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 June 30, 2007March 31, 2008
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 001-14217
ENGlobal Corporation
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(Exact name of registrant as specified in its charter)
Nevada
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(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 77060-5914
----------------------------------------------------- ----------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 non-accelerated filer.smaller reporting company. See
definitionthe definitions of "large accelerated filer," "accelerated filer," and large accelerated filer"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 August 1, 2007.April 30, 2008.
$0.001 Par Value Common Stock 26,921,22527,063,541 shares
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED JUNE 30, 2007MARCH 31, 2008
TABLE OF CONTENTS
Page
Number
------
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Income for the Three Months Ended
And Six Months Ended June 30,March 31, 2008 and March 31, 2007 and June 30, 2006 3
Consolidated Statements of Comprehensive Income for the Three Months Ended
And Six Months Ended June 30, 2007 and June 30, 2006 4
Condensed Consolidated Balance Sheets at June 30, 2007March 31, 2008 and December 31, 2006 52007 4
Condensed Consolidated Statements of Cash Flows for the SixThree Months
6
Ended June 30,March 31, 2008 and March 31, 2007 and June 30, 20065
Notes to Condensed Consolidated Financial Statements 8-156-10
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 16-2811-22
Engineering Segment Results 18
Construction Segment Results 20
Automation Segment Results 21
Land Segment Results 22
Item 3. Quantitative and Qualitative Disclosures About Market Risk 2923
Item 4. Controls and Procedures 29-3123-24
Part II. Other Information
Item 1. Legal Proceedings 3225
Item 1A. Risk Factors 3225
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 3225
Item 3. Defaults Upon Senior Securities 3225
Item 4. Submission of Matters to a Vote of Security Holders 3225
Item 5. Other Information 3225
Item 6. Exhibits 32
Signature 3325
Signatures 26
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 Six Months
Ended June 30, Ended June 30,
------------------------------ ------------------------------March 31,
--------------------
2008 2007
2006 2007 2006
------------- ------------- ------------- -------------
Operating Revenue-------- --------
Revenues $ 89,576,29698,166 $ 75,065,714 $ 171,234,929 $ 141,692,550
------------- ------------- ------------- -------------
Operating Expenses:81,659
Direct cost 75,357,142 64,337,124 143,738,050 122,742,331costs 83,820 68,382
-------- --------
Gross Profit 14,346 13,277
Selling, general and administrative 6,570,025 6,812,569 13,615,778 12,510,241
Depreciation and amortization 719,917 353,720 1,417,852 756,400
------------- ------------- ------------- -------------
Total operating expenses 82,647,084 71,503,413 158,771,679 136,008,972
------------- ------------- ------------- -------------7,226 7,744
-------- --------
Operating income 6,929,212 3,562,301 12,463,249 5,683,5787,120 5,533
Other Income (Expense):
Other income 515,247 387,355 515,117 409,107(expense) 26 --
Interest income (expense), net (700,088) (252,996) (1,259,931) (415,142)
------------- ------------- ------------- -------------
Total other income (expense) (184,841) 134,359 (744,814) (6,035)
------------- ------------- ------------- -------------(483) (560)
-------- --------
Income before Income Taxes 6,663 4,973
Provision for Federal and State Income Taxes 6,744,371 3,696,660 11,718,435 5,677,543
Provision for Income Taxes 2,831,074 1,365,225 4,650,795 2,111,965
------------- ------------- ------------- -------------2,660 1,818
-------- --------
Net Income $ 3,913,2974,003 $ 2,331,435 $ 7,067,640 $ 3,565,578
============= ============= ============= =============3,155
======== ========
Net Income Per Common Share:
Basic $ 0.15 $ 0.09 $ 0.26 $ 0.140.12
Diluted $ 0.140.15 $ 0.09 $ 0.26 $ 0.130.12
Weighted Average Shares Used in Computing Net Income Per Share:
Basic 26,864,358 26,444,185 26,839,184 26,388,702
Fully27,060 26,809
Diluted 27,290,047 27,191,617 27,208,578 27,218,98227,527 27,260
See accompanying notes to interim condensed consolidated financial statements.
3
ENGlobal Corporation
Condensed Consolidated StatementsBalance Sheets
(Dollars in Thousands)
ASSETS
------
March 31, December 31,
2008 2007
Current Assets: (unaudited) (audited)
--------- ---------
Cash $ 2,019 $ 908
Trade receivables, net 67,186 64,141
Prepaid expenses and other current assets 1,794 2,125
Current portion of Comprehensive Income
(Unaudited)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------------- --------------------------notes receivable 155 154
Costs and estimated earnings in excess of billings on uncompleted contracts 6,751 6,981
Deferred tax asset 3,081 3,081
--------- ---------
Total Current Assets 80,986 77,390
Property and Equipment, net 6,220 6,472
Goodwill 20,048 19,926
Other Intangible Assets, net 3,718 4,112
Long term notes receivable, net of current portion 10,546 10,593
Deferred tax asset, non-current 90 77
Other Assets 1,107 1,020
--------- ---------
Total Assets $ 122,715 $ 119,590
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable $ 7,630 $ 10,482
Accrued compensation and benefits 15,270 16,182
Notes payable 569 931
Current portion of long-term debt 1,442 1,508
Deferred rent 527 558
Billings and estimated earnings in excess of costs on uncompleted contracts 922 963
Other liabilities and taxes payable 5,309 3,851
--------- ---------
Total Current Liabilities 31,669 34,475
Long-Term Debt, net of current portion 30,884 29,318
--------- ---------
Total Liabilities 62,553 63,793
--------- ---------
Commitments and Contingencies (Note 9)
Stockholders' Equity:
Common stock - $0.001 par value; 75,000,000 shares authorized; 27,063,541
and 27,051,766 shares issued and outstanding at March 31, 2008 and
December 31, 2007, 2006 2007 2006
----------- ----------- ----------- -----------
Net Income $ 3,913,297 $ 2,331,435 $ 7,067,640 $ 3,565,578
----------- ----------- ----------- -----------
Other Comprehensive Income (Loss):
Foreign currency translation adjustment (25,629) 10,238 (26,739) 9,535
Income tax effect 9,995 (3,942) 10,428 (3,671)
----------- ----------- ----------- -----------
Netrespectively 28 28
Additional paid-in capital 34,003 33,593
Retained earnings 26,184 22,181
Accumulated other comprehensive income (15,634) 6,296 (16,311) 5,864
----------- ----------- ----------- -----------
Net Comprehensive Income(loss) (53) (5)
--------- ---------
Total Stockholders' Equity 60,162 55,797
--------- ---------
Total Liabilities and Stockholders' Equity $ 3,897,663122,715 $ 2,337,731 $ 7,051,329 $ 3,571,442
=========== =========== =========== ===========119,590
========= =========
See accompanying notes to interim condensed consolidated financial statements.
4
ENGlobal Corporation
Condensed Consolidated Balance SheetsStatements Of Cash Flows
(Unaudited)
ASSETS
------
June 30, December(Dollars in Thousands)
For the Three Months Ended
March 31,
--------------------
2008 2007
2006
------------- -------------
Current Assets:-------- --------
Cash Flows from Operating Activities:
Net income $ 2,325,1454,003 $ 1,402,8803,155
Adjustments to reconcile net income to net cash provided (used)
by operating activities:
Depreciation and amortization 1,111 1,069
Share based compensation expense 387 233
Gain on disposal of property, plant and equipment (1) (14)
Deferred income taxes (90) (39)
Changes in current assets and liabilities, net of acquisitions:
Trade receivables net 69,649,366 60,247,612
Prepaid expenses and other current assets 1,456,088 1,723,907
Current portion of notes receivable 53,611 52,031
Costs(3,044) (3,866)
Billings and estimated earnings in excess of billings on uncompleted contracts 10,188,515 5,390,111
Deferred tax asset 2,310,106 2,310,106
Federalcosts 230 (2,679)
Prepaid expenses and state income taxes receivable -- 638,266
------------- -------------
Total Current Assets 85,982,831 71,764,913
Property and Equipment, net 6,929,346 8,724,902
Goodwill 19,941,170 19,202,197
Other Intangible Assets, net 4,845,904 5,426,824
Long term notes receivable, net of current portion 1,587,022 129,105
Other Assets 927,080 468,864
------------- -------------
Total Assets $ 120,213,353 $ 105,716,805
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:other assets 298 (462)
Accounts payable $ 10,285,684 $ 14,672,165
Federal and state income taxes 1,370,780 --(2,851) (4,036)
Accrued compensation and benefits 16,588,289 12,806,919
Notes payable 252,563 1,109,772
Current portion of long-term debt 1,554,556 1,418,029
Deferred rent 618,073 678,583(913) 593
Billings in excess of costs and estimated earnings on uncompleted contracts 3,399,936 539,910(41) 1,157
Other liabilities 3,205,651 5,352,886
------------- -------------
Total Current Liabilities 37,275,532 36,578,264
Long-Term Debt, net(903) (1,775)
Income taxes receivable/payable 2,210 1,732
-------- --------
Net cash provided (used) by operating activities 396 (4,932)
-------- --------
Cash Flows from Investing Activities:
Property and equipment acquired (445) (574)
Proceeds from sale of current portion 33,317,984 27,162,263
Deferred Tax Liability 1,037,208 1,114,224
------------- -------------
Total Liabilities 71,630,724 64,854,751
------------- -------------
Commitments and Contingencies (Note 11)
Stockholders' Equity:
Commonequipment -- 48
Proceeds from note receivable 46 8
Proceeds from sale of other assets 1 90
-------- --------
Net cash used in investing activities (398) (428)
-------- --------
Cash Flows from Financing Activities:
Borrowings on line of credit 64,078 39,412
Payments on line of credit (62,235) (33,759)
Proceeds from issuance of common stock - $0.001 par value; 75,000,000 shares authorized; 26,907,335
and 26,807,460 shares issued and outstanding23 42
Long-term debt repayments (705) (817)
-------- --------
Net cash provided by financing activities 1,161 4,878
-------- --------
Effect of Exchange Rate Changes on Cash (48) 29
-------- --------
Net change in cash 1,111 (453)
Cash, at June 30, 2007 and
December 31, 2006, respectively 27,559 27,459
Additional paid-in capital 31,796,816 31,147,343
Retained earnings 16,784,993 9,717,354
Accumulated other comprehensive loss (26,739) (30,102)
------------- -------------
Total Stockholders' Equity 48,582,629 40,862,054
------------- -------------
Total Liabilities and Stockholders' Equitybeginning of period 908 1,403
-------- --------
Cash, at end of period $ 120,213,3532,019 $ 105,716,805
============= =============950
======== ========
Supplemental Disclosures:
Interest paid $ 393 $ 354
-------- --------
Income taxes paid $ 575 $ (135)
-------- --------
See accompanying notes to interim condensed consolidated financial statements.
5
ENGlobal Corporation
Condensed Consolidated Statements Of Cash Flows
(Unaudited)
For the Six Months Ended
June 30,
--------------------------
2007 2006
----------- -----------
Cash Flows from Operating Activities:
Net income $ 7,067,640 $ 3,565,578
Adjustments to reconcile net income to net cash used in
operating activities -
Depreciation and amortization 1,942,564 1,253,070
Share based compensation expense 455,108 491,199
Loss on disposal of property, plant and equipment (552,562) 36,030
Deferred income tax benefit (77,016) (73,889)
Changes in current assets and liabilities, net of acquisitions -
Trade receivables (9,401,755) (2,869,847)
Costs and estimated earnings in excess of billings (4,798,403) (1,467,014)
Prepaid expenses and other assets (784,928) (77,889)
Accounts payable (4,386,481) (7,055,855)
Accrued compensation and benefits 3,781,371 1,367,860
Billings in excess of costs and estimated earnings 2,860,026 1,741,821
Other liabilities (4,364,188) 306,288
Income taxes receivable (payable) 3,849,950 802,170
----------- -----------
Net cash used in operating activities (4,408,674) (1,980,478)
----------- -----------
Cash Flows from Investing Activities:
Property and equipment acquired and construction in progress (1,051,344) (1,624,592)
Proceeds from sale of equipment -- 12,200
Proceeds from sale of other assets 710,790 50,000
Proceeds from note receivable 20,502 8,126
Business acquired in purchase transaction, net of cash acquired 18,125 (5,935,162)
Partnership distribution -- 350,000
Insurance proceeds -- 68,317
----------- -----------
Net cash used in investing activities (301,927) (7,071,111)
----------- -----------
Cash Flows from Financing Activities:
Net borrowings (payments) on line of credit 6,959,125 9,703,310
Proceeds from issuance of common stock 194,465 442,857
Long-term debt repayments (1,524,086) (383,387)
----------- -----------
Net cash provided by financing activities 5,629,504 9,762,780
----------- -----------
----------- -----------
Effect of Exchange Rate Changes on Cash 3,362 13,556
----------- -----------
Net change in cash 922,265 724,747
Cash, at beginning of period 1,402,880 159,414
----------- -----------
Cash, at end of period $ 2,325,145 $ 884,161
=========== ===========
Supplemental Disclosures:
Interest paid $ 827,201 $ 212,237
=========== ===========
Income taxes paid $ 3,442,783 $ 1,306,947
=========== ===========
See accompanying notes to interim condensed consolidated financial statements.
