UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
------ EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2008
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
------ EXCHANGE ACT OF 1934
Commission File No. 001-14217
ENGlobal Corporation
--------------------
(Exact name of registrant as specified in its charter)
Nevada
------
(State or other jurisdiction of
incorporation or organization)
88-0322261
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(I.R.S Employer Identification No.)
654 N. Sam Houston Parkway E., Suite 400, Houston, TX 77073-6033
----------------------------------------------------- ----------
(Address of principal executive offices) (Zip code)
(281) 878-1000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shortened period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer," and smaller
reporting company in Rule 12b-2 of the Exchange Act. (check one):
Large Accelerated Filer [ ] Accelerated Filer [X]
Non-Accelerated Filer [ ] Smaller Reporting Company [ ]
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the close of business of November 6, 2008.
$0.001 Par Value Common Stock 27,294,591 shares
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2008
TABLE OF CONTENTS
Page
Number
------
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Income for the Three Months and
Nine Months Ended September 30, 2008 and September 30, 2007 3
Condensed Consolidated Balance Sheets at September 30, 2008 and December 31, 2007 4
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2008 and September 30, 2007 5
Notes to Condensed Consolidated Financial Statements 6-13
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14-32
Engineering Segment Results 24
Construction Segment Results 27
Automation Segment Results 29
Land Segment Results 31
Item 3. Quantitative and Qualitative Disclosures About Market Risk 33
Item 4. Controls and Procedures 33-34
Part II. Other Information
Item 1. Legal Proceedings 35
Item 1A. Risk Factors 36
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 37
Item 3. Defaults Upon Senior Securities 37
Item 4. Submission of Matters to a Vote of Security Holders 37
Item 5. Other Information 37
Item 6. Exhibits 37
Signatures 38
2
PART I. - FINANCIAL INFORMATION
-------------------------------
ITEM 1. FINANCIAL STATEMENTS
ENGlobal Corporation
Condensed Consolidated Statements of Income
(Unaudited)
(Dollars in Thousands)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------------ -----------------------
2008 2007 2008 2007
--------- --------- --------- ---------
Revenues $ 123,167 $ 96,825 $ 357,344 $ 268,060
Direct costs 109,533 80,486 309,063 224,225
--------- --------- --------- ---------
Gross profit $ 13,634 $ 16,339 $ 48,281 $ 43,835
Selling, general and administrative 7,449 8,603 23,376 23,636
--------- --------- --------- ---------
Operating income $ 6,185 $ 7,736 $ 24,905 $ 20,199
Other income (expense):
Other income $ 49 $ (53) $ 134 $ 462
Interest income (expense), net (360) (636) (1,256) (1,896)
--------- --------- --------- ---------
Income before income taxes $ 5,874 $ 7,047 $ 23,783 $ 18,765
Provision for federal and state income taxes 2,379 3,072 9,583 7,722
--------- --------- --------- ---------
Net income $ 3,495 $ 3,975 $ 14,200 $ 11,043
========= ========= ========= =========
Net income per common share:
Basic $ 0.13 $ 0.15 $ 0.52 $ 0.41
Diluted $ 0.13 $ 0.14 $ 0.51 $ 0.40
Weighted average shares used in computing net income
per share (in thousands):
Basic 27,272 26,953 27,143 26,877
Diluted 27,956 27,417 27,704 27,278
See accompanying notes to interim condensed consolidated financial statements.
3
ENGlobal Corporation
Condensed Consolidated Balance Sheets
(Unaudited)
(Dollars in Thousands)
ASSETS
------
September 30, December 31,
2008 2007
--------- ---------
Current Assets:
Cash $ 1,370 $ 908
Trade receivables, net 85,615 64,141
Prepaid expenses and other current assets 1,524 2,125
Current portion of notes receivable 156 154
Costs and estimated earnings in excess of billings on uncompleted contracts 5,246 6,981
Deferred tax asset 3,081 3,081
--------- ---------
Total Current Assets $ 96,992 $ 77,390
Property and equipment, net $ 6,106 $ 6,472
Goodwill 23,294 19,926
Other intangible assets, net 3,370 4,112
Long term notes receivable, net of current portion 9,110 10,593
Deferred tax asset, non-current 281 77
Other assets 1,038 1,020
--------- ---------
Total Assets $ 140,191 $ 119,590
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable $ 11,634 $ 10,482
Accrued compensation and benefits 18,489 16,182
Notes payable -- 931
Current portion of long-term lease 171 --
Current portion of long-term debt 1,901 1,508
Deferred rent 459 558
Billings and estimated earnings in excess of costs on uncompleted contracts 441 963
Other current liabilities including taxes payable 2,381 3,851
--------- ---------
Total Current Liabilities $ 35,476 $ 34,475
Long-Term Lease, net of current portion 288 --
Long-Term Debt, net of current portion 32,115 29,318
--------- ---------
Total Liabilities $ 67,879 $ 63,793
--------- ---------
Commitments and Contingencies (Note 9)
Stockholders' Equity:
Common stock - $0.001 par value; 75,000,000 shares authorized; 27,289,591
and 27,051,766 shares issued and outstanding at September 30, 2008
and December 31, 2007, respectively $ 27 $ 28
Additional paid-in capital 35,984 33,593
Retained earnings 36,381 22,181
Accumulated other comprehensive income (loss) (80) (5)
--------- ---------
Total Stockholders' Equity $ 72,312 $ 55,797
--------- ---------
Total Liabilities and Stockholders' Equity $ 140,191 $ 119,590
========= =========
See accompanying notes to interim condensed consolidated financial statements.
4
ENGlobal Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in Thousands)
For the Nine Months Ended
September 30,
-------------------------
2008 2007
--------------------
Cash Flows from Operating Activities:
Net income $ 14,200 $ 11,043
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Depreciation and amortization 3,393 3,410
Share-based compensation expense 1,063 947
Gain on disposal of property, plant and equipment (85) (552)
Deferred income taxes (204) (170)
Changes in current assets and liabilities, net of acquisitions:
Trade receivables (19,622) (19,600)
Costs and estimated earnings in excess of billings on uncompleted contracts 1,735 (2,784)
Prepaid expenses and other assets 520 (668)
Accounts payable 1,023 (4,279)
Accrued compensation and benefits 1,783 2,679
Billings in excess of costs and estimated earnings (522) 1,757
Other liabilities (1,107) (5,027)
Income taxes receivable/payable (1,192) 3,850
-------- --------
Net cash provided by (used in) operating activities $ 985 $ (9,394)
-------- --------
Cash Flows from Investing Activities:
Property and equipment acquired $ (1,570) $ (1,842)
Proceeds from note receivable 1,480 55
Business acquisitions, net of cash acquired (2,844) --
Additional consideration for acquisitions -- 18
Proceeds from sale of other assets 383 516
-------- --------
Net cash used in investing activities $ (2,551) $ (1,253)
-------- --------
Cash Flows from Financing Activities:
Net borrowings (payments) on line of credit $ 2,284 $ 11,782
Proceeds from issuance of common stock 1,327 656
Borrowing under capital lease 459 --
Long-term debt repayments (1,967) (2,113)
-------- --------
Net cash (used in) provided by financing activities $ 2,103 $ 10,325
-------- --------
Effect of Exchange Rate Changes on Cash (75) 22
-------- --------
Net change in cash $ 462 $ (300)
Cash, at beginning of period 908 1,403
-------- --------
Cash, at end of period $ 1,370 $ 1,103
======== ========
Supplemental Disclosures:
Interest paid $ 1,004 $ 1,829
-------- --------
Income taxes paid $ 11,010 $ 6,167
-------- --------
Non-cash investing and financing activities:
Acceptance of note receivable from Oak Tree Holdings, LLC -- $ (1,480)
-------- --------
Acceptance of note receivable from South Louisiana Ethanol (SLE) -- $(12,329)
-------- --------
Notes payable issued in acquisition of ACE, discounted for interest $ 1,941 --
-------- --------
See accompanying notes to interim condensed consolidated financial statements.
5
Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
NOTE 1 - BASIS OF PRESENTATION
Our condensed consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United States of
America. Our Company consolidates all of its wholly-owned subsidiaries and
all significant inter-company accounts and transactions have been
eliminated in the consolidation.
The condensed consolidated financial statements of ENGlobal Corporation
(which may be referred to as "ENGlobal," the "Company," "we," "us," or
"our") included herein are unaudited for the three month and nine month
periods ended September 30, 2008 and 2007, have been prepared from the
books and records of the Company pursuant to the rules and regulations of
the Securities and Exchange Commission, and in the case of the condensed
balance sheet as of December 31, 2007, have been derived from the audited
financial statements. These financial statements reflect all adjustments
(consisting of normal recurring adjustments), which are, in the opinion of
management, necessary to fairly present the results for the periods
presented. Certain information and note disclosures, normally included in
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America, have been condensed or
omitted pursuant to rules and regulations of the Securities and Exchange
Commission. It is suggested that these condensed financial statements be
read in conjunction with the Company's audited financial statements for the
year ended December 31, 2007, included in the Company's Annual Report on
Form 10-K filed with the Securities and Exchange Commission. The Company
believes that the disclosures made herein are adequate to make the
information presented not misleading.
NOTE 2 - CRITICAL ACCOUNTING POLICIES
A summary of critical accounting policies is disclosed in Note 2 to the
consolidated financial statements included in our 2007 Annual Report on
Form 10-K. Our critical accounting policies are further described under the
caption "Critical Accounting Policies" in Management's Discussion and
Analysis of Financial Condition and Results of Operation in our 2007 Annual
Report on Form 10-K.
NOTE 3 - SHARE-BASED COMPENSATION
Effective January 1, 2006, the Company adopted the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 123 (Revised), "Share-Based
Payment" ("SFAS No. 123(R)"). Under the fair value recognition provisions
of SFAS No. 123(R), share-based compensation for employees is measured at
the grant date based on the value of the awards and is recognized as
expense over the requisite service period (usually a vesting period). The
Company selected the modified prospective method of adoption described in
SFAS No. 123(R). The fair values of awards recognized under SFAS No. 123(R)
are determined based on the vested portion of the awards; however, the
total compensation expense is recognized on a straight-line basis over the
vesting period.
The Company maintained a share-based incentive plan, under which the
Company had the ability to award non-statutory options, incentive stock
options, restricted stock and stock appreciation rights to employees
including non-employee directors. Under the Plan, a maximum of 3,250,000
shares of our common stock was approved to be issued or transferred to
non-employee directors, officers and employees pursuant to awards granted.
At the date of the Plan's expiration, June 5, 2008, 512,494 shares remained
available under the Plan. This plan has not been extended or replaced.
The Company's policy regarding share issuance upon option exercise takes
into consideration the optionee's eligibility and vesting status. Upon
receipt of an optionee's exercise notice and payment, and the Company's
subsequent determination of eligibility, the Company's Chief Governance
Officer or the Chairman of the Compensation Committee instructs our
transfer agent to issue shares of our common stock to the optionee.
Stock options have been granted with exercise prices at or above the market
price on the date of grant. The granted options have vested generally over
one year for non-employee directors and ratably over four years for
officers and employees. The granted options generally have ten year
contractual terms.
In accordance with the provisions of SFAS No. 123(R), total share-based
compensation expense in the amount of $247,000 and $492,000 was recorded in
the three months ended September 30, 2008, and September 30, 2007,
respectively. Total share-based compensation expense in the amount of
$1,063,000 and $947,000 was recorded in the nine months ended September 30,
2008, and September 30, 2007, respectively. The total share-based
6
Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
compensation expense was recorded in selling, general and administrative
expense. The total income tax benefit recognized in the condensed
consolidated statements of income for the share-based arrangements was
$24,000 and $128,000 for the three months ended September 30, 2008, and
September 30, 2007, respectively, and $204,000 and $205,000 for the nine
months ended September 30, 2008, and September 30, 2007, respectively.
Compensation expense related to outstanding non-vested stock option awards
under the Plan of $1.2 million had not been recognized at September 30,
2008. This compensation expense is expected to be recognized over a
weighted-average period of approximately 26 months.
