreements with certain of its executive officers and
certain other officers, the terms of which expire in December 2010, with the
severance terms ranging from six to twelve months. Such agreements provide for
minimum salary levels. If employment is terminated for any reason other than 1)
termination for cause, 2) voluntary resignation, or 3) employee's death, the
Company is obligated to provide a severance benefit equal to between six and
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 a
non-competition agreement. These agreements are renewable for an additional
one-year term at the Company's option. No liability is recorded for the
Company's obligations under employment agreements as the amounts that will
ultimately be paid cannot be reasonably estimated, if any.
Litigation
----------
From time to time, the Company or one or more of its subsidiaries is involved in
various legal proceedings or is subject to claims that arise in the ordinary
course of business alleging, among other things, claims of breach of contract or
negligence in connection with the performance or delivery of goods and/or
services, and the outcome of any such claims or proceedings cannot be predicted
with certainty. As of the date of this filing, all such active proceedings and
claims of substance that have been raised against any subsidiary business entity
have been adequately reserved for, or are covered by insurance, such that, if
determined adversely to those entities individually or in the aggregate, they
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 and a general umbrella policy. The
Company is not aware of any claims in excess of insurance recoveries. ENGlobal
82
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
is partially self-funded for health insurance claims. Provisions for expected
future payments are accrued based on the Company's experience. Specific stop
loss levels provide protection for the Company with $200,000 per occurrence and
approximately $15.7 million in the aggregate for each policy year being covered
by a separate insurance policy. The self-insurance liability, which is included
in the Accrued Compensation and Benefits line of the balance sheet, was $0.9
million as of December 31, 2009 and $1.4 million as of December 31, 2008.
NOTE 19 - SUBSEQUENT EVENTS
On January 28, 2010, the court granted ENGlobal's Motion for Summary Judgment
and dismissed with prejudice EcoProduct's claims against ENGlobal in their
entirety. This judgment is subject to appeal. Based on information available to
us at this time, we do not believe this litigation will have a material adverse
effect on our financial condition.
83
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
For the Quarters Ended - 2009
March June September December
------------- ------------ -------------- ------------
(in thousands, except per share amounts)
-------------------------------------------------------------------------------------
Revenue per segment
Engineering $ 42,575 45.5% $ 33,454 41.9% $ 32,008 36.7% $ 31,027 37.5%
Construction 21,237 22.8% 22,436 28.1% 28,473 32.6% 27,972 33.7%
Automation 20,591 22.0% 15,577 19.5% 19,540 22.4% 16,614 20.1%
Land 9,086 9.7% 8,412 10.5% 7,250 8.3% 7,210 8.7%
------------- ------------ ------------- ------------
Total $ 93,489 100.0% $ 79,879 100.0% $ 87,271 100.0% $ 82,823 100.0%
============= ============ ============= ============
Gross profit per segment
Engineering $ 4,616 4.9% $ 2,753 3.5% $ 1,569 1.8% $ 1,510 1.8%
Construction 1,640 1.7% 1,789 2.2% 1,802 2.1% 1,894 2.3%
Automation 2,857 3.1% 1,217 1.5% 2,748 3.1% 1,881 2.3%
Land 1,371 1.5% 1,288 1.6% 1,049 1.2% 1,069 1.3%
------------- ------------ ------------- ------------
Total $ 10,484 11.2% $ 7,047 8.8% $ 7,168 8.2% $ 6,354 7.7%
============= ============ ============= ============
Net income $ 2,013 $ 50 $ (69) $ (761)
============= ============ ============= ============
Earnings per share - basic $ 0.07 $ 0.00 $ 0.00 $ (0.03)
Earnings per share - diluted $ 0.07 $ 0.00 $ 0.00 $ (0.03)
For the Quarters Ended - 2008
March June September December
------------- ------------ -------------- ------------
(in thousands, except per share amounts)
-------------------------------------------------------------------------------------
Revenue per segment
Engineering $ 52,029 53.0% $ 77,479 57.0% $ 63,110 51.2% $ 59,084 43.4%
Construction 26,900 27.4% 35,654 26.2% 40,910 33.2% 35,896 26.4%
Automation 10,402 10.6% 11,036 8.1% 7,896 6.5% 30,396 22.4%
Land 8,835 9.0% 11,842 8.7% 11,251 9.1% 10,612 7.8%
------------- ------------ ------------- ------------
Total $ 98,166 100.0% $ 136,011 100.0% $ 123,167 100.0% $ 135,988 100.0%
============= ============ ============= ============
Gross profit per segment
Engineering $ 9,882 10.1% $ 12,779 9.4% $ 8,864 7.2% $ 7,344 5.4%
Construction 2,028 2.1% 3,988 2.9% 2,765 2.2% 1,671 1.2%
Automation 1,044 1.1% 1,362 1.0% 154 0.2% 4,925 3.6%
Land 1,392 1.4% 2,172 1.6% 1,851 1.5% 1,586 1.2%