6
ENGlobal Corporation
Condensed Consolidated Statements Of Cash Flows
(Unaudited)
(Continued)
For the Six Months Ended
June 30,
--------------------------
2007 2006
----------- -----------
Non-Cash:
Issuance of note for purchase of WRC Corporation $ $ 2,400,000
=========== ===========
Issuance of common stock for purchase of WRC Corporation $ $ 1,400,000
=========== ===========
Issuance of note for ATI assets $ $ 1,000,000
=========== ===========
Acceptance of note for Constant Power assets $ $ (216,000)
=========== ===========
Acceptance of note from Oak Tree $(1,480,000) $ --
=========== ===========
See accompanying notes to interim condensed consolidated financial statements.
7
Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
NOTE 1 - BASIS OF PRESENTATION
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 six month
periods ended June 30, 2007 and 2006. 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, 2006, included in the Company's
Annual Report on Form 10-K filed with the Securities and Exchange
Commission on March 16, 2007 and as amended on Form 10K/A filed with the
Securities and Exchange Commission on March 29, 2007 (collectively referred
to as "2006 Annual Report on Form 10-K"). 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 2006 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 2006 Annual
Report on Form 10-K.
The Company's adoption of SFAS No. 123(R), "Share-Based Payment," became
effective January 1, 2006 and is further described in Note 3, below.
On July 13, 2006, the FASB issued FIN 48, "Accounting for Uncertainty in
Income Taxes, and Related Implementation Issues," which provides guidance
on the financial statement recognition, measurement, presentation and
disclosure of uncertain tax positions that a company has taken or expects
to take on a tax return. Under FIN 48, financial statements should reflect
expected future tax consequences of such positions presuming the taxing
authorities have full knowledge of the position and all relevant facts.
This interpretation also revises the disclosure requirements and was
adopted by the Company effective as of January 1, 2007. There are currently
no material tax positions identified as uncertain for the Company or its
subsidiaries. As of June 30, 2007, we have not recognized interest or
penalties relating to any uncertain tax positions.
The Company is subject to Federal and state income tax audits from time to
time that could result in proposed assessments. The Company cannot predict
with certainty the timing of such audits, how these audits would be
resolved and whether the Company would be required to make additional tax
payments, which may or may not include penalties and interest. The Company
was subject to a Federal tax audit for the years 2002 and 2003. That
examination has been closed.
WRC Corporation, which was acquired by the Company on May 26, 2006,
recently underwent a Federal tax audit for the pre-acquisition fiscal year
ended September 30, 2005. This audit was closed on July 12, 2007, with no
significant tax impact on the Company. The Company does not have any other
on-going Internal Revenue Service examinations, and the open years
currently subject to audit are tax years 2004-2006. For most states where
the Company conducts business, the Company is subject to examination for
the preceding three to six years.
NOTE 3 - SHARE BASED COMPENSATION
The Company currently sponsors a stock-based compensation plan as described
below. 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), stock-based compensation is measured at the
grant date based on the value of the awards and is recognized as an expense
over the requisite service period (usually a vesting period). The Company
8
Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
selected the modified prospective method of adoption described in SFAS No.
123(R). The fair values of the stock 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.
In accordance with the provisions of SFAS No. 123(R), total stock-based
compensation expense in the amount of $222,143 and $405,894 was recorded
for the three months ended June 30, 2007 and June 30, 2006, respectively,
and $455,107 and $491,198 was recorded the six months ended June 30, 2007
and June 30, 2006, respectively. The total stock-based 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 for the three months ended June 30,
2007 was $38,509 and for the six months ended June 30, 2007 was $77,018.
Prior to January 1, 2006, the Company accounted for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. Under APB Opinion No. 25, no
compensation expense was recognized for stock options issued to employees
because the grant price equaled or was above the market price on the date
of grant for options issued by the Company.
The average price per share for the three months ended June 30, 2007 and
2006 was $8.83 per share and $9.53 per share, respectively, and for the six
months ended June 30, 2007 and 2006 was $7.44 per share and $10.33 per
share, respectively.
Stock Option and Incentive Plans
The Company maintains a stock option plan (the "Option Plan") under which
the Company may issue stock options to employees and non-employee
directors. On March 30, 2007, the Board of Directors approved (subject to
stockholder approval which occurred on June 14, 2007) an amendment to the
Option Plan to increase the number of shares available for issuance under
the Plan from 2,650,000 to 3,250,000. The Company intends to issue
stock-based awards under the option plan in order to enhance its ability to
attract, retain and compensate employees and non-employee directors of
outstanding ability. As of June 30, 2007, 600,806 shares remain available
for grant under the Option Plan.
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 options generally have a ten-year term.
Compensation expense of $1.4 million related to previously granted stock
option awards which are not vested had not yet been recognized at June 30,
2007. This compensation expense is expected to be recognized over a
weighted-average period of approximately 12 months.
9
Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
NOTE 1 - BASIS OF PRESENTATION
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 periods ended
March 31, 2008 and 2007. 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 on March 28,
2008. 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 - STOCK BASED COMPENSATION
The Company currently sponsors a stock-based compensation plan as described
below. 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), stock-based compensation 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 the stock 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.
In accordance with the provisions of SFAS No. 123(R), total stock-based
compensation expense in the amount of $387,000 and $233,000 was recorded in
the three months ended March 31, 2008, and March 31, 2007, respectively.
The total stock-based 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 stock-based
arrangements was $90,000 and $39,000 for the three months ended March 31,
2008, and March 31, 2007, respectively.
The total fair value of vested options outstanding as of March 31, 2008 and
2007 was $4.6 million and $6.5 million, respectively. The average closing
price per share of our common stock for the three months ended March 31,
2008 and 2007 was $9.26 per share and $6.00 per share, respectively. Our
common stock was quoted on the NASDAQ Global Select market during the three
months ended March 31, 2008 and on the American Stock Exchange during the
three months ended March 31, 2007.
Stock Option and Incentive Plans
The Company maintains a stock option plan (the "Option Plan") under which
the Company may issue incentive stock options to employees and non-employee
directors. Under the Option Plan, a maximum of 3,250,000 shares of our
common stock was approved to be issued or transferred to certain
non-employee directors, officers and employees pursuant to stock based
awards granted. As of March 31, 2008, 482,494 shares remain available for
grant under the Option Plan.
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.
6
Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
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.
Compensation expense of $1.6 million related to previously granted stock
option awards which are non-vested had not yet been recognized at March 31,
2008. This compensation expense is expected to be recognized over a
weighted-average period of approximately 30 months.
The following summarizes stock option activity for the secondfirst quarter of
2007:2008:
Weighted Weighted Average
Average Remaining Aggregate
Number of Exercise Contractual Intrinsic *
Options Price Term (Years) Value (000's)
--------- ------------------- ---------- ------------ -------------
Balance at December 31, 2006 1,422,4942007 1,306,500 $ 5.16 7.9 years6.26 7.4 $ 2,8713,920
Granted 150,000 10.93140,000 9.44 10.0 years ---
Exercised 99,875 1.66 - 587(11,775) 1.98 -- (86)
Canceled or expired 20,000 2.05 - -
--------- --------- ------------ ------------- -- -- --
---------- ---------- -------- ----------
Balance at June 30, 2007 1,452,619March 31, 2008 1,434,725 $ 6.04 7.86.61 7.2 $ 3,458
========= ========= ============ ===========3,802
========== ========== ======== ==========
Exercisable at June 30, 2007 1,047,419March 31, 2008 1,115,525 $ 5.08 7.85.79 7.0 $ 4,974
========= ========= ============ ===========3,871
========== ========== ======== ==========
*Based on average stock price for the secondfirst quarter 20072008 of $8.83$9.26 per
share. The average stock price for the same period in 20062007 was $9.53$6.00 per
share.
The total intrinsic value of options exercised was $405,000$86,000 and $608,000$77,000 for
the three months ended June 30,March 31, 2008 and 2007, and 2006, respectively, and
$587,000 and $930,000 for the six months ended June 30, 2007 and 2006, respectively.
NOTE 4 - FIXED FEE CONTRACTS
Costs, estimated earnings and billings on uncompleted contracts consisted
of the following at June 30, 2007March 31, 2008 and December 31, 2006:
June 30,2007:
March 31, December 31,
2008 2007
2006
--------------------
(in thousands)
------------------------------------------
(Dollars in Thousands)
----------------------
Costs incurred on uncompleted contracts $ 84,21474,374 $ 75,31774,599
Estimated earnings (losses) on uncompleted contracts (7,417) (7,390)(1,390) (1,686)
-------- --------
Earned revenues 76,797 67,92772,984 72,913
Less: Billings to date 70,008 63,07767,155 66,895
-------- --------
Net costs and estimated earnings in excess of billings
on uncompleted contracts $ 6,7895,829 $ 4,8506,018
======== ========
Costs and estimated earnings in excess of billings on uncompleted contracts $ 10,1896,751 $ 5,3906,981
Billings and estimated earnings in excess of cost on uncompleted contracts (3,400) (540)(922) (963)
-------- --------
Net costs and estimated earnings in excess of billings
on uncompleted contracts $ 6,7895,829 $ 4,8506,018
======== ========
NOTE 5 - COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) represents net earningsEstimated losses on uncompleted contracts are related to a large EPC
contract, discussed in our 2007 Annual Report on Form 10-K and any revenue,
expenses, gains2006 Annual
Report on Form 10-K/A and losses that, under accounting principles generally
accepted in the United States of America, are excluded from net earnings
and recognized directly as a component of stockholders' equity. At June 30,
2007, comprehensive income included losses of ($16,659) and ($17,380) for
the quarter and year to date, respectively, from foreign currency
translation adjustments.
NOTE 6 - GOODWILL
In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets,"
goodwill is no longer amortized over its estimated useful life, but rather
is subject to at least an annual assessment for impairment. SFAS 142 also
requires that intangible assets with estimable useful lives be amortized
over their respective estimated useful lives to their estimated residual
10pending final resolution.
7
Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
values and reviewed for impairment in accordance with SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." Goodwill
has been allocated to the Company's two reportable segments. The test for
impairment is made on each of these reporting segments. No impairment of
goodwill has been incurred to date.
Reference is made to NOTE 16 - ACQUISITIONS, in the Company's 2006 Annual
Report on Form 10K for the period ended December 31, 2006. A third party
valuation of intangible assets was received relating to the Company's
acquisition of WRC Corporation. A portion of the goodwill was allocated to
intangible assets based on the value and nature of the agreements and is
being amortized accordingly over the term of the agreements. During the
three months ended March 31, 2007, the Company consulted with the third
party valuation provider and revised the allocation to intangible assets
resulting in approximately $669,000 being re-allocated back to goodwill. As
a result, in 2006, we amortized $70,000 more of intangibles than we would
have amortized based on the second valuation. The Company's amortization of
the affected intangible assets will be adjusted over the remaining five
year term of those assets and will not have a material effect on the
current or future period financial results.
NOTE 75 - LINE OF CREDIT AND DEBT
At the end of the reporting period, the Company had a Credit Facility (the
"Comerica Credit Facility") with Comerica Bank ("Comerica") that consisted
of a line of credit maturing on July 26, 2009. The Comerica Credit Facility
positions the Comerica debt as senior to all other debt. The line of credit
is limited to $35 million, subject to loan covenant restrictions and is
collateralized by substantially all the assets of the Company. The
outstanding balance on the line of credit as of June 30, 2007 was $30.9
million. The remaining borrowings available under the line of credit as of
June 30, 2007 were $4.1 million after consideration of loan covenant
restrictions.
The Comerica Credit Facility contains covenants requiring the Company, as
of the end of each calendar month, to maintain certain ratios, including
the total funded debt to EBITDA; total funded debt to total liabilities
plus net worth; and total funded debt to accounts/unbilled receivables. The
Company is also required, as of the end of each quarter, to maintain
minimum levels of net worth, and the Company must comply with an annual
limitation on capital expenditures. The Company was in compliance with all
covenants under the Comerica Credit Facility as of June 30, 2007.