The following table summarizes stock option activity through the third
quarter of 2008:
Weighted Aggregate
Weighted Average Intrinsic
Average Remaining Value (000's)
Number of Exercise Contractual Based on $14.28 per
Options Price Term (Years) share
---------- -------- ----------- -------------------
Balance at December 31, 2007 1,306,500 $ 6.26 7.4 $ 10,478
Granted 140,000 9.44 9.5 678
Exercised (237,825) 5.62 -- (2,059)
Canceled or expired (30,000) 5.27 -- (270)
---------- -------- ------ ----------
Balance at September 30, 2008 1,178,675 $ 6.79 5.6 $ 8,825
========== ======== ====== ==========
Exercisable at September 30, 2008 974,475 $ 6.15 6.1 $ 7,922
========== ======== ====== ==========
*Based on average stock price through the third quarter of 2008 of $14.28
per share. The average stock price for the same period in 2007 was $10.64
per share. Our common stock was quoted on the NASDAQ Global Select market
during the nine months ended September 30, 2008 and on the American Stock
Exchange during the nine months ended September 30, 2007. The total fair
value of vested options outstanding as of September 30, 2008 and 2007 was
$7.9 million and $6.0 million, respectively.
The total intrinsic value of options exercised was $2.1 million and $1.2
million for the nine months ended September 30, 2008 and 2007,
respectively.
Restricted Stock Unit Awards
On August 8, 2008, the Company granted compensation to each of its three
non-employee directors via restricted stock unit awards equivalent to 6,420
shares of common stock. The award of restricted stock units (RSUs) is
intended to compensate and retain the directors over the term of the award.
The fair value of the award 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 RSUs will be convertible into cash or common
stock. Settlement of the RSUs with the non-employee directors is at the
discretion of the Compensation Committee, subject to the requirement for
stockholder approval to settle in common stock. The RSUs will 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. The
stock price was $13.27 on September 30, 2008, when the first installment
vested. One-fourth of the compensation related to the restricted stock unit
awards was recognized in the third quarter of 2008. The amount of
compensation that was unrecognized at September 30, 2008, totals $210,000.
7
Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
NOTE 4 - FIXED FEE CONTRACTS
Costs, estimated earnings and billings on uncompleted contracts consisted
of the following at September 30, 2008 and December 31, 2007:
September 30, December 31,
2008 2007
-------------------------------
(Dollars in Thousands)
-------------------------------
Costs incurred on uncompleted contracts $ 70,715 $ 74,599
Estimated earnings (losses) on uncompleted contracts (1,791) (1,686)
-------- --------
Earned revenues 68,924 72,913
Less: billings to date 64,119 66,895
-------- --------
Net costs and estimated earnings in excess of billings
on uncompleted contracts $ 4,805 $ 6,018
======== ========
Costs and estimated earnings in excess of billings on uncompleted contracts $ 5,246 $ 6,981
Billings and estimated earnings in excess of cost on uncompleted contracts (441) (963)
-------- --------
Net costs and estimated earnings in excess of billings
on uncompleted contracts $ 4,805 $ 6,018
======== ========
NOTE 5 - LINE OF CREDIT AND DEBT
September 30, December 31,
2008 2007
--------------------------
(Dollars in Thousands)
--------------------------
Schedule of Long-Term Debt:
Comerica Credit Facility - Line of credit, variable interest at 4.75% at
September 30, 2008, maturing in August 2010 $ 30,119 $ 27,835
Sterling Planet and EDGI - Notes payable, interest at 5%, principal payments in
installments of $15,000 plus interest due quarterly, maturing in December 2008 15 60
Cleveland Inspection Services, Inc., CIS Technical Services and F.D. Curtis
- Notes payable, discounted at 5% interest, principal payments in installments
of $100,000 due quarterly, maturing in October 2009 388 667
A.T.I. Inc. - Note payable, interest at 6%, principal payments in installments of
$30,422 including interest due monthly, maturing in January 2009 120 382
Michael Lee - Note payable, interest at 5%, principal payments in installments of
$150,000 plus interest due quarterly, maturing in July 2010 1,050 1,500
Watco Management, Inc. - Note payable, interest at 4%, principal payments in
installments of $137,745 including interest due annually, maturing in
October 2010 382 382
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. 1,942 --
-------- --------
Total long-term debt 34,016 30,826
Less: current maturities of long-term debt (1,901) (1,508)
-------- --------
Long-term debt, net of current portion $ 32,115 $ 29,318
Borrowings under capital lease 459 --
Less: current maturities of capital lease (171) --
-------- --------
Total $ 32,403 $ 29,318
======== ========
8
Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
The Company plans additional borrowings of approximately $500,000 under
capital leases during the remainder of 2008.
NOTE 6 - SEGMENT INFORMATION
ENGlobal has four reportable segments: Engineering, Construction,
Automation and Land. Our segments are strategic business units that offer
different services and products and therefore require different marketing
and management strategies. Our segments have grown through strategic
acquisitions, which have also served to augment management expertise.
The Engineering segment provides consulting services relating to the
development, management and execution of projects requiring professional
engineering and related project services. Services provided by the
Engineering segment include feasibility studies, engineering, design,
procurement, and construction management. The Construction segment provides
construction management personnel and services in the areas of inspection,
mechanical integrity, vendor and turnaround surveillance, field support,
construction, quality assurance and plant asset management. The Automation
segment provides services related to the design, fabrication, and
implementation of process distributed control and analyzer systems,
advanced automation, and information technology projects. The Land segment
provides land management, right-of-way, environmental compliance, and
governmental regulatory compliance services primarily to pipeline, utility
and telecom companies and other owner/operators of infrastructure
facilities throughout the United States and Canada.
The accounting policies of each of the segments are the same as those
described in the summary of significant accounting policies. The Company
evaluates performance based on profit or loss from operations before
interest, income taxes and other income or loss, but after selling, general
and administrative expenses attributable to the reportable segments.
Transactions between reportable segments are at market rates comparable to
terms available from unrelated parties.
(Dollars in Thousands) Engineering Construction Automation Land All Other Consolidated
For the three months ended ----------- ------------ ---------- ---- --------- ------------
September 30, 2008
------------------
Revenue before eliminations $ 63,170 $ 44,481 $ 7,912 $ 11,251 $ -- $ 126,814
Inter-segment eliminations $ (60) (3,571) (16) -- -- (3,647)
--------- --------- --------- --------- --------- ---------
Revenue $ 63,110 40,910 7.896 11,251 -- $ 123,167
Gross profit $ 8,864 2,765 154 1,851 -- $ 13,634
SG&A $ 1,446 794 720 660 3,829 $ 7,449
--------- --------- --------- --------- --------- ---------
Operating income $ 7,418 $ 1,971 $ (566) $ 1,191 $ (3,829) $ 6,185
--------- --------- --------- --------- ---------
Other income (expense) (311)
Tax provision (2,379)
---------
Net income $ 3,495
=========
(Dollars in Thousands)
For the three months ended
September 30, 2007
------------------
Revenue before eliminations $ 61,687 $ 26,402 $ 8,853 $ 7,620 $ -- $ 104,562
Inter-segment eliminations $ (7) (7,403) (327) -- -- (7,737)
--------- --------- --------- --------- --------- ---------
Revenue $ 61,680 18,999 8,526 7,620 -- $ 96,825
Gross profit $ 10,801 3,678 774 1,086 -- $ 16,339
SG&A $ 2,741 791 688 562 3,821 $ 8,603
--------- --------- --------- --------- --------- ---------
Operating income $ 8,060 $ 2,887 $ 86 $ 524 $ (3,821) $ 7,736
--------- --------- --------- --------- ---------
Other income (expense) (689)
Tax provision (3,072)
---------
Net income $ 3,975
=========
9
Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
NOTE 6 - SEGMENT INFORMATION (continued)
(Dollars in Thousands) Engineering Construction Automation Land All Other Consolidated
For the nine months ended ----------- ------------ ---------- ---- --------- ------------
September 30, 2008
------------------
Revenue before eliminations $ 192,685 $ 110,356 $ 29,880 $ 31,928 $ -- $ 364,849
Inter-segment eliminations $ (67) (6,892) (546) -- -- (7,505)
--------- --------- --------- --------- --------- ---------
Revenue $ 192,618 103,464 29,334 31,928 -- $ 357,344
Gross profit $ 31,525 8,781 2,560 5,415 -- $ 48,281
SG&A $ 5,003 2,255 2,101 2,219 11,798 $ 23,376
--------- --------- --------- --------- --------- ---------
Operating income $ 26,522 $ 6,526 $ 459 $ 3,196 $ (11,798) $ 24,905
--------- --------- --------- --------- ---------
Other income (expense) (1,122)
Tax provision (9,583)
---------
Net income $ 14,200
=========
(Dollars in Thousands)
For the nine months ended
September 30, 2007
------------------
Revenue before eliminations $ 170,103 $ 60,069 $ 28,618 $ 21,611 $ -- $ 280,401
Inter-segment eliminations $ (8) (11,297) (1,036) -- -- (12,341)
--------- --------- --------- --------- --------- ---------
Revenue $ 170,095 48,772 27,582 21,611 -- $ 268,060
Gross profit $ 29,549 8,406 2,667 3,213 -- $ 43,835
SG&A $ 6,339 2,084 2,306 1,719 11,188 $ 23,636
--------- --------- --------- --------- --------- ---------
Operating income $ 23,210 $ 6,322 $ 361 $ 1,494 $ (11,188) $ 20,199
--------- --------- --------- --------- ---------
Other income (expense) (1,434)
Tax provision (7,722)
---------
Net income $ 11,043
=========
Financial information about geographic areas
--------------------------------------------
Revenue from the Company's non-U.S. operations is not material. Long-lived
assets (principally leasehold improvements and computer equipment) located
in Canada were valued at $57,000 as of September 30, 2008, net of
accumulated depreciation, stated in U.S. dollars.
NOTE 7 - FEDERAL AND STATE INCOME TAXES
The components of income tax expense (benefit) for the three months and
nine months ended September 30, 2008 and 2007 were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2008 2007 2008 2007
------- ------- ------- -------
(Dollars in thousands) (Dollars in thousands)
Current $ 2,403 $ 3,110 $ 9,787 $ 7,927
Deferred (24) (38) (204) (205)
------- ------- ------- -------
Total tax provision $ 2,379 $ 3,072 $ 9,583 $ 7,722
======= ======= ======= =======
Effective tax rate 40.5% 42.0% 40.3% 39.7%
------- ------- ------- -------
The estimated effective tax rates are based on estimates using historical
rates adjusted by recurring and non-recurring book to tax differences.
Estimates at September 30, 2008, are based on results of the 2007 year end
and adjusted for estimates of non-recurring differences from the prior
year, as well as anticipated book to tax differences for 2008.
10
Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
NOTE 8 - EARNINGS PER SHARE
The following table reconciles the number of shares used to compute basic
earnings per share to the number of shares used to compute diluted earnings
per share ("EPS").
Three Months Ended Nine Months Ended
September 30, September 30,
2008 2007 2008 2007
------ ------ ------ ------
(Shares in thousands) (Shares in thousands)
Weighted average shares outstanding
used to compute basic EPS 27,272 26,953 27,143 26,877
Effect of share-based plan 684 464 561 401
------ ------ ------ ------
Shares used to compute diluted EPS 27,956 27,417 27,704 27,278
====== ====== ====== ======
NOTE 9 - COMMITMENTS AND CONTINGENCIES
Employment Agreements
The Company has employment agreements with certain of its executive
officers and other officers. Such agreements provide for minimum salary
levels. Generally, if the Company terminates the employment of the employee
for any reason other than (1) for cause, as defined in the employment
agreement, (2) voluntary resignation, or (3) the employee's death, the
Company is obligated to provide a severance benefit equal 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
employee's agreement not to engage in certain competitive activities. These
agreements are renewable for one year at the Company's option.
Long-term Note Receivable
In the first quarter of 2007, ENGlobal Engineering, Inc. ("EEI") and South
Louisiana Ethanol, LLC ("SLE") executed an agreement for engineering,
procurement and construction (EPC) services relating to the retro-fit of an
ethanol plant in southern Louisiana. The history of the SLE project (the
"SLE Project") is described in Note 12 to the Company's condensed
consolidated financial statements included in its Quarterly Report on Form
10-Q for the quarter ended September 30, 2007, and is discussed further in
the Company's Annual Report on Form 10-K for the year ended December 31,
2007, under Litigation, below, and in Part II, "Item 1 - Legal Proceedings"
of this Quarterly Report on Form 10-Q.
