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, 2008
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
--------------------
(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 Identification No.)
incorporation or organization)
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]
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]
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shortened period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark 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]
Non-accelerated filer [ ] Smaller reporting company [ ]
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act)
Yes [ ] No [X]
1
The aggregate market value of the registrant's common stock held by
non-affiliates of the registrant on June 30, 2008 was $172,024,967 (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 10, 2009 is as follows:
$0.001 Par Value Common Stock 27,294,852 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 2009 Annual Meeting of Stockholders
to be filed with the Securities and Exchange Commission on or before April 20,
2009.
2
ENGlobal Corporation
2008 ANNUAL REPORT ON FORM 10-K
-------------------------------
TABLE OF CONTENTS
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PART I PAGE
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ITEM 1. BUSINESS 5
ITEM 1A. RISK FACTORS 21
ITEM 1B. UNRESOLVED STAFF COMMENTS 26
ITEM 2. PROPERTIES 26
ITEM 3. LEGAL PROCEEDINGS 27
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 27
PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES 28
ITEM 6. SELECTED FINANCIAL DATA 31
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 33
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 54
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 54
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE 92
ITEM 9A. CONTROLS AND PROCEDURES 92
PART III
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 94
ITEM 11. EXECUTIVE COMPENSATION 94
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS 94
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 94
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES 94
PART IV
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ITEM 15. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES 95
SIGNATURES
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SIGNATURES 100
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.
4
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 $493.6 million in 2008, a compounded annual growth rate
of approximately 33%. We have accomplished this growth by expanding our
engineering and professional service capabilities and our geographic presence
through internal growth, including new initiatives, and to a lesser extent,
through a series of strategic acquisitions.
We now have more than 2,300 full-time equivalent employees in 22 offices and
419,600 square feet of office and manufacturing fabrication space strategically
located in the following cities: Houston, Beaumont, Clear Lake and Freeport,
Texas; Baton Rouge and Lake Charles, Louisiana; Tulsa, Cleveland and Blackwell,
Oklahoma; Broomfield, Colorado; Mobile, Alabama; 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 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 and construction
management, mechanical integrity, vendor and turnaround surveillance, field
support, quality assurance and plant asset management. 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 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 include members of the 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, and governmental regulatory compliance services, primarily to
pipeline, utility and telecom companies and other owner/operators of
infrastructure facilities throughout the United States and Canada. Land segment
personnel are typically assigned to client facilities throughout the United
States.
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 http://www.englobal.com. You may also read and
copy any document we file at the SEC's public reference room at
5
ITEM 1. BUSINESS (Continued)
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
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 2008 2007 2006
--------- --------- ---------
Engineering 51.0% 61.0% 71.1%
Construction 28.3% 20.2% 11.9%
Automation 12.1% 10.4% 11.5%
Land 8.6% 8.4% 5.5%
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100.0% 100.0% 100.0%
========= ========= =========
6
ITEM 1. BUSINESS (Continued)
Engineering Segment
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Selected Financial Data
2008 2007 2006
-----------------------------------
(amounts in thousands)
-----------------------------------
Revenue $251,702 $221,787 $215,306
Operating profit $ 31,786 $ 28,301 $ 6,195
Total assets $ 71,954 $ 63,265 $ 57,995
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. The
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
subsidiary, ENGlobal Engineering, Inc. ("EEI"), and EEI's wholly-owned
subsidiary, 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 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.
Our domestic base of energy related clients, until late 2008, was generally less
impacted by the downturn in the economy than most industries, with a high level
of spending for both capital and maintenance projects. However, given dramatic
decreases in prices for energy commodities, lower profit spreads for downstream
operators and a more difficult financing environment, we expect all except
possibly the largest of our clients to lower their spending plans for 2009.
Currently the most active project areas are in the pipeline and alternative
energy industries. Our clients' plans for larger capital projects in the
refining and petrochemical industries have been most impacted by the economic
downturn, with much of our work in this area now consisting of maintenance,
small capital retrofit, and regulatory and compliance driven work. For the most
part, clients are choosing to defer project activity into future years, as
opposed to canceling projects outright.
As of December 31, 2008, the Engineering segment had more than 100 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
7
ITEM 1. BUSINESS (Continued)
Company strives to establish longer term alliance relationships with our 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. In the first
quarter of 2007, our Dallas office was closed, the majority of its assets were
sold, a major portion of the office lease obligations were assumed by others,
and its operations were transferred to other Engineering offices.
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.
8
ITEM 1. BUSINESS (Continued)
Construction Segment
--------------------
Selected Financial Data
2008 2007 2006
-----------------------------------
(amounts in thousands)
-----------------------------------
Revenue $139,360 $ 73,210 $ 36,128
Operating profit $ 7,459 $ 7,133 $ 1,579
Total assets $ 23,581 $ 17,226 $ 11,287
General
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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 and construction management, mechanical
integrity, vendor and turnaround management, field support, quality assurance
and plant asset management. 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.
Our Construction segment operates out of offices in Baton Rouge and Lake
Charles, Louisiana; Beaumont, Clear Lake and Freeport, Texas; 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 recent 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 the
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 alliance relationships with our clients
that can be expected to provide a steadier stream of work. In addition, the
Company has found that the inspection of pipelines and client facilities has
also provided for a stable business mix.
9
ITEM 1. BUSINESS (Continued)
Automation Segment
------------------
Selected Financial Data
2008 2007 2006
-----------------------------------
(amounts in thousands)
-----------------------------------
Revenue $ 59,730 $ 37,766 $ 34,888
Operating profit (loss) $ 3,744 $ (58) $ 579
Total assets $ 36,553 $ 17,468 $ 18,841
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 projects and process piping heat tracing.
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
Systems, Inc. ("ESI") and ENGlobal Automation Group, Inc. ("EAG"), both
wholly-owned subsidiaries of ENGlobal, and EAG's wholly owned subsidiary,
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, whereby some or
all of the project activities related to engineering, material procurement and
fabrication are performed for a lump sum amount. The lump sum contracts
performed by ESI tend to be smaller than those performed in our Engineering
segment. Out of the number of our total fixed price projects, 60% have less than
$100,000 contract value, 32% have between $100,000 and $1,000,000 contract value
and 8% have greater than $1,000,000 contract value. As a service provider, our
Automation 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 SG&A expenses.
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.
In January 2006, ESI acquired certain assets of Analyzer Technology
International, Inc. ("ATI"), a Houston-based analyzer systems provider of online
process analyzer systems, and ATI has relocated its operation to ESI's Houston
facility. The addition of ATI has provided ESI with a greater presence in the
process analyzer sector, especially for opportunities involving larger foreign
downstream projects.
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.
10
ITEM 1. BUSINESS (Continued)
Land Segment
------------
Selected Financial Data
2008 2007 2006
-----------------------------------
(amounts in thousands)
-----------------------------------
Revenue $ 42,540 $ 30,464 $ 16,768
Operating profit $ 4,114 2,105 716
Total assets $ 13,482 $ 15,096 $ 11,540
General
-------
Our Land segment provides land management, right-of-way, environmental
compliance 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, electric power transmission lines and telecommunication
cables). As examples, rights-of-way are required for pipelines that transport
oil & gas from imported sources, and from newly developed 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 that is 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
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. Given current market
conditions, 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. However, it is unclear how our acquisition
11
ITEM 1. BUSINESS (Continued)
strategy will be impacted by the world economic situation and we may focus less
on acquisitions in 2009 than we have in prior years. The following table lists
the businesses we have acquired during the four-year period ended December 31,
2008.
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 May 2006 Integrated Land Management
WRC Canada
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
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
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. To enhance
these efforts, we have added an officer level position responsible for
project auditing and monitoring compliance with these internal project
procedures and quality standards.
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
12
ITEM 1. BUSINESS (Continued)
utilization of human and computer resources. We believe the
work-sharing program helps to reduce employee turnover and provides
for a more stable work environment. We believe our ongoing program to
standardize of 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 Management), while pursuing a cost-plus contracting
strategy. 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. Competitive employee benefits, together with various
incentive programs, 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. In the past, we followed a balanced
growth strategy for our business, utilizing both external acquisitions
as well as internal measures. Given economic uncertainty that is
likely to affect our business as well as the business of potential
acquisition targets, ENGlobal believes that an internal focus may be
its primary mode of growth in the near term and we have already
announced several new measures to enhance internal growth and
profitability. The internal measures will continue to include an
active business development program covering all of our business
segments. Our external growth, if any, 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) grow our business geographically, and
(iv) capture more of a project's value.
o Building our Brand. We intend to continue to present a more unified
identification for the Company by building a cohesive brand and
increasing ENGlobal's name recognition. We have redesigned our website
to highlight our four businesses: Engineering, Construction,
Automation and Land. Effective January 1, 2008, we decided to focus on
the ENGlobal name for purposes of branding all of our businesses. Our
new image presents ENGlobal as one company, wherein our four business
segments can work together as a team to offer their many capabilities
seamlessly, with one consistent message and a continued focus on
better serving our clients.
13
ITEM 1. BUSINESS (Continued)
Sales and Marketing
-------------------
ENGlobal derives revenue primarily from three sources: (1) in-house direct
sales, (2) 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 our business development department. Our
Senior Vice President of Business Development supervises our in-house sales
managers who are assigned to industry segments, clients and territories within
the United States. Management believes that this method of selling should result
in increased account penetration and enhanced customer service, which should, in
turn, create and maintain the foundation for long-term customer relationships.
In addition, relationships can be nurtured by our geographic advantage of having
office locations near our larger clients. 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 on-line 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 department 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 businesses -
Engineering, Construction, Automation, and Land. Sales leads are often jointly
developed and pursued by the sales personnel from these various businesses.
ENGlobal develops alliance agreements with clients in order to facilitate repeat
business. The Company currently has 24 alliances with 20 customers. These
alliance 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 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 alliance customers are easier to
negotiate. Management believes that alliance agreements can serve to stabilize
project centered operations such as the engineering and construction industry.
In 2008, services provided under ENGlobal's alliance agreements accounted for
27% of the Company's revenue.
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 referrals provide the opportunity for increased
profitability because referrals do not involve direct selling, but instead,
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
client. The Company also believes that cross-selling can help to ensure a
greater predictability of revenue and can be a cost effective way to grow.
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
14
ITEM 1. BUSINESS (Continued)
impact on our financial statements. In 2009, the Company will continue to focus
substantial attention on improving customer services in order to enhance
satisfaction and increase customer retention.
In 2008, almost 75% of our revenue was generated through sources such as
in-plant staffing and alliance relationships that we consider longer-term in
nature and that 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 of engineering services, and more recently,
sole-sourcing. This trend has fostered the development of ongoing, longer-term
alliance arrangements with clients, 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 alliance
agreements, often they form the basis for a longer-term relationship with our
clients. Despite their variety, we believe that these partnering relationships
have a stabilizing influence on our revenue. At December 31, 2008, we maintained
some form of partnering or alliance arrangement with 20 major oil and chemical
companies. Alliance 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 62% of our total revenue for 2008, 57% of total revenue for 2007,
and 62% of total revenue for 2006. 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 2008 were Spectra Energy, Alon USA and Gulf
South Pipeline Company. Even though we frequently receive work from repeat
clients, our client list may vary significantly from year to year. Our potential
revenue in all segments is dependent on continuing relationships with our
customers.
15
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 77% of our total revenue for 2008, 74%
of total revenue for 2007, and 83% of total revenue for 2006. Our top three
clients in 2008 were Alon USA, Motiva and ConocoPhillips.
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 alliance 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. Our ten largest customers accounted for 91% of our total revenue for
2008, 82% of total revenue for 2007, and 75% of total revenue for 2006. Our top
three clients in 2008 were Gulf South Pipeline Company, Spectra Energy and
Magellan Midstream Partners, LP.
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.
Automation Segment:
In the Automation segment, our ten largest customers, who also vary from one
period to the next, accounted for 66% of our total revenue for 2008, 73% of
total revenue for 2007 and 62% of total revenue for 2006. Our top three clients
in 2008 were ExxonMobil, E.I. Dupont and Yanbu National Petrochemical. Total
foreign customers accounted for 14% of our Automation segment revenue for 2008
and 22% for both 2007 and 2006. During 2008, 4% of our revenue came from our
Canadian operations compared to 3% in 2007 and 1% in 2006.
Though 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 driven by
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 72% of our total revenue for 2008, 70% of total
revenue for 2007 and 83% of total revenue for 2006. Our top three clients in
2008 were Spectra Energy, TransCanada 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.
16
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 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 $248,764 $ 2,938
Construction 139,352 8
Automation 33,308 26,422
Land 42,521 19
Total company $463,945 94.0 $ 9,387 6.0
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 for 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 sub-contractor 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 any 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
economy, as it may relate to demand, labor shortages, and inflation of
equipment and materials costs, natural disasters, and other changes
that may occur over the contract period. Another risk includes our
ability to secure written change orders prior to commencing work on
such orders, without which we may not receive payment for work
performed. Consequently, the profitability of fixed-price contracts
may vary substantially. We plan to limit the size and scope of EPC
fixed-price contracts that we enter into in the future due to
significant losses on two fixed-price contracts during 2006.
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.
17
ITEM 1. BUSINESS (Continued)
At December 31, 2008, our backlog was $325.7 million compared to an estimated
$289.2 million at December 31, 2007. We expect a majority of the $325.7 million
in backlog to be completed during 2009.
The backlog at December 31, 2008 consists of $314.9 million with commercial
customers and $10.8 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, 2008 was as
follows:
Engineering segment $ 113.5 million
Construction segment 128.9 million
Automation segment 43.2 million
Land segment 40.1 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.
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.
18
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. The U.S. Patent and Trademark Office registered our
trademark application for the use of "ENGlobal"(R) with our products in
September 2004 and the Company claims common law trademark rights for
"ENGlobal"TM in connection with our services. The U.S. Patent and Trademark
Office registered our "Integrated Rack"TM application in 2008. We have pending
trademark applications for "Engineered for Growth"TM. ENGlobal claims common law
trademark rights for "Global Thinking...Global Solutions"TM, "CARES -
Communicating Appropriate Responses in Emergency Situations"TM, "Flare-Mon"TM,
"Purchased Data"TM and "viMAC."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 as established by the
Occupational Safety and Health Administration. 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. 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, 2008, the Company and its subsidiaries employed 2,302
individuals. Of these employees, 1,247 were employed in engineering and related
positions; 430 were employed as inspectors; 295 were employed as project support
staff; 218 were employed in technical production positions; 83 were employed in
administration, finance and management information systems and 29 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. The Company
makes mandatory 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 are
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. The Company made contributions of approximately $3,049,000,
$2,147,000, and $1,310,000, respectively, for the years ended December 31, 2008,
2007, and 2006. 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.
19
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.
2008 2007 2006
-------- -------- --------
(dollars in thousands)
------------------------------
US operations revenue $490,584 $360,309 $299,333
Canadian operations revenue 2,748 2,918 3,757
-------- -------- --------
Total revenue $493,332 $363,227 $303,090
Long-lived assets consist of property, plant and equipment, net of depreciation
("PPE").
2008 2007 2006
------ ------ ------
(dollars in thousands)
----------------------------
US operations PPE $5,703 $6,378 $8,642
Canadian operations PPE 41 94 83
------ ------ ------
Total PPE $5,744 $6,472 $8,725
20
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.
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 the required governmental approval, we may not be able to pursue particular
projects, which could adversely affect our profitability.
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 petroleum refining,
petroleum chemical and pipeline industries and in other industries that we
provide services to. During economic downturns in these industries, 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 the price of oil will be relatively low. However, these factors can
cause our profitability to decline significantly.
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 contractors. Some competitors have
greater financial and other resources than we do, which, in some instances,
gives them a competitive advantage over us.
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.