11
Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
June 30,March 31, December 31,
2008 2007
2006
--------------------
(in thousands)
------------------------------------------
(Dollars in Thousands)
----------------------
Schedule of Long-Term Debt:
Comerica Credit Facility - Line of credit, prime (8.25%variable interest at June 30, 2007),5.0% at March 31,
2008, maturing in July 20092010 $ 30,92229,678 $ 23,96327,835
Sterling Planet and EDGI - Notes payable, interest at 5%, principal payments in
installments of $15,000 plus interest due quarterly, maturing in December 2008 90 12045 60
Cleveland Inspection Services, Inc., CIS Technical Services and F.D. Curtis - Notes
payable, discounted at 5% interest, principal in installments of $100,000 due
quarterly, maturing in October 2009 936 1,109
InfoTech Engineering, Inc. - Note payable, interest at 5%, principal payments in
installments of $65,000 plus interest due annually, maturing in December 2007 75 75575 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 550 713296 382
Michael Lee - Note payable, interest at 5%, principal payments in installments of
$150,000 plus interest due quarterly, maturing in July 2010 1,800 2,1001,350 1,500
Watco Management, Inc. - Note payable, interest at 4%, principal payments in
installments of $137,745 including interest annually, maturing in October 2010 500 500
Miscellaneous -- --382 382
-------- --------
Total long-term debt 34,873 28,58032,326 30,826
Less: Current maturities (1,555) (1,418)(1,442) (1,508)
-------- --------
Long-term debt, net of current portion $ 33,31830,884 $ 27,16229,318
======== ========
NOTE 86 - SEGMENT INFORMATION
TheDuring the first three quarters of 2007, the Company operates inmanaged and reported
through two business segments: (1)Engineering and Systems. In the fourth
quarter of 2007, due to the past and anticipated growth in certain areas of
our business and change in leadership during 2007, we reevaluated our
reportable segments under Financial Accounting Standards Board Statement
No. 131, "Disclosures about Segments of an Enterprise and Related
Information." As a result, we have elected to realign both management and
reporting into four business segments: Engineering, Construction,
Automation and Land.
The Engineering segment provides consulting services relating to the
development, management and execution of projects requiring professional
engineering providingand 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 majorthe pipeline,
utility and telecom companies involved in the hydrocarbon and chemical processing industries, pipelines, oil and gas development, and
cogeneration units that, for the most part, are located inother owner/operators of infrastructure
facilities throughout the United States;States and (2) systems, providing designCanada.
Our Corporate segment includes costs related to business development,
investor relations/governance, executive functions, finance, accounting,
safety, human resources and implementationinformation technology that are not
specifically attributable to one of control
systems for specific applications primarily in the energyfour operating segments but do
support corporate activities and process
industries, and uninterruptible power systems and battery chargers to
customers that, for the most part, are located in the United States.initiatives. Revenue and operating income
for each segment are set forth in the following table.
The amount under Corporate includes those activities that
are not allocated to the operating segments and include costs related to
business development, executive function, finance, accounting, investor
relations/governance, project controls, information technology, legal,
safety and human resources that are not specifically identifiable with the
two segments. Inter-company elimination includes the amount of
administrative costs allocated to the segments. Corporate functions support
both business segments and therefore cannot be specifically assigned to
either. Significant portions of Corporate cost are allocated to each
segment based on each segment's revenues and eliminated in consolidation.
12
Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2007 2006 2007 2006
--------- --------- --------- ---------
(in thousands)
------------------------------------------------
Revenue:
Engineering $ 84,263 $ 69,869 $ 160,706 $ 132,499
Systems 5,767 5,576 11,277 9,888
Less intercompany revenue (454) (379) (748) (694)
--------- --------- --------- ---------
Total revenue $ 89,576 $ 75,066 $ 171,235 $ 141,693
========= ========= ========= =========
Operating income (loss):
Engineering $ 10,495 $ 6,596 $ 19,996 $ 11,486
Systems (60) 55 (240) (127)
Corporate (3,506) (3,089) (7,293) (5,676)
--------- --------- --------- ---------
Total operating income $ 6,929 $ 3,562 $ 12,463 $ 5,683
========= ========= ========= =========
Financial information about geographic areas
--------------------------------------------
Revenue from the Company's non-U.S. operations is currently not material.
Long-lived assets (principally leasehold improvements and computer
equipment) outside the United States were $98,539 as of June 30, 2007, net
of accumulated depreciation.
NOTE 9 - FEDERAL INCOME TAXES
The components of income tax expense (benefit) for the three and six months
ended June 30, 2007 and 2006 were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
2007 2006 2007 2006
------- ------- ------- -------
(in thousands)
----------------------------------------
Current $ 2,869 $ 1,423 $ 4,728 $ 2,186
Deferred (38) (58) (77) (74)
------- ------- ------- -------
Total tax provision $ 2,831 $ 1,365 $ 4,652 $ 2,112
======= ======= ======= =======
13
Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
NOTE 10 - EARNINGS PER SHARE
The following table reconciles the denominator used to compute basic
earnings per share to the denominator used to compute diluted earnings per
share ("EPS").
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2007 2006 2007 2006
---------- ---------- ---------- ----------
(in thousands)
-------------------------------------------------
Weighted average shares outstanding
(denominator used to compute basic EPS) 26,864,358 26,444,185 26,839,184 26,388,702
Effect of employee and outside director stock options 425,689 747,432 369,394 830,280
---------- ---------- ---------- ----------
Denominator used to compute diluted EPS 27,290,047 27,191,617 27,208,578 27,218,982
========== ========== ========== ==========8
Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
Note 6 - Segment Information (continued) Three Months Ended
March 31,
--------------------
2008 2007
-------- --------
(Dollars in Thousands)
Revenue:
Engineering $ 52,029 $ 51,449
Construction 26,900 13,785
Automation 10,402 9,538
Land 8,835 6,887
-------- --------
Total revenue $ 98,166 $ 81,659
======== ========
Operating income (loss):
Engineering $ 8,587 $ 7,297
Construction 1,325 1,455
Automation 412 (64)
Land 715 667
Corporate (3,919) (3,822)
-------- --------
Total operating income $ 7,120 $ 5,533
======== ========
Financial information about geographic areas
--------------------------------------------
Revenue from the Company's non-U.S. operations is currently not material.
Long-lived assets (principally leasehold improvements and computer
equipment) outside the United States were $79,000 as of March 31, 2008, net
of accumulated depreciation, stated in U.S. dollars.
NOTE 117 - CONTINGENCIESFEDERAL INCOME TAXES
The components of income tax expense (benefit) for the three months ended
March 31, 2008 and 2007 were as follows:
Three Months Ended
March 31,
----------------------
2008 2007
-------- --------
(Dollars in Thousands)
Current $ 2,750 $ 1,857
Deferred (90) (39)
------- -------
Total tax provision $ 2,660 $ 1,818
======= =======
NOTE 8 - EARNINGS PER SHARE
The following table reconciles the denominator used to compute basic
earnings per share to the denominator used to compute diluted earnings per
share ("EPS").
Three Months Ended
March 31,
------------------
2008 2007
-------- --------
(in thousands)
Weighted average shares outstanding
(denominator used to compute basic EPS) 27,060 26,809
Effect of employee and outside director stock options 467 451
------ ------
Denominator used to compute diluted EPS 27,527 27,260
====== ======
9
Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
NOTE 9 -CONTINGENCIES
Employment Agreements
The Company has employment agreements with certain of its executive
officers the latest of which expires in February 2009. Theand certain other officers. Such agreements provide for minimum
salary levels. If the Company terminates the employment of the employee for
any reason other than 1) termination(1) for cause, 2)as defined in the employment
agreement, (2) voluntary resignation, or 3)(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 a non- competition
provision.the
non-compete. These agreements are renewable for one year at the Company's
option. The Company has employment agreements with certain other officers
which contain the elements of those agreements with its executive officers
but are in effect from three to five years.
Litigation
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 which we have reserves, whichor 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 and a general umbrella
policy. The Company is not aware of any claims in excess of insurance
recoveries. ENGlobal is partially self-funded for health insurance claims.
Provisions for expected future payments are accrued based on the Company's
experience.
Specific stop loss levels provide protectionLong-term Note Receivable
In the first quarter of 2007, ENGlobal Engineering, Inc. ("EEI") and South
Louisiana Ethanol, LLC ("SLE") executed an agreement for EPC services
relating to the retro-fit of an ethanol plant in southern Louisiana. The
history of the SLE project (the "Project") is described in Note 12 to the
Company's financial statements included in its Quarterly Report on Form
10-Q for the Company
with $175,000 per occurrence and approximately $12.1 million in aggregate
in each policy year being covered by a separate insurance policy.
Unapproved Change Orders and Claims
At Junequarter ended September 30, 2007 (the "Third Quarter 10-Q")
and is discussed further in the Company had outstanding unapproved change
orders/claims of approximately $18.6 million. The Company recorded $1.2
million in revenue duringCompany's Annual Report on Form 10-K for
the year ended December 31, 2006 related to these
claims. No additional amounts have been recognized during 2007 related to
these claims. Generally, collection of amounts related to unapproved change
orders2007.
Although work has not recommenced on the Project and claims is expected within twelve months. However, clients
generally willSLE has not pay these amounts until final resolution of related
claims, thus accordingly, collection of these amounts may extend beyond one
year. In the future, ifobtained
permanent financing, the Company determines collectioncontinues to believe that, due to the
value of any unapproved
change order/claimthe Collateral, the Note Receivable is fully collectible.
Specifically, an updated appraisal from the bridge lending bank's appraiser
indicates a fair market value of $35.8 million, an orderly liquidation
value of $25.3 million, and a forced liquidation value of $20.0 million.
Moreover, SLE may seek equity financing for the Project in lieu of or in
addition to debt financing.
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 probable, it will post a charge to earnings in
the period such determination is made.
14
Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
NOTE 12 - SUBSEQUENT EVENT
On August 6, 2007, the Company entered into a Credit Agreement (the "Credit
Agreement"), provides a three-year, $50 million senior secured revolving
credit facility (the "New Credit Facility"). Becoming effective August 8,
2007, the New Credit Facility is guaranteed by substantially all of
Company's subsidiaries and is secured by a lien on substantially all of the
Company's assets. The New Credit Facility replaced a $35 million senior
revolving credit facility that would have expired in July 2009.
The New Credit Facility may be used for working capital, issuances of
letters of credit or other lawful corporate purposes. The Credit Agreement
contains customary affirmative and negative covenants that place certain
limitations and restrictions on the Company. These covenants place certain
limitations on the Company including limits on new debt, mergers, asset
sales, investments, and fixed price contracts along with restrictions on
certain distributions. The Company must also maintain certain financial
covenants as of the end of each calendar month, including the following:
o Leverage Ratio not to exceed 3.00 to 1.00;
o Asset Coverage Ratio to be less than 1.00 to 1.00; and
o Net Worth must be greater than the sum of $40.1 million plus 75%
of positive Net Income earned in each fiscal quarter after
January 1, 2007 plus 100% of the net proceeds of any offering,
sale or other transfer of any capital stock or any equity
securities.
At the Company's option, amounts borrowed under the New Credit Facility
will bear interestassured
at LIBOR or an Alternate Base Rate, plus in each case,
an additional margin based on the Leverage Ratio. The Alternate Base Rate
is the greater of the Prime Rate or the Fed Funds Effective Rate, plus
1.0%. The additional margin ranges from 0% on the Alternate Base Rate loans
and 1.50% to 2.0% on the LIBOR-based loans.
15this time.
10
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 2006 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 with 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
2006 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 Consolidated Financial Statements,
including the notes thereto, included in this Quarterly Report on Form 10-Q and the Company's
2006 Annual Report on Form 10-K.10-K for the year ended December 31, 2007.
MD&A Overview
-------------
The following list sets forth a general overview of the morecertain significant
changes in the Company's financial condition and results of operations for
the three and six months ended June 30, 2007,March 31, 2008, compared to the corresponding period
in 2006.2007.
During the three months During the six monthsthree-month period
ended June 30, 2007 ended June 30, 2007
($ in millions) % ($ in millions) %
--------------- ------ --------------- ------March 31, 2008
-----------------------------
Revenue $ 14.5 19.3% $ 29.5 20.8%Increased 20.2%
Gross profit 3.5 32.7% 8.5 44.7%Increased 7.5%
Operating income 3.3 91.7% 6.8 119.3%Increased 29.1%
SG&A expense 0.1 1.4% 1.7 12.8%Decreased 6.5%
Net income 1.6 70.0% 3.5 97.2%Increased 25.0%
Long-term debt, net of current portion, increased 22.4%5.5%, or $6.1million,$1.6 million,
from $27.2$29.3 million at December 31, 20062007 to $33.3$30.9 million at June 30, 2007,
andMarch 31, 2008,
however, as a percentage of stockholders' equity, long-term debt increaseddecreased
to 68.6%51.3% from 66.5%52.5% at these same dates. The primary reason for the increase in long-term debt is
primarily related to the $1.9 million increase in our line of credit
supporting our growth and the timing difference related tobetween meeting short-term
bi-weekly payroll obligations from our growth and longer collection periods
on receipts from our clients.collections of associated trade
receivables. On average, our accounts receivable daysday's sales outstanding is 70increased to 62 days
for the three monthsthree-month period ended June 30,March 31, 2008, from 61 days at December
31, 2007, compared
to 64but decreased from 71 days for the three months ended June 30, 2006.comparable three-month period
in 2007. The Company continues to work toward improving billing and
collection processes.
Total stockholders' equity increased 18.8%7.9%, or $7.7$4.4 million, from $40.9$55.8
million as of December 31, 20062007 to $48.6$60.2 million as of June 30, 2007.
16March 31, 2008.