Accounts Receivable
Note 10 to the Company's condensed consolidated financial statements
("Subsequent Events") included in its Quarterly Report on Form 10-Q for the
quarter ended June 30, 2008, discussed the petition for reorganization
under Chapter 11 of the U.S. Bankruptcy Code filed by the parent of
ENGlobal client SemCrude, L.P. This client has continued to be current on
payments due to the Company throughout the third quarter.
Litigation
Due to SLE's continued failure to obtain permanent financing, on May 30,
2008, the Company filed suit in the United States District Court for the
Eastern District of Louisiana, Cause Number 08-3601, seeking damages of
$15.8 million. An independent appraisal, dated March 17, 2008, from the
bridge lending bank's appraiser, Revpro and Associates, indicates a fair
market value of SLE's assets of $35.8 million, an orderly liquidation value
of $25.3 million, and a forced liquidation value of $20.0 million. While
the Company believes that in the event the collateral is liquidated, SLE's
obligations to the Company would be paid in full pursuant to the Collateral
Mortgage in favor of the Company, collectability is not assured at this
time. However, at this time the Company believes that the ultimate
disposition of the SLE collateral will not materially adversely affect our
liquidity or overall financial position.
11
Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
From time to time, the Company is involved in various legal proceedings
arising in the ordinary course of business alleging, among other things,
breach of contract or tort in connection with the performance of
professional services, the outcome of which cannot be predicted with
certainty. As of the date of this filing, we are party to several legal
proceedings that we believe have been reserved for or are covered by
insurance, or that, if determined adversely to us individually or in the
aggregate, would not have a material adverse effect on our results of
operations or financial position.
Insurance
The Company carries a broad range of insurance coverage, including general
and business automobile liability, commercial property, professional errors
and omissions, workers' compensation insurance, directors and officers
liability insurance and a general umbrella policy. The Company is not aware
of any claims in excess of insurance recoveries. ENGlobal is partially
self-funded for health insurance claims. Provisions for expected future
payments are accrued based on the Company's experience.
Building Lease Commitment
As discussed in Note 20 to the Company's consolidated financial statements
included in its 2007 Annual Report on Form 10-K, on February 28, 2008,
ENGlobal entered into a lease agreement with a third party relating to the
construction of a new facility in Beaumont, Texas. Commencement of the
lease agreement and construction of the facility was contingent on the sale
of property to the developer/lessor. During May 2008, the Company completed
the sale of property to the developer/lessor. Construction has commenced on
the new facility and is expected to continue throughout 2008.
Restricted Stock Units
As discussed at the end of Note 3, on August 8, 2008, the Company granted
compensation to each of its three non-employee directors via restricted
stock unit awards equivalent to 6,420 shares of common stock. The fair
value of the award 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.
The total value of the grant was $280,000. Upon vesting, the RSUs will be
convertible into cash or common stock. Settlement of the RSUs with the
non-employee directors is at the discretion of the Compensation Committee,
subject to the requirement for stockholder approval to settle in common
stock. One-fourth, $70,000, of the compensation related to the restricted
stock unit awards vested in the third quarter of 2008. Because it has not
yet been determined whether this award will be settled in cash or stock,
the award has not been classified as a liability. If settlement is
ultimately made in cash, the transaction will be reclassified from
additional paid in capital to a liability. The amount of compensation that
was unrecognized at September 30, 2008, totals $210,000.
Retention Bonus
On September 29, 2008, the Company acquired 100% of the membership
interests of Advanced Control Engineering, LLC ("Advanced Control
Engineering") as discussed in Note 10 below. Per Section 6.10 of the
Purchase Agreement between ENGlobal and Advanced Control Engineering (which
is attached as an exhibit to this Quarterly Report on Form 10-Q), one of
the conditions to the transaction's closing was the agreement to pay
employee retention bonuses. The retention bonuses are payable to employees
of Advanced Control Engineering, contingent on their continued employment
with ENGlobal, and, as such, will be recognized as compensation expense in
the period in which they become due.
12
Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
NOTE 10 - ACQUISITIONS
EMC Design & Consulting, Inc.
On September 4, 2008, the Company acquired the net assets of EMC Design &
Consulting, Inc. for a cash payment of $350,000. The property, plant and
equipment was valued at $206,000 net of depreciation. The remaining
$144,000 is included in other intangible assets and is being amortized over
24 months.
Advanced Control Engineering
On September 29, 2008, the Company acquired 100% of the membership
interests of Advanced Control Engineering, LLC ("Advanced Control
Engineering"). Advanced Control Engineering provides control system and
related technical services to a variety of industries. Advanced Control
Engineering complements the business of the Company's Automation segment
and is situated geographically to expand the Automation segment's service
territory. At the closing of the acquisition, the aggregate purchase price
was $4.4 million, including a cash payment of $2.5 million to the
principals of Advanced Control Engineering, and promissory notes issued to
such principals (described in Note 5) in the face amount of $2.0 million,
discounted for interest to $1.9 million, using guidance from the Internal
Revenue Service on discounting non-interest bearing notes. The following
table summarizes the estimated fair values of the assets acquired and
liabilities assumed at the date of acquisition. ENGlobal is in the process
of obtaining third-party valuations of certain intangible assets.
Therefore, the allocation of the purchase price is subject to change.
Advanced Control Engineering, LLC At September 30, 2008
---------------------
(Dollars in thousands)
Cash and other current assets $ 75
Accounts receivable 1,913
Property, plant and equipment 244
Goodwill 2,910
Less liabilites assumed (700)
-------
Net assets acquired $ 4,442
=======
Net purchase price $ 4,442
-------
The Company is expecting to account for this transaction as a purchase
under SFAS No. 141, Business Combinations.
Because the transaction closing date was September 29, 2008, no results of
operations of Advanced Control Engineering are reflected in the Company's
condensed consolidated statements of income in this Quarterly Report on
Form 10-Q. The results of operations of Advanced Control Engineering are
summarized as follows:
Advanced Control Engineering, LLC Three Months Ended Nine Months Ended
September 30, 2008 September 30, 2008
------------------ ------------------
(Dollars in thousands) (Dollars in thousands)
Total Revenue $2,330 $7,059
------ ------
Net Income $ 85 $ 624
====== ======
NOTE 11 - SUBSEQUENT EVENTS
On or about November 4, 2008, EcoProduct Solutions, L.P. ("EcoProduct")
served ENGlobal Engineering, Inc. ("EEI") with an arbitration demand in
connection with a previously initiated arbitration proceeding against
defendant Swenson Technology, Inc. ("Swenson") pending before the American
Arbitration Association. According to the first amended statement of
claims, the claimant has made various allegations, including professional
negligence, breach of contract, and violation of Texas consumer protection
laws, against primary defendant Swenson Technology, Inc., and now, also
against EEI in connection with an engineering project on which EEI's work
was completed in 2005. EcoProduct is seeking approximately $45 million in
damages. Due to the recentness of the filing, we have not yet had a chance
to review the claims thoroughly. However, it is our current understanding
that the suit is substantially without merit, and we intend to vigorously
defend against it.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Statements
--------------------------
Certain information contained in this Quarterly Report on Form 10-Q, the
Company's Annual Report on Form 10-K, as well as other written and oral
statements made or incorporated by reference from time to time by the
Company and its representatives in other reports, filings with the
Securities and Exchange Commission, press releases, conferences, or
otherwise, may be deemed to be forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934. This
information includes, without limitation, statements concerning the
Company's future financial position and results of operations; planned
capital expenditures; business strategy and other plans for future
operations; the future mix of revenues and business; customer retention;
project reversals; commitments and contingent liabilities; and future
demand and industry conditions. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable,
it can give no assurance that such expectations will prove to have been
correct. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. Generally, the words "anticipate," "believe,"
"estimate," "expect," "may," and similar expressions, identify
forward-looking statements, which generally are not historical in nature.
Actual results could differ materially from the results described in the
forward-looking statements due to the risks and uncertainties set forth in
this Quarterly Report on Form 10-Q, the specific risk factors identified in
the Company's Annual Report on Form 10-K for the year ended December 31,
2007, and those described from time to time in our future reports filed
with the Securities and Exchange Commission.
The following discussion is qualified in its entirety by, and should be
read in conjunction with, the Company's condensed consolidated financial
statements, including the notes thereto, included in this Quarterly Report
on Form 10-Q and the Company's Annual Report on Form 10-K for the year
ended December 31, 2007.
MD&A Overview
-------------
The following list sets forth a general overview of certain significant
changes in the Company's financial condition and results of operations for
the three months and nine months ended September 30, 2008, compared to the
corresponding periods in 2007.
During the three months During the nine months
ended September 30, 2008 ended September 30, 2008
------------------------ ------------------------
Revenues Increased 27.3% Increased 33.3%
Gross profit Decreased 16.6% Increased 10.3%
Operating income Decreased 19.5% Increased 23.3%
SG&A expense Decreased 14.0% Decreased 0.8%
Net income Decreased 12.5% Increased 29.1%
14
Management's Discussion and Analysis (continued)
------------------------------------------------
As of As of As of
Selected Balance Sheet Comparisons September 30, December 31, September 30,
2008 2007 2007
------------- ------------ -------------
(Dollars in Thousands)
--------------------------------------------
Working capital $ 61,516 $ 42,915 $ 48,924
Total assets $140,191 $119,590 $126,790
Long-term debt, net of current portion $ 32,115 $ 29,318 $ 37,795
Stockholders' equity $ 72,312 $ 55,797 $ 53,531
Long-term debt, net of current portion, increased 9.6%, or $2.8 million,
from $29.3 million at December 31, 2007 to $32.1 million at September 30,
2008. As a percentage of stockholders' equity, long-term debt decreased to
44.4% from 52.5% at these dates. The increase in long-term debt primarily
relates to $1.9 million in notes payable issued as a part of the
consideration paid for the acquisition of Advanced Control Engineering and
a $2.3 million increase in the amount drawn on our line of credit, offset
by note payments. On average, our days sales outstanding remained 61 days
for the three-month period ended September 30, 2008, equal to 61 days for
the twelve-month period ended December 31, 2007, but lower than the 66 days
for the three-month period ended September 30, 2007. The Company continues
to work toward improving it's billing and client collection processes.
Total stockholders' equity increased 29.6%, or $16.5 million, from $55.8
million as of December 31, 2007 to $72.3 million as of September 30, 2008.