------------- ------------ ------------- ------------
Total $ 14,346 14.7% $ 20,301 14.9% $ 13,634 11.1% $ 15,526 11.4%
============= ============ ============= ============
Net income $ 4,003 $ 6,702 $ 3,495 $ 4,059
============= ============ ============= ============
Earnings per share - basic $ 0.15 $ 0.25 $ 0.13 $ 0.15
Earnings per share - diluted $ 0.15 $ 0.24 $ 0.13 $ 0.15
84
Schedule II
-----------
ENGlobal Corporation
VALUATION AND QUALIFYING ACCOUNTS
Balance - Balance -
Beginning Deductions- End of
Description of Period Additions Write offs Period
--------------------------------------------------------------------------------------------------------
(in thousands)
-----------------------------------------
Allowance for doubtful accounts
For year ended December 31, 2009 $ 2,288 $ 728 $(1,148) $ 1,868
For year ended December 31, 2008 $ 1,405 $ 1,620 $ (737) $ 2,288
For year ended December 31, 2007 $ 670 $ 840 $ (105) $ 1,405
Reserve on current notes receivable for the year ended
December 31, 2009 $ 120 $ -- $ (120) $ --
Reserve on long-term notes receivable for the year
ended December 31, 2009 $ 3,709 $ -- $ -- $ 3,709
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
a) 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 December 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 December 31,
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.
85
ITEM 9A. CONTROLS AND PROCEDURES (continued)
b) Changes in Internal Control Over Financial Reporting
No changes in our internal control over financial reporting occurred during the
twelve months ended December 31, 2009, that materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting as that term is defined in Exchange Act Rule
13a-15(f). Our internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of our financial statements for external reporting purposes
in accordance with generally accepted accounting principles ("GAAP"). Our
internal control over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect our transactions and dispositions of our assets;
(ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of our financial statements in accordance with GAAP, and that
our receipts and expenditures are being made only in accordance with
authorizations of our management and directors; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition,
use or disposition of our assets that could have a material effect on our
financial statements.
Internal control over financial reporting cannot provide absolute assurance of
achieving financial reporting objectives because of its inherent limitations.
Internal control over financial reporting is a process that involves human
diligence and compliance and is subject to lapses in judgment and breakdowns
resulting from human failures. Internal control over financial reporting also
can be circumvented by collusion or improper management override. Because of
such limitations, there is a risk that material misstatements may not be
prevented or detected on a timely basis by internal control over financial
reporting. However, these inherent limitations are known features of the
financial reporting process. Therefore, it is possible to design safeguards into
the process to reduce, although not eliminate, this risk. In addition,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions or
because the degree of compliance with the policies or procedures may
deteriorate.
In order to evaluate the effectiveness of our internal control over financial
reporting as of December 31, 2009, as required by Section 404 of the
Sarbanes-Oxley Act of 2002, our management conducted an assessment, including
testing, based on the criteria set forth in Internal Control--Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the "COSO Framework"). A material weakness is a control deficiency,
or a combination of control deficiencies, that results in more than a remote
likelihood that a material misstatement of our annual or interim financial
statements will not be prevented or detected. In assessing the effectiveness of
our internal control over financial reporting, management did not identify a
material weakness in internal control over financial reporting as of December
31, 2009. We have concluded that our internal control over financial reporting
at December 31, 2009, was effective.
The Company's independent registered public accounting firm, Hein & Associates,
has issued the attestation report on the Company's internal control over
financial reporting as stated on page 57.
PART III
--------
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by Items 401, 405, 406, and 407(c)(3), (d)(4), and
(d)(5) of Regulation S-K will appear under the captions "Election of Directors,"
"Section 16(a) Beneficial Ownership Reporting Compliance" and "Corporate
Governance" in our 2009 Proxy Statement. For the limited purpose of providing
the information necessary to comply with this Item 10, the 2009 Proxy Statement
is incorporated herein by this reference.