11
MD&A/Results of OperationsManagement's Discussion and Analysis (continued)
- --------------------------------------------------------------------------------------
Consolidated Results of Operations for the Three and Six Months
Ended June 30,March 31, 2008 and 2007
and 2006
(Unaudited)
(Dollars in Thousands)
Three Months Ended
Six Months Ended
June 30, June 30,March 31,
----------------------------------------
-----------------------------------------2008 2007
2006 2007 2006
------------------- ------------------- ------------------- -------------------
(dollars in thousands)
----------------------------------------------------------------------------------------------------------------------------
Revenue:
Engineering $ 83,938 93.752,029 53.0 % $ 69,752 92.951,449 63.0 %
$ 160,087 93.5Construction 26,900 27.4 % $ 132,339 93.413,785 16.9 %
Systems 5,638 6.3Automation 10,402 10.6 % 5,314 7.19,538 11.7 %
11,148 6.5Land 8,835 9.0 % 9,354 6.66,887 8.4 %
------------------- ------ ---------- ------ ---------- ------ ------------------- ------
Total revenue $ 89,57698,166 100.0 % $ 75,06681,659 100.0 %
$ 171,235 100.0 % $ 141,693 100.0 %
========== ========== ========== =================== ------ ========= ------
Gross profit:
Engineering $ 13,967 15.69,882 10.1 % $ 10,189 13.69,164 11.2 %
$ 26,996 15.7Construction 2,028 2.1 % $ 17,986 12.72,082 2.6 %
Systems 252 0.3Automation 1,044 1.1 % 539 0.7781 1.0 %
501 0.3Land 1,392 1.4 % 964 0.71,250 1.5 %
------------------- ------ ---------- ------ ---------- ------ ------------------- ------
Total gross profit 14,219 15.914,346 14.7 % 10,728 14.313,277 16.3 %
27,497 16.0 % 18,950 13.4 %
---------- ---------- ---------- ------------------- ------ --------- ------
SG&A expense:
Engineering 3,472 3.91,295 1.3 % 3,593 4.81,867 2.3 %
7,000 4.1Construction 703 0.7 % 6,500 4.6627 0.8 %
Systems 312 0.3 % 484Automation 632 0.6 % 741 0.4845 1.0 %
1,091 0.8Land 677 0.7 % 583 0.7 %
Corporate 3,5063,919 4.0 % 3,089 4.13,822 4.7 %
7,293 4.3 % 5,676 4.0 %
------------------- ------ ---------- ------ ---------- ------ ------------------- ------
Total SG&A expense 7,290 8.27,226 7.3 % 7,1667,744 9.5 %
15,034 8.8 % 13,267 9.4 %
---------- ---------- ---------- ------------------- ------ --------- ------
Operating income:
Engineering 10,495 11.7 % 6,5968,587 8.8 % 19,996 11.77,297 8.9 %
11,486 8.1Construction 1,325 1.4 % Systems (60) -1,455 1.8 %
55 -Automation 412 0.5 % (240) (0.2)(64) 0.0 %
(127) (0.1)Land 715 0.7 % 667 0.8 %
Corporate (3,506)(3,919) (4.0)% (3,089) (4.0)% (7,293) (4.3)% (5,676) (4.0)(3,822) (4.7)%
---------- ------ ---------- ------ ---------- ------ ------------------- ------
Total operating income 6,929 7.77,120 7.4 % 3,562 4.8 % 12,463 7.2 % 5,683 4.05,533 6.8 %
---------- ---------- ---------- ---------------- --------- ------
Other income (expense), net (185) (0.2)(457) (0.6)% 134 0.1)% (745) (0.4)% (6) - (560) (0.7)%
Tax provision (2,831) (3.1)% (1,365) (1.8)% (4,650)(2,660) (2.7)% (2,112) (1.5)(1,818) (2.2)%
------------------- ------ ---------- ------ ---------- ------ ------------------- ------
Net income $ 3,913 4.4 % $ 2,331 3.1 % $ 7,0674,003 4.1 % $ 3,565 2.53,155 3.9 %
========== ========== ========== ==========
All========= =========
The percentages are based onshown in the table above represent each segment's portion of the
gross profit, SG&A and operating income as a percentage of the Company's total
revenue.
Other financial comparisons:
----------------------------
As of June 30,
-------------------
2007 2006
-------- --------
(in thousands)
-------------------
Working capital $ 48,707 $ 31,051
Total assets $120,213 $ 93,053
Long-term debt, net of current portion $ 33,318 $ 16,943
Stockholders' equity $ 48,583 $ 45,777
17revenue for each respective period.
12
MD&A/Results of OperationsManagement's Discussion and Analysis (continued)
- --------------------------------------------------------------------------------------
March 31, March 31,
Quarter-to-Quarter Balance Sheet Comparisons: 2008 2007
----------------------
(Dollars in Thousands)
----------------------
Working capital $ 49,317 $ 44,215
Total assets $122,715 $111,201
Long-term debt, net of current portion $ 30,884 $ 32,474
Stockholders' equity $ 60,162 $ 44,321
We recorded net income of $3.9$4.0 million, or $0.15 per diluted share for the
three months ended June 30, 2007,March 31, 2008, compared to net income of $2.3$3.2 million,
or $0.09$0.12 per diluted share for the corresponding period last year.
We recorded net income of $7.1 million, or $0.26 per diluted share for the
six months ended June 30, 2007, compared to net income of $3.6 million, or
$0.13 per diluted share for the corresponding period last year.
The following table presents, for the periods indicated, the approximate
percentage of total revenues and operating income or loss attributable to
our reportable segments:
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ------------------
2007 2006 2007 2006
------ ------ ------ ------
Revenue:
Engineering 93.7 % 92.9 % 93.5 % 93.4 %
Systems 6.3 % 7.1 % 6.5 % 6.6 %
Operating income (loss):
As a % of Total Revenues
Engineering 11.7 % 8.8 % 11.7 % 8.1 %
Systems - % - % (0.2)% (0.1)%
The Company's revenue is composed of engineering, construction and
procurement service revenue, systems, land/management and related product
sales.
The Company recognizes service revenue as soon as the services are
performed. The majority of the Company's engineering servicesservice revenues have historically
been provided through cost-plus contracts whereas a majority of the Company's product sales areour
fabrication and turnkey EPC projects revenue is earned on fixed-price
contracts. However, our engineering segment recognized approximately $8.0Approximately $8.1 million in fixed-price revenue was recognized
in the six monthsthree-month period ended June 30, 2007,March 31, 2008, compared to $14.8$8.9 million of
similar revenue in the same period in 2007. Of the fixed-price revenue,
$46,000 and $1.8 million for the three-month period ending March 31, 2008
and March 31, 2007, respectively, were related to the two projects with
recorded losses during 2006.
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 either a
subcontracted or direct
hire or subcontractor basis. Generally, these materials, equipment and
subcontractor costs are passed through to our clients and reimbursed, along
with fees, which in the aggregate,total are at margins lower than those of our normal
core business. In accordance with industry practice and generally accepted
accounting principles, all costs and fees are included in revenue. The use
of subcontractor services can change significantly from project to project;
therefore, changes in revenue and gross profit, SG&A expense and operating
income as a percent of revenue may not be indicative of business trends.
For analytical purposes only, we segregate from our total revenue the
revenues derived from material assets or companies acquired during the
first 12 months following their respective dates of acquisition and refer
to such revenue as "Acquisition" revenue. We also segregate gross profits
and SG&A expenses derived from material assets or company acquisitions on
the same basis as we segregate revenues.
Operating SG&A expense includes management and staff compensation, office
costs such as rents and utilities, depreciation, amortization, travel and
other expenses generally unrelated to specific client contracts, but
directly related to the support of a segment's operation.
18
MD&A/Results of Operations (continued)
- --------------------------------------operations.
Corporate SG&A expense is comprised primarily of marketingbusiness 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 client projects, but which are incurred to
support corporate activities and initiatives.
Industry Overview:
Many ENGlobal offices have benefited from the strong downstream refinery
market. We expect significant capital projects to be generated by refinery
operationsoperators over the next several years given increasing demand for refined products,
improved margins, and an aging refining infrastructure in the U.S.we will continue to research
other markets that value our services. Overall, projects that relaterelated to
expandingincreasing refining capacity at existing refineriesand the utilization of heavy or those
projects that relate to processing lower cost grades ofsour crude oil
have trended upward.upward, while projects to satisfy environmental mandates have
trended downward. Given that global demand for energyoil products has tightened
the supply of both crude oil as well as refined products, we believe each
ENGlobalof ENGlobal's business segmentsegments is well positioned within the industry as
capacity increase and to perform
services primarilymodernization projects are undertaken in the North American market.United
States.
13
Management's Discussion and Analysis (continued)
- ------------------------------------------------
The downstream petrochemical industry has historically been a good source
of projects for ENGlobal. WeWhile not currently as robust as the refining
market, we have seen a smallrecent increase in both maintenance and capital
spending on domestic facilities after several years of relative inactivity. InWe 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 for the Company's view, largeforeseeable future, that
petrochemical work undertaken in the U.S. will consist of smaller capital
projects or be maintenance related.
Despite past downturns in the petrochemical industry, are currently being undertaken outsidepipeline projects have remained
constant for the U.S., in areas of the world with
increasing product demand or lower cost feedstock.
The Company is currently seeingmost part, and we have recently seen a significant
increase in North American
pipeline project activity. It is projected that this activity in terms of
pipeline miles built will increase approximately 70% in 2007, when compared
to 2006. Moving products through cross country pipelines requires other
installations on which the Company performs services, such as pump
stations, gas compression facilities, tank farms, metering and surveillance
installations. As a general statement,From an engineering perspective, pipeline
projects tend to require less engineering man hours as the scope of engineering work is somewhat
smaller than for similar sized
downstream projects. However, ENGlobal is seeing significant increasedprovides several services such as
right-of-way acquisition, inspection and construction management that are
in addition to its pipeline related engineering services. However the
drivers we see behind growth in domestic pipeline activity on projectsinclude: 1)
Natural gas transportation away from the Rocky Mountain area as well as
from 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 U.S., and 4) Movement of refined products from
Gulf Coast refineries to the Midwest and Northeast.
The country's focus on alternative and renewable energy. Inenergy has presented the Company with
many cases, our clients for these
projects are new project developers, as opposed to our historical client
baseopportunities. The North American Industrial Project
Spending Index has recently indicated that are much larger in sizecapital spending for all
alternative energy projects exceeds that for refining and with long operating histories. In
this area, the Company primarily focusespipeline
combined. To date, ENGlobal has mainly focused its marketing efforts on facilities that will utilize biomass
technologies, includingprocess, such as those related to the production of ethanol and biodiesel,
coal to liquids, andalong with the utilization of refinery petroleum coke as
an energy source. In addition, the Company sees a good opportunity in solar
energy in the coming years, both by performing project services on solar
collector facilities, as well as facilities for the production of
polysilicon, used in photo voltaic cells. Most of our work on alternative
energy project is not for our traditional large client base, but instead
for financially backed developers
Revenue:
Revenue increased $29.5$16.5 million, or 20.8%20.2%, to $171.2$98.2 million for the sixthree
months ended June 30, 2007March 31, 2008 from $141.7$81.7 million for the comparable prior
year period with approximately $27.8$0.6 million of the increase coming from
our engineering segment and $1.7 attributable to
our systems segment. This
is discussed further in ourEngineering segment, information.
Revenue increased $14.5 million, or 19.3%, to $89.6 million for the three
months ended June 30, 2007 from $75.1 million for the comparable prior year
period with approximately $14.1$13.1 million of the increase coming from our
engineering segment and $0.3 million attributable to our
systemsConstruction segment, $0.9 million of the increase attributable to our
Automation segment and $1.9 million of the increase attributable to our
Land segment. This is discussed further in our segment information.
Gross Profit:
Gross profit increased $8.5$1.0 million, or 44.7%7.5%, to $27.5$14.3 million for the
sixthree months ended June 30,March 31, 2008 from $13.3 million for the comparable
prior year period. Approximately $2.7 million of the increase in gross
profit was due to the $16.5 million increase in revenue offset by
approximately $1.7 million in higher costs and lower margins.
As a percentage of revenue, gross profit decreased 1.6% from 16.3% for the
three months ended March 31, 2007 to 14.7% for the quarter ended March 31,
2008. The decrease in gross profit margin as a percentage of revenue was
primarily related to a shift in revenue mix quarter-over-quarter resulting
from $19.0a 119% increase in lower margin Inspection revenue within our
Construction segment.
Selling, General, and Administrative:
As a percentage of revenue, SG&A expense decreased 2.2% to 7.3% for the
three months ended March 31, 2008 from 9.5% for the comparable period in
2007. Total expense for SG&A decreased $0.5 million, or 6.5%, to $7.2
million for the three months ended March 31, 2008 from $7.7 million for the
comparable prior year period.
As a percentage of revenue, gross profit increased 2.6% from 13.4%
for the six months ended June 30, 2006Operating SG&A expense decreased 1.5% to 16.0% for the quarter ended June
30, 2007. Of the overall $8.5 million increase in gross profit,
approximately $3.9 million was primarily due to the $29.5 million increase
in revenue and approximately $4.6 million was due to equivalent lower
costs.