15
Management's Discussion and Analysis (continued)
------------------------------------------------
Consolidated Results of Operations for the Three Months
Ended September 30, 2008 and 2007
(Unaudited)
For the three months ended
September 30, 2008
(Dollars in Thousands) Engineering Construction Automation Land All Other Consolidated
---------------------- ----------- ------------ ---------- ---- --------- ------------
-
Revenue before eliminations $ 63,170 $ 44,481 $ 7,912 $ 11,251 $ -- $ 126,814
Inter-segment eliminations (60) (3,571) (16) -- -- (3,647)
--------- --------- --------- --------- --------- ---------
Revenue $ 63,110 $ 40,910 $ 7.896 $ 11,251 $ -- $ 123,167
--------- --------- --------- --------- --------- ---------
Gross profit $ 8,864 $ 2,765 $ 154 $ 1,851 $ -- $ 13,634
SG&A 1,446 794 720 660 3,829 7,449
--------- --------- --------- --------- --------- ---------
Operating income $ 7,418 $ 1,971 $ (566) $ 1,191 $ (3,829) $ 6,185
--------- --------- --------- --------- ---------
Other income (expense) (311)
Tax provision (2,379)
---------
Net income $ 3,495
=========
For the three months ended
September 30, 2007
(Dollars in Thousands)
----------------------
Revenue before eliminations $ 61,687 $ 26,402 $ 8,853 $ 7,620 $ -- $ 104,562
Inter-segment eliminations (7) (7,703) (327) -- -- (7,737)
--------- --------- --------- --------- --------- ---------
Revenue $ 61,680 $ 18,999 $ 8,526 $ 7,620 $ -- $ 96,825
--------- --------- --------- --------- --------- ---------
Gross profit $ 10,801 $ 3,678 $ 774 $ 1,086 $ -- $ 16,339
SG&A 2,741 791 688 562 3,821 8,603
--------- --------- --------- --------- --------- ---------
Operating income $ 8,060 $ 2,887 $ 86 $ 524 $ (3,821) $ 7,736
--------- --------- --------- --------- ---------
Other income (expense) (689)
Tax provision (3,072)
---------
Net income $ 3,975
=========
16
Management's Discussion and Analysis (continued)
------------------------------------------------
Consolidated Results of Operations for the Nine Months
Ended September 30, 2008 and 2007
(Unaudited)
For the nine months ended
September 30, 2008
(Dollars in Thousands) Engineering Construction Automation Land All Other Consolidated
---------------------- ----------- ------------ ---------- ---- --------- ------------
-
Revenue before eliminations $ 192,685 $ 110,356 $ 29,880 $ 31,928 $ -- $ 364,849
Inter-segment eliminations (67) (6,892) (546) -- -- (7,505)
--------- --------- --------- --------- --------- ---------
Revenue $ 192,618 $ 103,464 $ 29,334 $ 31,928 $ -- $ 357,344
--------- --------- --------- --------- --------- ---------
Gross profit $ 31,525 $ 8,781 $ 2,560 $ 5,415 $ -- $ 48,281
SG&A 5,003 2,255 2,101 2,219 11,798 $ 23,376
--------- --------- --------- --------- --------- ---------
Operating income $ 26,522 $ 6,526 $ 459 $ 3,196 $ (11,798) $ 24,905
--------- --------- --------- --------- ---------
Other income (expense) (1,122)
Tax provision (9,583)
---------
Net income $ 14,200
=========
For the nine months ended
September 30, 2007
(Dollars in Thousands
---------------------
Revenue before eliminations $ 170,103 $ 60,069 $ 28,618 $ 21,611 $ -- $ 280,401
Inter-segment eliminations (8) (11,297) (1,036) -- -- (12,341)
--------- --------- --------- --------- --------- ---------
Revenue $ 170,095 $ 48,772 $ 27,582 $ 21,611 $ -- $ 268,060
--------- --------- --------- --------- --------- ---------
Gross profit $ 29,549 $ 8,406 $ 2,667 $ 3,213 $ -- $ 43,835
SG&A 6,339 2,084 2,306 1,719 11,188 $ 23,636
--------- --------- --------- --------- --------- ---------
Operating income $ 23,210 $ 6,322 $ 361 $ 1,494 $ (11,188) $ 20,199
--------- --------- --------- --------- ---------
Other income (expense) (1,434)
Tax provision (7,722)
---------
Net income $ 11,043
=========
17
Management's Discussion and Analysis (continued)
------------------------------------------------
We recorded net income of $3.5 million, or $0.13 per diluted share, for the
three months ended September 30, 2008, compared to net income of $4.0
million, or $0.14 per diluted share, for the corresponding period last
year. We recorded net income of $14.2 million, or $0.51 per diluted share,
for the nine months ended September 30, 2008, compared to net income of
$11.0 million, or $0.40 per diluted share, for the corresponding period in
2007.
The decline in net income during the three months ended September 30, 2008
was due in part to the impacts of Hurricane Gustav and Hurricane Ike. The
Company's operations in Baton Rouge, Louisiana were impacted by the
landfall of Hurricane Gustav on September 1, 2008. Hurricane Ike's landfall
on September 13, 2008 impacted approximately one-third of the Company's
operations. Ike was particularly devastating to our Beaumont, Texas
operations, with evacuations spanning from September 11 to September 20 and
power outages affecting certain of the Company's offices throughout this
period as the infrastructures of the affected areas were repaired.
Nonetheless, our Company and employees displayed resilience during this
time by returning to work when possible, utilizing weekends to make up lost
time, and seeking additional opportunities to assist our clients with the
restoration of their facilities.
The Company recognizes service revenue as soon as the services are
performed. The majority of the Company's service revenue has historically
been provided through cost-plus contracts, whereas a majority of our
fabrication and turnkey EPC projects revenue has been earned on fixed-price
contracts.
Revenue on fixed-price contracts is recorded primarily using the
percentage-of-completion (cost-to-cost) method. Under this method, revenue
on long-term contracts is recognized in the ratio that contract costs
incurred bear to total estimated contract costs. Revenue and gross margin
on fixed-price contracts are subject to revision throughout the lives of
the contracts and any required adjustments are made in the period in which
the revisions become known. Losses on contracts are recorded in full as
they are identified.
In the course of providing our services, we routinely provide engineering,
materials, and equipment and may provide construction services on a direct
hire or subcontractor basis. Generally, the materials, equipment and
subcontractor costs are passed through to our clients and reimbursed, along
with fees, which in total are at margins lower than those of our normal
core business. In accordance with industry practice and generally accepted
accounting principles, all such costs and fees are included in reported
revenue. The use of subcontractor services can change significantly from
project to project; therefore, changes in revenue and gross profit, SG&A
expense and operating income as a percent of revenue may not be indicative
of the Company's core business trends.
Operating SG&A expense includes management and staff compensation, office
costs such as rents and utilities, depreciation, amortization, travel and
other expenses generally unrelated to specific contracts, but directly
related to the support of a segment's operations.
All other SG&A expense is comprised primarily of business development
costs, as well as costs related to the executive, investor
relations/governance, finance, accounting, safety, human resources, project
controls, legal and information technology departments, and other costs
generally unrelated to specific projects, but which are incurred to support
corporate activities and initiatives.
Industry Overview:
Due to the increasing global demand for, and limited supply of, both crude
oil and refined products, and the resulting increased spending on necessary
energy infrastructure improvements in North America, we believe each of
ENGlobal's business segments is well positioned within the industry.
Many ENGlobal offices have benefited from significant capital projects in
the downstream refinery market, primarily related to increasing capacity,
utilizing heavy or sour crude oil, and rebuilding facilities damaged by
accidents or natural disasters. While many of such projects are currently
underway, some refiners may choose to defer significant new spending given
the recent tightening of refining margins. The Company expects a
continuation of compliance-driven refining projects, such as EPA
environmental initiatives, DOT pipeline integrity requirements, and OSHA
safety-related projects, which may result from increased audits of
U.S.-based refineries. Also, the Company is seeing opportunities to upgrade
obsolete automation and control systems at existing refineries and to plan
and manage turnaround projects.
18
Management's Discussion and Analysis (continued)
------------------------------------------------
The downstream petrochemical industry has historically been a good source
of projects for ENGlobal. While not currently as robust as the refining
market, we have seen a steady level of both maintenance and capital
spending in this industry. We believe that major grassroots petrochemical
projects will continue to be undertaken overseas, either closer to product
demand in emerging economies, or located closer to less expensive feed
stocks. We expect that future petrochemical work undertaken in the U.S.
primarily will consist of smaller capital projects or will be maintenance
related.
Despite past downturns in the industry, pipeline projects have remained
fairly constant and we have recently seen a significant increase in project
activity. Although pipeline projects tend to require fewer engineering man
hours than similarly sized downstream projects, ENGlobal may also provide a
pipeline client with several additional services, such as right-of-way
acquisition, regulatory permitting, inspection, and construction
management. The drivers we see behind growth in domestic pipeline activity
include: (1) natural gas transportation away from the Rocky Mountain area
and new gas fields in other parts of the country, (2) natural gas
transportation related to LNG import facilities, (3) movement of heavy
Canadian crude oil into the United States, and (4) movement of refined
products from Gulf Coast refineries to the Midwest and Northeast.
The country's focus on alternative energy has presented the Company with
many new project opportunities. The North American Industrial Project
Spending Index has recently indicated that capital spending for all
alternative energy projects exceeds that for refining and pipeline. To
date, ENGlobal has mainly focused its efforts on biomass processes, such as
those related to coal-to-liquids projects, the production of ethanol and
biodiesel, and the utilization of refinery petroleum coke as an energy
source (e.g. ammonia to feed a fertilizer plant). In addition, the Company
predicts possible opportunities related to solar energy in future years,
including the opportunity to perform project services on solar collector
and polysilicon (used in photovoltaic cells) production facilities. Most of
our alternative energy projects are awarded from smaller developers rather
than our larger, traditional clients.
Tightening credit markets have resulted in a worldwide credit crisis that
has triggered substantial uncertainty with respect to the funding of
capital expenditures by our customers, and oil and natural gas prices have
fallen substantially from their highs in summer 2008. These changes have
impacted general business conditions and may reduce demand for certain of
our products and services. As mentioned above, some refiners may choose to
defer significant new spending given the recent tightening of refining
margins. Although we are not immune to the current financial and economic
events, we believe each of ENGlobal's business segments is well positioned
within the industry, as further discussed in the Current Report on Form 8-K
filed with the Securities and Exchange Commission on October 29, 2008, and
as follows:
ENGlobal has served many of our valued clients over a long period of time,
and these strong alliance relationships are the foundation of our business.
Our business relies on small to mid-sized projects, many of which fall into
the "run and maintain" category. we are not nearly as dependent on huge
grass roots capital projects as most others in our industry.
A significant part of our Automation segment's work is driven by our
clients' need to replace aging and obsolete distributed control system
(DCS) and analytical equipment. While at times these expenditures can be
deferred, the need to replace DCS and other equipment has provided a
reliable and recurring source of projects. We are focusing our efforts on
improving operational efficiencies that will allow us to fully capitalize
on these opportunities.
About half of the states in the U.S. have enacted Renewable Portfolio
Standards, which mandate a timeline and percentage for electricity
generation from renewable sources such as wind, solar, geothermal, and
biomass. Also, the Investment Tax Credit for these renewable energy
projects was due to expire on December 31, 2008, but was extended as part
of the recent "bailout" legislation. We believe these two factors working
together, will serve to drive demand for alternative energy projects in the
future.
Facilities in the energy industry, as well as in many other industries, are
aging. No grassroots refinery has been built in the U.S. since 1976, and
many of the country's large pipelines were installed over 50 years ago. We
anticipate that maintaining and rebuilding this aging infrastructure - an
ENGlobal core competency - will benefit our Company.
Note: The segment information contains further detail regarding the reasons
for changes from period to period.
Revenue:
Revenue increased $26.4 million, or 27.3%, to $123.2 million for the three
months ended September 30, 2008, from $96.8 million for the comparable
prior-year period. Of the increase, approximately $1.4 million is
attributable to our Engineering segment, $21.9 million to our Construction
segment, and $3.7 million to our Land segment, while our Automation segment
decreased $0.6 million. The most significant increase in revenue for the
three months ended September 30, 2008, was in the Construction segment, as
inspection services rose by $22.2 million, an increase of 133.7% over the
comparable prior-year period.
Revenue increased $89.2 million, or 33.3%, to $357.3 million for the nine
months ended September 30, 2008, from $268.1 million for the comparable
prior-year period. Of the increase, approximately $22.5 million is
attributable to our Engineering segment, $54.7 million to our Construction
segment, $1.7 million to our Automation segment, and $10.3 million to our
Land segment. The most significant increase in revenue for the nine months
ended September 30, 2008, was in the Construction segment, as inspection
services rose by $53.8 million, an increase of 136.5% over the comparable
prior-year period. The next most significant increase in revenue was in the
Engineering segment as detail-design services rose by $28.4 million, an
increase of 28.7% over the comparable prior-year period.
Gross Profit:
Gross profit decreased $2.7 million, or 16.6%, to $13.6 million for the
three months ended September 30, 2008, from $16.3 million for the
comparable prior-year period. The $2.7 million decrease in gross profit is
attributable to approximately $7.1 million in higher costs and increased
procurement and inspection services, where higher employee-related costs
and competitive pressure on bill rates resulted in lower margins. This is
offset by the $4.4 million increase in revenue related to the increase in
inspection services and more competitive margins on the detail-design
services related to a single refinery rebuild project.
19
Management's Discussion and Analysis (continued)
------------------------------------------------
As a percentage of revenue, gross profit decreased 5.8% from 16.8% for the
three months ended September 30, 2007, to 11.0% for the three months ended
September 30, 2008. The decrease in gross profit margin as a percentage of
revenue primarily relates to a shift in revenue mix quarter-over-quarter.
Revenues in the Construction segment for the three months ended September
30, 2008, included $38.8 million in inspection services compared to $16.6
million for the three months ended September 30, 2007. While this portion
of our revenue added $22.2 million to our overall revenue growth, this type
of service has typically been performed at lower margins, thereby resulting
in an average reduction of 2.8% in our overall gross margin. Increased
costs on fixed-price work and increased non-reimbursable costs in our
Automation segment also contributed to the lower margins.