Competition for key personnel is intense. We cannot be certain that we will
retain our key managerial, technical and business development personnel or that
we will 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.
If we are not able to successfully manage our growth strategy, our business and
results of operations may be adversely affected.
-------------------------------------------------------------------------------
We have grown rapidly over the last several years. Our growth presents numerous
managerial, administrative, operational and other challenges. Our ability to
manage the growth of our operations will require us to continue to improve our
management information systems and maintain discipline in our internal systems
and controls. Industry trends and our ability to manage and measure project
performance will require us to strengthen our internal project and cost control
systems within operations that have traditionally operated in a cost-plus
environment. In addition, our growth will increase our need to attract, develop,
motivate and retain both our management and professional employees. The
inability of our management to effectively manage our growth or the inability of
our employees to achieve anticipated performance could have a material adverse
effect on our business.
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
21
ITEM 1A. RISK FACTORS (Continued)
evaluate and attempt to monitor our clients' financial condition, there is no
guarantee that we will accurately assess their creditworthiness. 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.
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, 2008, our backlog was approximately $325.7 million. We cannot
assure investors that the revenue projected in our backlog will be realized or,
if realized, will result in profits. Projects 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.
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 2008, three of our clients each accounted for
approximately 10% of our revenue was from Spectra Energy, approximately 10% of
our revenue was from Alon USA and another 9% was from Gulf South Pipeline. 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 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. Additionally, 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.
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 the Company believes may
have significant potential needs for the Company's services. The downside risks
are that such initiatives could have a negative effect on current earnings until
they reach critical mass, that industry trends have been misread or delayed or
that the Company is unable to successfully execute on these initiatives. In
these cases, continued funding could have a negative impact on long term
earnings.
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. In 2006, we
22
ITEM 1A. RISK FACTORS (Continued)
suffered significant losses as a result of two fixed-price contracts.
Consequently, we plan to limit the size and scope of EPC fixed-price contracts
that we enter into in the future.
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. In certain cases, we may attempt to recoup some
or all of the cost overruns by entering into a claims recovery process. We may
even retain 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.
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 compensation for these matters could require us to
record in the current period 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 adequate to compensate us for our additional work or
expenses.
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 will 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 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.
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, which could have a significant adverse effect on our business
and reputation.
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
23
ITEM 1A. RISK FACTORS (Continued)
our ability to ensure timely and reliable financial reports and the ability of
our auditors to attest to the effectiveness of our internal controls.
Our indebtedness could limit our ability to finance future operations or engage
in other business activities.
-------------------------------------------------------------------------------
As of December 31, 2008, we had $27.8 million of total outstanding indebtedness
against our revolving line of credit, which is currently limited to $50 million,
subject to limitations based on the amount of our accounts receivable.
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 contractual payment terms;
o material losses and/or negative cash flows on significant projects;
o clients' inability to pay our invoices due to economic conditions or
otherwise; and
o our ability to meet current credit facility financial ratios and
covenants.
Although we are in compliance with all current credit facility covenants, our
indebtedness could limit our ability to finance future operations or engage in
other business activities.
Force majeure events such as natural disasters have negatively impacted and
could further 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. If
we are not able to react quickly and/or negotiate contractual relief under a
force majeure event, our operations may be affected significantly, which would
have a negative impact on our financial condition, results of operations and
cash flows.
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 damage. We
are intensely focused on maintaining a safe environment and reducing the risk of
accidents. 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.
Our growth strategy requires that we increase the size of our workforce. While
we normally target experienced personnel for employment, 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.
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 2008, approximately 6.0% of our net revenue was
derived from fixed-price contracts, as compared with 10.9% was in 2007. 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, given the economic
downturn.
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
24
ITEM 1A. RISK FACTORS (Continued)
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
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. This is a major risk factor that
could materially impact our operating results.
If the operating result of any segment 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 Statement on Financial Accounting Standards No. 142, Goodwill
and Other Intangible Assets, ("SFAS No. 142"). The Company has assigned goodwill
to its segments based on estimates of the relative fair value of each segment.
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 are not realized, 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
SFAS No. 142, the Company would be required to write down the carrying value of
goodwill. In 2007, the Company determined that goodwill within the Automation
segment was impaired in the amount of $432,000.
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 in the performance of these contracts. In addition, if a subcontractor or
supplier is unable to deliver its services or materials according to the
negotiated 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.
Additional acquisitions may adversely affect our ability to manage our business.
--------------------------------------------------------------------------------
Acquisitions have contributed to our growth in the past and, although we plan to
reduce the size and number of our acquisitions, we plan to continue making some
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. We may not 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 inability to find additional attractive acquisition
candidates or to effectively manage the integration of any businesses acquired
in the future could adversely affect our ability to grow profitably or at all.
Seasonality of our industry may cause our revenue to fluctuate.
---------------------------------------------------------------
Holidays and employee vacations during our fourth quarter 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 new year, which can depress results
25
ITEM 1A. RISK FACTORS (Continued)
for the first quarter. Principally due to these factors, our first and fourth
quarters may be less robust than our second and third quarters.
Our Board of Directors may authorize future sales of ENGlobal common stock,
which could result in a decrease in value to existing stockholders of the shares
they hold.
--------------------------------------------------------------------------------
Our Articles of Incorporation authorize our board of directors to issue up to an
additional 47,705,148 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 options as incentives
under an 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 23 buildings in the U.S. and Canada totaling approximately
419,600 square feet. The leases have remaining terms ranging from monthly to
five 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; and Calgary, Alberta Canada. Approximately 372,000
square feet of our total office space is designated for our professional,
technical and administrative personnel. 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 62,600 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 is being moved from the 63,000 square
foot location to an 81,000 square foot location near its existing facility.
On May 25, 2006, the Company, through its wholly-owned subsidiary ENGlobal
Corporate Services, Inc., purchased a one-third partnership interest in PEI
Investments, A Texas Joint Venture ("PEI"), from Michael L. Burrow, the
Company's then President and CEO, and another one-third interest from a
stockholder who owns less than 1% of the Company's common stock. The partnership
interests were purchased for a total of $69,000. The remaining one-third
interest was already held by the Company through its wholly-owned subsidiary
EEI. PEI owned the land on which our Beaumont, Texas office building, destroyed
by Hurricane Rita in September 2005, was located. The remains of the building
were razed in July 2006. In September 2006, the Company acquired approximately
1.2 acres immediately adjacent to the former facility. In May 2008, the Company
sold the land 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 50,000 square foot facility.
26
ITEM 2. PROPERTIES (Continued)
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 a third party tenant.
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, amortized over 180 months, payable in equal monthly installments
and one irregular installment consisting of the interest and principal due at
the end of the 60 months. The financed portion of the purchase price was secured
by a first mortgage on the property. The Company's basis in the property,
together with the building and all improvements, was approximately $1.4 million.
On July 24, 2008 the purchaser of the Baton Rouge building paid all outstanding
principal owed on the note. The Company has leased approximately 31,900 square
feet of space in two separate facilities to house its Engineering and Automation
operations in Baton Rouge.
ITEM 3. LEGAL PROCEEDINGS
From time to time, one or more of ENGlobal's individual subsidiary business
entities are 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 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. This lawsuit was consolidated with
Cause No. 56-225, Griner Drilling Service, Inc. v. ENGlobal Construction
Resources, Inc., ENGlobal Engineering, Inc. and South Louisiana Ethanol, LLC,
originally filed in the 25th Judicial District Court of Plaquemines Parish,
Louisiana and seeking a judgment for work allegedly performed at the SLE
facility. Related lawsuits are (i) Cause No. B-183,211, Brand Scaffold Builders
v. ENGlobal Construction Resources, Inc. in the 60th Judicial District Court of
Jefferson County, Texas, seeking payment for or a return of scaffolding
equipment; (ii) Cause No. 56-344, J&C Welding and Fabrication, Inc. v. ENGlobal
Construction Resources, Inc., ENGlobal Engineering, Inc. and South Louisiana
Ethanol, LLC, filed in the 25th Judicial District Court of Plaquemines Parish,
Louisiana; seeking payment allegedly due for work performed on the SLE project;
and (v) Civil Action No. 08-4008, Industrial Process Technology, Inc. v. J&C
Welding & Fabrication, Inc. v. South Louisiana Ethanol, LLC and HPS Development,
LLC seeking enforcement of alleged liens.
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, 2008.
27
PART II
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
----------------------------------------------------
2008 2007
------------------------- --------------------------
High Low High Low
------------ ------------ ------------- ------------
First quarter $ 10.61 $ 8.35 $ 7.18 $ 5.05
Second quarter 14.24 8.74 12.73 5.66
Third quarter 17.85 11.58 12.90 8.87
Fourth quarter 12.30 2.35 14.81 9.78
The foregoing figures, based on information published by NASDAQ, do not reflect
retail mark-ups or markdowns and may not represent actual trades.
As of December 31, 2008, approximately 238 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 is advisable in order to enhance the Company's ability to
respond to these and similar opportunities.
28
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES (Continued)
Performance Graph
The following graph compares the percentage change in (i) the cumulative total
stockholder return on the Company's Common Stock for the five-year period ended
December 31, 2008 with (ii) the cumulative total return on (a) the S&P SmallCap
600 Index, (b) the NASDAQ Market Index (US), and (c) self-instructed peer group,
consisting of the following companies: Fermanite Corporation (formerly Xanser
Corporation), Michael Baker Corporation, Matrix Service Company, Tetra Tech,
Inc., Willbros Group, and VSE Corporation.
The comparison assumes (i) an investment of $100 on December 31, 2003 in each of
the foregoing indices and (ii) reinvestment of dividends, if any.
THE STOCK PRICE PERFORMANCE SHOWN ON THE GRAPH BELOW REPRESENTS HISTORICAL PRICE
PERFORMANCE AND IS NOT NECESSARILY INDICATIVE OF ANY FUTURE STOCK PRICE
PERFORMANCE.
COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN
AMONG ENGLOBAL,
NASDAQ MARKET INDEX (U.S.) AND PEER GROUP INDEX
[GRAPHIC ON FILE]
2003 2004 2005 2006 2007 2008
------ ------ ------ ------ ------ ------
ENGLOBAL CORP. 100.00 157.36 426.40 326.40 576.65 164.97
PEER GROUP INDEX 100.00 87.30 81.88 98.50 155.77 108.47
NASDAQ MARKET INDEX (U.S.) 100.00 109.04 112.97 126.73 138.98 81.17
ASSUMES $100 INVESTED ON DECEMBER 31, 2003
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING DECEMBER 31, 2008
Notwithstanding anything to the contrary set forth in any of ENGlobal'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 ENGlobal under those Acts.
Equity Compensation Plan Information
------------------------------------
The following table sets forth certain information concerning the Company's only
equity compensation plan as of December 31, 2008. See Note 13 in the attached
financial statements.
29
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES (Continued)
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 1,173,206 (1) $6.82 0
approved by security
holders
The Company's 1998 Incentive Plan expired in June 2008, and, as of December 31,
2008, it has not been replaced by a new plan. The Board of Directors has approved
the ENGlobal Inc. 2009 Incentive Plan and currently intends to request that its'
stockholders approve this plan at the next stockholders' meeting.
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 Comerica Bank preclude us from paying any dividends on our common
stock while any debt under those agreements is outstanding. 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
on general business conditions.
Stock Repurchase Policy
Restrictions contained in our loan agreements governing our credit facility with
Comerica Bank preclude us from effecting a stock repurchase of our common stock
while any debt under those agreements is outstanding.
------------
(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
30
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, 2008, 2007, and 2006 have been derived from the audited
financial statements appearing elsewhere in this document. The data as of
December 31, 2005 and 2004 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,
--------------------------------------------------------------------
2008 2007 2006 2005 2004
--------------------------------------------------------------------
(in thousands, except per share amounts)
--------------------------------------------------------------------
Statement of Operations
Revenue
Engineering $ 251,702 $ 221,787 $ 215,306 $ 193,376 $ 127,299
Construction 139,360 73,210 36,128 21,898 8,046
Automation 59,730 37,766 34,888 18,311 13,543
Land 42,540 30,464 16,768 - -
------------ ------------ ------------ ------------ ------------
Total revenue 493,332 363,227 303,090 233,585 148,888
------------ ------------ ------------ ------------ ------------
Costs and expenses
Engineering 212,833 181,821 199,645 169,773 112,389
Construction 128,908 63,486 32,403 19,483 7,110
Automation 52,245 34,382 30,400 16,056 11,418
Land 35,539 25,921 14,378 - -
Selling, general and administrative 32,208 34,774 29,884 19,689 13,479
------------ ------------ ------------ ------------ ------------
Total costs and expenses 461,733 340,384 306,710 225,001 144,396
------------ ------------ ------------ ------------ ------------
Operating income (loss) 31,599 22,843 (3,620) 8,584 4,492
Interest income (expense), net (1,636) (2,514) (1,312) (800) (590)
Other income (expense), net 64 345 652 116 118
Foreign currency gain (loss) (4) (1) (19) (2) -
------------ ------------ ------------ ------------ ------------
Income (loss) from continuing operations before
provision for income taxes 30,023 20,673 (4,299) 7,898 4,020
Provision for income taxes 11,765 8,209 (813) 3,116 1,656
------------ ------------ ------------ ------------ ------------
Net income (loss) $ 18,258 $ 12,464 $ (3,486) $ 4,782 $ 2,364
============ ============ ============ ============ ============
31
ITEM 6. SELECTED FINANCIAL DATA (Continued)
Years Ended December 31,
--------------------------------------------------------------------
2008 2007 2006 2005 2004
--------------------------------------------------------------------
(in thousands, except per share amounts)
--------------------------------------------------------------------
Per Share Data
Basic earnings (loss) per share
Continuing operations $ 0.67 $ 0.46 $ (0.13) $ 0.20 $ 0.10
Discontinued operations - - - - -
------------ ------------ ------------ ------------ ------------
Net income (loss) per share $ 0.67 $ 0.46 $ (0.13) $ 0.20 $ 0.10
============ ============ ============ ============ ============
Weighted average common
shares outstanding - basic (000's) 27,180 26,916 26,538 24,300 23,455
Diluted earnings (loss) per share
Continuing operations $ 0.66 $ 0.45 $ (0.13) $ 0.19 $ 0.10
Discontinued operations - - - - -
------------ ------------ ------------ ------------ ------------
Net income (loss) per share $ 0.66 $ 0.45 $ (0.13) $ 0.19 $ 0.10
============ ============ ============ ============ ============
Weighted average common
shares outstanding - diluted (000's) 27,672 27,435 26,538 25,250 23,786
Cash Flow Data
Operating activities, net $ 8,346 $ (1,980) $ (8,953) $ (920) $ (2,391)
Investing activities, net (4,365) (1,707) (9,330) (2,418) (1,811)
Financing activities, net (3,779) 3,167 19,553 3,493 4,170
Exchange rate changes (110) 25 (26) (4) -
------------ ------------ ------------ ------------ ------------
Net change in cash and cash equivalents $ 92 $ (495) $ 1,244 $ 151 $ (32)
============ ============ ============ ============ ============
Balance Sheet Data
Working capital $ 58,585 $ 42,915 $ 35,187 $ 21,825 $ 14,503
Property and equipment, net $ 5,744 $ 6,472 $ 8,725 $ 6,861 $ 5,262
Total assets $ 152,705 $ 119,590 $ 106,227 $ 75,936 $ 57,261
Long-term debt, net of current portion $ 23,614 $ 29,318 $ 27,162 $ 5,228 $ 15,585
Long-term capital leases, net of current portion $ 243 $ - $ - $ - $ -
Stockholders' equity $ 76,766 $ 55,797 $ 40,862 $ 39,864 $ 20,051
Material Events and Uncertainties
---------------------------------
The Company experienced events in 2007 and 2006 that had a material adverse
effect on net income from operations. In 2006, the Company incurred losses on
two large EPC contracts, which caused the overall loss reported for that year.
