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, 2009
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 001-14217
654 N. Sam Houston Parkway E., Suite 400, Houston, TX 77060-6033
----------------------------------------------------- ----------
(Address of principal executive offices) (Zip code)
(281) 878-1000
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(Registrant's telephone number, including area code)
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Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shortened period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T during the
preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files).
Yes [ ] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer," and smaller reporting company in Rule 12b-2 of the Exchange Act. (check one):
Large Accelerated Filer [ ] Accelerated Filer [X] Non-Accelerated Filer [ ] Smaller Reporting Company [ ]
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the close of business of August 3, 2009.
$0.001 Par Value Common Stock 27,352,159 shares
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED JUNE 30, 2009
TABLE OF CONTENTS
Page
Number
------
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Income for the
Three Months and Six Months Ended June 30, 2009 and
June 30, 2008 4
Condensed Consolidated Balance Sheets at June 30, 2009
and December 31, 2008 5
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2009 and June 30, 2008 6
Notes to Condensed Consolidated Financial Statements 7-15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16-35
Engineering Segment Results 27
Construction Segment Results 30
Automation Segment Results 32
Land Segment Results 34
Item 3. Quantitative and Qualitative Disclosures About Market Risk 36
Item 4. Controls and Procedures 36
Part II. Other Information
Item 1. Legal Proceedings 37
Item 1A. Risk Factors 37
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 37
Item 3. Defaults Upon Senior Securities 37
Item 4. Submission of Matters to a Vote of Security Holders 37
Item 5. Other Information 38
Item 6. Exhibits 38
Signatures 39
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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,
---------------------- ----------------------
2009 2008 2009 2008
--------- --------- --------- ---------
Revenues $ 79,879 $ 136,011 $ 173,368 $ 234,177
Operating costs 72,832 115,710 155,837 199,530
--------- --------- --------- ---------
Gross profit 7,047 20,301 17,531 34,647
Selling, general and administrative 6,751 8,701 13,858 15,927
--------- --------- --------- ---------
Operating income 296 11,600 3,673 18,720
Other income (expense):
Other income (expense) (113) 59 151 85
Interest income (expense), net (120) (413) (331) (896)
--------- --------- --------- ---------
Income before income taxes 63 11,246 3,493 17,909
Provision for federal and state income taxes 13 4,544 1,430 7,204
--------- --------- --------- ---------
Net income $ 50 $ 6,702 $ 2,063 $ 10,705
========= ========= ========= =========
Net income per common share:
Basic $ 0.00 $ 0.25 $ 0.08 $ 0.40
Diluted $ 0.00 $ 0.24 $ 0.07 $ 0.39
Weighted average shares used in computing net income
per share (in thousands):
Basic 27,298 27,096 27,297 27,078
Diluted 27,585 27,641 27,542 27,576
See accompanying notes to interim condensed consolidated financial statements.
4
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ENGlobal Corporation
Condensed Consolidated Balance Sheets
(Unaudited)
(Dollars in thousands)
ASSETS
------
June 30, December 31,
2009 2008
--------- ---------
Current Assets:
Cash $ 849 $ 1,000
Trade receivables, net 61,136 96,023
Prepaid expenses and other current assets 1,827 2,392
Notes receivable 4,875 --
Current portion of long term notes receivable 50 59
Costs and estimated earnings in excess of billings on uncompleted contracts 7,455 6,913
Federal and state income taxes receivable 1,299 --
Deferred tax asset 4,281 4,281
--------- ---------
Total Current Assets $ 81,772 $ 110,668
Property and equipment, net 6,914 5,744
Goodwill 21,528 21,457
Other intangible assets, net 4,284 5,000
Long term notes receivable, net of current portion 8,620 8,636
Deferred tax asset, non-current 153 153
Other assets 910 1,047
--------- ---------
Total Assets $ 124,181 $ 152,705
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable $ 8,967 $ 18,830
Accrued compensation and benefits 16,836 24,432
Notes payable 234 1,058
Current portion of long-term debt and leases 1,045 1,861
Deferred rent 473 416
Billings and estimated earnings in excess of costs on uncompleted contracts 2,307 208
Federal and state income taxes payable -- 2,472
Other current liabilities 1,006 2,805
--------- ---------
Total Current Liabilities $ 30,868 $ 52,082
Long-Term Debt and Lease, net of current portion 14,196 23,857
--------- ---------
Total Liabilities $ 45,064 $ 75,939
--------- ---------
Commitments and Contingencies (Note 9)
Stockholders' Equity:
Common stock - $0.001 par value; 75,000,000 shares authorized; 27,352,159
and 27,294,852 shares issued and outstanding at June 30, 2009 and
December 31, 2008, respectively $ 27 $ 27
Additional paid-in capital 36,697 36,415
Retained earnings 42,503 40,439
Accumulated other comprehensive income (loss) (110) (115)
--------- ---------
Total Stockholders' Equity $ 79,117 $ 76,766
--------- ---------
Total Liabilities and Stockholders' Equity $ 124,181 $ 152,705
========= =========
See accompanying notes to interim condensed consolidated financial statements.