Gross profit increased $4.5 million, or 10.3%, to $48.3 million for the
nine months ended September 30, 2008, from $43.8 million for the comparable
prior-year period. The $4.5 million increase in gross profit is
attributable to a $14.6 million increase in revenue, which was offset by
approximately $10.1 million in higher costs and lower margins.
As a percentage of revenue, gross profit decreased 2.9% from 16.4% for the
nine months ended September 30, 2007, to 13.5% for the quarter ended
September 30, 2008. Revenues in the Engineering segment for the nine months
ended September 30, 2008, included $25.1 million in procurement services
compared to $16.2 million for the nine months ended September 30, 2007.
Revenues in the Construction segment for the nine months ended September
30, 2008, included $93.2 million in inspection services compared to $39.4
million for the nine months ended September 30, 2007. While these two
portions of our revenue added $62.7 million to our overall revenue growth,
these pass-through type services have typically been performed at lower
margins, thereby resulting in an average reduction of 2.9% in our overall
gross margin.
Selling, General, and Administrative:
As a percentage of revenue, total SG&A expense decreased 2.9% to 6.0% for
the three months ended September 30, 2008, from 8.9% for the comparable
period in 2007. Total expense for SG&A decreased $1.2 million, or 14.0%, to
$7.4 million for the three months ended September 30, 2008, from $8.6
million for the comparable prior-year period.
As a percentage of revenue, operating SG&A expense decreased 2.1% to 2.9%
for the three months ended September 30, 2008, from 5.0% for the comparable
prior-year period. Operating SG&A decreased $1.2 million, or 25.0%, to $3.6
million for the three months ended September 30, 2008, from $4.8 million
for the comparable prior-year period. Decreases in operating SG&A were
primarily related to decreases in bad debt expense and identifying
approximately $0.3 million of certain associate expenses as direct costs
rather than overhead. Operating SG&A is discussed in further detail in each
of the segment sections.
As a percentage of revenue, all other SG&A expense decreased 0.8% to 3.1%
for the three months ended September 30, 2008, from 3.9% for the comparable
prior-year period. All other SG&A expense remained the same at $3.8 million
for both the three months ended September 30, 2008 and for the comparable
prior-year period.
As a percentage of revenue, total SG&A expense decreased 2.3% to 6.5% for
the nine months ended September 30, 2008, from 8.8% for the comparable
period in 2007. Total expense for SG&A decreased $0.2 million, or 0.8%, to
$23.4 million for the nine months ended September 30, 2008, from $23.6
million for the comparable prior-year period.
As a percentage of revenue, operating SG&A expense decreased 1.4% to 3.2%
for the nine months ended September 30, 2008, from 4.6% for the comparable
prior-year period. Operating SG&A expense decreased approximately $0.8
million to $11.6 million for the nine months ended September 30, 2008, from
$12.4 million for the comparable prior-year period. Decreases in operating
SG&A were primarily related to identifying approximately $0.9 million of
certain associate expenses as direct costs rather than overhead.
As a percentage of revenue, all other SG&A expense decreased 0.9% to 3.3%
for the nine months ended September 30, 2008, from 4.2% for the comparable
prior-year period. All other SG&A expense increased approximately $0.6
million, or 5.4%, to $11.8 million for the nine months ended September 30,
2008, from $11.2 million for the comparable prior-year period. The increase
over the prior year's all other SG&A was related to increases of
approximately $375,000 related to professional services, $252,000 in
depreciation and amortization expense, and $97,000 in stock compensation
expense.
20
Management's Discussion and Analysis (continued)
------------------------------------------------
Operating Income:
Operating income decreased approximately $1.5 million, or 19.5%, to $6.2
million for the three months ended September 30, 2008, from $7.7 million
for the same period in 2007. As a percentage of revenue, operating income
decreased 3.0% to 5.0% for the three months ended September 30, 2008, from
8.0% for the comparable prior-year period.
Operating income increased approximately $4.7 million, or 23.3%, to $24.9
million for the nine months ended September 30, 2008, from $20.2 million
for the comparable period in 2007. As a percentage of revenue, operating
income decreased 0.5% to 7.0% for the three months ended September 30,
2008, from 7.5% for the comparable prior- year period.
Other Expense, net:
Other expense decreased $0.3 million, to $0.3 million for the three months
ended September 30, 2008, from $0.6 million for the comparable prior-year
period.
Other expense decreased $0.3 million, to $1.1 million for the nine months
ended September 30, 2008, from $1.4 million for the comparable prior-year
period.
Tax Provision:
Income tax expense decreased $0.7 million, or 22.6%, to $2.4 million for
the three months ended September 30, 2008, from $3.1 million for the
comparable prior-year period. The estimated effective tax rate was 40.5%
for the three months ended September 30, 2008, compared to 42.0% for the
comparable prior-year period.
Income tax expense increased $1.9 million, or 24.7%, to $9.6 million for
the nine months ended September 30, 2008, from $7.7 million for the
comparable prior-year period. The estimated effective tax rate was 40.3%
for the nine months ended September 30, 2008, compared to 39.7% for the
comparable prior-year period and for the twelve-month period ended December
31, 2007.
The estimated effective tax rates are based on estimates using historical
rates adjusted by recurring and non-recurring book to tax differences.
Estimates at September 30, 2008, are based on results of the 2007 year end
and adjusted for estimates of non-recurring differences from the prior
year, as well as anticipated book to tax differences for 2008.
Net Income:
Net income for the three months ended September 30, 2008 decreased $0.5
million, or 12.5%, to $3.5 million from $4.0 million for the comparable
prior-year period. As a percentage of revenue, net income decreased 1.3% to
2.8% for the three months ended September 30, 2008, from 4.1% for the three
months ended September 30, 2007.
Net income for the nine months ended September 30, 2008 increased $3.2
million, or 29.1%, to $14.2 million from $11.0 million for the comparable
prior-year period. As a percentage of revenue, net income decreased 0.1% to
4.0% for the nine months ended September 30, 2008, from 4.1% for the nine
months ended September 30, 2007.
Liquidity and Capital Resources
-------------------------------
Overview
The Company defines liquidity as its ability to pay liabilities as they
become due, fund our operations and meet monetary contractual obligations.
Our primary source of funds to meet liquidity needs during the period ended
September 30, 2008 was borrowings under our senior revolving credit
facility. Cash on hand at September 30, 2008 totaled $1.4 million and
availability under the credit facility totaled $19.6 million, resulting in
cash and previously arranged borrowing capacity to meet additional
liquidity needs of $21.0 million. As of September 30, 2008, management
believes the Company is positioned to meet its liquidity requirements for
the next 12 months.
21
Management's Discussion and Analysis (continued)
------------------------------------------------
At September 30, 2008, the amount outstanding on the Company's line of
credit was $30.1 million compared to $25.5 million at June 30, 2008. This
increase in debt is primarily related to $2.5 million borrowed on September
29, 2008, for the acquisition of Advanced Control Engineering.
We are a growth company and we manage our business to achieve reasonable
growth objectives that are commensurate with profitable operations given
existing and anticipated economic conditions. The outlook for our continued
organic growth is generally favorable. We also expect opportunities to make
strategic acquisitions. We intend to continue to meet our incremental
liquidity needs through internally generated profits and existing borrowing
arrangements. In 2008, we began to utilize capital lease arrangements for a
significant upgrade in our computing equipment. We expect that the capital
lease commitment will be approximately $1.0 million when completed by the
end of 2008.
The competitive contracting environment exposes us to situations where our
clients may become unable or unwilling to complete a contract and meet
their obligations to us in the normal course of business. These situations
cause unexpected liquidity requirements, lower than expected profits and
even losses. We currently are financing more than $9.2 million relating to
such a situation, described more fully in Note 9 to the condensed
consolidated financial statements included in this Quarterly Report on Form
10-Q. While this situation has caused the Company to incur higher interest
costs than would otherwise have been incurred, our liquidity remains
sufficient to meet our objectives.
However, cash and the availability of cash could be materially restricted
if:
(1) circumstances prevent the timely internal processing of invoices,
(2) amounts billed are not collected or are not collected in a timely
manner,
(3) project mix shifts from cost-reimbursable to fixed-price
contracts during periods of growth,
(4) the Company loses one or more of its major customers,
(5) the Company experiences material cost overruns on fixed-price
contracts,
(6) our client mix shifts from our historical owner-operator client
base to more developer-based clients,
(7) acquisitions are not accretive or are not integrated timely, or
(8) we are unable to meet the covenants of the Credit Facility.
If any such event occurs, we would be forced to consider alternative
financing options, if such options are available given current market
conditions.
Cash Flows from Operating Activities:
Operations generated approximately $1.0 million in net cash for the nine
months ended September 30, 2008, compared with net cash used for operations
of $9.4 million during the same period in 2007. The $9.4 million in cash
used for operations during the nine-month period ended September 30, 2007
primarily related to funding amounts required for the SLE project.
Operations used approximately $3.5 million in net cash for the three months
ended September 30, 2008, compared to the $5.0 million used for the three
months ended September 30, 2007. Although we are experiencing growth in our
operations, this growth is reflected in increased working capital rather
than a significant improvement in cash flows from operations. Our most
significant working capital changes are discussed below. The primary
changes in working capital accounts during the period were:
o Increased Trade Receivables - The increase of $19.6 million from
December 31, 2007, was primarily the result of an overall
increase in operating activity. Our collections on past due
Accounts Receivable balances continue to improve and our days
sales outstanding has decreased from 66 days as of the period
ended September 30, 2007 to 61 days at the periods ended
September 30, 2008 and December 31, 2007.
22
Management's Discussion and Analysis (continued)
------------------------------------------------
o Increased Accounts Payable - The increase of $1.0 million from
December 31, 2007, was primarily the result of increases in
vendor and sub-contractor charges due to increased operating
activity in our Engineering segment during the three months ended
September 30, 2008. A material portion of these obligations are
scheduled to be met during the fourth quarter of 2008 and are
expected to be funded through receipts from collections of Trade
Receivables. Approximately $440,000 in payments related to the
SLE project were paid during the three month period ended
September 30, 2008, and approximately $858,000 in commitments
remain outstanding. The SLE obligations are also expected to be
satisfied during the fourth quarter of 2008.
o Increased Accrued Compensation and Benefits - The increase was
primarily due to timing of bi-weekly payroll and benefits
payments at September 30, 2008.
23
Management's Discussion and Analysis (continued)
------------------------------------------------
Engineering Segment Results
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------------------ -------------------------------------------
2008 2007 2008 2007
----------------------------------------------------------------------------------------
(Dollars in Thousands)
----------------------------------------------------------------------------------------
Revenue before eliminations $ 63,170 $ 61,687 $ 192,685 $ 170,103
Inter-segment eliminations (60) (7) (67) (8)
--------- --------- --------- ---------
Total revenue $ 63,110 $ 61,680 $ 192,618 $ 170,095
========= ========= ========= =========
Detailed revenue:
Detail-design $ 43,236 68.5 % $ 32,504 52.7 % $ 127,212 66.1 % $ 98,831 58.1 %
Field services 12,055 19.1 % 13,923 22.6 % 38,112 19.8 % 41,716 24.5 %
Procurement services 7,607 12.1 % 9,439 15.3 % 25,107 13.0 % 16,225 9.5 %
Fixed-price 212 0.3 % 5,814 9.4 % 2,187 1.1 % 13,323 7.9 %
--------- --------- --------- ---------
Total revenue: $ 63,110 100.0 % $ 61,680 100.0 % $ 192,618 100.0 % $ 170,095 100.0 %
Gross profit: $ 8,864 14.0 % $ 10,801 17.5 % $ 31,525 16.4 % $ 29,549 17.4 %
Operating SG&A expense: $ 1,446 2.3 % $ 2,741 4.4 % $ 5,003 2.6 % $ 6,339 3.7 %
--------- --------- --------- ---------
Operating income: $ 7,418 11.7 % $ 8,060 13.1 % $ 26,522 13.8 % $ 23,210 13.7 %
========= ========= ========= =========
Overview of Engineering Segment:
Our Engineering segment continues to benefit from a large project load
generated primarily by both its downstream and midstream clients. The
industry's refining and pipeline segments continue to be very active,
supplying a large percentage of the Company's backlog. ENGlobal is
benefiting from the renewed interest of maintenance and small capital
projects as product margins improve.
Revenue:
Engineering segment revenue increased $1.4 million, or 2.3%, to $63.1
million for the three months ended September 30, 2008, from $61.7 million
for the comparable prior-year period.