In 2007, the Company was notified by its client, South Louisiana Ethanol
("SLE"), to stop work on a large project due to difficulties SLE was having in
obtaining permanent financing. Also in 2007, price and labor increases on
materials contributed to the loss reported for the Automation segment. Details
of these losses are more fully explained in Item 7 and throughout this Annual
Report on Form 10-K.
The Company's involvement with the SLE project resulted from the Company's
efforts to diversify its client base. Historically, the Company has performed
large projects primarily with Fortune 500 Companies, which generally have good
cash flow and established credit. The SLE project involved a smaller developer
that planned to retrofit a 20-year old ethanol plant. Due to a number of
factors, including, among others, increased corn prices and declining ethanol
prices, SLE has been unable to secure permanent financing for the project.
Due to SLE's continued failure to obtain permanent financing, on May 30, 2008
the Company filed suit in the United States District Court for the Eastern
District of Louisiana, Cause Number 08-3601, and is seeking damages of $15.8
million. An independent appraisal, dated December 31, 2008, from the bridge
lending bank's appraiser, indicated that on an in-place basis the materials and
32
ITEM 6. SELECTED FINANCIAL DATA (Continued)
equipment utilized as an ethanol facility would have a fair market value of
$22.1 million, an orderly liquidation value of $14.9 million, and a forced
liquidation value of $11.7 million. The Company believes that if the collateral
is liquidated, SLE's obligations to the Company would be paid in full pursuant
to the Collateral Mortgage in favor of the Company. However, collectability is
not assured at this time. 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. 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 priority 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.
Current Efforts to Mitigate Losses
----------------------------------
The Company has stopped work on the SLE project, and may provide SLE with
introductions to third parties. These introductions could potentially result in
selling the uncompleted facility, likely for purposes other than as an ethanol
facility.
Our project controls department is reviewing projects that may be experiencing
degradations on margins to determine methods for protecting current margins.
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 18 to the
Financial Statements contains 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, mechanical
integrity, vendor and turnaround surveillance, field support, construction,
quality assurance and plant asset management. The Automation segment provides
services related to the design, fabrication, and implementation of process
distributed control and analyzer systems, advanced automation, information
technology, and process piping heat tracing projects. The Land segment provides
land management, right-of-way, and governmental regulatory compliance services
primarily to pipeline, utility and telecom companies and other owner/operators
of infrastructure facilities throughout the United States and Canada.
The 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,
33
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
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.
34
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, 2008, 2007 and 2006
----------------------------------------------------------------------------------------------
Twelve months ended
December 31, 2008 Engineering Construction Automation Land All Other Consolidated
----------------- ----------- ------------ ---------- ---- --------- ------------
(dollars in thousands)
------------------------------------------------------------------------------------
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
------------ ------------ ----------- --------- ----------- ------------
Gross profit $ 38,869 $ 10,452 $ 7,485 $ 7,001 $ - $ 63,807
SG&A 7,083 2,993 3,741 2,887 15,504 32,208
------------ ------------ ----------- --------- ----------- ------------
Operating income (loss) $ 31,786 $ 7,459 $ 3,744 $ 4,114 $ (15,504) $ 31,599
------------ ------------ ----------- --------- -----------
Other income (expense) (1,576)
Tax provision (11,765)
------------
Net income (loss) $ 18,258
============
Twelve months ended
December 31, 2007
-----------------
(dollars in thousands)
-----------------------------------------------------------------------------------
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
------------ ------------ ----------- --------- ----------- ------------
Gross profit $ 39,966 $ 9,724 $ 3,384 $ 4,543 $ - $ 57,617
SG&A 11,665 2,591 3,442 2,438 14,638 34,774
------------ ------------ ----------- --------- ----------- ------------
Operating income (loss) $ 28,301 $ 7,133 $ (58) $ 2,105 $ (14,638) $ 22,843
------------ ------------ ----------- --------- -----------
Other income (expense) (2,170)
Tax provision (8,209)
------------
Net income (loss) $ 12,464
============
Twelve months ended
December 31, 2006
-----------------
(dollars in thousands)
-----------------------------------------------------------------------------------
Revenue before eliminations $ 215,444 $ 37,083 $ 37,206 $ 16,768 $ - $ 306,501
Inter-segment eliminations (138) (955) (2,318) - - (3,411)
------------ ------------ ----------- --------- ----------- ------------
Revenue $ 215,306 $ 36,128 $ 34,888 $ 16,768 $ - $ 303,090
------------ ------------ ----------- --------- ----------- ------------
Gross profit $ 15,661 $ 3,725 $ 4,488 $ 2,390 $ - $ 26,264
SG&A 9,466 2,146 3,909 1,674 12,689 29,884
------------ ------------ ----------- --------- ----------- ------------
Operating income (loss) $ 6,195 $ 1,579 $ 579 $ 716 $ (12,689) $ (3,620)
------------ ------------ ----------- --------- -----------
Other income (expense) (679)
Tax provision 813
------------
Net income (loss) $ (3,486)
============
35
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
OVERALL COMPARISONS
-------------------
Revenue
-------
Overall revenue increased 35.8%, or $130.1 million, from $363.2 million in 2007
to $493.3 million in 2008 and increased 19.8%, or $60.1 million, from $303.1
million in 2006. Only 3% of our growth in 2008 was a result of the incremental
revenue contribution from 2008 acquisitions. We had increases in revenue in 2008
of $8.9 million due to additional work created by Hurricane Ike and $42.4
million from a refinery rebuild project. Both of these projects included large
amounts of material and subcontractor purchases and are expected to be completed
by the first quarter of 2009. Revenue also grew due to an overall higher level
of project activity in the markets we serve. In particular we benefited from the
increased capital spending in the pipeline area which increased revenue in our
construction, engineering and land segments. Approximately 36% of our revenue
growth from 2006 to 2007 was external growth as a result of the incremental
revenue contribution from 2006 acquisitions. The balance of the revenue growth
from 2006 to 2007 occurred as a result of internal measures and a higher level
of project activity in the market we serve.
Gross Profit
------------
Gross profit increased $6.2 million, or 10.8%, from $57.6 million in 2007 to
$63.8 million in 2008 and increased $31.3 million, or 119.0%, from $26.3 million
in 2006. As a percentage of revenue, gross profit decreased by 3.0% from 15.9%
in 2007 to 12.9% in 2008 but increased 7.2% in 2007 from 8.7% in 2006. 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 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
-----------------------------------------------------
Overall SG&A expenses decreased $2.6 million, or 7.5%, from $34.8 million in
2007 to $32.2 million in 2008. In 2007, overall SG&A expense increased $4.9
million, or 16.4%, from $29.9 million in 2006. As a percentage of revenue, SG&A
decreased 3.1% from 9.6% in 2007 to 6.5% in 2008 and decreased 0.3% from 9.9% in
2006. The main savings occurred in bad debt expense and amortization. In 2007,
the bad debt expense was elevated due to the creation of the reserve on the
notes receivable for the SLE project and amortization was increased by $432,000
due to the goodwill impairment in the Automation segment. 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. Details relating to the changes in each segment are discussed
further below.
Corporate SG&A expenses increased $0.9 million, or 6.2%, from $14.6 million in
2007 to $15.5 million in 2008. The increase primarily relates to salaries and
employee-related expenses, which increased $0.7 million. There was also an
increase of $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 an increase in amortization and depreciation expense of
$0.2 million. These increases were offset by a decrease in stock compensation
expense of $0.3 million. As a percentage of revenue, corporate SG&A decreased
0.8% from 4.0% in 2007 to 3.2% in 2008.
Corporate SG&A expenses increased $1.9 million, or 15.0%, from $12.7 million in
2006 to $14.6 million in 2007. The increase relates primarily to salaries and
employee-related expenses, which increased $1.7 million. Of these expenses, $0.9
million relates to the management incentive plan. Since the Company experienced
losses in 2006, we incurred no management incentive plan expense during that
year. The remainder is attributable to a general increase in corporate overhead
positions to support Company growth. There was also an increase in professional
services for items such as Sarbanes-Oxley ("SOX") compliance and audits totaling
$0.2 million and an increase of amortization and depreciation expense of $0.2
million. These increases were offset by a decrease in stock compensation expense
of $0.5 million. As a percent of revenue, corporate SG&A decreased 0.2% from
4.2% in 2006 to 4.0% in 2007.
36
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Operating Profit
----------------
Operating profit increased $8.8 million to $31.6 million in 2008 as compared to
$22.8 million in 2007, increasing, as a percentage of total revenue, from 6.3%
in 2007 to 6.4% in 2008. This increase was primarily the result of higher levels
of project activity in the markets we serve, along with savings in the SG&A.
Operating profit increased $26.4 million to $22.8 million in 2007 as compared to
$(3.6) million in 2006, increasing, as a percentage of total revenue, from
(1.2)% in 2006 to 6.3% in 2007. This increase was primarily the result of the
Company's loss in 2006 on two fixed-price contracts that did not recur in 2007.
However, operating profit in 2007 was reduced by a $4.0 million charge taken in
relation to the SLE project, discussed in further detail in Item 6.
Other Income (Expense)
----------------------
Other income decreased from $379,600 in 2007 to $128,800 in 2008. Other income
was $651,500 in 2006. Other income in 2008 was derived mainly from gains on the
sale of fixed assets with the majority being from the sale of land in Beaumont
which resulted in a gain of $83,900. Other income in 2007 was derived from a
gain of $483,500 from the sale of our building in Baton Rouge offset by a loss
of $103,900 on the sale of assets from the closing of our Dallas office.
Net Income
----------
Net Income increased $5.8 million to $18.3 million in 2008 as compared to $12.5
million in 2007, increasing, as a percentage of total revenue, from 3.4% in 2007
to 3.7% in 2008. Net Income increased $16.0 million to $12.5 million in 2007 as
compared to $(3.5) million in 2006, increasing, as a percentage of total
revenue, from (1.2)% in 2006 to 3.4% in 2007.
37
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
2008 Compared to 2007 and 2007 Compared to 2006
Engineering Segment:
Twelve Months Ended December 31,
---------------------------------------------------------------------------
2008 2007 2006
--------------------- ---------------------- ------------------------
(dollars in thousands)
---------------------------------------------------------------------------
Gross revenue $ 252,711 $ 221,802 $ 215,444
Less intercompany revenue (1,009) (15) (138)
------------- ------------- -------------
Total revenue:
Detail-design 168,079 66.8% 132,210 59.6% 111,503 51.8%
Field services 50,647 20.1% 56,379 25.4% 53,921 25.0%
Procurement services 30,038 11.9% 16,011 7.2% 19,271 9.0%
Fixed-price 2,938 1.2% 17,187 7.8% 30,611 14.2%
------------- ------------- -------------
Total revenue: $ 251,702 100.0% $ 221,787 100.0% $ 215,306 100.0%
Gross profit: $ 38,869 15.4% $ 39,966 18.0% $ 15,661 7.3%
Operating SG&A expense: $ 7,083 2.8% $ 11,665 5.3% $ 9,466 4.4%
------------- ------------- -------------
Operating income: $ 31,786 12.6% $ 28,301 12.8% $ 6,195 2.9%
Revenue
-------
Engineering revenue accounted for 51.0% of our total revenue for the year,
increasing $29.9 million from $221.8 million in 2007 to $251.7 million in 2008.
During 2007, revenue increased $6.5 million from $215.3 million in 2006.
The increase in engineering revenue was primarily brought about by increased
midstream and downstream capital spending in the energy industry. Refining
related activity in 2008 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, with numerous
projects in North America currently underway to deliver crude oil, natural gas,
petrochemicals and refined products. Renewable energy appears to be an emerging
area of activity and potential growth, with the Company currently performing a
variety of services primarily on biomass related facilities. The Engineering
segment's estimated backlog at December 31, 2008 was $113.5 million.
Our detail design services proved strong with revenues increasing 27.2%, or
$35.9 million, from $132.2 million in 2007 to $168.1 million in 2008. This
increase was mainly due to a refinery rebuild project. In 2007, these services
increased 18.6%, or $20.7 million, from $111.5 million in 2006. As a percent of
total engineering revenue, detail design revenue increased 7.2% to 66.8% in 2008
from 59.6% in 2007 and increased 7.8% in 2007 from 51.8% in 2006.
Our field services revenues decreased 10.3%, or $5.8 million, from $56.4 million
in 2007 to $50.6 million in 2008 due to a general decrease in demand from our
existing customers for in-plant resources. In 2007, field services revenue
increased 4.6%, or $2.5 million, from $53.9 million in 2006. This was due to an
increased demand from our existing customers for in-plant resources. As a
percent of total engineering revenue, field services revenue decreased 5.3% to
20.1% in 2008 from 25.4% in 2007 and increased 0.4% in 2007 from 25.0% in 2006.
Revenue from procurement services increased 87.5%, or $14.0 million, from $16.0
million in 2007 to $30.0 million in 2008. In 2007, these services decreased
17.1%, or $3.3 million, from $19.3 million in 2006. The significant increase
38
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
in 2008 is primarily related to a large project to rebuild a client facility
which has been completed. The decrease in 2007 was due to the completion of the
two EPC projects. As a percent of total engineering revenue, procurement
services revenue increased 4.7% to 11.9% in 2008 from 7.2% in 2007 and decreased
1.8% in 2007 from 9.0% in 2006. 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 decreased 83.1%, or $14.3 million, from $17.2 million in
2007 to $2.9 million in 2008. There was a decrease in 2007 of 43.8%, or $13.4
million, from $30.6 million in 2006. As a percent of total engineering revenue,
fixed-price revenue decreased 6.6% to 1.2% in 2008 from 7.8% in 2007, and in
2007 it decreased 6.4% from 14.2% in 2006. This decrease was the result of the
Company's decision to be very selective in the fixed-price contracts it
undertakes due to the risk of loss if the contract costs are not estimated
accurately.
Gross Profit
------------
Our Engineering segment's total gross profit decreased $1.1 million, or 2.8%,
from $40.0 million in 2007 to $38.9 million in 2008. As a percentage of total
gross profit, the Engineering segment's gross profit decreased from 18.0% to
15.4% during the same period. The decrease in total gross profit percentages was
due to the increase in low margin procurement services revenue from $16.0
million to $30.0 million. Total gross profit in 2007 increased $24.3 million, or
155.2%, from $15.7 million in 2006 due to the completion of the two EPC loss
projects.
In 2006, the Company shifted a portion of its services to developer-type work
for customers that are typically smaller than its historical customer base,
including SLE. The viability of these projects and the creditworthiness of these
types of customers must be carefully analyzed to assure profitable results. In
the future, the Company intends to analyze these projects on a more
comprehensive basis before accepting them. However, the Company believes that
some of its customers may begin to require contracts on a fixed-price basis.
The Company has also engaged in a number of entrepreneurial ventures over the
past several years, not all of which have been profitable. In the future, the
Company intends to scrutinize these projects much more carefully before engaging
in them and exit them more quickly if they are not successful. During 2007, one
of those ventures was discontinued in March with the closing of our Dallas
office as the location did not provide the intended benefits.
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 16.7%. 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
---------------------------------------------------------------
Our Engineering segment's SG&A expenses decreased $4.6 million, or 39.3%, from
$11.7 million in 2007 to $7.1 million in 2008. In 2007, the Engineering
segment's SG&A expenses increased $2.2 million, or 23.2%, from $9.5 million in
2006. As a percent of revenue, SG&A decreased 2.5% from 5.3% in 2007 to 2.8% in
2008, and it increased 0.9% in 2007 from 4.4% in 2006.
The Engineering segment's SG&A expenses decreased $3.1 million in 2008 from 2007
as a result of decreases for bad debt expense almost entirely related to the
creation of the reserve against the SLE notes receivable in 2007. Also,
amortization and depreciation decreased $0.3 million, while salaries and related
employee expenses decreased $1.2 million.