86
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (continued)
We have adopted a written code of conduct that applies to our directors,
officers, and employees. In addition, we have a code of ethics specific for our
chief executive officer, chief financial officer, and senior accounting officers
or persons performing similar functions. Both codes can be found on our web
site, which is located at www.englobal.com, and are also exhibits to this
report. We intend to make all required disclosures concerning any amendments to,
or waivers from, our code of ethics on our web site.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 402 and paragraphs (e)(4) and (e)(5) of Item
407 of Regulation S-K will appear under the captions "Director Compensation" and
"Executive Compensation Tables" including "Compensation Discussion and
Analysis," "Compensation Committee Interlocks and Insider Participation" and
"Compensation Committee Report" in our 2009 Proxy Statement. For the limited
purpose of providing the information necessary to comply with this Item 11, the
2009 Proxy Statement is incorporated herein by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Items 201(d) and 403 of Regulation S-K will appear
under the headings "Beneficial Ownership of Common Stock" and "Securities
Authorized for Issuance under Equity Compensation Plans" in our 2009 Proxy
Statement. For the limited purpose of providing the information necessary to
comply with this Item 12, the 2009 Proxy Statement is incorporated herein by
this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Items 404 and 407(a) of Regulation S-K will appear
under the captions "Certain Relationships and Related Transactions" and
"Director Independence" in our 2009 Proxy Statement. For the limited purpose of
providing the information necessary to comply with this Item 13, the 2009 Proxy
Statement is incorporated herein by this reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
This information required by Item 9(e) of Schedule 14A will appear under the
caption "Principal Auditor Fees and Services" in our 2009 Proxy Statement. For
the limited purpose of providing the information necessary to comply with this
Item 14, the 2009 Proxy Statement is incorporated herein by this reference.
PART IV
-------
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES
(a)(1) Financial Statements
The consolidated financial statements filed as part of this Form
10-K are listed and indexed in Part II, Item 8.
(a)(2) Schedules
All schedules have been omitted since the information required by
the schedule is not applicable, or is not present in amounts
sufficient to require submission of the schedule, or because the
information required is included in the consolidated financial
statements and notes thereto.
(a)(3) Exhibits
87
EXHIBIT INDEX
Incorporated by Reference to:
------------------------------------------------
Filing
Form or Date with SEC File
Exhibit No. Description Schedule Exhibit No. 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
4.1 Registrant's specimen common stock certificate S-3 4.1 10/31/05 333-129336
4.2 Registration Rights Agreement by and among S-3 4.2 10/31/05 333-129336
Registrant and Certain Investors named therein
dated September 29, 2005
4.3 Securities Purchase Agreement by and between S-3 4.5 10/31/05 333-129336
Tontine Capital Partners, L.P. and Registrant
dated September 29, 2005
4.4 Form of Subscription Agreement by and among S-3 4.6 10/31/05 333-129336
Registrant, Michael L. Burrow, Alliance 2000,
Ltd. and certain subscribers
10.1 Option Pool Agreement by and between Industrial 10-KSB 10.48 04/01/02 001-14217
Data Systems Corporation and Alliance 2000, Ltd.