Engineering segment revenue increased $22.5 million, or 13.2%, to $192.6
million for the nine months ended September 30, 2008, from $170.1 million
for the comparable prior-year period.
The increase in Engineering segment revenue resulted primarily from
increased activity in the engineering and construction markets.
Refining-related activity has been particularly strong, and includes
projects to expand existing facilities and utilize heavier sour crude.
Capital spending in the pipeline area is also trending 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 for biodiesel, coal-to-liquids,
petroleum coke to ammonia, and other biomass processes.
The increase in detail-design services for the three months and nine months
ended September 30, 2008, and the increase in procurement services for the
nine months ended September 30, 2008, are directly related to rebuilding a
single refinery. Procurement services include subcontractor placements,
equipment purchases, and other procurement activities necessary to rebuild
the damaged facilities. Although most of the services rendered during the
current fiscal year to date occurred in the second quarter of 2008, we
continued providing services during the third quarter, impacting both the
three months and nine months ended September 30, 2008.
24
Management's Discussion and Analysis (continued)
------------------------------------------------
Our detail-design services proved strong with revenue increasing 32.9%, or
$10.7 million, to $43.2 million for the three months ended September 30,
2008, from $32.5 million for the comparable period in 2007. As a percentage
of the total Engineering segment revenue during these periods,
detail-design revenue increased 15.8% to 68.5% in 2008 from 52.7% in 2007.
The increase is related to the refinery rebuild project described above.
Revenue from detail-design services increased 28.7%, or $28.4 million, to
$127.2 million for the nine months ended September 30, 2008, from $98.8
million for the comparable period in 2007. As a percentage of the total
Engineering segment revenue during these periods, detail-design revenue
increased 8.0% to 66.1% in 2008 from 58.1% in 2007. The increase is related
to the refinery rebuild project described above.
Our field services revenues decreased 12.9%, or $1.8 million, to $12.1
million for the three months ended September 30, 2008, from $13.9 million
for the comparable period in 2007. As a percentage of the total Engineering
segment revenue during these periods, field services revenue decreased 3.5%
to 19.1% in 2008 from 22.6% in 2007.
Our field services revenues decreased 8.6%, or $3.6 million, to $38.1
million for the nine months ended September 30, 2008, from $41.7 million
for the comparable period in 2007. As a percentage of the total Engineering
segment revenue during these periods, field services revenue decreased 4.7%
to 19.8% in 2008 from 24.5% in 2007.
Revenue from procurement services decreased 19.1%, or $1.8 million, to $7.6
million for the three months ended September 30, 2008, from $9.4 million
for the comparable period in 2007. As a percentage of the total Engineering
segment revenue, procurement services revenue decreased 3.2% to 12.1% for
the three months ended September 30, 2008, from 15.3% for the comparable
period in 2007. Much of this decrease is attributable to the peaking in the
second quarter of 2008 of the procurement activities related to the
refinery rebuild project described above.
Revenue from procurement services increased 54.9%, or $8.9 million, to
$25.1 million for the nine months ended September 30, 2008, from $16.2
million for the comparable period in 2007. As a percentage of the total
Engineering segment revenue, procurement services revenue increased 3.5% to
13.0% for the nine months ended September 30, 2008, from 9.5% for the
comparable period in 2007. Much of this increase is related to the refinery
rebuild project described above. The level of procurement services is
project dependent and varies over time depending on the volume of
procurement activity our customers choose to do themselves as opposed to
using our services.
Fixed-price revenue decreased 96.6%, or $5.6 million, to $0.2 million for
the three months ended September 30, 2008, from $5.8 million for the
comparable period in 2007. As a percentage of the total Engineering segment
revenue, fixed-price revenue decreased 9.1% to 0.3% for the three months
ended September 30, 2008, from 9.4% for the comparable period in 2007 as
the Company neared completion of certain EPC contracts. We are focusing on
accepting new projects on a cost-plus basis rather than fixed-price due to
the economic conditions discussed earlier.
Fixed-price revenue decreased 83.5%, or $11.1 million, to $2.2 million for
the nine months ended September 30, 2008, from $13.3 million for the
comparable period in 2007. As a percentage of the total Engineering segment
revenue, fixed-price revenue decreased 6.8% to 1.1% for the nine months
ended September 30, 2008, from 7.9% for the comparable period in 2007 as
the Company neared completion of certain EPC contracts. We are focusing on
accepting new projects on a cost-plus basis rather than fixed-price due to
the economic conditions discussed earlier.
25
Management's Discussion and Analysis (continued)
------------------------------------------------
Gross Profit:
Our Engineering segment's gross profit decreased $1.9 million, or 17.6%, to
$8.9 million for the three months ended September 30, 2008, from $10.8
million for the comparable period in 2007. As a percentage of the total
Engineering segment revenue, gross profit decreased by 3.5% to 14.0% from
17.5% for the three months ended September 30, 2008 and 2007, respectively.
The overall $1.9 million decrease in gross profit was attributable to the
overall lower margins in the detail-design services. While the refinery
rebuild project was the primary source of the $10.7 million of increased
detail-design services revenues, the project was performed at a more
competitive margin.
Our Engineering segment's gross profit increased $2.0 million, or 6.8%, to
$31.5 million for the nine months ended September 30, 2008, from $29.5
million for the comparable period in 2007. As a percentage of the total
Engineering segment revenue, gross profit decreased by 1.0% to 16.4% from
17.4% for the nine months ended September 30, 2008 and 2007, respectively.
The overall $2.0 million increase in gross profit was attributable to the
overall $22.5 million increase in Engineering segment revenues, offset by
$20.5 million in overall increased direct costs as work was performed at
more competitive margins. The decrease in margins is attributable to higher
activity in low margin/high dollar procurement projects and the refinery
rebuild project.
Selling, General, and Administrative:
Our Engineering segment's SG&A expense decreased $1.3 million, or 48.1%, to
$1.4 million for the three months ended September 30, 2008, from $2.7
million for the comparable period in 2007. The decrease in the Engineering
segment's SG&A expense is attributable to approximately $0.9 million in
lower bad debt expense and approximately $0.3 million in employee and
associated costs reclassified to direct expense. As a percentage of the
total Engineering segment revenue, the segment's SG&A costs decreased by
2.1% to 2.3% from 4.4% for the three months ended September 30, 2008 and
2007, respectively.
Our Engineering segment's SG&A expense decreased $1.3 million, or 20.6% to
$5.0 million for the nine months ended September 30, 2008, from $6.3
million for the comparable period in 2007. The differences in the
Engineering segment's SG&A expense are attributable to approximately $0.9
million in lower employee and associated costs re-classified to direct
expense in 2008, a $0.2 decrease in bad debt expense and a $0.2 million
decrease in depreciation and amortization. As a percentage of the total
Engineering segment revenue, the segment's SG&A costs decreased by 1.1% to
2.6% from 3.7% for the nine months ended September 30, 2008 and 2007,
respectively.
Operating Income:
Operating income for the Engineering segment decreased $0.7 million, or
8.6%, to $7.4 million for the three months ended September 30, 2008, from
$8.1 million for the comparable prior-year period. As a percentage of the
total Engineering segment revenue, operating income decreased by 1.4% to
11.7% for the three months ended September 30, 2008, from 13.1% for the
comparable prior-year period. The decrease in operating income for the
three months ended September 30, 2008 and the comparable prior-year period
is a result of the increase in lower margin procurement revenue discussed
in the gross profit discussion.
Operating income for the Engineering segment increased $3.3 million, or
14.2%, to $26.5 million for the nine months ended September 30, 2008, from
$23.2 million for the comparable prior-year period. As a percentage of the
total Engineering segment revenue, operating income increased by 0.1% to
13.8% for the nine months ended September 30, 2008, from 13.7% for the
comparable prior-year period. The increase in operating income for the nine
months ended September 30, 2008 and the comparable prior-year period is a
result of the overall increases in total revenue discussed in the gross
profit discussion.
26
Management's Discussion and Analysis (continued)
------------------------------------------------
Construction Segment Results
----------------------------
Three Months Ended Nine Months Ended
September 30 September 30
----------------------------------------- ---------------------------------------
2008 2007 2008 2007
------------------- ------------------- ------------------ ------------------
(Dollars in Thousands)
-----------------------------------------------------------------------------------
Revenue before eliminations $ 44,481 $ 26,402 $ 110,356 $ 60,069
Inter-segment eliminations (3,571) (7,403) (6,892) (11,297)
--------- --------- --------- ---------
Total revenue $ 40,910 $ 18,999 $ 103,464 $ 48,772
========= ========= ========= =========
Detailed revenue:
Inspection 38,800 94.8 % 16,625 87.5 % 93,220 90.1 % 39,393 80.8 %
Construction services 2,110 5.2 % 2,374 12.5 % 10,244 9.9 % 9,379 19.2 %
--------- --------- --------- ---------
Total revenue: $ 40,910 100.0 % $ 18,999 100.0 % $ 103,464 100.0% $ 48,772 100.0 %
Gross profit: $ 2,765 6.7 % $ 3,678 19.4 % $ 8,781 8.5 % $ 8,406 17.2 %
Operating SG&A expense: $ 794 1.9 % $ 791 4.2 % 2,255 2.2 % 2,084 4.2 %
--------- --------- --------- ---------
Operating income: $ 1,971 4.8 % $ 2,887 15.2 % $ 6,526 6.3 % $ 6,322 13.0 %
========= ========= ========= =========
Overview of Construction Segment:
The construction group provides construction management personnel and
services in the areas of mechanical integrity, vendor and turnaround
surveillance, field support, construction, inspection, and high-tech
maintenance. Our construction management business provides project
managers, instrument technicians, CADD operators, clerical staff, and
inspectors.
Revenue:
Our Construction segment's revenue increased $21.9 million, or 115.3%, to
$40.9 million for the three months ended September 30, 2008, from $19.0
million for the comparable prior-year period.
We have experienced significant growth in our inspection related revenue
due to increased capital spending primarily by our pipeline clients. While
inspection related revenues increased $22.2 million, or approximately
133.7%, to $38.8 million for the three months ended September 30, 2008,
from $16.6 million for the comparable prior-year period, the contribution
to gross profit was reduced. This was the result of our decision to seek to
increase market share and remain competitive by accepting work at lower
margins. Increased variable costs associated with labor to perform
proposals, project controls and project management also contributed to the
decrease in gross profit.
Construction services revenues decreased $0.3 million, or 12.5%, to $2.1
for the three months ended September 30, 2008, from $2.4 million for the
comparable period in 2007.
Our Construction segment's revenue increased $54.7 million, or 112.1%, to
$103.5 million for the nine months ended September 30, 2008, from $48.8
million for the comparable prior-year period.
While inspection related revenues increased $53.8 million, or approximately
136.6%, to $93.2 million for the nine months ended September 30, 2008, from
$39.4 million for the comparable prior-year period, the contribution to
gross profit was reduced. The reduction resulted in part from increased
variable costs associated with labor to perform proposals. In addition,
project controls and project management also contributed to the decrease in
gross profit. Increased market share has contributed to the increase in our
construction services revenues. Construction services revenues increased
$0.8 million, or 8.5%, to $10.2 for the nine months ended September 30,
2008, from $9.4 million for the comparable period in 2007.
27
Management's Discussion and Analysis (continued)
------------------------------------------------
Our Construction and Engineering segments are both providing services in
connection with refinery rebuild projects, with many of those services
being performed at tighter margins. The Construction segment has taken
action to develop new business by adding new sales personnel.
Gross profit:
Our Construction segment's gross profit decreased approximately $0.9
million, or 24.3%, to $2.8 million for the three months ended September 30,
2008, from $3.7 million for the comparable prior-year period and, as a
percentage of the total Construction segment revenue, gross profit
decreased by 12.7% to 6.7% from 19.4% for the respective periods. The
decrease in gross profit is primarily attributable to increased revenue
related to our growth of inspection services, where higher employee-related
costs and competitive pressure on bill rates resulted in lower margins.
Our Construction segment's gross profit increased approximately $0.4
million, or 4.8%, to $8.8 million for the nine months ended September 30,
2008, from $8.4 million for the comparable prior-year period and, as a
percentage of the total Construction segment revenue, gross profit
decreased by 8.7% to 8.5% from 17.2% for the respective periods. The
decrease in gross profit as a percentage of total Construction segment
revenue is primarily attributable to increased revenue related to an
increase in our provision of inspection services, where higher
employee-related costs and competitive pressure on bill rates resulted in
lower margins.