Gross profit increased $3.5 million, or 32.7%, to $14.2 million3.3%
for the three months ended June 30, 2007March 31, 2008 from $10.7 million4.8% for the comparable prior
year period. As a percentage of revenue, gross profit increased 1.6%
from 14.3% forOperating SG&A expense decreased approximately $0.6 million
quarter-over-quarter primarily due to $0.3 million in employee and
associated costs re-classified to direct expense, $0.2 million in
non-recurring costs associated with closing the three months ended June 30, 2006 to 15.9% forDallas office during the
quarter ended June 30, 2007. Of the overall $3.5March 31, 2007, and $0.1 million increase in gross
profit, approximately $2.1 million was primarily due to the $14.5 million
increase in revenuelower bad debt expense.
14
Management's Discussion and approximately $1.4 million was due to equivalent
lower costs.
19
MD&A/Results of OperationsAnalysis (continued)
- --------------------------------------
Selling, General, and Administrative:
As a percentage of revenue, SG&A expense decreased 0.6% to 8.8% for the six
months ended June 30, 2007 from 9.4% for the comparable prior year period.
Total expense for SG&A increased $1.7 million, or 12.8%, to $15.0 million
for the six months ended June 30, 2007 from $13.3 million for the
comparable prior year period.
As a percentage of revenue, SG&A expense decreased 1.3% to 8.2% for the
three months ended June 30, 2007 from 9.5% for the comparable prior year
period. Total expense for SG&A increased $0.1 million, or 1.4%, to $7.3
million for the three months ended June 30, 2007 from $7.2 million for the
comparable prior year period.------------------------------------------------
As a percentage of revenue, Corporate SG&A expense increased 0.3%decreased 0.7% to 4.3%4.0%
for the sixthree months ended June 30, 2007March 31, 2008 from 4.0%4.7% for the comparable
prior year period. Corporate SG&A expense increased approximately $1.6$0.1
million, or 28.1%2.6%, to $7.3$3.9 million for the sixthree months ended June 30, 2007March 31, 2008
from $5.7$3.8 million for the comparable prior year period. The increase over
the prior year's Corporate SG&A grew as personnel increasedwas related to 92 employees for the six
months ended June 30, 2007 compared to 75 employees for the six months
ended June 30, 2006. The Company increased the Business Development, Human
Resources, Accounting and IT departments to support the overall growth of
the Company. Facilities expensesincreases of approximately
$100,000 were added over
this timeframe$151,000 related to add additional office spacestock compensation expense and $125,000 in Houstondepreciation
and Denveramortization expense, offset by reduced costs of approximately $91,000
in salaries and to
add to our office network.
As a percentage of revenue, Corporate SG&Aother employee expenses, $44,000 in facilities expense decreased 0.1% to 4.0%
for the three months ended June 30, 2007 from 4.1% for the comparable prior
year period. Corporate SG&A expenseand
$84,000 in professional services.
Operating Income:
Operating income increased approximately $0.4$1.6 million, or 12.9%29.1%, to $3.5$7.1
million for the three months ended June 30, 2007March 31, 2008 from $3.1 million for the comparable prior year period.
Operating Income:
Operating income increased approximately $6.8 million, or 119.3%, to $12.5
million for the six months ended June 30, 2007 from $5.7$5.5 million
compared to the same period in 2006.2007. As a percentage of revenue, operating
income increased 3.2%0.6% to 7.2% for the six months ended June 30, 2007 from 4.0% for
the comparable prior year period.
Operating income increased approximately $3.3 million, or 91.7%, to $6.9
million7.4% for the three months ended June 30, 2007March 31, 2008
from $3.6 million compared
to the same period in 2006. As a percentage of revenue, operating income
increased 2.9% to 7.7% for the three months ended June 30, 2007 from 4.8%6.8% for the comparable prior year period.
Other Expense, net:
Other expense increased $739,000 for the six months ended June 30, 2007
from the comparable prior year period. Interest expense increased $845,000
duedecreased $0.1 million, to an increased outstanding balance on our line of credit. Other income
increased $106,000 due to a gain of $483,000 recorded for the sale of our
office building located in Baton Rouge, Louisiana. Other income for the six
months ended June 30, 2006 was mainly from insurance proceeds related to
Hurricane Rita damage.
Other expense increased $319,000$0.5 million for the three months
ended June 30, 2007March 31, 2008 from $0.6 million for the comparable prior year
period. Interest expense increased $447,000period, primarily due to an increased outstanding balancelower net interest expense related to lower
interest rates on our line of credit. Other income
increased $128,000 due to the gain on the sale of the building.Credit Facility.
Tax Provision:
Income tax expense increased $2.6$0.9 million, or 123.8%50.0%, to $4.7$2.7 million for
the sixthree months ended June 30, 2007March 31, 2008 from $2.1$1.8 million for the comparable
prior year period. The estimated effective tax rate was 39.7%39.9% for the
six
monthsthree-month period ended June 30, 2007March 31, 2008 compared to 37.2%36.6% for the
comparable prior year period. The change in the effective tax rate is the result of increasing
state income taxes.
20
MD&A/Results of Operations (continued)
- --------------------------------------
Income tax expense increased $1.4 million, or 100.0%, to $2.8 millionquarterly period and 39.7% for the three monthstwelve-month
period ended June 30, 2007 from $1.4 million for the comparable
prior year period. The estimated effective tax rate was 42.0% for the three
months ended June 30, 2007 compared to 36.9% for the comparable prior year
period. The change in the effective tax rate is the result of increasing
state income taxes.
As we experienced greater earnings in a broader range of jurisdictions
compared to 2006, we realized the need to recognize greater tax obligations
to those jurisdictions. The effective rate of 42.0% for the three months
ended June 30, 2007 compared to the 39.7% effective rate for the six months
ended June 30, 2007, indicates that the increased estimates were booked in
the second quarter. Our expected effective rate for 2007, annualizing the
impact of Federal and state taxes, should average approximately 41%.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 June 30, 2006 included the effect of non-recurring differences
in tax estimates from the 2005 year end. Estimates at June 30, 2007March 31, 2008 are based on results of the 2006 year end2007 year-end and
adjusted for estimates of non-recurring differences from the prior year, as
well as anticipated book to tax differences for 2007.2008.
Net Income:
Net income for the sixthree months ended June 30, 2007March 31, 2008 increased $3.5$0.8
million, or 97.2%25.0%, to $7.1$4.0 million from $3.6$3.2 million for the comparable
prior year period. As a percentage of revenue, net income increased 1.6%0.2% to
4.1% for the six
monthsthree-month period ended June 30, 2007March 31, 2008 from 2.5%3.9% for the
period ended June 30, 2006.
Net income for the three months ended June 30, 2007 increased $1.6 million,
or 69.6%, to $3.9 million from $2.3 for the comparable prior year period.
As a percentage of revenue, net income increased 1.3% to 4.4% for the three
months ended June 30, 2007 from 3.1% for the period ended June 30, 2006.March 31, 2007.
Liquidity and Capital Resources
-------------------------------
Historically, cash requirements have been satisfied throughOverview
The Company defines liquidity as its ability to pay liabilities as they
become due, fund the business operations and meet monetary contractual
obligations. Our primary source of liquidity during the period ended March
31, 2008 was borrowings under aour senior revolving lineCredit Facility, also
discussed under Note 8 - Line of credit, which is currentlyCredit and Debt, to the Consolidated
Financial Statements included in effect
with Comerica Bank (the "Comericathe 2007 Annual Report on Form 10-K. Cash
on hand at March 31, 2008 totaled $2.0 million and availability under the
Credit Facility").Facility totaled $20.1 million resulting in total liquidity of $22.1
million. As of June 30, 2007,
we had working capital of $49.1 million. Long-term debt, net of current
portion, was $33.3 million as of June 30, 2007, including $30.9 million
outstanding under the Comerica Credit Facility.
The Comerica Credit Facility positions the Comerica debt as senior to all
other debt. The line of credit is limited to $35 million, subject to loan
covenant restrictions and is collateralized by substantially all the assets
of the Company. The outstanding balance on the line of credit as of June
30, 2007 was $30.9 million. The remaining borrowings available under the
line of credit as of June 30, 2007 were $4.1 million after consideration of
loan covenant restrictions.
The Comerica Credit Facility contains covenants requiring the Company, as
of the end of each calendar month, to maintain certain ratios, including
the total funded debt to EBITDA; total funded debt to total liabilities
plus net worth; and total funded debt to accounts/unbilled receivables. The
Company is also required, as of the end of each quarter, to maintain
minimum levels of net worth, and the Company must comply with an annual
limitation on capital expenditures. The Company was in compliance with all
covenants under the Comerica Credit Facility as of June 30, 2007.
We are not currently subject to any obligations under standby letters of
credit, guarantees, repurchase obligations or other commitments. We have no
off-balance sheet arrangements.
As of June 30, 2007,March 31, 2008, management believes the Company's cash
position is sufficient to meet its working capital requirements for at least the
next twelve12 months. Any future decrease in demand for the Company's services or
products would reduceHowever, cash and the availability of funds through operations.
On August 6, 2007,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 entered into aloses 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 integrated timely, or
(8) we not able to meet the covenants of the Credit Agreement (the "Credit
Agreement"), provides a three-year, $50Facility.
If any such event occurs, we would be forced to consider alternative
financing options.
15
Management's Discussion and Analysis (continued)
- ------------------------------------------------
Cash Flows from Operating Activities:
Operations generated approximately $0.4 million senior secured revolvingin net cash for the
three-month period ended March 31, 2008, compared with net cash used for
operations of $4.9 million during the same period in 2007. Unfavorable
changes in working capital accounts during the period negatively impacted
cash flows from operating activities. The primary changes in working
capital were due to the following:
o Increased Trade Receivables - The increase was primarily the
result of increased operating activity. Our collections on past
due Accounts Receivable balances continue to improve and
management does not expect any material collection issues in the
future.
o Decreased Accounts Payable - The decrease was primarily due to
$1.9 million in scheduled vendor and sub-contractor payments
related to the SLE project, which was terminated during the third
quarter of 2007. An additional $2.0 million in similar payments
are scheduled to be made during the second quarter of 2008, which
we anticipate will complete our current material cash commitments
related to the SLE project.
During the quarter, the line of credit facility (the "Newincreased by $1.9 million from $27.8
million as of December 31, 2007 to $29.7 million as of March 31, 2008.
Our average day's sales outstanding ("DSO") was 62 days for the three-month
period ended March 31, 2008 compared to 71 days for the comparable
three-month period in 2007 and 61 days for the twelve months ended December
31, 2007.
Cash Flows from Investing Activities:
Investing activities used $398,000 in cash for the three-month period ended
March 31, 2008, compared to $429,000 cash used during the same period in
2007. The Company's primary use of invested capital during both periods was
for capital expenditures, mainly computers and technical software
applications. Future investing activities are anticipated to remain
consistent with prior years and include expenditures for capital leasehold
improvements, technical applications software, and equipment, such as
upgrades to computers. Our Credit Facility"). Becoming effective August 8,
2007,Facility limits annual capital
expenditures to $3.25 million.
Cash Flows from Financing Activities:
Financing activities provided $1.2 million in cash for the Newthree-month
period ended March 31, 2008, compared to $4.9 million in cash provided
during the same period in 2007. In the first quarter of 2008, the Company
increased its outstanding line of credit by $1.9 million for working
capital needs compared to an increase of $5.6 million in its outstanding
line of credit for the same period in 2007.
Senior Revolving Credit Facility:
Our Credit Facility is guaranteed by substantially all of
Company's subsidiaries and is secured by a lien on substantially all of the
Company's assets. The New Credit Facility replaced a $35 million senior
revolving credit facility that would have expiredused primarily to satisfy changes in July 2009.
21
MD&A/Results of Operations (continued)
- --------------------------------------
The New Credit Facility may be used for working capital
issuancesneeds and requirements for the issuance of letters of credit. At March 31,
2008, the capacity of the Credit Facility was $50.0 million with an
outstanding balance of $29.7 million and one letter of credit or other lawful corporate purposes.outstanding
in the amount of $247,000 to cover self-insured deductibles under both our
general liability and workers' compensation insurance policies. The letter
of credit was issued in November 2007 and covers the policy period from
September 30, 2007 through September 30, 2008. The remaining borrowings
available under the Credit Facility as of March 31, 2008 were $20.1 million
after consideration of loan covenant restrictions.