39
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
The Engineering segment's SG&A expenses increased $4.7 million in 2007 over 2006
as a result of increases for bad debt expense. Of this increase, $4.0 million
was related to creation of the reserve against the SLE notes receivable, while
the remainder comprised general increases to the allowance for doubtful
accounts. To offset these increases, facilities and office expenses decreased by
$1.2 million due to the closing of the Dallas office in March 2007. Also,
salaries and employee expenses decreased by $0.9 million as a result of the
reclassification of some employees from overhead to direct expense positions.
Additional savings were recognized as a result of the reduction in stock
compensation expense and professional services.
Operating Profit
----------------
Operating profit increased $3.5 million to $31.8 million in 2008 as compared to
$28.3 million in 2007, which increased $22.1 million from $6.2 million in 2006.
As a percentage of total revenue, operating profit remained relatively stable at
12.6% in 2008 compared to 12.8% in 2007, but increased significantly from 2.9%
in 2006.
40
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Construction Segment:
Twelve Months Ended December 31,
--------------------------------------------------------------------
2008 2007 2006
---------------------- -------------------- -------------------
(dollars in thousands)
--------------------------------------------------------------------
Gross revenue $ 147,714 $ 86,811 $ 37,083
Less intercompany revenue (8,354) (13,601) (955)
------------- ----------- -----------
Total revenue:
Pipeline 125,731 90.2% 60,430 82.5% 28,987 80.2%
Non-pipeline 13,629 9.8% 12,780 17.5% 7,141 19.8%
------------- ----------- -----------
Total revenue: $ 139,360 100.0% $ 73,210 100.0% $ 36,128 100.0%
Gross profit: $ 10,452 7.5% $ 9,724 13.3% $ 3,725 10.3%
Operating SG&A expense: $ 2,993 2.1% $ 2,591 3.5% $ 2,146 5.9%
------------- ----------- -----------
Operating income: $ 7,459 5.4% $ 7,133 9.7% $ 1,579 4.4%
Revenue
-------
The Construction segment contributed 28.3% of our total revenue for 2008, as its
revenue increased $66.2 million, or 90.4%, from $73.2 million in 2007 to $139.4
million in 2008. The revenue in 2007 for this segment increased 102.8%, or $37.1
million, from $36.1 million in 2006. The Construction segment's estimated
backlog at December 31, 2008 was $128.9 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.
Non-pipeline revenue, as a percent of the segment's total revenue, continued to
decline from 19.8% in 2006, to 17.5% in 2007 and 9.8% during 2008. Our
non-pipeline revenue growth increased 6.6% year-over-year from $12.8 million in
2007 to $13.6 million in 2008. Increased capital spending in the pipeline area
in 2008, particularly in inspection services, contributed 90.2% of the segment's
total revenue in 2008 as pipeline revenue has grown 108% year-over-year from
2006 to 2007 and again from 2007 to 2008.
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 Profit
------------
The Construction segment's gross profit increased $0.8 million, or 8.3%, from
$9.7 million in 2007 to $10.5 million in 2008. In 2007, this segment's gross
profit increased $6.0 million, or 162.7%, from $3.7 million in 2006. As a
percent of revenue, gross profit decreased by 5.8%, from 13.3% in 2007 to 7.5%
in 2008, but it increased 3.0% in 2007 from 10.3% in 2006.
The percentage of gross profit has decreased while revenue has been increasing
significantly due to the changing mix of work being performed in this segment.
The main increase in work has been in pipeline related revenues which typically
carry lower margins than our non-pipeline related revenues.
41
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Operating Selling, General and Administrative ("SG&A") Expenses
---------------------------------------------------------------
The Construction segment's SG&A expenses increased $0.4 million, or 15.4%, from
$2.6 million in 2007 to $3.0 million in 2008. In 2007, SG&A expenses increased
$0.4 million, or 19.1%, from $2.1 million in 2006. As a percent of revenue, SG&A
decreased 1.4% from 3.5% in 2007 to 2.1% in 2008, and decreased 2.4% in 2007
from 5.9% in 2006.
The Construction segment's SG&A expenses increased $0.4 million in 2008 over
2007 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.
The Construction segment's SG&A expenses increased $0.4 million in 2007 over
2006 mainly due to increases in salaries and related employee expenses of
$362,000. Overhead positions were added to accommodate the internal and
acquisition-related growth of this segment. Additionally, facilities expense
increased $75,000 as a result of additional office space leased to house
acquired operations.
Operating Profit
----------------
This segment's operating profit increased $0.4 million to $7.5 million in 2008
from $7.1 million in 2007, and it increased $5.5 million in 2007 from $1.6
million in 2006. As a percentage of total revenue, operating profit decreased to
5.4% in 2008 from 9.7% in 2007, but it increased in 2007 from 4.4% in 2006.
42
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Automation Segment:
Twelve Months Ended December 31,
------------------------------------------------------------------
2008 2007 2006
-------------------- --------------------- --------------------
(dollars in thousands)
------------------------------------------------------------------
Gross revenue $ 60,372 $ 39,115 $ 37,206
Less intercompany revenue (642) (1,349) (2,318)
----------- ----------- -----------
Total revenue:
Fabrication 28,266 47.3% 22,814 60.4% 26,032 74.6%
Non-fabrication 31,464 52.7% 14,952 39.6% 8,856 25.4%
----------- ----------- -----------
Total revenue: $ 59,730 100.0% $ 37,766 100.0% $ 34,888 100.0%
Gross profit: $ 7,485 12.6% $ 3,384 9.0% $ 4,488 12.9%
Operating SG&A expense: $ 3,741 6.3% $ 3,442 9.1% $ 3,909 11.2%
----------- ----------- -----------
Operating income (loss): $ 3,744 6.3% $ (58) (0.2%) $ 579 1.7%
Revenue
-------
The Automation segment contributed 12.1% of our total revenue for the year, as
its revenue increased $21.9 million, or 57.9%, from $37.8 million in 2007 to
$59.7 million in 2008. This segment's revenue also increased 8.3% in 2007, or
$2.9 million, from $34.9 million in 2006. The 2008 revenue increased $8.9
million as a result of the Hurricane Ike rebuilding project. This project is
expected to end during the first quarter of 2009.
The Company began to focus more on automation services beginning in 2005 and
began marketing them more aggressively at that time. Refining-related activity
has been particularly strong, including projects to satisfy environmental
mandates. This, together with the acquisition of Analyzer Technology
International, Inc. ("ATI") in January 2006, has increased the client demand for
turn-key, analytical solutions. Another factor positively affecting the
automation business is that the computer-based distributed control systems
equipment used for facility plant automation becomes technologically obsolete
over time, supporting ongoing replacement. In 2008, this segment expanded its
customer base and geographic reach to include specialty chemicals and pulp and
paper markets with the acquisition of Advanced Control Engineering, LLC in
September. The Automation segment's estimated backlog at December 31, 2008 was
$43.2 million, but the backlog could be negatively impacted by the current and
possible future economic downturn.
Gross Profit
------------
The Automation segment's gross profit increased $4.1 million, or 120.6%, from
$3.4 million in 2007 to $7.5 million in 2008. In 2007, it decreased $1.1
million, or 24.5%, from $4.5 million in 2006. Also, as a percent of revenue,
gross profit increased by 3.6% from 9.0% in 2007 to 12.6% in 2008, but it
decreased 3.9% in 2007 from 12.9% in 2006.
During 2007, the Automation segment expanded into several new regions, resulting
in higher increased costs in relation to revenues. Also during 2007, an
unanticipated shortage of available experienced labor caused an increase in
labor hourly rates of approximately 25%. During that same period, most material
costs unexpectedly increased by approximately 8% to 10%, and the price of copper
wire increased 300%. These increases in labor and material costs adversely
affected project margins on fixed-price projects in 2007.
43
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Selling, General and Administrative ("SG&A") Expenses
-----------------------------------------------------
The Automation segment's SG&A expenses increased $0.3 million, or 8.8%, from
$3.4 million in 2007 to $3.7 million in 2008. In 2007, SG&A expenses decreased
$0.5 million, or 12.8%, from $3.9 million in 2006. As a percent of revenue, SG&A
decreased 2.8% from 9.1% in 2007 to 6.3% in 2008, and it decreased 2.1% in 2007
from 11.2% in 2006.
The automation segment's SG&A expenses increased $300,000 in 2008 over 2007,
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. Additional savings of
$61,000 was recognized in professional services.
This segment's SG&A expenses decreased $467,000 in 2007 over 2006, mainly due to
decreases in salaries and related employee expenses of $896,000. Salaries and
expenses for business development personnel were moved to corporate overhead in
July 2006 to be consistent with the reporting of these costs throughout the
Company. The reduction of overhead personnel and the transfer of Automation
segment overhead personnel expense to direct expense also contributed to this
decrease. We also recognized professional services savings of $152,000 and
$85,000 less in bad debt expense in 2007 compared to 2006. Offsetting these
savings, amortization costs increased by $674,000. Of these additional costs,
$432,000 was goodwill impairment.
Operating Profit
----------------
This segment's operating profit increased $3,802,000 to a profit of $3,744,000
in 2008 as compared to a loss of ($58,000) in 2007. Operating profit in 2007
decreased $637,000 from $579,000 in 2006. As a percentage of total revenue,
operating profit increased to 6.3% in 2008 from (0.2)% in 2007, but it decreased
in 2007 from 1.7% in 2006.
44
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Land Segment:
Twelve Months Ended December 31,
--------------------------------------------------------------------
2008 2007 2006
--------------------- ------------------- ----------------------
(dollars in thousands)
--------------------------------------------------------------------
Gross revenue $ 42,540 $ 30,464 $ 16,768
Less intercompany revenue - - -
------------- ----------- -------------
Total Revenue: $ 42,540 100.0% $ 30,464 100.0% $ 16,768 100.0%
Gross profit: $ 7,001 16.5% $ 4,543 14.9% $ 2,390 14.2%
Operating SG&A expense: $ 2,887 6.8% $ 2,438 8.0% $ 1,674 10.0%
------------- ----------- -------------
Operating income: $ 4,114 9.7% $ 2,105 6.9% $ 716 4.3%
The Land segment was created through an acquisition of WRC Corporation in May
2006. Therefore, financial information for 2006 only includes seven months of
activity compared to a complete year in both 2007 and 2008.
Revenue
-------
The Land segment contributed 8.6% of our total revenues for 2008, as its revenue
increased $12.0 million, or 39.4%, from $30.5 million in 2007 to $42.5 million
in 2008. This segment's revenue also increased 81.6% in 2007, or $13.7 million,
from $16.8 million in 2006. The WRC Corporation acquisition in May 2006 was the
foundation for this segment. Therefore, 2006 financial information only includes
seven months of activity. This acquisition has given ENGlobal additional
cross-selling capabilities and allows us to offer our clients a turkey solution
for a pipeline project, with the additional capability of right-of-way
acquisition through the Land group.
A general increase in capital spending by our clients has contributed to this
increase in Land segment revenue. We have also been able to increase our client
base. The Land segment's estimated backlog at December 31, 2008 was $40.1
million. However, the backlog may be negatively impacted by current and possible
future economic downturn.
Gross Profit
------------
Gross profit for our Land segment increased $2.5 million, or 55.6%, from $4.5
million in 2007 to $7.0 million in 2008. In 2007, it increased $2.2 million, or
91.7%, from $2.4 million in 2006. This increase in gross profit 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 and increased 0.7% in 2007 from 14.2% in 2006.
Selling, General and Administrative ("SG&A") Expenses
-----------------------------------------------------
The Land segment's SG&A expenses increased $0.5 million, or 20.8%, from $2.4
million in 2007 to $2.9 million in 2008. In 2007, SG&A expenses increased $0.7
million, or 41.2%, from $1.7 million in 2006.
As a percent of revenue, SG&A decreased 1.2% from 8.0% in 2007 to 6.8% in 2008
and decreased 2.0% in 2007 from 10.0% in 2006.
The increase of $0.5 million is 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.
45
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
The increase in 2007 is primarily due to the extended months reported for 2007.
However, in reviewing SG&A as a percentage of revenue, there were decreases of
0.2% in facilities, 0.3% in marketing, and 0.7% in salaries and related employee
expenses. In 2007, the Houston operations of the former WRC Corporation moved
into the existing ENGlobal facilities and the Engineering segment took over some
of the former WRC Corporation's facilities in Denver.
Operating Profit
----------------
The Land segment's operating profit increased by $2.0 million from $2.1 million
in 2007 to $4.1 million in 2008. Operating profit in 2007 increased $1.4 million
from $0.7 million in 2006. As a percentage of total revenue, operating profit
increased to 9.7% in 2008 from 6.9% in 2007, and increased in 2007 from 4.3% in
2006.
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 during the year ended December 31, 2008 was
borrowings under our senior revolving credit facility with Comerica Bank,
discussed under "Senior Revolving Credit Facility" below (the "Comerica Credit
Facility"). Cash on hand at December 31, 2008 totaled $1.0 million and
availability under the Comerica Credit Facility totaled $27.1 million resulting
in total liquidity of $28.1 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 Comerica Credit
Facility.
If any such event occurs, we would be forced to consider alternative financing
options.
Cash Flows from Operating Activities
Operating activities provided $8.7 million in net cash in 2008 but required the
use of $2.0 million and $9.0 million in net cash in each of 2007 and 2006
respectively. For the year ended December 31, 2008, cash generated from
operations was offset by the increase in working capital primarily due to
increased trade receivables of $30.1 million, increased accounts payable of $8.2
million, and increased accrued compensation and benefits of $7.7 million. The
increase in trade receivables was primarily due to amounts billed but not
collected in a timely manner in our Engineering segment and circumstances
preventing the timely internal processing of invoices in our Automation segment.
The increase in accounts payable primarily related to vendor sub-contractor
payments of approximately $8.7 million related to projects in both our
Engineering and Automation segments. The increase in accrued compensation and
benefits was primarily related to year-over-year timing differences of pay
period ending dates during the month of December.
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.
46
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Cash flows from operating activities were significantly lower in 2006 than in
2007 and 2008 primarily due to the $13.7 million in operating losses recorded
during 2006 on two fixed price EPC contracts.
Cash Flows from Investing Activities
Investing activities used cash totaling $4.4 million in 2008, compared to $1.7
million in 2007 and $9.3 million in 2006. 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 of $2.2 million
primarily for computers and technical software applications. The investing
activity in 2006, which was significantly higher than in 2007 and 2008, was
primarily a result of the investments made in acquiring WRC Corporation and
certain assets of both ATI and Watco.
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
Comerica Credit Facility, discussed under "Senior Revolving Credit Facility"
below, limits annual capital expenditures to $3.25 million.
Cash Flows from Financing Activities
Financing activities used cash totaling $4.1 million in 2008, but provided cash
totaling $3.2 million and $19.6 million in 2007 and 2006, respectively. Our
primary financing mechanism is our line of credit under the Comerica Credit
Facility. The line of credit has been used principally to finance working
capital requirements. During 2008, our borrowings on the line of credit were
$296.0 million in the aggregate, and we repaid an aggregate of $301.2 million on
our short-term and long-term bank and other debt. During 2007, our borrowings on
the line of credit were $175.7 million in the aggregate, and we repaid an
aggregate of $171.8 million on our short-term and long-term bank and other debt.
Cash flow from financing activity in 2006, which was significantly higher than
in 2007 and 2008, was primarily a result of borrowings related to our
acquisitions of WRC Corporation, ATI, and Watco plus the losses related to the
two fixed-price contracts.
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 $1.9 million.