Selling, General, and Administrative:
Our Construction segment's SG&A expense remained steady at $0.8 million for
the three months ended September 30, 2008, and for the same period in 2007.
As a percentage of the total Construction segment revenue, SG&A expense
decreased by 2.3% to 1.9% from 4.2% for the respective periods.
Our Construction segment's SG&A expense increased approximately $0.2
million, or 9.5%, to $2.3 million for the nine months ended September 30,
2008, from $2.1 million for the same period in 2007. As a percentage of the
total Construction segment revenue, SG&A expense decreased by 2.0% to 2.2%
from 4.2% for the respective periods. Increases of $250,000 in salaries and
$137,000 in bad debt expense were offset by savings of $121,000 in
professional services.
Operating Income:
Our Construction segment's operating income decreased $0.9 million, or
31.0%, to $2.0 million for the three months ended September 30, 2008, from
$2.9 million for the comparable prior-year period. As a percentage of the
total Construction segment revenue, operating income decreased by 10.4% to
4.8% for the three months ended September 30, 2008, from 15.2% for the
comparable prior-year period. The decrease in operating income is primarily
attributable to increased revenue related to an increase in our provision
of inspection services, where higher employee-related costs and competitive
pressure on bill rates resulted in lower margins as described in gross
profit above.
Our Construction segment's operating income increased $0.2 million, or
3.2%, to $6.5 million for the nine months ended September 30, 2008, from
$6.3 million for the comparable prior-year period. As a percentage of the
total Construction segment revenue, operating income decreased by 6.7% to
6.3% for the nine months ended September 30, 2008, from 13.0% for the
comparable prior-year period. The increase in operating income is primarily
attributable to holding SG&A expenses to nearly the same level, while total
revenue more than doubled. The increase in total revenue was mostly in the
inspection services, where higher employee-related costs and competitive
pressure on bill rates resulted in lower margins as described in gross
profit above.
28
Management's Discussion and Analysis (continued)
------------------------------------------------
Automation Segment Results
--------------------------
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------------------------- ------------------------------------------
2008 2007 2008 2007
------------------- -------------------- ------------------- --------------------
(Dollars in Thousands)
--------------------------------------------------------------------------------------------
Revenue before eliminations $ 7,912 $ 8,853 $ 29,880 $ 28,618
Inter-segment eliminations (16) (327) (546) (1,036)
---------- ------------ ---------- ----------
Total revenue $ 7,896 $ 8,526 $ 29,334 $ 27,582
========== ============ ========== ==========
Detailed revenue:
Fabrication 4,446 56.3% 4,528 53.1% 18,067 61.6% 15,676 56.8%
Non-Fabrication 3,450 43.7% 3,998 46.9% 11,267 38.4% 11,906 43.2%
------------------ -------------------- ---------- ----------
Total revenue: $ 7,896 100.0% $ 8,526 100.0% $ 29,334 100.0% $ 27,582 100.0%
Gross profit: $ 154 1.9% $ 774 9.1% $ 2,560 8.7% $ 2,667 9.7%
Operating SG&A expense: $ 720 9.1% $ 688 8.1% 2,101 7.1% 2,306 8.4%
---------- ------------ ---------- ----------
Operating income: $ (566) (7.2)% $ 86 1.0% $ 459 1.6% $ 361 1.3%
========== ============ ========== ==========
Overview of Automation Segment:
Our Automation group provides services relating to the implementation of
process controls, advanced automation and information technology projects.
We provide clients with a full range of services including front-end
engineering feasibility studies and the execution of active engineering,
procurement, and construction projects. By focusing on such large-scope
projects, we intend to pursue Distributed Control Systems (DCS) conversion
and new installation projects by utilizing our own resources as well as
resources from our engineering and systems businesses. ENGlobal has proven
capabilities for plant automation services and products to respond to an
industry progression toward replacing obsolete technology with new open
system architecture DCS.
Revenue:
Our Automation segment's revenue decreased approximately $0.6 million, or
7.1%, to $7.9 million for the three months ended September 30, 2008, from
$8.5 million for the comparable prior-year period due to slowed receipt of
materials resulting from Hurricanes Gustav and Ike and the lag between
consummation of sales and actual project start-up.
Our Automation segment's revenue increased approximately $1.7 million, or
6.2%, to $29.3 million for the nine months ended September 30, 2008, from
$27.6 million for the comparable prior-year period due to increased
fabrication revenue in the first and second quarters of 2008.
The Automation segment aggressively pursued new business in the third
quarter with the acquisition of Advanced Control Engineering, LLC
("Advanced Control Engineering") on September 29, 2008. The strategic
location of this acquisition will allow the Company to pursue business in
the Southeastern U.S. and expand the business of its Atlanta, Georgia,
office. The plant expansions along the upper Texas Gulf Coast may provide a
number of opportunities for remote instrument enclosures (RIEs) and
analytical systems, which this segment is poised to provide. The Automation
segment experienced a significant increase in its engineering services
proposal activity during this period. The segment continues to evaluate
potential acquisitions with the goal of complementing its current
portfolio.
Gross profit:
The Automation segment's gross profit decreased approximately $0.6 million,
or 75.0%, to $0.2 million for the three months ended September 30, 2008,
from $0.8 million for the comparable prior-year period. As a percentage of
29
Management's Discussion and Analysis (continued)
------------------------------------------------
the total Automation segment revenue, gross profit decreased by 7.2% to
1.9%, from 9.1% for the three months ended September 30, 2008 and 2007,
respectively. Increased costs on fixed-price work and increased
non-reimbursable costs contributed to the lower margins.
The Automation segment's gross profit decreased approximately $0.1 million,
or 3.7%, to $2.6 million for the nine months ended September 30, 2008, from
$2.7 million for the comparable prior-year period. As a percentage of the
total Automation segment revenue, gross profit decreased by 1.0% to 8.7%,
from 9.7% for the nine months ended September 30, 2008 and 2007,
respectively. Increased costs on fixed-price work and increased
non-reimbursable costs contributed to the lower margins.
Selling, General, and Administrative:
Our Automation segment's SG&A expense was $0.7 million for the three months
ended September 30, 2008 and September 30, 2007. As a percentage of the
total Automation segment revenue, SG&A expense increased by 1.0% to 9.1%,
from 8.1% for the three months ended September 30, 2008 and 2007,
respectively.
Our Automation segment's SG&A expense decreased approximately $0.2 million,
or 8.7%, to $2.1 million for the nine months ended September 30, 2008, from
$2.3 million for the same period in 2007. As a percentage of the total
Automation segment revenue, SG&A expense decreased by 1.3% to 7.1%, from
8.4% for the nine months ended September 30, 2008 and 2007, respectively.
The decrease in SG&A expense from September 30, 2008 to the comparable
prior-year period is the result of overall cost controls in all SG&A
categories.
Operating Income:
The Automation segment recorded an operating loss of $0.6 million for the
three months ended September 30, 2008, compared to near breakeven for the
three months ended September 30, 2007. As a percentage of the total
Automation segment revenue, operating income decreased by 8.2% to (7.2)%
for the three months ended September 30, 2008, from 1.0% for the comparable
prior-year period. Increased costs on fixed-price work and increased
non-reimbursable costs contributed to the operating loss of the Automation
segment during the three months ended September 30, 2008.
The Automation segment recorded an operating income of $0.5 million for the
nine months ended September 30, 2008, compared to operating income of $0.4
million for the nine months ended September 30, 2007. As a percentage of
the total Automation segment revenue, operating income increased by 0.3% to
1.6% for the nine months ended September 30, 2008, from 1.3% for the
comparable prior-year period.
30
Management's Discussion and Analysis (continued)
------------------------------------------------
Land Segment Results
--------------------
Three Months Ended Nine Months Ended
September 30 September 30
----------------------------------------------- ------------------------------------------
2008 2007 2008 2007
--------------------- --------------------- ------------------ --------------------
(Dollars in Thousands)
----------------------------------------------------------------------------------------------
Revenue before eliminations $ 11,251 $ 7,620 $ 31,928 $ 21,611
Inter-segment eliminations - - - -
---------- ------------ ---------- ----------
Total revenue $ 11,251 100.0% $ 7,620 100.0% $ 31,928 100.0% $ 21,611 100.0%
========== ============ ========== ==========
Gross profit: $ 1,851 16.5% $ 1,086 14.3% $ 5,415 17.0% $ 3,213 14.9%
Operating SG&A expense: $ 660 5.9% $ 562 7.4% 2,219 7.0% 1,719 8.0%
---------- ------------ ---------- ----------
Operating income: $ 1,191 10.6% $ 524 6.9% $ 3,196 10.0% $ 1,494 6.9%
========== ============ ========== ==========
Overview of Land Segment:
Our Land segment possesses a long, reputable history of land management
expertise in title research, permitting and acquisition. We provide land
and right of way consulting services and a broad menu of complementary
solutions primarily to the energy, utility, transportation,
telecommunications, power, mining and government sectors. We have
successfully built a reputation for quality, budget management, focused
objectives, ownership and responsibility for deliverables as long term
alliance partnerships with clients.
The Land segment was formed out of our acquisition of WRC Corporation in
May 2006, which was renamed ENGlobal Land, Inc. in January 2008. The Land
segment provides services to a cross-section of clients in the energy
markets. As the country attempts to shift its dependence on foreign energy
to reliance on domestic sources, it is anticipated that the Land segment
will have additional project opportunities.
Revenue:
The Land segment's revenue increased approximately $3.7 million, or 48.7%,
to $11.3 million for the three months ended September 30, 2008, from $7.6
million for the comparable prior-year period. This increase in Land segment
revenue is primarily attributable to expanded market opportunities in the
energy and alternative energy industries, as well as geographically with
services being provided throughout the United States.
The Land segment's revenue increased approximately $10.3 million, or 47.7%,
to $31.9 million for the nine months ended September 30, 2008, from $21.6
million for the comparable prior-year period. This increase in Land segment
revenue is primarily attributable to expanded market opportunities in the
energy and alternative energy industries, as well as geographically with
services being provided throughout the United States.
Gross profit:
The Land segment's gross profit increased approximately $0.8 million, or
72.7%, to $1.9 million for the three months ended September 30, 2008, from
$1.1 million for the comparable prior-year period. In 2008, we renegotiated
billing rates on existing contracts to accommodate increased costs which
has contributed to improved gross margins. Of the $0.8 million increase in
gross profit quarter-over-quarter, approximately $0.5 million is
attributable to the increase in revenue and approximately $0.3 million is
attributable to improved margins. As a percentage of the total Land segment
revenue, gross profit increased by 2.2% to 16.5%, from 14.3% for the three
months ended September 30, 2008 and 2007, respectively.
The Land segment's gross profit increased approximately $2.2 million, or
68.8%, to $5.4 million for the nine months ended September 30, 2008, from
$3.2 million for the comparable prior-year period. As a percentage of the
total Land segment revenue, gross profit increased by 2.1% to 17.0%, from
14.9% for the nine months ended September 30, 2008 and 2007, respectively.
31
Management's Discussion and Analysis (continued)
------------------------------------------------
Of the $2.2 million increase in gross profit comparing year-to-date,
approximately $1.5 million is attributable to the increase in revenue and
approximately $0.7 million is attributable to improved margins.
In 2007, as we focused on growing this segment's business, we increased the
number of its personnel. As a result, our gross profit margins decreased
because we were not able to immediately pass through to clients the
resulting increased costs of labor and expenses. As mentioned above, in
2008, we renegotiated billing rates on existing contracts to accommodate
these increased costs, which has contributed to improved gross margins.
Selling, General, and Administrative:
The Land segment's SG&A expense increased approximately $0.1 million, or
16.7%, to $0.7 million for the three months ended September 30, 2008, from
$0.6 million for the same period in 2007. As a percentage of the total Land
segment revenue, SG&A expense decreased by 1.5% to 5.9%, from 7.4% for the
three months ended September 30, 2008 and 2007, respectively. Increases in
SG&A costs for the three months ended September 30, 2008, were related to
$57,000 in higher salaries and associated expenses primarily associated
with our growth, $19,000 in increased marketing expenses and an increase in
associate relations expense of $17,000.