Availability under our Credit Facility is as follows:
March 31, December 31, March 31,
2008 2007 2007
------- ------- -------
(Dollars in Thousands)
---------------------------------
Credit Facility $50,000 $50,000 $35,000
Amounts borrowed 29,678 27,835 29,616
Letters of credit 247 247 --
------- ------- -------
Availability under Credit Facility $20,075 $21,918 $ 5,384
======= ======= =======
16
Management's Discussion and Analysis (continued)
- ------------------------------------------------
The Credit Agreement
contains customary affirmative and negative covenants that place certain
limitations and restrictions on the Company. These covenants place certain
limitations onFacility requires the Company including limits on new debt, mergers, asset
sales, investments, and fixed price contracts along with restrictions on
certain distributions. The Company must alsoto maintain certain financial
covenants as of the end of each calendar month, including the following:
o Leverage Ratio not to exceed 3.00 to 1.00;
o Asset Coverage Ratio to be less than 1.00 to 1.00; and
o Net Worth must be greater than the sum of $40.1 million plus 75%
of positive Net Income earned in each fiscal quarter after
January 1, 2007 plus 100% of the net proceeds of any offering,
sale or other transfer of any capital stock or any equity
securities.
AtThe Credit Facility also contains covenants that place certain limitations
on the Company's option, amounts borrowedCompany including limits on new debt, mergers, asset sales,
investments, fixed-price contracts, and restrictions on certain
distributions. The Company was in compliance with all covenants under the
New Credit Facility
will bear interest at LIBOR or an Alternate Base Rate, plus in each case,
an additional margin based on the Leverage Ratio. The Alternate Base Rate
is the greater of the Prime Rate or the Fed Funds Effective Rate, plus
1.0%. The additional margin ranges from 0% on the Alternate Base Rate loans
and 1.50% to 2.0% on the LIBOR-based loans.
Cash Flow
---------
The Company believes that it has available the necessary cash required for
operations for the next 12 months. Cash and the availability of cash could
be materially restricted if circumstances prevent the timely internal
processing of invoices, if amounts billed are not collected, if project mix
shifts from cost reimbursable to fixed cost contracts during significant
periods of growth, if the Company was to lose one or more of its major
customers, if demand for the Company's services decreases, or if the
Company is not able to meet the covenants of the Comerica Credit Facility.
If any such event occurs, the Company would be forced to consider
alternative financing options.
Operating activities:
Net cash used in operating activities was $4.4 million for the six months
ended June 30, 2007, compared with net cash used of $2.0 million in the
same period in 2006. For the three months ended June 30, 2007, the
Company's operating activities provided approximately $500,000 of cash
compared with approximately $1.2 million of cash provided during the same
period in 2006. The credit facility increased from $29.6 million as of March 31, 20072008.
17
Management's Discussion and from $13.5 million as of June 30, 2006 to $30.9 million
as of June 30, 2007.
Our average days of sales outstanding ("DSO") was 70 days for the three
months ended June 30, 2007 compared to 64 days for the comparable three
month period in 2006 and 69 days for the period ended December 31, 2006.
The Company revised the method used for calculating DSO changing from
annualized average revenue and accounts receivable totals to average
quarterly revenue and accounts receivable totals. The average DSO for all
periods referenced herein and for all future periods have been and will be
calculated under the new method.
The decrease in our cash needs for the three months ended June 30, 2007 was
primarily due to:
1) an increase in net income;
2) an increase in accrued compensation and benefits due to timing of
the quarter's last bi-weekly payroll;
3) an increase in billings in excess of costs on fixed price
engineering projects; offset by:
a) an increase in trade receivables due to increased revenue
and past due accounts;
b) an increase in costs in excess of billings in our systems
manufacturing segment; and
c) a decrease in accrued liabilities due to subcontractor
payments made against reserves related to the fixed price
contract losses in 2006.
22
MD&A/Results of OperationsAnalysis (continued)
- --------------------------------------
Accounts payable are not expected to materially impact cash during the
third quarter as the two fixed price EPC projects are scheduled to be
completed during that period with final billings and retention collections
expected to have a positive cash impact. A continued increase------------------------------------------------
Engineering Segment Results
- ---------------------------
Three Months Ended
March 31,
-------------------------------------------
2008 2007
-------------------- ---------------------
(Dollars in costs and
estimated earnings in excess of billings is not expected during the third
quarter even though improvements can only be made with more favorable
contractual terms.
Investing activities:
Net cash used in investing activities was $302,000 for the six months ended
June 30, 2007, compared with net cash used of $7,071,000 in the same period
in 2006. In the first six months of 2006, the Company acquired the assets
of ATI, Inc. for $750,000 cash and a note payable and the Company acquired
the assets of WRC for $10.1 million. That transaction included $4.3 million
assumption of debt, $2 million in cash, notes payable of
$2.4 million and ENGlobal shares of common stock valued at $1.4 million.
The Company also used cash for capital expenditures in the six months ended
June 30, 2007 of $1.1 million and $1.6 million in the comparable prior year
period.
Financing activities:
Net cash provided by financing activities was $5.6 million for the six
months ended June 30, 2007, compared with net cash provided of $9.8 million
in the same period in 2006. In the first six months of 2007, the Company
increased its outstanding credit facility by $7.0 million for working
capital needs compared to an increase in the credit facility of $9.7
million in the same period in 2006.
Asset Management
----------------
The Company's cash flow from operations has been affected primarily by the
timing of its collection of trade accounts receivable. The Company
typically sells its products andThousands)
-------------------------------------------
Gross revenue $ 52,035 $ 51,442
Less intercompany revenue (6) 7
----------- -----------
Total revenue $ 52,029 $ 51,449
=========== ===========
Detailed revenue:
Detail-design 37,935 72.9% 32,796 63.8%
Field services on short-term credit terms and
seeks to minimize its credit risk by performing credit checks and
conducting its own collection efforts. The Company had net trade accounts
receivable of $69.6 million and $60.2 million at June 30, 2007 and December
31, 2006, respectively. The DSO in trade accounts receivables was 70 days
at June 30, 2007 and at December 31, 2006.
23
Engineering Segment Results (continued)
- ---------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------- -------------------------------------
2007 2006 2007 2006
----------------- ----------------- ----------------- -----------------
(dollars in thousands)
-----------------------------------------------------------------------------
Gross revenue $ 84,263 $ 69,869 $ 160,706 $ 132,499
Less intercompany revenue (325 (117) (619) (160)
--------- --------- --------- ---------
Total Revenue: $ 83,938 100% $ 69,752 100% $ 160,087 100% $ 132,339 100%
Gross profit: $ 13,967 16.6% $ 10,189 14.6% $ 26,996 16.8% $ 17,986 13.6%
Operating SG&A expense: $ 3,472 4.1% $ 3,593 5.2% $ 7,000 4.4% $ 6,500 4.9%
Operating income: $ 10,495 12.5% $ 6,596 9.5% $ 19,996 12.5% $ 11,486 8.7%
12,988 25.0% 13,758 26.7%
Procurement services 34 0.1% 1,332 2.6%
Fixed-price 1,072 2.0% 3,563 6.9%
----------- ------- ----------- -------
Total revenue: $ 52,029 100.0% $ 51,449 100.0%
Gross profit: $ 9,882 19.0% $ 9,164 17.8%
Operating SG&A expense: $ 1,295 2.5% $ 1,867 3.6%
----------- -----------
Operating income: $ 8,587 16.5% $ 7,297 14.2%
Overview of Engineering Segment:
Our engineeringEngineering segment continues to benefit from a large project load
generated primarily by its downstream clients and to a lesser extent by its
midstream clients. The industry's refining segment continues to be very
active, supplying a large percentage of the Company's backlog. ENGlobal is
benefiting from the renewed interest of its chemical/petrochemical clients
in maintenance and retrofitsmall capital projects as product margins in this
marketplace improve.
Even though some of our subsidiary entities may focus more on one
discipline than another, each of the entities provides services to our
clients in the petrochemical and energy industries. As our clients have
downsized and began limiting the number of vendors and subcontractors, we
have attempted to become a "one-stop shop" solution for an entire project
or large portion of that project with more than one entity providing a
portion of the work, while other times only one entity may provide one or
more portions of the entire project. For example, we may have a project in
which WRC provides right of way services, EEI provides engineering and
design services, and ECR provides construction management and inspection
services. The client would view the work as one project under one contract.
We provide these services based on the client requirements.
We provide services to a wide range of industrial sectors including:
petroleum refining, gas processing, pipeline and product movement,
petrochemical, production, sulfur processing, manufacturing, chemical
exploration, and co-generation. Each of our subsidiaries can service
customers in these industries. The various entities also share similar
processes for delivery of services.
All of our entities are greatly impacted by the general availability of
qualified engineers and other technical professional staff and employees
are often shared among entities as needed.
Revenue
Year over yearRevenue:
Engineering segment revenue increased $27.8$0.6 million, or 21.0%1.2%, to $160.1$52.0
million for the sixthree months ended June 30, 2007March 31, 2008 from $132.3$51.4 million for
the comparable prior year period.
The increase in engineeringEngineering segment revenue resultedwas primarily frombrought about by
increased activity in the engineering and construction markets. Refining
related activity has been particularly strong, including projects to satisfy environmental mandates, 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 ethanol, biodiesel, coal to liquids,coal-to-liquids,
petroleum coke to ammonia, and other biomass processes.
The acquisition of WRC in May 2006, togetherOur detail-design services proved strong with our
clients' increased demand for in-plant and inspection resources, stimulated
growth in our staffing services division.
24
Engineering Segment Results (continued)
- ---------------------------------------
The following table illustrates the composition of the Company's revenue
mix quarter over quarter for the six months ended June 30, 2007 and 2006,
and provides a comparison of the changes in revenue and revenue trends
period over period.
Six Months Ended June 30,
--------------------------------------------------------------
2007 % rev 2006 % rev $ change % change
-------- ----- -------- ----- -------- --------
(dollars in millions)
Detail-design $ 72.0 45% $ 56.0 43% $ 16.0 29 %
Field services & inspection 73.3 46% 44.6 34% 28.7 64 %
Procurement & construction 6.8 4% 16.9 13% (10.1) (60)%
Design-build fixed price 8.0 5% 14.8 10% (6.8) (46)%
-------- -------- --------
$ 160.1 100% $ 132.3 100% $ 27.8 21 %
======== ======== ========
o The largest increase in revenue came from field services and
inspection activity which increased $28.7revenue increasing 15.6%, or
$5.1 million, or
approximately 64%, to $73.3 million for the six months ended June
30, 2007 from $44.6 million for the comparable prior year period.
o Detail-design services increased $16.0 million, or approximately
29% for the six months ended June 30, 2007. Our core engineering
segment's activities accounted for approximately 91% of
engineering's total revenue mix during the six months ended June
30, 2007 compared to approximately 77% for the comparable prior
year period.
o Revenue from non-labor procurement and construction activity
decreased $10.1 million from $16.9 million during the six months
ended June 30, 2006 to $6.8 million during the six months ended
June 30, 2007.
o The design-build fixed price revenue decreased $6.8 million, or
(46)%, from $14.8 million for the six months ended June 30, 2006
to $8.0 million for the same period in 2007 and accounted for
approximately 5% of engineering's total revenue.
Quarter over quarter revenue increased $14.1 million, or 20.2%, to $83.9
million for the three months ended June 30, 2007 from $69.8 million for the
comparable prior year period. The following table illustrates the
composition of the Company's revenue mix quarter over quarter for the three
months ended June 30, 2007 and 2006, and provides a comparison of the
changes in revenue and revenue trends period over period:
Three Months Ended June 30,
---------------------------------------------------------
2007 % rev 2006 % rev $ change % change
-------- ----- -------- ----- -------- --------
(dollars in millions)
Detail-design $ 36.1 43% $ 28.4 41% $ 7.7 27 %
Field services & inspection 38.2 45% 25.0 36% 13.2 53 %
Procurement & construction 5.5 7% 6.3 9% (0.8) (13)%
Design-build fixed price 4.2 5% 10.1 14% (5.9) (58)%
-------- -------- --------
$ 84.0 100% $ 69.8 100% $ 14.2 20 %
======== ======== ========
Gross Profit:
Gross profit increased $9.0 million, or 50.0%, to $27.0 million for the six
months ended June 30, 2007 from $18.0 million for the comparable prior year
period. As a percentage of revenue, gross profit increased by 3.2% to 16.8%
from 13.6% for the six months ended June 30, 2007 and 2006, respectively.
Of the overall $9.0 million increase in gross profit, approximately $3.8
million was attributable to the $27.8million increase in total revenue, and
approximately $5.2 million was attributable to improved margins. The
increase in margins can be attributed to the reduced activity in low
margin/high dollar procurement projects being replaced with higher margin
core revenue derived from labor activity. Included in gross profit for the
six months ended June 30, 2007, were $456,000 of additional losses related
to the completion of the two fixed price contracts.
25
Engineering Segment Results (continued)
- ---------------------------------------
Gross profit increased $3.8 million, or 37.3%, to $14.0 million for the
three months ended June 30, 2007 from $10.2 million for the comparable
prior year period. As a percentage of revenue, gross profit increased by
2.0% to 16.6% from 14.6% for the three months ended June 30, 2007 and 2006,
respectively. Of the overall $3.8 million increase in gross profit,
approximately $2.1 million was attributable to the $14.1million increase in
total revenue, and approximately $1.7 million was attributable to improved
margins. The increase in margins can be attributed to the reduced activity
in low margin/high dollar procurement projects being replaced with higher
margin core revenue derived from labor activity. Included in gross profit
for the three months ended June 30, 2007, were $456,000 of additional
losses related to the completion of the two fixed price contracts.