dated December 21, 2001
10.2 Amended and Restated Alliance Stock Option Pool 10-K 10.2 03/28/08 001-14217
Agreement effective December 20, 2006
10.3 Second Amended and Restated Alliance Stock Option 8-K 10.2 05/23/07 001-14217
Agreement dated December 20, 2006
10.4 ENGlobal Corporation Incentive Bonus Plan Dated 8-K 10.1 08/17/09 001-14217
effective July 1, 2009
10.5 Purchase Agreement by and between ENGlobal and 10-Q 10.1 11/07/08 001-14217
Advanced Control Engineering, LLC dated
September 25, 2008
10.6 Promissory Note Payable between Registrant and 10-Q 10.2 11/07/08 001-14217
Frank H McIlwain dated September 30, 2008
10.7 Promissory Note Payable between Registrant and 10-Q 10.3 11/07/08 001-14217
James A Walters dated September 30, 2008
10.8 Promissory Note Payable between Registrant and 10-Q 10.4 11/07/08 001-14217
William M Bosarge dated September 30, 2008
10.9 Promissory Note Payable between Registrant and 10-Q 10.5 11/07/08 001-14217
Matthew R Burton dated September 30, 2008
88
Incorporated by Reference to:
------------------------------------------------
Filing
Form or Date with SEC File
Exhibit No. Description Schedule Exhibit No. SEC Number
----------- ----------- -------- ----------- --------- ---------
10.10 Second Amended and Restated Lease Agreement 10-Q 10.63 08/12/02 001-14217
between Petrocon Engineering, Inc. and Corporate
Property Associates dated February 28, 2002 (Exec
I)
10.11 Guaranty and Suretyship Agreement between 10-Q 10.64 08/12/02 001-14217
Industrial Data Systems Corporation and Corporate
Property Associates dated April 26, 2002 (Exec I)
10.12 Amended and Restated 1998 Incentive Plan of 10-K 10.6 03/28/08 001-14217
Registrant dated June 8, 2006
10.13 First Amendment to the Amended and Restated 1998 10-K 10.7 03/28/08 001-14217
Incentive Plan of Registrant dated June 14, 2007
10.14 Form of Incentive Stock Option Award Agreement of 10-K 10.8 03/28/08 001-14217
1998 Incentive Plan of Registrant
10.15 Form of Non-qualified Stock Option Agreement S-8 10.80 08/24/05 333-127803
Granted Outside of 1998 Incentive Plan of
Registrant
10.16 Form of Restricted Stock Unit Award Agreement 10-Q 10.2 08/11/08 001-14217
between Registrant and its Independent
Non-employee Directors
10.17 Form of Restricted Stock Award Agreement of 2009 10-Q 10.1 08/10/09 001-14217
Equity Incentive Plan between Registrant and its
independent directors
10.18 Lease Agreement between Oral Roberts University 10-K 10.11 03/28/08 001-14217
and ENGlobal Engineering, Inc. dated
January 27, 2005
10.19 First Amendment to the Lease Agreement between 10-K/A 10.26 03/29/07 001-14217
Oral Roberts University and ENGlobal Engineering,
Inc. dated April 5, 2005
10.20 Second Amendment to the Lease Agreement between 10-K/A 10.27 03/29/07 001-14217
Oral Roberts University and ENGlobal Engineering,
Inc. dated June 15, 2005
10.21 Third Amendment to the Lease Agreement between 10-K/A 10.28 03/29/07 001-14217
Oral Roberts University and ENGlobal Engineering,
Inc. dated December 28, 2005
10.22 Fourth Amendment to the Lease Agreement between 10-K/A 10.29 03/29/07 001-14217
Oral Roberts University and ENGlobal Engineering,
Inc. dated February 27, 2006
10.23 Fifth Amendment to the Lease Agreement between 10-K/A 10.30 03/29/07 001-14217
Oral Roberts University and ENGlobal Engineering,
Inc. dated July 28, 2006
10.24 Sixth Amendment to the Lease agreement between 10-K 10.17 03/28/08 001-14217
Oral Roberts University and ENGlobal Engineering,
Inc. dated June 20, 2007
10.25 Build-to-Suit Lease Agreement between Clay Real 10-Q 10.1 05/07/08 001-14217
Estate Development, L.P. and ENGlobal Corporate
Services, Inc., executed March 6, 2008
89
Incorporated by Reference to:
------------------------------------------------
Filing
Form or Date with SEC File
Exhibit No. Description Schedule Exhibit No. SEC Number
----------- ----------- -------- ----------- --------- --------
*10.26 First Amendment to the Lease Agreement between
Clay Real Estate Development, L.P. and ENGlobal
Corporate Services, Inc. executed January 15, 2009
10.27 Credit agreement by and between Wells Fargo Bank 8-K 10.1 01/11/10 001-14217
and Registrant and its subsidiaries dated
December 29, 2009
10.28 Hand Note between South Louisiana Ethanol LLC and 10-Q 10.2 11/09/07 001-14217