Senior Revolving Credit Facility
Historically, we have satisfied our cash requirements through operations and
borrowings under a revolving credit facility. During August 2007, the Company
entered into a new credit agreement with Comerica Bank, which provides a
three-year, $50 million senior secured revolving credit facility ("Comerica
Credit Facility"). The Comerica Credit Facility is guaranteed by substantially
all of Company's subsidiaries, is secured by substantially all of the Company's
assets, and positions Comerica as senior to all other debt. It replaced a $35
million senior revolving credit facility that would have expired in July 2009.
The outstanding balance on the Comerica Credit Facility as of December 31, 2008
was $22.5 million. The remaining borrowings available under the Comerica Credit
Facility as of December 31, 2008 were $27.1 million after consideration of loan
covenant restrictions.
At the Company's option, amounts borrowed under the Comerica Credit Facility
will bear interest at a Eurodollar-based Rate plus an additional margin based on
the Leverage Ratio or at the Prime-based Rate. The additional margin ranges from
125 basis points to 175 basis points on the LIBOR-based loans.
Upon maturity, the LIBOR debt will automatically roll into the Revolver unless
the Company elects to renew, at which time a new maturity date and interest rate
will be set.
47
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
The Comerica Credit Facility requires the Company to maintain certain financial
covenants as of the end of each calendar month, including the following:
o Leverage Ratio not to exceed 3.00 to 1.00;
o Asset Coverage Ratio less than 1.00 to 1.00; and
o Net Worth greater than the sum of $40.1 million plus 75% of positive
Net Income earned in each fiscal quarter after January 1, 2007 plus
100% of the net proceeds of any offering, sale or other transfer of
any capital stock or any equity securities.
The Comerica Credit Facility also contains covenants that place certain
limitations on the Company including limits on new debt, mergers, asset sales,
investments, fixed-price contracts, and restrictions on certain distributions.
The Company was in compliance with all covenants under the Comerica Credit
Facility as of December 31, 2008.
Due to significant losses incurred on two fixed-price projects during the third
and fourth quarters of 2006, the Company requested and was successful in
obtaining a waiver and subsequent amendment to the Comerica Credit Facility in
order to meet the monthly fixed charge ratio. If we had not been able to obtain
a waiver or amendment of the covenant, we may have been unable to make further
borrowings and may have been required to repay all loans then outstanding under
the Comerica Credit Facility.
Letters of Credit
As of December 31, 2008, the Company had outstanding letters of credit totaling
$367,000 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, 2008 was $25.7 million (see
Note 10 to Consolidated Financial Statements), a decrease from $30.8 million as
of December 31, 2007. As of December 31, 2008, the Company had outstanding
letters of credit totaling $367,000 primarily to cover self-insured deductibles
under both our general liability and workers compensation insurance policies.
The following table summarizes our contractual obligations as of December 31, 2008:
Payments Due by Period
-------------------------------------------------------------------------------
2013 and
2009 2010 2011 2012 thereafter Total
----------- ----------- ---------- ----------- ------------- -----------
(in thousands)
-------------------------------------------------------------------------------
Long-term debt $ 1,686 $ 23,614 $ - $ - $ - $ 25,300
Capital Lease 175 192 51 - - 418
Contractual interest
and discount on certain notes(1) 1,222 1,150 1 - - 2,373
----------- ----------- ---------- ----------- ------------- -----------
Subtotal long-term debt 3,083 24,956 52 - - 28,091
Insurance note payable 1,058 - - - - 1,058
Operating leases 5,353 4,819 3,991 2,636 5,789 22,588
----------- ----------- ---------- ----------- ------------- -----------
Total contractual cash obligations $ 9,494 $ 29,775 $ 4,043 $ 2,636 $ 5,789 $ 51,737
=========== =========== ========== =========== ============= ===========
(1) Future interest consists primarily of interest on the line of credit under
the Comerica Credit Facility. The rate applicable to debt outstanding at
December 31, 2008 was 3% and fluctuates with the prime rate. Interest and
discount rates on the remainder of the Company's notes payable vary from 4% to
6%, with the weighted average being 5.8% at December 31, 2008.
48
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
2008 Non-Cash Transactions
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. In 2006, non-cash transactions included $216,000
notes receivable issued in connection with a sale of assets and $3.9 million
notes payable issued for acquisitions. Also in 2006, $1.4 million of stock was
issued associated with the acquisition of WRC Corporation. We also acquired
insurance with notes payable of $1.6 million, $1.2 million, and $1.3 million in
2008, 2007, and 2006, 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 Note 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
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.
Although work has not recommenced on the Project and SLE has not obtained
permanent financing, the Company continues to believe that, due to the value of
the collateral and the Company's lien position, the Note Receivable is fully
49
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
collectible. Specifically, an updated appraisal 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 believes that if the collateral is liquidated, SLE's obligations to
the Company would be paid in full pursuant to the collateral mortgage in favor
of the Company. However, collectability is not assured at this time. 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. 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 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.
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.
There are 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 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 FIN 48, 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, 2008, 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.
50
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
The Company does not have any examination on-going by the Internal Revenue
Service, and the open years subject to audit are currently tax years 2005-2007.
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 increased to $94.6 million
from $64.1 million as of December 31, 2008 and 2007, respectively. The number of
days outstanding for trade accounts receivable increased from 61 days at
December 31, 2007, to 64 days at December 31, 2008 primarily due to
administrative delays in getting billings completed on new projects and clients
extending payments beyond payment terms. We do not expect the number of days
outstanding for trade accounts receivable to materially change in the first
quarter of 2009. Bad debt expense was approximately .03% and .08% of revenue for
the years ended December 31, 2008 and 2007. We increased our allowance for
doubtful accounts from $1.4 million to $2.3 million or 2.0% of trade accounts
receivable balance for each of the years 2007 and 2008, 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
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 new 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.
51
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
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 (typically
smaller 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 a
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. 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 Statement of Position ("SOP") 81-1,
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 and 2006, pass-through transactions totaled $0.5
million and $8.9 million, respectively. We had no pass-through transactions in
2008.
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.
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. Goodwill is evaluated for impairment by first comparing
management's estimate of the fair value of a reporting unit with its carrying
52
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
value, including goodwill. Reporting units for the purpose of goodwill
impairment calculations are components one level below our reportable operating
segments.
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. As a result, actual results may differ from the estimates utilized in
our discounted cash flow analysis. The use of alternate judgments and/or
assumptions could result in significantly different fair value estimates and
therefore different decisions about the appropriate recognition of impairment
charges in the financial statements.
As a result of these uncertainties, we utilize multiple scenarios and assign
probabilities to each of the scenarios in the discounted cash flow analysis. The
results of the discounted cash flow analysis are then compared to the carrying
value of the reporting unit. If the carrying value of a reporting unit exceeds
its fair value, a computation of the implied fair value of goodwill is compared
with its carrying value. If the carrying value of the reporting unit goodwill
exceeds the implied fair value of that goodwill, an impairment loss is
recognized in the amount of the excess. If an impairment charge is incurred, it
negatively impacts our results of operations and financial position.
The results of our annual goodwill impairment analysis for the year ended
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 and did not recognize impairment for the year ended December 31, 2006.
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 $4.4 million and $3.2 million
as of December 31, 2008 and December 31, 2007, respectively. These net deferred
tax assets are identified in Footnote 16 to the financial statements.
Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 157, "Fair Value Measurements" which establishes a framework for measuring
fair value, and expands disclosures about fair value measurements. The effective
date of SFAS 157 for us was January 1, 2008. Adoption of SFAS 157 has not had
and is not expected to have a material impact on our consolidated financial
statements.
In December 2007, the FASB issued SFAS 160, "Noncontrolling Interests in
Consolidated Financial Statements--An Amendment of ARB No. 51." SFAS 160
establishes new accounting and reporting standard for the noncontrolling
interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160
is effective for fiscal periods, and interim periods within those fiscal years,
beginning on or after December 15, 2008. This new accounting standard will not
have an impact on our financial statements unless and until we enter into
transactions that create noncontrolling interests.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
Combinations" ("SFAS 141R"). SFAS 141R establishes principles and requirements
for how an acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, any noncontrolling
interest in the acquiree and the goodwill acquired. SFAS 141R also establishes
disclosure requirements to enable the evaluation of the nature and financial
effects of the business combination. SFAS 141R will apply to ENGlobal
prospectively for future business combinations with an acquisition date on or
after January 1, 2009.
53
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
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, 2008 and 2007, 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 SFAS No. 107 or SFAS No.
133. There are no material investments at December 31, 2008. 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 $22.5 million and $27.8 million as of
December 31, 2008 and 2007, 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 5.05% as of December 31, 2008, to an average
interest rate of 5.56%, annual interest expense would have been approximately
$144,000 higher in 2008 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. Assuming an increase in interest
rate to 7% on our variable-rate debt obligation i.e., an increase from the
actual average interest rate of 5.05% as of December 31, 2008, annual interest
expense would have been approximately $556,000 higher in 2008 based on an annual
average line of credit debt obligation, plus 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, 2008.
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, 2008 and 2007 and statements of income, cash flows and stockholders' equity
for the three-year period ended December 31, 2008, are attached hereto and made
part hereof.
54
INDEX
PAGE
------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON CONSOLIDATED
FINANCIAL STATEMENTS 56
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL
CONTROL OVER FINANCIAL REPORTING 57
CONSOLIDATED BALANCE SHEETS
December 31, 2008 and 2007 58
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2008, 2007 and 2006 59
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 2008, 2007 and 2006 60
CONSOLIDATED STATEMENTS OF CASH FLOW
Years Ended December 31, 2008, 2007 and 2006 61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 62
SCHEDULE II
Valuation and Qualifying Accounts 91
55
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, 2008 and 2007,
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,
2008. 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, 2008 and 2007, and the results of their
operations and their cash flows for each of the years in the three year period
ended December 31, 2008 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, 2008, 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 16, 2009,
expressed an unqualified opinion on the Company's internal control over
financial reporting.
/s/ Hein & Associates LLP
-------------------------
Hein & Associates LLP
Houston, Texas
March 16, 2009
56
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, 2008, 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, 2008, 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, 2008 and 2007, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 2008, of ENGlobal and
our report dated March 16, 2009 expressed an unqualified opinion thereon.
/s/ Hein & Associates LLP
-------------------------
Hein & Associates LLP
Houston, Texas
March 16, 2009
57
ENGLOBAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2008 AND 2007
(in thousands)
ASSETS
Current Assets 2008 2007
--------- ---------
Cash and cash equivalents $ 1,000 $ 908
Trade receivables, net of allowances of $2,288 and $1,405 96,023 64,141
Prepaid expenses and other current assets 2,392 2,125
Current portion of notes receivable 59 154
Costs and estimated earnings in excess of billings on uncompleted contracts 6,913 6,981
Deferred tax asset 4,281 3,081
--------- ---------
Total current assets $ 110,668 $ 77,390
Property and equipment, net 5,744 6,472
Goodwill 21,457 19,926
Other intangible assets, net 5,000 4,112
Long-term notes receivable, net of current portion and allowances 8,636 10,593
Deferred tax asset, non-current 153 77
Other assets 1,047 1,020
--------- ---------
Total assets $ 152,705 $ 119,590
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 18,830 $ 10,482
Accrued compensation and benefits 24,432 16,182
Notes payable 1,058 931
Current portion of long-term debt and leases 1,861 1,508
Deferred rent 416 558
Billings in excess of costs and estimated earnings on uncompleted contracts 208 963
Federal and state income taxes payable 2,472 963
Other 2,805 2,888
--------- ---------
Total current liabilities $ 52,082 $ 34,475
Long-Term Debt, net of current portion 23,614 29,318
Long-Term Leases, net of current portion 243 --
Total liabilities $ 75,939 $ 63,793
--------- ---------
Commitments and Contingencies (Notes 3, 10, 11, 16, and 19)
Stockholders' Equity
Common stock - $0.001 par value; 75,000,000 shares authorized; 27,294,852
and 27,051,766 shares outstanding and 27,294,852 and 27,051,766 issued
at December 31, 2008 and 2007, respectively 27 28
Additional paid-in capital 36,415 33,593
Retained earnings 40,439 22,181
Accumulated other comprehensive income (loss) (115) (5)
--------- ---------
Total stockholders' equity $ 76,766 $ 55,797
--------- ---------
Total liabilities and stockholders' equity $ 152,705 $ 119,590
========= =========
See accompanying notes to these consolidated financial statements.
58
ENGLOBAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
--------------------------------------------
(in thousands)
--------------------------------------------
2008 2007 2006
------------ ------------ ------------
Operating Revenue $ 493,332 $ 363,227 $ 303,090
------------ ------------ ------------
Operating Costs and Expenses:
Operating Costs 429,525 305,610 276,826
Selling, General, and Administrative Expenses 32,208 34,774 29,884
------------ ------------ ------------
Total Operating Costs and Expenses 461,733 340,384 306,710
------------ ------------ ------------
Operating Income (Loss) $ 31,599 $ 22,843 $ (3,620)
Interest and Other expense (1,576) (2,170) (679)
------------ ------------ ------------
Income (loss) before provision for income taxes $ 30,023 $ 20,673 $ (4,299)
Provision for Income Taxes 11,765 8,209 (813)
------------ ------------ ------------
Net Income (Loss) $ 18,258 $ 12,464 $ (3,486)
============ ============ ============
Basic earnings (loss) per common share $ 0.67 $ 0.46 $ (0.13)
Weighted average common shares outstanding 27,180 26,916 26,538
============ ============ ============
Diluted earnings (loss) per common share $ 0.66 $ 0.45 $ (0.13)
Weighted average common shares outstanding 27,672 27,435 26,538
============ ============ ============
See accompanying notes to these consolidated financial statements.
59
ENGLOBAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
(in thousands)
2008 2007 2006
-------- -------- --------
Preferred Stock $ -- $ -- $ --
Common Stock
Balance at beginning of year 28 28 27
Common stock issued -- -- 1
Retirement of treasury stock (1)
-------- -------- --------
Balance at end of year 27 28 28
-------- -------- --------
Paid-in Capital
Balance at beginning of year 33,593 31,147 27,230
Common stock issued 1,338 1,007 2,333
Stock based compensation 1,171 1,439 2,176
Deferred tax adjustment 313
-------- -------- --------
Balance at end of year 36,415 33,593 31,147
-------- -------- --------
Retained Earnings
Balance at beginning of year 22,181 9,717 13,203
Net income (loss) 18,258 12,464 (3,486)
-------- -------- --------
Balance at end of year 40,439 22,181 9,717
-------- -------- --------
Treasury Stock
Balance at beginning of year -- -- (592)
Retirement of treasury stock -- -- 592
-------- -------- --------
Balance at end of year -- -- --
-------- -------- --------
Accumulated Other Comprehensive Income (Loss), net of taxes
Balance at beginning of year (5) (30) (4)
Foreign currency translation adjustment (110) 25 (26)
-------- -------- --------
Balance at end of year (115) (5) (30)
-------- -------- --------
Total Stockholder's Equity $ 76,766 $ 55,797 $ 40,862
======== ======== ========
See accompanying notes to these consolidated financial statements.