At June 30, 2007, the Company had outstanding unapproved change
orders/claims of approximately $18.6 million. The Company recorded $1.2
million in revenue during the year ended December 31, 2006 related to these
claims. No additional amounts have been recognized during 2007 related to
these claims. Generally, collection of amounts related to unapproved change
orders and claims is expected within twelve months. However, clients
generally will not pay these amounts until final resolution of related
claims, thus accordingly, collection of these amounts may extend beyond one
year. In the future, if the Company determines collection of any unapproved
change order/claim is not probable, it will post a charge to earnings in
the period such determination is made.
Selling, General, and Administrative:
As a percentage of revenue, SG&A expense decreased 0.5% to 4.4% for the six
months ended June 30, 2007 from the comparable prior year period. SG&A
expense increased $0.5 million, or 7.7%, to $7.0 million for the six months
ended June 30, 2007 from $6.5 million for the comparable prior year period.
As a percentage of revenue, SG&A expense decreased 1.1% to 4.1% for the
three months ended June 30, 2007 from 5.2% for the comparable prior year
period. SG&A expense decreased $0.1 million, or (2.8)%, to $3.5 million for
the three months ended June 30, 2007 from $3.6 million for the comparable
prior year period.
Operating Income:
Operating income increased $8.5 million, or 73.9%, to $20.0 million for the
six months ended June 30, 2007 from $11.5 million for the comparable prior
year period. As a percentage of revenue, operating income increased to
12.5% for the six months ended June 30, 2007 from 8.7% for the comparable
prior year period.
Operating income increased $3.9 million, or 59.1%, to $10.5 million for the
three months ended June 30, 2007 from $6.6 million for the comparable prior
year period. As a percentage of revenue, operating income increased to
12.5% for the three months ended June 30, 2007 from 9.5% for the comparable
prior year period.
26
Systems Segment Results
- -----------------------
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------- --------------------------------------
2007 2006 2007 2006
------------------ --------------- ---------------- ------------------
(dollars in thousands)
-------------------------------------------------------------------------------
$ 5,767 $ 5,576 $11,277 $ 9,888
Gross revenue
Less intercompany revenue 129 262 129 534
------- ------- ------- -------
Total revenue: $ 5,638 100.0 % 5,314 100.0% $11,148 100.0 % $ 9,354 100.0 %
Gross profit: $ 252 4.5 % $ 539 10.1% $ 501 4.5 % $ 964 10.3 %
------- ------- ------- -------
Operating SG&A expense: 312 5.5 % 484 9.1% 741 6.7 % 1,091 11.7 %
------- ------- ------- -------
Operating income: (60) (1.1)% 55 1.0% (240) (2.2)% (127) (1.4)%
======= ======= ======= =======
Overview of Systems Segment:
The systems segment began a detailed review process in the fourth quarter
of 2006. As a continuation of this initiative in the first six months of
2007, the Company initiated more detailed project cost control/forecasting
was initiated on all active lump sum projects in order to identify
potential areas of remediation and improve financial results.
Revenue:
Revenue increased approximately $1.7 million, or 18.1%, to $11.1$37.9 million for the six months ended June 30, 2007period ending March 31, 2008 from
$9.4$32.8 million for the comparable prior year period.period in 2007. As a percentage of total
Engineering segment revenue, detail-design revenue increased 9.1% to 72.9%
in 2008 from 63.8% in 2007.
Our field services revenues remained relatively stable with a decrease of
5.8%, or $0.8 million, from $13.8 million for the period ended March 31,
2007 to $13.0 million for the comparable period in 2008. As a percentage of
total Engineering segment revenue, field services revenue decreased 1.7% to
25.0% in 2008 from 26.7% in 2007.
18
Management's Discussion and Analysis (continued)
- ------------------------------------------------
Engineering Segment Results (continued)
- ---------------------------------------
Revenue from procurement services decreased 97.5%, or $1,298,000, from
$1,332,000 for the period ended March, 31 2007 to $34,000 for the
comparable period in 2008. As a percentage of total Engineering segment
revenue, procurement services revenue decreased 2.5% to 0.1% in 2008 from
2.6% in 2007. 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 71.4%, or $2.5 million, from $3.6 million in
2007 to $1.1 million in 2008. As a percentage of total Engineering segment
revenue, fixed-price revenue decreased 4.9% to 2.0% in 2008 from 6.9% in
2007 as the Company neared completion of certain EPC contracts.
Gross Profit:
Our Engineering segment's gross profit increased approximately $0.3$0.7 million, or 5.7%7.6%, to
$5.6$9.9 million for the three months ended June 30, 2007March 31, 2008 from $5.3$9.2 million
for the comparable prior year period.
A general turnaroundperiod in 2007. As a percentage of total Engineering
segment revenue, gross profit increased by 1.2% to 19.0% from 17.8% for the
three-month periods ended March 31, 2008 and 2007, respectively. Of the
overall $0.7 million increase in gross profit, approximately $103,000 was
attributable to the $0.7 million increase in total revenue, plus
approximately $615,000 in improved margins. The increase in margins can be
attributed to the reduced activity in low margin/high dollar procurement
projects, as these projects are being replaced with higher margin, core
revenue derived from labor activity.
Selling, General, and Administrative:
Our Engineering segment's SG&A expense decreased $0.6 million, or 31.6%, to
$1.3 million for the three months ended March 31, 2008 from $1.9 million
for the comparable period in 2007. The quarter-over-quarter decrease in the
oilEngineering segment's SG&A expense came from approximately $0.3 million in
employee and gas industry, togetherassociated costs re-classified to direct expense, $0.2 million
in non-recurring costs associated with closing the acquisitionDallas office during the
quarter ended March 31, 2007, and $0.1 million in lower bad debt expense.
As a percentage of Analyzer Technology International, Inc. ("ATI") in January
2006 hastotal Engineering segment revenue, the segment's SG&A
costs decreased by 1.1% to 2.5% from 3.6% for the three-month periods ended
March 31, 2008 and 2007, respectively.
Operating Income:
Operating income for the Engineering segment increased the demand for systems services. Another factor
positively affecting systems business is that the computer-based
distributed control systems equipment used for facility plant automation
becomes technologically obsolete over time, requiring ongoing replacement
of these systems.
Gross profit:
Gross profit decreased approximately $463,000,$1.3 million, or
48.0%17.8%, to $501,000$8.6 million for the sixthree months ended June 30, 2007March 31, 2008 from $964,000$7.3
million for the comparable prior year period. As a percentage of total
Engineering segment revenue, gross profit decreasedoperating income increased by 2.3% to 4.5%
from 10.3% for the respective periods. Lower margins on fixed price work
accounted for 3% of the decrease. The remainder was caused by increased
project management costs and increased variable costs associated with labor
to perform proposals.
Gross profit decreased approximately $287,000, or 53.2%, to $252,00016.5%
for the three months ended June 30,March 31, 2008 from 14.2% for the comparable
prior year period.
19
Management's Discussion and Analysis (continued)
- ------------------------------------------------
Construction Segment Results
----------------------------
Three Months Ended
March 31,
-----------------------------------------
2008 2007
------------------ --------------------
(Dollars in Thousands)
-----------------------------------------
Gross revenue $ 27,017 $ 14,635
Less intercompany revenue (117) (850)
--------- ---------
Total revenue $ 26,900 $ 13,785
========= =========
Detailed revenue:
Inspection 23,394 87.0% 10,703 77.7%
Construction services 3,506 13.0% 3,082 22.3%
--------- ------ --------- ------
Total revenue: $ 26,900 100.0% $ 13,785 100.0%
Gross profit: $ 2,028 7.5% $ 2,082 15.1%
Operating SG&A expense: $ 703 2.6% $ 627 4.5%
Operating income: $ 1,325 4.9% $ 1,455 10.6%
Overview of Construction Segment:
Revenue:
Our Construction segment's revenue increased $13.1 million, or 94.9%, to
$26.9 million for the three-month period ended March 31, 2008 from $539,000$13.8
million for the comparable prior year period. We have experienced
significant growth in our inspection related revenue due to increased
capital spending mainly by our pipeline clients. Also contributing to the
increase in construction services revenue has been our ability to increase
our market share.
Gross profit:
Our Construction segment's gross profit decreased approximately $0.1
million, or 4.8%, to $2.0 million for the three months ended March 31, 2008
from $2.1 million for the comparable prior year period and, as a percentage
of total Construction segment revenue, gross profit decreased by 7.6% to
4.5%7.5% from 10.1%15.1% for the respective periods. The decrease in gross profit
percentage is primarily attributable to the major increase in revenue
related to our growth in inspection services where increased employee
related costs and competitive pressure on bill rates resulted in lower
margins. While inspection related revenues increased $12.7 million, or
approximately 119%, to $23.4 million for the three months ended March 31,
2008 from $10.7 million for the comparable prior year period, the
contribution to gross profit was effectively unchanged. Increased variable
costs associated with labor to perform proposals, project controls and
project management also contributed to the decrease in gross profit.
Selling, General, and Administrative:
Our Construction segment's SG&A expense increased approximately $0.1
million, or 16.7%, to $0.7 million for the three months ended March 31,
2008 from $0.6 million for the same period in 2007 and, as a percentage of
total Construction segment revenue, SG&A expense decreased by 1.9% to 2.6%
from 4.5% for the respective periods.
Operating Income:
Our Construction segment's operating income decreased $0.2 million, or
13.3%, to $1.3 million for the three months ended March 31, 2008 from $1.5
million for the comparable prior year period. As a percentage of total
Construction segment revenue, operating income decreased by 5.7% to 4.9%
for the three months ended March 31, 2008 from 10.6% for the comparable
prior year period.
20
Management's Discussion and Analysis (continued)
- ------------------------------------------------
Automation Segment Results
- --------------------------
Three Months Ended
March 31,
-----------------------------------------
2008 2007
------------------ -------------------
(Dollars in Thousands)
-----------------------------------------
Gross revenue $ 10,557 $ 9,823
Less intercompany revenue (155) (285)
--------- ---------
Total revenue $ 10,402 $ 9,538
========= =========
Detailed revenue:
Fabrication 6,683 64.3% 5,510 57.8%
Non-fabrication 3,719 35.7% 4,028 42.2%
--------- ------ --------- ------
Total revenue: $ 10,402 100.0% $ 9,538 100.0%
Gross profit: $ 1,044 10.0% $ 781 8.2%
Operating SG&A expense: $ 632 6.1% $ 845 8.9%
Operating income: $ 412 4.0% $ (64) (0.7%)
Overview of Automation Segment:
Revenue:
Our Automation segment's revenue increased approximately $0.9 million, or
9.5%, to $10.4 million for the three-month period ended March 31, 2008 from
$9.5 million for the comparable prior year period.
Gross profit:
The Automation segment's gross profit increased approximately $0.2 million,
or 25.0%, to $1.0 million for the three months ended March 31, 2008, from
$0.8 million for the comparable prior year period and, as a percentage of
total Automation segment revenue, gross profit increased by 1.8% to 10.0%
from 8.2% for the respective periods. During the first quarter of 2007, we
experienced reduced margins on a few larger lump sum projects that were not
repeated in the first quarter of 2008. We also are performing more detailed
project reviews and analysis, which have contributed to higher gross
profits.
Selling, General, and Administrative:
Our Automation segment's SG&A expense decreased approximately $350,000,$0.2 million,
or 32.1%25.0%, to $741,000$0.6 million for the sixthree months ended June 30, 2007March 31, 2008 from
$1,091,000$0.8 million for the same period in 20062007 and, as a percentage of total
Automation segment revenue, SG&A expense decreased by 2.8% to 6.7%6.1% from
11.7%8.9% for the respective periods. Salaries and related expenses decreased
by $535,000 for a variety of reasons. The expenses of four sales persons
were moved to Corporate SG&A from Operations; some salaries were moved to
direct costs variable; and the Company's Systems segment personnel
decreased. Amortization expense increased by $290,000 as a resultApproximately $145,000 of the non-compete intangible relatedreduction of
SG&A expenses was due to the ATI acquisition. Facilities and
related expenses decreased by $27,000 as a resultreduction in overhead staff.
Operating Income:
The Automation segment recorded an operating income of consolidating the
offices of ATI and Systems.
27
Systems Segment Results
- -----------------------
SG&A expense decreased approximately $172,000, or 35.5%, to $312,000$0.4 million for the
three months ended June 30, 2007 from $484,000 for the same period in
2006 and, as a percentage of revenue, SG&A expense decreased to 5.5% from
9.1% for the respective periods as a result of the measures described for
the six months ended above.
Operating Income:
The systems segment recorded an operating loss of $240,000 for the six
months ended June 30, 2007March 31, 2008 compared to an operating loss of $127,000($0.1)
million for the six monthsthree-month period ended June 30, 2006.
The systemsMarch 31, 2007. As a percentage of
total Automation segment recorded anrevenue, operating loss of $60,000income increased by 4.7% to
4.0% for the three months ended June 30, 2007 comparedMarch 31, 2008 from (0.7)% for the
comparable prior period. Overall, improved control of direct costs and
overhead contributed to the increased operating income of $55,000the Automation
segment during the three months ended March 31, 2008.