The Land segment's SG&A expense increased approximately $0.5 million, or
29.4%, to $2.2 million for the nine months ended September 30, 2008, from
$1.7 million for the same period in 2007. As a percentage of the total Land
segment revenue, SG&A expense decreased by 1.0% to 7.0%, from 8.0% for the
nine months ended September 30, 2008 and 2007, respectively. Most of the
increases in SG&A costs for the nine months ended September 30, 2008, were
related to $216,000 in higher salaries and associated expenses primarily
associated with our growth, an increase in marketing expense of $58,000 and
an increase in bad debt expense of $163,000.
Operating Income:
The Land segment recorded an operating income of $1.2 million for the three
months ended September 30, 2008, compared to an operating income of $0.5
million for the three months ended September 30, 2007, due to higher
revenue and lower cost as a percentage of revenue. As a percentage of the
total Land segment revenue, operating income increased 3.7% to 10.6% for
the three months ended September 30, 2008, from 6.9% for the same period in
2007.
The Land segment recorded an operating income of $3.2 million for the three
months ended September 30, 2008, compared to an operating income of $1.5
million for the three months ended September 30, 2007, due to higher
revenue and lower cost as a percentage of revenue. As a percentage of the
total Land segment revenue, operating income increased 3.1% to 10.0% for
the three months ended September 30, 2008, from 6.9% for the same period in
2007.
32
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our financial instruments include cash and cash equivalents, accounts
receivable, accounts payable, notes and capital leases payable, and debt
obligations. The book value of cash and cash equivalents, accounts
receivable, accounts payable and short-term notes payable are considered to
be representative of fair value because of the short maturity of these
instruments.
We do not utilize financial instruments for trading purposes and we do not
hold any derivative financial instruments that could expose us to
significant market risk. In the normal course of business, our results of
operations are exposed to risks associated with fluctuations in interest
rates and currency exchange rates.
Our exposure to market risk for changes in interest rates relates primarily
to our obligations under the Comerica Credit Facility (the "Credit
Facility"). As of September 30, 2008, $30.1 million had been borrowed under
the Credit Facility, accruing interest at 4.75% per year, excluding
amortization of prepaid financing costs. A 10% increase in the short-term
borrowing rates on the Credit Facility outstanding as of September 30, 2008
would be 47.5 basis points. Such an increase in interest rates would
increase our annual interest expense by approximately $140,000, assuming
the amount of debt outstanding remains constant.
In general, our exposure to fluctuating exchange rates relates to the
effects of translating the financial statements of our Canadian subsidiary
from the Canadian dollar to the U.S. dollar. We follow the provisions of
SFAS No. 52 - "Foreign Currency Translation" in preparing our condensed
consolidated financial statements. Currently, we do not engage in foreign
currency hedging activities.
ITEM 4. CONTROLS AND PROCEDURES
a) Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures of a
registrant designed to ensure that information required to be disclosed by
the registrant in the reports that it files or submits under the Exchange
Act is properly recorded, processed, summarized, and reported, within the
time periods specified in the Securities and Exchange Commission's ("SEC")
rules and forms. Disclosure controls and procedures include processes to
accumulate and evaluate relevant information and communicate such
information to a registrant's management, including its Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow for timely
decisions regarding required disclosures.
We evaluated the effectiveness of the design and operation of our
disclosure controls and procedures as of September 30, 2008, as required by
Rule 13a-15 of the Exchange Act. As described below, material weaknesses
were identified in our internal control over financial reporting as of
September 30, 2008. Based on the evaluation described above, our Chief
Executive Officer and Chief Financial Officer have concluded that, as of
September 30, 2008, our disclosure controls and procedures were not
effective to ensure that information required to be disclosed by us in the
reports we file or submit under the Exchange Act is recorded, processed,
summarized, and reported, within the time periods specified in the SEC's
rules and forms.
Changes in Internal Control over Financial Reporting
In our Form 10-K for the year ended December 31, 2007, we disclosed certain
material weaknesses in internal control over financial reporting, which are
identified below. Neither material weakness has been remediated as of
September 30, 2008.
33
Deficiencies in the Company's Control Environment and Accounting System
Controls. We did not effectively and accurately close the general ledger in
a timely manner and we did not provide complete and accurate disclosure in
our notes to financial statements, as required by generally accepted
accounting principles. Specifically, the Company lacks sufficient knowledge
and expertise in financial reporting to adequately handle complex or
non-routine accounting issues, resulting in the following:
- failure in a timely manner to properly evaluate goodwill for potential
impairment in accordance with SFAS 142, "Goodwill and Other Intangible
Assets";
- 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 Form 10-K; and
- failure to effectively utilize third-party specialists in a timely
manner to assist with complex or non-routine accounting issues.
As noted above, no change in our internal control over financial reporting
occurred during the nine months ended September 30, 2008, that has
materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting. However, the Company has engaged
consultants to begin review of the goodwill impairment modeling for 2008.
These consultants have reviewed certain non-routine accounting issues for
the third quarter of 2008.
Remediation Initiatives
Management, with oversight from the Audit Committee of the Board of
Directors, has been addressing the material weaknesses discussed above.
While progress has been made, these remedial steps have not been completed;
however, the Company has performed additional analysis and procedures in
order to ensure that the condensed consolidated financial statements
contained in this Quarterly Report on Form 10-Q were prepared in accordance
with generally accepted accounting principles in the United States.
Although the Company's remediation efforts are underway, control weaknesses
will not be considered remediated until new internal controls over
financial reporting are implemented and operational for a sufficient period
of time to allow for effective testing and are tested, and management and
its independent registered certified public accounting firm conclude that
these controls are operating effectively. Management, along with its
outside consultants, and the Audit Committee of the Company's Board of
Directors are working to determine the most effective way to implement the
remedial measures listed below, and, if necessary, to develop additional
remedial measures to address the internal control deficiencies identified
above. The Company is monitoring the effectiveness of planned actions and
will make any other changes and take such other actions as management or
the Audit Committee determines to be appropriate. The Company's remediation
efforts include:
o engagement of various third-party consultants to assist us with
specific technical accounting issues;
o engagement of third-party consultants to provide valuation services in
accordance with SFAS 142;
o implementation of quarterly and annual disclosure checklists, which
are utilized in connection with the completion of our quarterly
financial statements;
o provision of additional training to accounting staff on SFAS 142, SEC
reporting principles, and GAAP; and
o implementation of periodic accounting management meetings where our
accounting processes and procedures are communicated and reinforced.
The Company has been holding quarterly meetings of the accounting staff to
facilitate quarterly closing procedures and review of quarterly checklists.
Certain training needs have been addressed as a result. The Company has
engaged a consulting firm to assist with the review of specific technical
accounting issues and disclosure checklists to improve compliance.
34
PART II. - OTHER INFORMATION
----------------------------
ITEM 1. LEGAL PROCEEDINGS
On or about November 4, 2008, EcoProduct Solutions, L.P. ("EcoProduct") served
ENGlobal Engineering, Inc. ("EEI") with an arbitration demand in connection with
a previously initiated arbitration proceeding against defendant Swenson
Technology, Inc. ("Swenson") pending before the American Arbitration
Association. According to the first amended statement of claims, the claimant
has made various allegations, including professional negligence, breach of
contract, and violation of Texas consumer protection laws, against primary
defendant Swenson Technology, Inc., and now, also against EEI in connection with
an engineering project on which EEI's work was completed in 2005. EcoProduct is
seeking approximately $45 million in damages. Due to the recentness of the
filing, we have not yet had a chance to review the claims thoroughly. However,
it is our current understanding that the suit is substantially without merit,
and we intend to vigorously defend against it.
As discussed in Note 9 above, in the first quarter of 2007 ENGlobal Engineering,
Inc. and South Louisiana Ethanol, LLC ("SLE") executed an agreement for EPC
services relating to the retro-fit of an ethanol plan in southern Louisiana. The
history of the SLE Project is described in Note 12 to the Company's condensed
consolidated financial statements included in its Quarterly Report on Form 10-Q
for the quarter ended September 30, 2007, and is discussed further in the
Company's Annual Report on Form 10-K for the year ended December 31, 2007. Due
to the continued failure of SLE to obtain permanent financing, on May 30, 2008,
the Company filed suit in the United States District Court for the Eastern
District of Louisiana, Cause Number 08-3601. The Company is seeking damages of
$15.8 million.
From time to time, the Company and its subsidiaries become parties to various
legal proceedings arising in the ordinary course of normal business activities.
While we cannot predict the outcome of these proceedings, in our opinion and
based on reports of counsel, any liability arising from such matters,
individually or in the aggregate, is not expected to have a material effect upon
the consolidated financial position or operations of the Company.
ITEM 1A. RISK FACTORS
If we are unable to collect our receivables, our results of operations and cash
flows could be adversely affected.
--------------------------------------------------------------------------------
Our business depends on our ability to successfully obtain payment from our
clients of the amounts they owe us for work performed and materials supplied. We
bear the risk that our clients will pay us late or not at all. Though we
evaluate and attempt to monitor our clients' financial condition, there is no
guarantee that we will accurately assess their creditworthiness. 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.
As discussed further in Note 9 above, due to the continued failure of South
Louisiana Ethanol, LLC ("SLE") to obtain permanent financing, the Company has
filed suit against SLE seeking damages of $15.8 million. While the Company
believes that in the event that the collateral is liquidated, SLE's obligations
to the Company would be paid in full pursuant to the Collateral Mortgage in
favor of the Company, collectability is not assured at this time.
As discussed further in Note 9 above, we have potential exposure related to
services provided by our Engineering and Construction segments to SemCrude, L.P.
("SemCrude"), an affiliate of SemGroup, L.P. ("SemGroup), in connection with
construction of the White Cliffs Pipeline. While SemCrude's account was
materially current as of November 6, 2008, the Company is closely monitoring
this account.
Our business depends on domestic spending by the oil, natural gas, and other
energy-related industries, and this spending and our business may be adversely
affected by industry and financial market conditions that are beyond our
control.
--------------------------------------------------------------------------------
35
We depend on our clients' willingness to make operating and capital expenditures
related to transportation, refining, and infrastructure improvements in the
United States. Clients' expectations for lower market prices for oil and natural
gas, as well as the availability of capital for operating and capital
expenditures, may curtail spending thereby reducing demand for our products and
services. Industry conditions are influenced by numerous factors over which we
have no control, such as the supply of and demand for oil, natural gas and other
energy sources; domestic and worldwide economic conditions; political
instability in oil and natural gas producing countries; and merger and
divestiture activity among energy producers. The volatility of the energy
industry could result in a decline in the demand for our services and adversely
affect the price of our services. Furthermore, recent adverse changes in capital
markets may cause energy-related companies to announce reductions in capital
budgets for future periods. Limitations on the availability of capital, or
higher costs of capital, for financing expenditures may cause some of our
smaller clients to make reductions to capital budgets.
In addition to the other information set forth in this Quarterly Report on Form
10-Q, you should carefully consider the factors discussed in Part I, "Item 1A.
Risk Factors" in our Annual Report on Form 10-K for the year ended December 31,
2007, which could materially affect our business, financial condition or future
results. The risks described in our Annual Report on Form 10-K are not the only
additional risks facing our Company. Additional risks and uncertainties not
currently known to us or that we currently deem to be immaterial also may
materially adversely affect our business, financial conditions or operating
results.
36
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
10.1 Purchase Agreement between ENGlobal and Advanced Control
Engineering, LLC dated September 25, 2008
10.2 Note Payable between ENGlobal and Frank H McIlwain, PC
10.3 Note Payable between ENGlobal and James A Walters, PC
10.4 Note Payable between ENGlobal and William M Bosarge, PC
10.5 Note Payable between ENGlobal and Matthew R Burton, PC
31.1 Certifications Pursuant to Rule 13a - 14(a) of the Securities
Exchange Act of 1934 for the Third Quarter 2008
31.2 Certifications Pursuant to Rule 13a - 14(a) of the Securities
Exchange Act of 1934 for the Third Quarter 2008
32.0 Certification Pursuant to Rule 13a - 14(b) of the Securities
Exchange Act of 1934 and 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for
the Third Quarter 2008
37
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ENGlobal Corporation
Dated: November 6, 2008
By: /s/ Robert W. Raiford
-------------------------------------
Robert W. Raiford
Chief Financial Officer and Treasurer