60
ENGLOBAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
Years Ended December 31,
-----------------------------------
(in thousands)
-----------------------------------
2008 2007 2006
--------- --------- ---------
Cash Flows from Operating Activities
Net income (loss) $ 18,258 $ 12,464 $ (3,486)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities -
Depreciation and amortization 4,642 4,550 3,369
Goodwill impairment -- 432 --
Stock based compensation 1,233 1,439 2,176
Deferred income tax expense (1,200) (1,962) (2,316)
(Gain) Loss on disposal of property, plant and equipment (100) (408) 42
Changes in current assets and liabilities, net of acquisitions -
Trade receivables (30,145) (3,894) (9,825)
Notes receivable -- (12,329) --
Reserve on notes receivable 558 3,150 --
Costs and estimated earnings in excess of billings 68 (1,591) (1,245)
Prepaid expenses and other assets (792) (1,652) 662
Accounts payable 8,185 (4,190) (1,236)
Accrued compensation and benefits 7,729 3,375 2,261
Billings in excess of costs and estimated earnings (755) 423 (3,235)
Other liabilities (844) (3,416) 5,079
Income taxes 1,509 1,629 (1,199)
--------- --------- ---------
Net cash provided by (used in) operating activities 8,346 (1,980) (8,953)
--------- --------- ---------
Cash Flows from Investing Activities
Purchase of property and equipment (1,920) (2,195) (3,405)
Additional consideration for acquisitions -- 18 --
Proceeds from insurance -- -- 68
Partnership distributions -- -- 350
Acquisitions of businesses, net of cash acquired (2,843) -- (6,528)
Proceeds from asset sales 398 470 185
--------- --------- ---------
Net cash (used in) investing activities (4,365) (1,707) (9,330)
--------- --------- ---------
Cash Flows from Financing Activities
Borrowings on line of credit 295,982 175,674 143,821
Payments on line of credit (301,287) (171,802) (123,632)
Proceeds from issuance of common stock 1,650 1,007 934
Proceeds from notes receivable 1,494 93 38
Borrowings on capital lease 418 -- --
Payments on other long-term debt (2,036) (1,805) (1,608)
--------- --------- ---------
Net cash provided by (used in) financing activities (3,779) 3,167 19,553
Effect of Exchange Rate Changes on Cash (110) 25 (26)
--------- --------- ---------
Net change in cash and cash equivalents 92 (495) 1,244
Cash and Cash Equivalents - beginning of year 908 1,403 159
--------- --------- ---------
Cash and Cash Equivalents - end of year $ 1,000 $ 908 $ 1,403
========= ========= =========
See accompanying notes to these consolidated financial statements.
61
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 18-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, 2008 and 2007, and the
results of our operations, cash flows and changes in stockholder's equity for
the years ended December 31, 2008, 2007 and 2006. 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 RELATED MATTERS
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.
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
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
62
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 -ACCOUNTING POLICIES AND RELATED MATTERS (Continued)
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:
2008 2007 2006
-------- -------- --------
(in thousands)
--------------------------------
Net income (loss) $ 18,258 $ 12,464 $ (3,486)
Foreign currency translation adjustment (115) (5) (26)
-------- -------- --------
Comprehensive income (loss) $ 18,143 $ 12,459 $ (3,512)
======== ======== ========
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.
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.
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.
63
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 -ACCOUNTING POLICIES AND RELATED MATTERS (Continued)
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.
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 SOP 81-1, which
requires that costs that are incurred for a specific anticipated contract and
that will result 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 are not
reinstated by a credit to income on the subsequent receipt of the contract.
64
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 -ACCOUNTING POLICIES AND RELATED MATTERS (Continued)
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 16. 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 Statement of Position ("SOP")
81-1, revenues and costs for these types of "pass-through" transactions are
reported net. During 2008 we had no pass-through transactions but in 2007 and
2006, pass-through transactions totaled $0.5 million and $8.9 million,
respectively.
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 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. Our borrowing covenants limit our use of
fixed price contracts without prior written approval from the lender to $2.0
million on any fixed price engineering, procurement and construction contract
and $5.0 million on any fixed price engineering contract as discussed in Note
10. 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.
65
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 -ACCOUNTING POLICIES AND RELATED MATTERS (Continued)
Occasionally, it is appropriate for us to combine or segment contracts in order
to meet requirements of SOP 81-1. Contracts are combined in those limited
circumstances when they are negotiated as a package in the same economic
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 nonvested
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 more than 10% of our consolidated revenues for the years
indicated:
2008 2007 2006
---- ---- ----
Spectra Energy 10% 4% 0%
Alon USA 10% <1% <1%
Motiva 8% 11% 9%
Conoco Phillips 6% 10% 15%
ExxonMobil 7% 9% 14%
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.
66
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 -ACCOUNTING POLICIES AND RELATED MATTERS (Continued)
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.
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.
In September 2006, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 157, "Fair Value Measurements" which establishes a framework for measuring
fair value, and expands disclosures about fair value measurements. The effective
date of SFAS 157 for us was January 1, 2008. Adoption of SFAS 157 has not had
and is not expected to have a material impact on our consolidated financial
statements.
In December 2007, the FASB issued SFAS 160, "Noncontrolling Interests in
Consolidated Financial Statements--An Amendment of ARB No. 51." SFAS 160
establishes new accounting and reporting standard for the noncontrolling
interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160
is effective for fiscal periods, and interim periods within those fiscal years,
beginning on or after December 15, 2008. This new accounting standard will not
have an impact on our financial statements unless and until we enter into
transactions that create noncontrolling interests.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
Combinations" ("SFAS 141R"). SFAS 141R establishes principles and requirements
for how an acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, any noncontrolling
interest in the acquiree and the goodwill acquired. SFAS 141R also establishes
disclosure requirements to enable the evaluation of the nature and financial
effects of the business combination. SFAS 141R will apply to ENGlobal
prospectively for future business combinations with an acquisition date on or
after January 1, 2009.
NOTE 3 - ACQUISITIONS
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
from October 1, 2008. We accounted for this acquisition in accordance with SFAS
141, "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 $1, 017,000 of the purchase price being allocated to
goodwill. The allocation is summarized below.
67
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - ACQUISITIONS (Continued)
($ 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.
WRC Corporation and Analyzer Technology International, Inc.
During 2006, the Company acquired all of the ownership interests in WRC
Corporation ("WRC") and certain assets of Analyzer Technology International,
Inc. ("ATI"), for an aggregate purchase price of $11,847,000 including
acquisition costs. We accounted for the acquisitions using the purchase method
of accounting. The results of WRC's operations have been included in the
ENGlobal consolidated financial statements since May 26, 2006, the date of
closing. WRC provides integrated land management, engineering, and related
68
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - ACQUISITIONS (Continued)
services to the pipeline, power, and transportation industries, among others.
The Company made the acquisitions to facilitate expansion of our services into
the Rocky Mountain and Western U.S. regions, as well as into Western Canada.
Consideration for the capital stock of WRC totaled $10.1 million and included
cash payments of $2.0 million, the payment of $4.3 million of debt on behalf of
WRC, which included $50,000 in long-term debt assumption, a promissory note of
$2.4 million, and 175,000 shares of ENGlobal common stock, valued at $1.4
million. We recognized as intangible assets the Non-Compete Covenants and
Customer Relationships acquired in the acquisition. We estimated the fair value
of these intangible assets based on a third party valuation study to be $0.6
million and $2.8 million, respectively, resulting in approximately $3.9 of the
purchase price allocated to goodwill. These intangible assets and goodwill were
assigned to the Land Segment. The following table summarizes the final
allocation of the purchase price.
($ in thousands)
----------------
Current assets $ 4,292
Property and equipment 208
Intangible assets 3,423
Goodwill 3,924
Tax liabilities (1,747)
Long-term debt (50)
----------
Total $ 10,050
==========
Amounts allocated to the WRC related Non-Compete Covenants and Customer
Relationships are subject to amortization. The amortization period, based on
management's estimate of the period over which the assets will affect the Land
Segment's cash flows, will be 5.6 years using the straight-line method and no
residual values. The goodwill is not deductible in our consolidated returns
under existing federal income tax regulations.
The ATI acquisition of assets referred to above was completed in January 2006.
ATI is a Houston-based analyzer systems provider of online process analyzer
systems. Its operation was relocated to our existing facility in Houston, which
the Company expects will enable us to offer our clients a more efficient factory
adaptable test by temporarily connecting both control and analyzer systems
onsite prior to delivery. The acquisition will provide us with a greater
presence in the process anlayzer sector, especially for larger downstream
opportunities involving foreign grassroots projects. The aggregate purchase
price was $1.75 million, including $750,000 in cash and an unsecured promissory
note in the principal amount of $1,000,000. The purchase agreement provided for
additional payments up to an estimated $288,000 contingent on the performance of
projects that were a part of ATI's backlog at closing. The acquired assets,
which are comprised of intellectual property and existing backlog, have been
entirely recognized in a non-compete covenant to be amortized over six years.
Watco Management, Inc
On October 6, 2006, the Company acquired certain assets of Watco Management,
Inc. ("Watco"), a Houston-based business providing construction management,
turnaround management, asset management, project commissioning and start-up
services, and other related services for projects and facilities located in
process plants. The addition of Watco is expected to provide us with
opportunities to expand our complementary services to existing Watco clients in
69
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - ACQUISITIONS (Continued)
addition to expanding its existing service offerings. Consideration was $1.0
million, including $500,000 in cash and a $500,000 unsecured promissory note.
The purchase price was allocated to the acquired assets including approximately
$800,000 to technical software, $52,000 to other fixed assets and $148,000 to
goodwill.
NOTE 4 - GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
--------
During 2008, the Company recognized goodwill of $1,017,000 associated with the
acquisition of Advanced Control Engineering as discussed in Note 3.
Changes in the carrying amount of goodwill by segment for 2008 and 2007 are
summarized in the following table.
Engineering Automation Construction Land Total
----------- ---------- ------------ ---- -----
Balance at December 31, 2006 $ 13,040 $ 1,410 $ 1,515 $ 3,237 $ 19,202
Contingent consideration paid 146 - 602 - 748
Reclassification (to) from intangibles - (279) - 687 408
Recognition of impairment - (432) - - (432)
----------- ---------- ----------- ----------- ---------
Balance at December 31, 2007 13,186 699 2,117 3,924 19,926
Contingent consideration paid 232 - 283 - 514
Acquisition additions - 1,017 - - 1,017
----------- ---------- ----------- ----------- ---------
Balance at December 31, 2008 $ 13,418 $ 1,716 $ 2,400 $ 3,924 $ 21,457
=========== ========== =========== =========== =========
Our annual goodwill impairment analysis for the year ended December 31, 2008
indicated that no goodwill impairments were required for any of our reporting
units for the period.
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 $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, 2008 and 2007. See Note
18 for the reportable segments to which intangible assets are assigned.
70
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - GOODWILL AND OTHER INTANGIBLE ASSETS (Continued)
Non-Compete Customer
Covenants Relationships Total
--------- ------------- -----
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
====== ====== ======
As of December 31, 2007
Intangible assets $3,729 $2,774 $6,503
Less: accumulated amortization 1,619 772 2,391
------ ------ ------
Intangible assets, net $2,110 $2,002 $4,112
====== ====== ======
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
------------------------------ ----------- ------------- -------
2009 $ 753 $ 886 $1,639
2010 673 862 1,535
2011 298 814 1,112
2012 94 314 408
2013 71 235 306
------ ------ ------
$1,889 $3,111 $5,000
====== ====== ======
Weighted average amortization
period remaining at
December 31, 2008 (years) 2.5 3.1
Amortization expense was $1,846,000, $1,630,000 and $1,087,000 for the three
years 2008, 2007 and 2006, respectively.
NOTE 5 - EARNINGS PER SHARE
Earnings per share were computed as follows:
Reconciliation of Earnings per Share Calculation
----------------------------------------------------------------
2008 2007 2006
----------------------------------------------------------------
Basic Diluted Basic Diluted Basic Diluted
----- ------- ----- ------- ----- -------
($ in thousands)
Net Income (Loss) $ 18,258 18,258 $ 12,464 $ 12,464 $ (3,486) $ (3,486)
======== ======== ======== ======== ======== ========
Weighted average number of shares 27,180 -- 26,916 -- 26,538 --
outstanding for basic
Weighted average number of shares
outstanding for diluted -- 27,672 -- 27,435 -- 26,538
Net income (loss) per share available
for common stock $ 0.67 0.66 $ 0.46 $ 0.45 $ (0.13) $ (0.13)
71
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - EARNINGS PER SHARE (Continued)
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, 2008, 2007
and 2006.
2008 2007 2006
---------- ---------- ----------
Common stock issued - beginning of year 27,051,766 26,807,460 26,289,567
Weighted average common stock issued (repurchased) 128,571 108,749 248,723
---------- ---------- ----------
Shares used in computing basic earnings per share 27,180,337 26,916,209 26,538,290
Assumed conversion of dilutive stock options 491,568 518,324 --
---------- ---------- ----------
Shares used in computing diluted earnings per share 27,671,905 27,434,533 26,538,290
========== ========== ==========
72
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,
---------------------------
2008 2007 2006
(in thousands)
---------------------------
Non-Cash Transactions:
Acceptance of notes for asset sales $ -- $ 1,480 $ (216)
Issuance of note for insurance 1,595 1,296 1,347
Retirement of treasury stock -- -- 592
Issuance of common stock for purchase of WRC Corporation -- -- 1,400
Issuance of notes in connection with acquisitions-
ATI -- -- 1,000
WRC -- -- 2,400
Watco -- -- 500
ACE 1,942 -- --
Cash paid:
Interest $ 1,703 $ 2,575 $ 977
State and federal income taxes 11,256 9,025 2,465
NOTE 7 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 2008 and 2007:
2008 2007
-------- --------
(in thousands)
--------------------
Land $ -- $ 216
Computer equipment and software 12,612 10,770
Shop equipment 1,439 1,267
Furniture and fixtures 964 812
Building and leasehold improvements 2,229 2,128
Autos and trucks 466 273
-------- --------
17,710 15,466
Accumulated depreciation and amortization (12,115) (9,165)
-------- --------
5,595 6,301
Software upgrade in process 149 171
-------- --------
Property and equipment, net $ 5,744 $ 6,472
======== ========
Depreciation expense has been $2,804,000, $2,911,000 and $2,282,000 for the
three years 2008, 2007 and 2006, respectively.
73
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
The components of trade receivables as of December 31, 2008 and 2007 are as
follows:
2008 2007
-------- --------
(in thousands)
--------------------
Amounts billed $ 63,765 $ 47,941
Amounts unbilled 34,157 16,322
Retainage 389 1,283
Less: Allowance for uncollectible accounts (2,288) (1,405)
-------- --------
Trade receivables, net $ 96,023 $ 64,141
======== ========
The components of long-term notes receivable as of December 31, 2008 and 2007
are as follows:
2008 2007
-------- --------
(in thousands)
--------------------
Notes receivable - South Louisiana Ethanol ("SLE") $ 12,329 $ 12,329
Less: Reserve on long-term notes receivable (3,709) (3,150)
Notes receivable - Oak Tree Holdings -- 1,439
Other notes receivable and current portion 16 (25)
-------- --------
$ 8,636 $ 10,593
======== ========
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.
The Company believes that if the collateral is liquidated, SLE's obligations to
the Company would be paid in full pursuant to the collateral mortgage in favor
of the Company. However, collectability is not assured at this time. 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. 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, due to the value of the Collateral the
Note Receivable is fully collectible. Specifically, an updated appraisal 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.
74
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS (Continued)
The principal amount of the note receivable from Oak Tree Holdings was
$1,480,000. The note was accepted, along with cash proceeds, in payment for an
office building located in Baton Rouge, Louisiana, which the Company sold in
June 2007. The note was paid in full during 2008.