21
Management's Discussion and Analysis (continued)
- ------------------------------------------------
Land Segment Results
- --------------------
Three Months Ended
March 31,
-----------------------------------------
2008 2007
------------------- -------------------
(Dollars in Thousands)
-----------------------------------------
Gross revenue $ 8,835 $ 6,887
Less intercompany revenue - -
-------- --------
Total Revenue: $ 8,835 100.0% $ 6,887 100.0%
Gross profit: $ 1,392 15.8% $ 1,250 18.2%
Operating SG&A expense: $ 677 7.7% $ 583 8.5%
Operating income: $ 715 8.1% $ 667 9.7%
Overview of Land Segment:
Revenue:
The Land segment's revenue increased approximately $1.9 million, or 27.5%,
to $8.8 million for the three-month period ended March 31, 2008 from $6.9
million for the comparable prior year period. The Land segment was formed
out of our acquisition of WRC Corporation in May 2006, which was renamed
ENGlobal Land, Inc. in January, 2008.
Gross profit:
The Land segment's gross profit increased approximately $0.1 million, or
7.7%, to $1.4 million for the three months ended June 30, 2006.
28March 31, 2008 from $1.3
million for the comparable prior year period and, as a percentage of total
Land segment revenue, gross profit decreased by 2.4% to 15.8% from 18.2%
for the respective periods. As we focused on growing business in the Land
segment, we increased the number of personnel by approximately 37% as of
March 31, 2008 compared to our staffing level at March 31, 2007. Our gross
profit margins have decreased due to the resulting increased costs of labor
and expenses that we were not able to immediately pass through to clients
under existing contracts. We are currently renegotiating billing rates on
existing contracts to accommodate these increased costs.
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 March 31, 2008 from $0.6
million for the same period in 2007 but, as a percentage of total Land
segment revenue, SG&A expense decreased by 0.8% to 7.7% from 8.5% for the
respective periods. Increases in SG&A costs for the three months ended
March 31, 2008, were related to marketing the ENGlobal brand name as WRC
Corporation was renamed ENGlobal Land, Inc. in January 2008; travel and
marketing expenses were $40,000 higher; bad debt expense grew by $25,000
and another $19,000 was attributable to increased office expenses.
Operating Income:
The Land segment recorded an operating income of $0.7 million for the three
months ended March 31, 2008, compared to an operating income of $0.7
million for the three-month period ended March 31, 2007. As a percentage of
total Land segment revenue, operating income decreased 1.6% from 9.7% for
the three months ended March 31, 2007 to 8.1% for the same period in 2008.
22
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. As of June 30, 2007, $30.9March 31,
2008, $29.7 million had been borrowed under the Comerica Credit Facility, accruing
interest at 8.25%5% per year, excluding amortization of prepaid financing costs.
A 10% increase in the short-term borrowing rates on the Comerica
Credit Facility
outstanding as of June 30, 2007March 31, 2008 would be 8350 basis points. Such an increase
in interest rates would increase our annual interest expense by
approximately $256,000,$148,500, 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 consolidated
financial statements. Currently, we do not engage in foreign currency
hedging activities.
ITEM 4. CONTROLS AND PROCEDURES
a.a) Evaluation of Disclosure Controls and Procedures
Our management is responsible for establishing and maintaining our
disclosure controls and procedures. As of June 30, 2007, we carried out an
evaluation, under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosureDisclosure controls and procedures or "disclosure controls." Disclosure controls are controls and other procedures of a
registrant designed to ensure that information required to be disclosed by the
registrant in ourthe reports filedthat it files or submits under the Securities Exchange Act of 1934 is
properly recorded, processed, summarized, and reported, within the time periods
specified in the U.S. 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 the CEOits Chief Executive Officer and CFO,Chief Financial Officer,
as appropriate, to allow for timely decisions regarding required disclosure. In designingdisclosures.
We evaluated the effectiveness of the design and evaluating theoperation of our disclosure
controls and procedures management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assuranceas of achieving the desired control objectives, and
management isMarch 31, 2008, as required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
Based on the controls evaluation, our CEO and CFO have concluded that, as a
resultby Rule 13a-15 of the
matters discussedExchange Act. As described below, with respect to our internal control
over financial reporting, our disclosure controls as of June 30, 2007,material weaknesses were not effective.
A material weakness in internal control over financial reporting is a
significant deficiency, or combination of significant deficiencies, that
results in more than a remote likelihood that a material misstatement of
the annual or interim financial statements will not be prevented or
detected. Management's assessment identified the following material
weaknesses in our
internal control over financial reporting as of March 31, 2008. Based on the
evaluation described above, our Chief Executive Officer and Chief Financial
Officer have concluded that, as of March 31, 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, 2006,2007, we disclosed certain
material weaknesses in internal control over financial reporting, which remained outstandingare
identified below. Neither material weakness has been remediated as of June 30, 2007:
oMarch 31,
2008.
23
Deficiencies in the Company's Control Environment. Our control
environment did not sufficiently promote effective internal control
over financial reporting throughout the organization. Specifically, we
had a shortage of supportEnvironment and resources in our accounting department,
which resulted in insufficient: (i) documentation and communication of
our accounting policies and procedures; and (ii) internal audit
processes of our accounting policies and procedures.
29
o Deficiencies in the Company's Information Technology Access Controls.
We did not maintain effective controls over preventing access by
unauthorized personnel to end-user spreadsheets and other information
technology programs and systems.
o Deficiencies in the Company's 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.
o DeficienciesSpecifically, 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 Controls Regarding Purchasesperiod-end
closing process for its 2007 Form 10-K; and
Expenditures. We did not maintain effective controls over the tracking
of our commitments and actual expenditures with- failure to effectively utilize third-party subsidiaries onspecialists in a
timely basis.
o Deficiencies in the Company's Controls Regarding Fixed-Price Contract
Information. We did not maintain effective controls over the complete,
accurate, and timely processing of information relatingmanner to the
estimated cost of fixed-price contracts.
o Deficiencies in the Company's Revenue Recognition Controls. We did not
maintain effective policies and procedures relating to revenue
recognition of fixed price contracts, which accounted for
approximately 11% of the Company's revenues in 2006.
o Deficiencies in the Company's Controls over Income Taxes. We did not
maintain sufficient internal controls to ensure that amounts provided
for in our financial statements for income taxes accurately reflected
our income tax position as of December 31, 2006.
o Management assessed the effectiveness of our internal control over
financial reporting as of December 31, 2006, but management did not
complete its assessment until March 2, 2007. Due to the lack of
adequate time to permit Hein to audit management's assessment, Hein
was unable to render an opinion on our assessment of the effectiveness
of our internal control over financial reporting as of December 31,
2006. Accordingly, management identified this as a material weakness.
Management's assessment process did not conclude in adequate time to
permit Hein to audit management's assessment due to a number of
factors, including: (i) our failure to prepare and plan for a timely
completion of management's assessment, including adding the resources
necessary to do so; and (ii) our failure to ensure that ourassist with complex or non-routine accounting
department was adequately staffed and sufficiently trained to meet
deadlines.
Except asissues.
As noted below under the heading "Remediation Initiatives,"above, no change in our internal control over financial reporting
(as defined in Rule
13a-15(f) under the Securities Exchange Act of 1934) occurred during the quarter ended June 30, 2007,March 31, 2008, that has materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting.
b.
Remediation Initiatives
Management, with oversight from the Audit Committee of the Board of Directors,
has been addressing the material weaknesses disclosed in its
2006 Annual Report on Form 10-K/A and is committed to effectively
remediating known weaknesses as expeditiously as possible. Thesediscussed 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
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 of America.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 have begunare
working with the Company's auditors 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 will monitoris
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 plansefforts include:
30
o We plan to hire additional personnelengagement of various third-party consultants to assist us with
documentingspecific technical accounting issues;
o engagement of third-party consultants to provide valuation services in
accordance with SFAS 142;
o implementation of quarterly and communicatingannual 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 policiesprocesses and procedures to ensure the
properare communicated and consistent application of those policies and procedures
throughout the Company. Recruitment for these positions has begun and
the selection process is ongoing.
o We plan to implement formal processes requiring periodic
self-assessments, independent tests, and reporting of our personnel's
adherence to our accounting policies and procedures.
o We plan to design effective policies and procedures to control
security of and access to spreadsheet information. If necessary, we
will also consider implementing a software solution with automatic
control checkpoints for day-to-day business processes.
o We plan to (i) require additional training for our current accounting
personnel; (ii) to hire additional accounting personnel to enable the
allocation of job functions among a larger group of accounting staff;
(iii) to engage outside consultants with technical accounting
expertise, as needed; and (iv) to consider restructuring our
accounting department, each to increase the likelihood that our
accounting personnel will have the resources, experience, skills, and
knowledge necessary to effectively perform the accounting system
functions assigned to them. During the second quarter, the Company
conducted training for the accounting staff, with an emphasis to
improve various accounting functions going forward.
o We plan to improve procurement and operational efficiencies by
implementing a software system and a matrix organization to more
completely, accurately, and timely track commitments on Company-wide
purchase and expenditure transactions.
o We plan to improve revenue recognition policies and procedures
relating to fixed-price contracts by evaluating the level of economic
success achieved by past fixed-price contracts and by stressing
throughout the Company the importance of (i) accurately estimating
costs, (ii) timely updating cost estimates to reflect the accuracy of
the cost savings, (iii) accurately estimating expected profit, (iv)
timely identifying when a project's scope changes, (v) promptly
reporting man hours and costs in excess of those originally estimated;
and (vi) closely scrutinizing the bid process.
o In the first six months of 2007, we have begun to train personnel to
effectively implement and evaluate the overall design of the Company's
fixed-price project control processes. Specifically, we plan to
enhance and tighten controls as they relate to the initial bid process
and the attendant recognition and management of risk by only bidding
on large procurement and construction activities on a cost plus basis.
Management recognizes that many of these enhancements require continual
monitoring and evaluation for effectiveness. The development of these
actions is an iterative process and will evolve as the Company continues to
evaluate and improve our internal controls over financial reporting. In
conjunction with the Company's SOX Section 404 Steering Committee,
management will review progress on these activities on a consistent and
ongoing basis at the Chief Executive Officer and senior management level in
conjunction with our Audit Committee. We have also begun to take additional
steps to elevate Company awareness about and communication of these
important issues through formal channels such as Company meetings,
departmental meetings, and training.
During the second quarter, the Company's external auditors began its review
of the 2007 internal controls audit. In July 2007, the Company hired a
third-party consultant to oversee the testing of its internal financial and
information technology controls. A quarterly review by consultants will
assist the Company with its remediation plan will assist its independent
auditors in their preparation for the final assessment in the third and
fourth quarters, allowing for any remediation before December 31, 2007.
31reinforced.
24
PART II. - OTHER INFORMATION
----------------------------
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company and its subsidiaries become parties to
various legal proceedings arising in the ordinary course of normal business
activities. While we cannot predict the outcome of these proceedings, in
our opinion and based on reports of counsel, any liability arising from
such matters, individually or in the aggregate, is not expected to have a
material effect upon the consolidated financial position or operations of
the Company.
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this report, you should
carefully consider the factors discussed in Part I, "Item 1A. Risk Factors"
in our 2006 Annual Report on Form 10-K.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 risks facing our Company. Additional risks and uncertainties not
currently known to us or that we currently deem to be immaterial also may
materially adversely affect our business, financial conditions or operating
results.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.In September 2005, Hurricane Rita destroyed our administrative offices in
Beaumont, Texas. Since that time, we have leased additional office space
near our existing Beaumont operations. In March 2008, agreement was met on
our building specifications in a build-to-suit lease agreement.
Groundbreaking commenced April 28, 2008, with plans for completion in the
fall of 2008.
ITEM 6. EXHIBITS
3.1 Amended and Restated Bylaws of ENGlobal Corporation, dated
November 6, 2007.
3.2 Amendment to Amended and Restated Bylaws of ENGlobal Corporation,
effective as of April 29, 2008.
10.1 Build-to-Suit Lease Agreement between Clay Real Estate
Development, L.P. and ENGlobal Corporate Services, Inc., executed
March 6, 2008.
10.2 Amended and Restated Option Pool Agreement between ENGlobal
Corporation and Alliance 2000 Ltd., effective December 20, 2006.
31.1 Certifications Pursuant to Rule 13a - 14(a) of the Exchange Act
of 2002 for the SecondFirst Quarter 20072008
31.2 Certifications Pursuant to Rule 13a - 14(a) of the Exchange Act
of 2002 for the SecondFirst Quarter 20072008
32 Certification Pursuant to Rule 13a - 14(b) of the Exchange Act
and 18U.S.C.18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 for the SecondFirst Quarter 2007
322008
25
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: August 7, 2007May 6, 2008
By: /s/ Robert W. Raiford
-------------------------
Robert W. Raiford
Chief Financial Officer and Treasurer
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