ENGlobal Engineering, Inc dated October 22, 2007
10.29 Collateral Mortgage between South Louisiana 10-Q 10.3 11/09/07 001-14217
Ethanol LLC, and ENGlobal Engineering, Inc. dated
August 26, 2007
10.30 Collateral Mortgage between South Louisiana 10-Q 10.4 06/14/07 001-14217
Ethanol LLC and ENGlobal Engineering, Inc. dated
August 31, 2007
10.31 Amended and Restated ENGlobal 401(k) Plan 10-K/A 10.22 03/29/07 001-14217
effective October 1, 2005
10.32 First Amendment of the ENGlobal 401(k) Plan 10-K/A 10.21 03/29/07 001-14217
effective December 21, 2001
10.33 Second Amendment to the ENGlobal 401(k) Plan 10-K/A 10.23 03/29/07 001-14217
effective April 1, 2006
10.34 Third Amendment to the ENGlobal 401(k) Plan 10-K/A 10.24 03/29/07 001-14217
effective July 1, 2006
10.35 Fourth Amendment to the ENGlobal 401(k) Plan 10-K 10.33 03/16/09 001-14217
effective July 1, 2008
10.36 Fifth Amendment to the ENGlobal 401(k) Plan 10-Q 10.1 05/11/09 001-14217
effective January 1, 2009
10.37 Regulations Amendment to the ENGlobal 401(k) 10-K 10.21 03/16/07 001-14217
Plan effective January 1, 2006
10.38 Key Managers Incentive Plan of Registrant 8-K 10.43 04/10/07 001-14217
effective January 1, 2007
10.39 Key Executive Employment Agreement between 10-K/A 10.39 03/29/07 001-14217
Registrant and William A. Coskey effective
January 1, 2006
10.40 Key executive Employment Agreement between 10-K 10.37 03/16/09 001-14217
Registrant and Robert W. Raiford effective
August 9, 2008
*10.41 Key Executive Employment Agreement between
Registrant and Michael M. Patton effective
October 13, 2009
10.42 Key executive Employment Agreement between 10-K 10.39 03/16/09 001-14217
Registrant and R. David Kelley effective
August 9, 2008
90
Incorporated by Reference to:
------------------------------------------------
Filing
Form or Date with SEC File
Exhibit No. Description Schedule Exhibit No. SEC Number
----------- ----------- -------- ----------- --------- ---------
10.43 Form of Indemnification Agreement between 10-Q 10.1 08/11/08 001-14217
Registrant and its Directors and Executive
Officers
10.44 Security Agreement by and between Wells Fargo 8-K 10.2 01/11/10 001-14217
Bank and ENGlobal Corporation and its
subsidiaries dated December 29, 2009
10.45 Security Interest Agreement and Acknowledgment 8-K 10.3 01/11/10 001-14217
by and between Wells Fargo Bank and ENGlobal
Corporation and its subsidiaries dated
December 29, 2009
10.46 Letter of Termination by and between Comerica 8-K 10.4 01/11/10 001-14217
Bank and ENGlobal Corporation and its
subsidiaries dated December 30, 2009
11.1 Statement Regarding Computation of Per Share 10-K 11.1 03/28/08 001/14217
Earnings is included as Note 2 to the Notes to
Consolidated Financial Statements
*14.1 Code of Business Conduct and Ethics of Registrant
dated June 18, 2009
*14.2 Code of Ethics for Chief Executive Officer and
Senior Financial Officers of Registrant dated
June 18, 2009
*21.1 Subsidiaries of the Registrant
*23.1 Consent of Hein & Associates LLP
*31.1 Certification of Chief Executive Officer pursuant
to Exchange Act Rules 13a-14 or 15d-14
*31.2 Certification of Chief Financial Officer pursuant
to Exchange Act Rules 13a-14 or 15d-14
*32.1 Certification of Chief Executive Officer pursuant
to Exchange Act Rules 13a-14(b) or 15d-14(b) and
18 U.S.C. Section 1350
*32.2 Certification of Chief Financial Officer pursuant
to Exchange Act Rules 13a-14(b) or 15d-14(b) and
U.S.C. Section 1350
* Filed herewith
91
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has caused this Annual Report on Form 10-K to be signed on its
behalf by the undersigned, thereunto duly authorized.
ENGlobal CORPORATION
Dated: March 8, 2010
By: //s// William A. Coskey
William A. Coskey, P.E.,
Chief Executive Officer, Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated:
By: //s// William A. Coskey
William A. Coskey, P.E.
Chief Executive Officer, Director
By: //s// William A. Coskey
William A. Coskey, P.E.
Chairman of the Board, Director
By: //s// Robert W. Raiford
Robert W. Raiford
Chief Financial Officer, Treasurer
By: //s// Meredith N. Barnes
Meredith N. Barnes, CMA
Controller
By: //s// David W. Gent
David W. Gent, P.E., Director
By: //s// Randall B. Hale
Randall B. Hale, Director
By: //s// David C. Roussel
David C. Roussel, Director
92