The components of other current liabilities as of December 31, 2008 and 2007 are
as follows:
2008 2007
------ ------
(in thousands)
-----------------
Reserve for known contingencies $2,266 $1,777
Accrued interest 255 292
Other 373 819
------ ------
Other current liabilities $2,894 $2,888
====== ======
NOTE 9 - FIXED-PRICE CONTRACTS
Costs, estimated earnings and billings on uncompleted contracts consisted of the
following at December 31, 2008 and 2007:
2008 2007
-------- --------
(in thousands)
--------------------
Costs incurred on uncompleted contracts $ 24,893 $ 74,599
Estimated earnings (losses) on uncompleted contracts 5,280 (1,686)
-------- --------
Earned revenue 30,173 72,913
Less: Billings to date 23,468 66,895
-------- --------
Net costs and estimated earnings in excess of
billings on uncompleted contracts $ 6,705 $ 6,018
======== ========
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 6,913 $ 6,981
Billings in excess of costs and estimated
earnings on uncompleted contracts (208) (963)
-------- --------
Net costs and estimated earnings in excess of
billings on uncompleted contracts $ 6,705 $ 6,018
======== ========
NOTE 10 - LINE OF CREDIT AND DEBT
Effective August 2007, the Company entered into a new credit agreement (the
"Comerica Credit Facility") with Comerica Bank, which provides a three-year, $50
million senior secured revolving credit facility. The Comerica Credit Facility
is guaranteed by substantially all of Company's subsidiaries, is secured by
substantially all of the Company's assets, and positions Comerica as senior to
all other debt. It replaced a $35 million senior revolving credit facility that
would have expired in July 2009. The outstanding balance on the Comerica Credit
75
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - LINE OF CREDIT AND DEBT (Continued)
Facility as of December 31, 2008 was $22.5 million. The remaining borrowings
available under the Comerica Credit Facility as of December 31, 2008 were $27.1
million after consideration of loan covenant restrictions.
At the Company's option, amounts borrowed under the Comerica Credit Facility
will bear interest at a Eurodollar-based Rate plus an additional margin based on
the Leverage Ratio or at the Prime-based Rate. The additional margin ranges from
125 basis points to 175 basis points on the LIBOR-based loans.
Upon maturity, the LIBOR debt will automatically roll into the Revolver unless
the Company elects to renew, at which time a new maturity date and interest rate
will be set.
The Comerica Credit Facility requires the Company to maintain certain financial
covenants as of the end of each calendar month, including the following:
o Leverage Ratio not to exceed 3.00 to 1.00;
o Asset Coverage Ratio less than 1.00 to 1.00; and
o Net Worth greater than the sum of $40.1 million plus 75% of positive
Net Income earned in each fiscal quarter after January 1, 2007 plus
100% of the net proceeds of any offering, sale or other transfer of
any capital stock or any other equity securities.
The Comerica Credit Facility also contains covenants that place certain
limitations on the Company including limits on new debt, mergers, asset sales,
investments, fixed-price contracts, and restrictions on certain distributions.
The Company was in compliance with all covenants under the Comerica Credit
Facility as of December 31, 2008.
Letters of Credit
-----------------
As of December 31, 2008, the Company had outstanding letters of credit totaling
$367,000 primarily to cover self-insured deductibles under both our general
liability and workers' compensation insurance policies.
76
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - LINE OF CREDIT AND DEBT (Continued)
Long-term debt consisted of the following at December 31, 2008 and 2007:
2008 2007
-------- --------
(in thousands)
--------------------
Comerica Credit Facility - Line of credit, prime (3.25% at December 31,
2008), maturing in August 2010 $ 22,530 $ 27,835
The following notes are subordinate to the credit facility and are
unsecured:
Sterling Planet and EDGI - Notes payable, interest at 5%,
principal payment installments of $15,000 plus interest due
quarterly, maturing in December 2008 -- 60
Cleveland Inspection Services, Inc., CIS Technical Services and
F.D. Curtis - Notes payable, discounted at 5% interest, principal in
installments of $100,000 due quarterly, maturing in October 2009 293 667
ATI Technologies - Note payable, interest at 6%, principal payments in
installments of $30,422 including interest due monthly, maturing in
January 2009 30 382
Michael Lee - Note payable, interest at 5%, principal payments in
installments of $150,000 plus interest due quarterly, maturing in
July 2010 900 1,500
Watco Management, Inc. - Note payable, interest at 4%, principal
payments in installments of $137,745 including interest annually,
maturing in October 2010 260 382
Frank H McIlwain, PC; James A Walters, PC; William M Bosarge, PC;
Matthew R Burton, PC - Notes payable, discounted at 2.38%
interest, payments in installments of $666,667 including
interest due annually, maturing in December 2010 1,287 --
-------- --------
Total long-term debt 25,300 30,826
Less: Current maturities of long-term debt (1,686) (1,508)
Long-term debt, net of current portion $ 23,614 $ 29,318
Borrowings under capital lease 418 --
Less: Current maturities of capital lease (175) --
-------- --------
Total long-term $ 23,857 $ 29,318
======== ========
Maturities of long-term debt as of December 31, 2008, are as follows:
Maturities
----------
(in thousands)
--------------
Years Ending December 31,
2009 $ 1,861
2010 23,806
2011 51
---------
Total long-term debt $ 25,718
=========
77
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, 2008
are as follows:
Operating
------------
(in thousands)
--------------
Years Ending December 31,
2009 $ 5,353
2010 4,819
2011 3,991
2012 2,636
2013 and after 5,789
--------
Total minimum lease payments $ 22,588
========
Rent expense for the years ended December 31, 2008, 2007 and 2006 was
$3,894,000, $3,875,000 and $5,502,000, respectively.
NOTE 12 - EMPLOYEE BENEFIT PLANS
ENGlobal sponsors a 401(k) profit sharing plan for its employees. The Company
makes mandatory 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 are
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. The Company made contributions of approximately $3,049,000,
$2,147,000, and $1,310,000, respectively, for the years ended December 31, 2008,
2007, and 2006. 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.
NOTE 13 - STOCK OPTION PLAN
The Company's 1998 incentive plan that provided for the issuance of options to
acquire up to 3,250,000 shares of common stock expired in June 2008. The
incentive plan ("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 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. In 2006, options were granted to employees to acquire
205,000 shares. Also in 2006, one grant was issued fully vested following
termination under which the employee had held a similar number of options. 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.
On August 8, 2008, the Company issued grants of non-Option Plan restricted stock
units equivalent to 6,420 shares of common stock to each of its three
non-employee directors. These restricted stock units were intended to compensate
and retain the directors over the one-year service period commencing July 1,
2008. The fair value of the awards was $93,411 per director based on the market
price of $14.55 per share of the Company's stock on the date the award was
granted. Upon vesting, the units are convertible into cash based on the fair
78
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - STOCK OPTION PLAN (Continued)
value of the Company's shares at the vesting date or, if shareholder approval is
obtained, into common stock at the Company's option. The units vest in equal
quarterly installments beginning on September 30, 2008, so long as the grantee
continues to serve as an independent director of the Company. Recognition of
compensation expense related to the restricted stock units commenced in the
third quarter of 2008. At the end of the fourth quarter 2008, the compensation
value of the vested units was remeasured and the amount to be settled in cash
was classified as a liability. The units that vested in 2008 are required to be
settled by and were settled by March 15, 2009. The remaining units are required
to be settled by March 15, 2010.
Effective January 1, 2006, the Company adopted SFAS No. 123(r). This statement
requires compensation expense relating to share-based payments to be recognized
in net income using a 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 Company
elected the modified prospective method as prescribed in SFAS No. 123(r) and
therefore, prior periods were not restated. Under the modified prospective
method, this statement was applied to new awards granted after the time of
adoption.
The fair value of the 2008 options granted to employees is estimated on the date
of grant using the Black-Scholes option-pricing model as follows:
Options Granted in 2008 Fair Values, Assumptions, and Impact on Net Income
--------------------------------------------------------------------------
Series $ 9.44
------ -------------
Grant date 03/12/2008
Number of options granted 140,000
Strike Price $ 9.44
Market price - date of grant $ 9.44
Total compensation at grant date 766,784
Compensation recognized
vesting in 2008 306,713
Amount remaining to be
recognized in compensation after 2008 460,071
Weighted average fair value at grant
date 5.48
Assumptions
-----------
Expected life (months) 70.8%
Risk-free rate of return 2.49%
Expected volatility 71.1141%
Expected dividend yield 0.00%
Expected forfeiture rate 9.39%
79
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - STOCK OPTION PLAN (Continued)
The fair value of the 2007 options granted to directors is estimated on the date
of grant using the Black-Scholes option-pricing model as follows:
Options Granted in 2007 Fair Values, Assumptions, and Impact on Net Income
Series $ 10.93
------ -------------
Grant date 6/14/2007
Number of options granted 150,000
Strike Price $ 10.93
Market price - date of grant $ 10.93
Total compensation at grant date 1,058,361
Compensation recognized
vesting in 2007 529,181
Amount remaining to be recognized in
compensation after 2007 529,181
Weighted average fair value at grant
date 7.06
Assumptions
-----------
Expected life (months) 75%
Risk-free rate of return 4.93%
Expected volatility 76.275%
Expected dividend yield 0.00%
Expected forfeiture rate 9.10%
80
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - STOCK OPTION PLAN (Continued)
Options Granted in 2006 Fair Values, Assumptions, and Impact on Net Income
--------------------------------------------------------------------------------------------
Weighted
Average
Series $ 11.97 $ 9.15 $ 6.83 Fair Value
------ ----------- ---------- --------- ----------
Grant date 4/17/2006 6/1/2006 12/4/2006
Number of options granted(1) 205,000 150,000 175,000 530,000
Strike price $ 11.97 $ 9.15 $ 6.83
Market price - date of grant $ 11.97 $ 9.15 $ 6.83
Total compensation at grant date 1,622,494 906,090 754,606 3,283,189
Compensation recognized
vesting in 2006 630,079 453,045 754,606 1,837,729
Amount remaining to be recognized
in compensation after 2006 992,415 453,045 - 1,445,460
Weighted average fair value
at grant date $ 7.91 $ 6.04 $ 4.31 $ 6.19
Assumptions
-----------
Expected life (months) 70.42 63.75 60.00
Risk-free rate of return 4.93% 5.05% 5.20%
Expected volatility 73.75% 74.45% 75.06%
Expected dividend yield 0.00% 0.00% 0.00%
Expected forfeiture rate 2.80% 0.00% 2.80%
(1) The 11.97 Series had 193,000 options remaining at year end due to
employee termination and forfeiture. Compensation recognized for 2006
was adjusted to reflect the forfeitures.
Stock compensation expenses will be recognized over a weighted average remaining
life of 2.41 years.
Pre-2006 Total
Amount of Compensation Expense 2008 Grants 2007 Grants Grants Compensation
--------------------------------- ----------- ----------- ---------- ------------
($ in thousands)
2007 $ - $ 529 $ 910 $ 1,439
2008 307 529 334 1,170
2009 131 - 306 437
2010 263 - - 263
-------- --------- --------- ----------
Total Stock Compensation Expense $ 701 $ 1,058 $ 1,550 $ 3,309
81
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - STOCK OPTION PLAN (Continued)
The following table summarizes total aggregate stock option activity for the
period December 31, 2005 through December 31, 2008:
Vested & Number Weighted
Exercisable of Shares Average
Balance Outstanding Exercise Price
----------- ------------ --------------
Balance at December 31, 2005 1,103,542 1,437,967 $ 3.07
Granted 530,000 9.47
Exercised (329,273) 2.22
Canceled or expired (216,200) 6.33
-----------
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
===========
The following table summarizes information concerning outstanding and
exercisable Company common stock options at December 31, 2008.
Options
Options Fully-Vested Un-Vested
Outstanding Average And Options
Exercise at Remaining Exercisable at Balance at
Prices(1) December 31, Contractual December 31, December 31,
(series) 2008 Life 2008 2008
----------- ------------- ------------- -------------- --------------
$ 0.96 52,206 1.8 52,206 -
$ 1.00 20,000 2.2 20,000 -
$ 1.25 60,000 1.0 60,000 -
$ 1.81 40,000 5.5 40,000 -
$ 1.87 20,000 4.3 20,000 -
$ 2.05 62,000 5.2 62,000 -
$ 2.32 40,000 4.4 40,000 -
$ 2.50 75,000 6.2 75,000 -
$ 3.75 150,000 6.5 150,000 -
$ 6.83 25,000 7.9 25,000 -
$ 9.15 150,000 7.4 150,000 -
$ 11.97 193,000 7.3 154,400 38,600
$ 10.93 150,000 8.5 150,000 -
$ 9.44 136,000 9.2 52,000 84,000
-------------- --------------- ---------------
1,173,206 1,050,606 122,600
============== =============== ===============
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.
82
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - STOCK OPTION PLAN (Continued)
($ in thousands)
Total intrinsic value of options outstanding at December 31, 2008 $ 1,060
Total intrinsic value of options exercisable at December 31, 2008 $ 1,060
Total intrinsic value of options exercised during 2008 $ 1,416
Total intrinsic value of options outstanding at December 31, 2007 $ 6,775
Total intrinsic value of options exercisable at December 31, 2007 $ 6,463
Total intrinsic value of options exercised during 2007 $ 1,605
Total intrinsic value of options outstanding at December 31, 2006 $ 4,738
Total intrinsic value of options exercisable at December 31, 2006 $ 4,031
Total intrinsic value of options exercised during 2006 $ 2,466
Available for grant at December 31, 2008 0
Weighted-average fair value of options at grant date, granted in 2005 $ 3.52
Weighted-average remaining life of all options outstanding at December 31, 2008 5.4 years
The Company's 1998 incentive plan expired in June 2008, and had not been
replaced by a new plan as of December 31, 2008
NOTE 14 - RELATED-PARTY TRANSACTIONS
On May 25, 2006, the Company, through its wholly-owned subsidiary ENGlobal
Corporate Services, Inc., purchased a one-third partnership interest in PEI
Investments, A Texas Joint Venture ("PEI"), from Michael L. Burrow, the
Company's former President and CEO, and another one-third interest from a
stockholder who owned less than 1% of the Company's common stock. The
partnership interests were purchased for a total of $69,000. The remaining
one-third interest was already held by the Company through its wholly-owned
subsidiary, EEI. PEI owned the land on which our Beaumont, Texas office
building, destroyed by Hurricane Rita in September 2005, was located. The
remains of the building were razed in July 2006. In September 2006, the Company
acquired approximately 1.2 acres immediately adjacent to the former facility. In
May 2008, the Company sold the land 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 50,000 square foot facility.
NOTE 15 - 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.
83
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - FEDERAL AND STATE INCOME TAXES
The components of income tax expense (benefit) from continuing operations for
the years ended December 31, 2008, 2007 and 2006 were as follows:
2008 2007 2006
-------- -------- --------
(in thousands)
----------------------------------
Current
Federal $ 10,853 $ 8,619 $ 1,047
Foreign 30 42 53
State 2,158 1,510 403
-------- -------- --------
13,041 10,171 1,503
-------- -------- --------
Deferred
Federal (1,125) (1,890) (1,917)
Foreign 16 4 (38)
State (167) (76) (361)
-------- -------- --------
(1,276) (1,962) (2,316)
-------- -------- --------
Total tax provision $ 11,765 $ 8,209 $ (813)
======== ======== ========
The components of the deferred tax asset (liability) consisted of the following
at December 31, 2008 and 2007:
2008 2007
------- -------
(in thousands)
------------------
Deferred tax asset
Allowance for doubtful accounts $ 2,280 $ 1,721
Net operating loss carry-forward 680 763
Accruals not yet deductible for tax purposes 2,632 2,082
Stock options 1,073 1,007
------- -------
Deferred tax assets 6,665 5,573
------- -------
Less: Valuation allowance (553) (516)
Deferred tax assets 6,112 5,057
------- -------
Deferred tax liabilities
Depreciation (358) (398)
Prepaid expenses (601) (641)
Goodwill (719) (860)
------- -------
Deferred tax liability (1,678) (1,899)
------- -------
Deferred tax asset, net $ 4,434 $ 3,158
======= =======
84
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - FEDERAL INCOME TAXES (Continued)
The following is a reconciliation of expected to actual income tax expense from
continuing operations:
2008 2007 2006
-------- -------- --------
(in thousands)
--------------------------------
Federal income tax expense at 35% for 2008, 35% for 2007 $ 10,507 $ 7,235 $ (1,462)
and 34% 2006, respectively
State and foreign taxes, net of federal income tax effect 1,296 935 (16)
Nondeductible expenses 105 106 102
Stock compensation expense 133 (268) 530
Valuation allowance 37 208 308
Prior year correction -- -- (169)
Domestic production activity deduction (366) -- --
Other, net 53 (7) (106)
-------- -------- --------
Total tax provision $ 11,765 $ 8,209 $ (813)
======== ======== ========
The Company had a federal net operating loss carryforward at December 31, 2008
of approximately $362,000. 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 carryforward that will be available for utilization in
2008 through 2010.
The Company also has a foreign net operating loss carryforward at December 31,
2008 of approximately $1,340,000. This loss is available for utilization in 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 $553,000 against the entire net operating loss.
During 2007, the Company's subsidiary, ENGlobal Land, Inc. was subject to an
audit 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 does not have any other examination on-going by the Internal Revenue
Service, and the open years subject to audit are currently tax years 2005-2007.
For most states where the Company conducts business, the Company is subject to
examination for the preceding three to six years.
NOTE 17 - SALE OF ASSET
During May 2008, the Company received cash proceeds of $382,129 upon completion
of the sale of property owned through, PEI Investments. The Company recognized a
gain of $83,934 on the transaction.
During June 2007, the Company completed the sale of a building in Baton Rouge,
Louisiana and recognized a gain of $483,483 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 18 - 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, mechanical
integrity, vendor and turnaround surveillance, field support, construction,
85
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 - SEGMENT INFORMATION (Continued)
quality assurance and plant asset management. The Automation segment provides
services related to the design, fabrication, and implementation of process
distributed control and analyzer systems, advanced automation, and information
technology projects. The Land segment provides land management, right-of-way,
environmental compliance, and governmental regulatory compliance services
primarily to 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.
86
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 - SEGMENT INFORMATION (Continued)
Segment information for 2008, 2007 and 2006 is as follows:
Engineering Construction Automation Land Corporate Total
----------- ------------ ---------- ---- --------- -----
(in thousands)
---------------------------------------------------------------------------------
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 - 21,457
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) 28,301 7,133 (58) 2,105 (14,638) 22,843
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
2006
----
Net sales from external customers $ 215,306 $ 36,128 $ 34,888 $ 16,768 $ - $ 303,090
Inter-segment sales 138 955 2,318 - - 3,411
Operating profit (loss) 6,195 1,579 579 716 (12,689) (3,620)
Depreciation and amortization 1,684 257 483 457 512 3,393
Tangible assets 44,952 9,488 15,956 4,639 6,563 81,598
Goodwill 13,040 1,515 1,410 3,237 - 19,202
Other intangible assets 3 284 1,475 3,664 - 5,426
Capital expenditures 1,948 1,122 384 167 840 4,461
87
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 - SEGMENT INFORMATION (Continued)
The Engineering segment contributed 51.0% of our total revenue for 2008, as its
revenue increased $29.9 million, or 13.5%, from $221.8 million in 2007 to $251.7
million in 2008. The revenue in 2007 for this segment increased 3.0% or $6.5
million from $215.3 million in 2006.
2008 2007 2006
--------------------- -------------------- ---------------------
(dollars in thousands)
---------------------------------------------------------------------
Total Engineering revenue:
Detail-design 168,079 66.8% 132,210 59.6% 111,503 51.8%
Field services 50,647 20.1% 56,379 25.4% 53,921 25.0%
Procurement services 30,038 11.9% 16,011 7.2% 19,271 9.0%
Fixed-price 2,938 1.2% 17,187 7.8% 30,611 14.2%
------------- ------------- -------------
Total Engineering revenue: $ 251,702 100.0% $ 221,787 100.0% $ 215,306 100.0%
============= ============= =============
The Construction segment contributed 28.3% of our total revenue for 2008, as its
revenue increased $66.2 million, or 90.4%, from $73.2 million in 2007 to $139.4
million in 2008. The revenue in 2007 for this segment increased 102.8%, or $37.1
million, from $36.1 million in 2006.
2008 2007 2006
--------------------- --------------------- ---------------------
(dollars in thousands)
----------------------------------------------------------------------
Total Construction revenue:
Pipeline 125,731 90.2% 60,430 82.5% 28,987 80.2%
Non-pipeline 13,629 9.8% 12,780 17.5% 7,141 19.8%
------------- ------------- ------------
Total Construction revenue: $ 139,360 100.0% $ 73,210 100.0% $ 36,128 100.0%
============= ============= ============
The Automation segment contributed 12.1% of our total revenue for the year, as
its revenue increased $21.9 million, or 57.9%, from $37.8 million in 2007 to
$59.7 million in 2008. This segment's revenue also increased 8.3% in 2007, or
$2.9 million, from $34.9 million in 2006.
2008 2007 2006
--------------------- --------------------- --------------------
(dollars in thousands)
--------------------------------------------------------------------
Total Automation revenue:
Fabrication 28,266 47.3% 22,814 60.4% 26,032 74.6%
Non-fabrication 31,464 52.7% 14,952 39.6% 8,856 25.4%
------------- ------------- ------------
Total Automation revenue: $ 59,730 100.0% $ 37,766 100.0% $ 34,888 100.0%
============= ============= ============
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 19 - 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 six months of the
employee's salary, and, at its option, an additional six months at 50% to 100%
of the employee's salary in exchange for an extension of the non-compete. These
88
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 - COMMITMENTS AND CONTINGENCIES (Continued)
agreements are renewable for one year at the Company's option. No liability is
recorded for the Company's obligations under employment agreements as the
amounts, if any, that will ultimately be paid cannot be reasonably estimated.
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
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.
NOTE 20 - SUBSEQUENT EVENTS
On January 1, 2009 due to the current economic conditions, the Company amended
its 401(k) Plan 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 January 13, 2009, the Company entered into an agreement to sublease its
Alpharetta, GA office. The sublease commenced on February 1, 2009 and continues
through June 15, 2010, the remainder of the term of the original lease.
89
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
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
For the Quarters Ended - 2007
March June September December
------------- ------------ ------------- ------------
(in thousands, except per share amounts)
----------------------------------------------------------------------------------
Revenue per segment
Engineering $ 51,449 63.0% $ 56,966 63.6% $ 61,680 63.7% $ 51,692 54.3%
Construction 13,785 16.9% 15,988 17.6% 18,999 19.6% 24,438 25.7%
Automation 9,538 11.7% 9,518 10.6% 8,526 8.9% 10,184 10.7%
Land 6,887 8.4% 7,104 8.2% 7,620 7.8% 8,853 9.3%
------------- ------------ ------------- ------------
Total $ 81,659 100.0% $ 89,576 100.0% $ 96,825 100.0% $ 95,167 100.0%
============= ============ ============= ============
Gross profit per segment
Engineering $ 9,164 17.8% $ 9,584 16.8% $ 10,801 17.6% $ 10,416 20.2%
Construction 2,082 15.1% 2,646 16.6% 3,678 19.4% 1,319 5.4%
Automation 781 8.2% 1,112 11.7% 774 9.1% 717 7.0%
Land 1,250 18.2% 877 12.4% 1,086 14.3% 1,330 15.0%
------------- ------------ ------------- ------------
Total $ 13,277 16.3% $ 14,219 15.9% $ 16,339 16.9% $ 13,782 14.5%
============= ============ ============= ============
Net income (loss) $ 3,155 $ 3,913 $ 3,975 $ 1,421
============= ============ ============= ============
Earnings per share - basic $ 0.12 $ 0.15 $ 0.15 $ 0.05
Earnings per share - diluted $ 0.12 $ 0.14 $ 0.14 $ 0.05
90
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, 2008 $1,405 $1,620 $ (737) $2,288
For year ended December 31, 2007 $ 670 $ 840 $ (105) $1,405
For year ended December 31, 2006 $ 503 $ 251 $ (84) $ 670
Reserve on current notes receivable for the year ended
December 31, 2008 $ 120 $ -- $ -- $ 120
Reserve on long-term notes receivable for the year
ended December 31, 2008 $3,150 $ 559 $ -- $3,709
91
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
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.
Under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, we conducted an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures, as such term is defined under Rule 13a-15(e) under the
Securities and Exchange Act of 1934, as amended (the "Exchange Act"), as of
December 31, 2008. Our Chief Executive Officer and Chief Financial Officer
concluded, based upon their evaluation, that our disclosure controls and
procedures are effective to ensure that the information required to be disclosed
in reports that we file under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in SEC rules and
forms.
Changes in Internal Control Over Financial Reporting
In our Form 10-K for the year ended December 31, 2007, we disclosed one material
weakness in internal control over financial reporting. The material weakness was
remediated during the three months ended December 31, 2008. Below is a list of
the remediation activities that were completed during the quarter to remediate
those material weaknesses:
1. Deficiencies in the Company's Control Environment and Accounting System
Controls
As of December 31, 2007, our control environment did not sufficiently promote
effective internal control over financial reporting throughout the organization.
Specifically, we lacked sufficient knowledge and expertise in financial
reporting to adequately handle complex or non-routine accounting issues which
resulted in: (i) failure in a timely manner to properly evaluate goodwill for
potential impairment in accordance with SFAS 142, "Goodwill and Other Intangible
Assets."; (ii) difficulty in obtaining timely resolution of SEC comments related
to the above item, causing a delay in the Company's period-end closing process
for its 2007 From 10-K; and (iii) failure to effectively utilize third-party
specialist in a timely manner to assist with complex or non-routine accounting
issues.
A. Actions Taken to Remediate the Weakness
o We provided several supplementary training courses to our
professional accounting staff on topics related to SFAS 142 and
SEC reporting and disclosure requirements.
o We retained several third-party specialists to assist us with
complex or non-routine accounting issues.
o We purchased various continuing education subscriptions for back
office departments.
92
B. Status of Material Weakness
The above material weakness was remediated as of December 31, 2008.
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, 2008, 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, 2008. We have concluded that our internal control over financial reporting
at December 31, 2008, 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.
93
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.
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.
94
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
95
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 5/708 001-14217
Registrant dated April 29, 2008.
4.1 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 4/1/02 001-14217
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 5/23/07 001-14217
Agreement dated December 20, 2006
10.4 Purchase Agreement by and between ENGlobal and 10-Q 10.1 11/7/08 001-14217
Advanced Control Engineering, LLC dated September
25, 2008
10.5 Promissory Note Payable between Registrant and 10-Q 10.2 11/7/08 001-14217
Frank H McIlwain dated September 30, 2008
10.6 Promissory Note Payable between Registrant and 10-Q 10.3 11/7/08 001-14217
James A Walters dated September 30, 2008
10.7 Promissory Note Payable between Registrant and 10-Q 10.4 11/7/08 001-14217
William M Bosarge dated September 30, 2008
10.8 Promissory Note Payable between Registrant and 10-Q 10.5 11/7/08 001-14217
Matthew R Burton dated September 30, 2008
96
Incorporated by Reference to:
------------------------------------------------
Filing
Form or Date with SEC File
Exhibit No. Description Schedule Exhibit No. SEC Number
----------- ----------- -------- ----------- --------- ---------
10.9 Second Amended and Restated Lease Agreement 10-Q 10.63 8/12/02 001-14217
between Petrocon Engineering, Inc. and Corporate
Property Associates dated February 28, 2002 (Exec
I)
10.10 Guaranty and Suretyship Agreement between 10-Q 10.64 8/12/02 001-14217
Industrial Data Systems Corporation and Corporate
Property Associates dated April 26, 2002 (Exec I)
10.11 Amended and Restated 1998 Incentive Plan of 10-K 10.6 03/28/08 001-14217
Registrant dated June 8, 2006
10.12 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
10.13 Form of Incentive Stock Option Award Agreement of 10-K 10.8 03/28/08 001-14217
1998 Incentive Plan of Registrant
10.14 Form of Non-qualified Stock Option Agreement S-8 10.80 08/24/05 333-127803
Granted Outside of 1998 Incentive Plan of
Registrant
10.15 Form of Restricted Stock Unit Award Agreement 10-Q 10.2 8/11/08 001-14217
between Registrant and its Independent
Non-employee Directors
10.16 Lease Agreement between Petrocon Engineering, 10-Q 10.66 11/14/02 001-14217
Inc. and Phelan Investments on July 25, 2002
(Exec III)
10.17 Lease Agreement between Oral Roberts University 10-K 10.11 03/28/08 001-14217
and ENGlobal Engineering, Inc. dated January 27,
2005
10.18 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
10.19 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
10.20 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
10.21 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
10.22 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
10.23 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
10.24 Build-to-Suit Lease Agreement between Clay Real 10-Q 10.1 5/7/08 001-14217
Estate Development, L.P. and ENGlobal Corporate
Services, Inc., executed March 6, 2008
97
Incorporated by Reference to:
------------------------------------------------
Filing
Form or Date with SEC File
Exhibit No. Description Schedule Exhibit No. SEC Number
----------- ----------- -------- ----------- --------- ---------
10.25 Credit Agreement by and between Comerica Bank and 10-Q 10.1 11/09/07 001-14217
Registrant and it subsidiaries dated August 8,
2007
10.26 Hand Note between South Louisiana Ethanol LLC and 10-Q 10.2 11/09/07 001-14217
ENGlobal Engineering, Inc dated October 22, 2007
10.27 Collateral Mortgage between South Louisiana 10-Q 10.3 11/09/07 001-14217
Ethanol LLC, and ENGlobal Engineering, Inc. dated
August 26, 2007
10.28 Collateral Mortgage between South Louisiana 10-Q 10.4 6/14/07 001-14217
Ethanol LLC and ENGlobal Engineering, Inc. dated
August 31, 2007
10.29 Amended and Restated ENGlobal 401(k) Plan 10-K/A 10.22 03/29/07 001-14217
effective October 1, 2005
10.30 First Amendment of the ENGlobal 401(k) Plan 10-K/A 10.21 03/29/07 001-14217
effective December 21, 2001
10.31 Second Amendment to the ENGlobal 401(k) Plan 10-K/A 10.23 03/29/07 001-14217
effective April 1, 2006
10.32 Third Amendment to the ENGlobal 401(k) Plan 10-K/A 10.24 03/29/07 001-14217
effective July 1, 2006
*10.33 Fourth Amendment to the ENGlobal 401(k) Plan
effective July 1, 2008
10.34 Regulations Amendment to the ENGlobal 401(k) Plan 10-K 10.21 03/16/07 001-14217
effective January 1, 2006
10.35 Key Managers Incentive Plan of Registrant 8-K 10.43 04/10/07 001-14217
effective January 1, 2007
10.36 Key Executive Employment Agreement between 10-K/A 10.39 03/29/07 001-14217
Registrant and William A. Coskey effective
January 1, 2006
*10.37 Key executive Employment Agreement between
Registrant and Robert W. Raiford effective August
9, 2008
*10.38 Key Executive Employment Agreement between
Registrant and Michael M. Patton effective October
2, 2008
*10.39 Key executive Employment Agreement between
Registrant and R. David Kelley effective August
9, 2008
10.40 Separation Agreement and Release between 8-K 10.1 05/23/07 001-14217
Registrant and Michael L. Burrow dated April 2,
2007
10.41 Form of Indemnification Agreement between 10-Q 10.1 08/11/08 001-14217
Registrant and its Directors and Executive
Officers
98
Incorporated by Reference to:
------------------------------------------------
Filing
Form or Date with SEC File
Exhibit No. Description Schedule Exhibit No. SEC Number
----------- ----------- -------- ----------- --------- ---------
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 10-K 14.1 03/28/08 001/14217
dated August 6, 2007
14.2 Code of Ethics for Chief Executive Officer and 10-K 14.2 03/28/08 001/14217
Senior Financial Officers of Registrant dated
August 6, 2007
*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
99
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 16, 2009
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// 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
100