5
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ENGlobal Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
For the Six Months Ended
June 30,
------------------------
2009 2008
-------- --------
Cash Flows from Operating Activities:
Net income $ 2,063 $ 10,705
Adjustments to reconcile net income to net cash provided (used) by operating
activities:
Depreciation and amortization 2,611 2,245
Share-based compensation expense 345 816
(Gain)/Loss on disposal of property, plant and equipment 45 (85)
Deferred income taxes -- (180)
Changes in current assets and liabilities, net of acquisitions:
Trade accounts and other receivables 30,011 (28,745)
Costs and estimated earnings in excess of billings on uncompleted contracts (541) 2,477
Prepaid expenses and other assets 446 400
Accounts payable (9,863) 11,265
Accrued compensation and benefits (7,596) 5,016
Billings in excess of costs and estimated earnings 2,099 (575)
Other liabilities (1,876) (79)
Income taxes receivable/payable (3,771) 1,256
-------- --------
Net cash provided by (used in) operating activities $ 13,973 $ 4,516
-------- --------
Cash Flows from Investing Activities:
Property and equipment acquired (2,855) (1,336)
Proceeds from note receivable 24 76
Proceeds from sale of other assets 3 383
-------- --------
Net cash used in investing activities $ (2,828) $ (877)
-------- --------
Cash Flows from Financing Activities:
Net borrowings (payments) on line of credit (9,282) (2,317)
Proceeds from issuance of common stock -- 1,080
Borrowing (repayments) under capital lease (86) 500
Long-term debt repayments (1,933) (1,418)
-------- --------
Net cash (used in) provided by financing activities $(11,301) $ (2,155)
-------- --------
Effect of Exchange Rate Changes on Cash 5 (48)
-------- --------
Net change in cash (151) 1,436
Cash, at beginning of period 1,000 908
-------- --------
Cash, at end of period $ 849 $ 2,344
======== ========
See accompanying notes to interim condensed consolidated financial statements.
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NOTE 1 - BASIS OF PRESENTATION
Our condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The Company consolidates all of its wholly-owned subsidiaries and all significant inter-company accounts and transactions have been eliminated in the consolidation.
The condensed consolidated financial statements of ENGlobal Corporation (which may be referred to as "ENGlobal," the "Company," "we," "us," or "our") included herein are unaudited for the three month and six month periods ended June 30, 2009 and 2008, have been prepared from the books and records of the Company pursuant to the rules and regulations of the Securities and Exchange Commission, and in the case of the condensed balance sheet as of December 31, 2008, have been derived from the audited financial statements. These financial statements reflect all adjustments (consisting of normal recurring adjustments), which are, in the opinion of management, necessary to fairly present the results for the periods presented. Certain information and note disclosures, normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission. It is suggested that these condensed financial statements be read in conjunction with the Company's audited financial statements for the year ended December 31, 2008, included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission. The Company believes that the disclosures made herein are adequate to make the information presented not misleading.
NOTE 2 - CRITICAL ACCOUNTING POLICIES AND NEW ACCOUNTING PRONOUNCEMENTS
A summary of critical accounting policies is disclosed in Note 2 to the consolidated financial statements included in our 2008 Annual Report on Form 10-K. Our critical accounting policies are further described under the caption "Critical Accounting Policies" in Management's Discussion and Analysis of Financial Condition and Results of Operation in our 2008 Annual Report on Form 10-K.
On May 28, 2009, the FASB issued SFAS No. 165, Subsequent Events, which provides guidance on management's assessment of subsequent events. Historically, management had relied on U.S. auditing literature for guidance on assessing and disclosing subsequent events. SFAS No. 165 represents the inclusion of guidance on subsequent events in the accounting literature and is directed specifically to management, since management is responsible for preparing an entity's financial statements. SFAS No. 165 clarifies that management must evaluate, as of each reporting period, events or transactions that occur after the balance sheet date through the date that the financial statements are issued. SFAS No. 165 is effective prospectively for interim and annual financial periods ending after June 15, 2009. The Company has adopted the provisions of SFAS No. 165 for its reporting period ending June 30, 2009. The adoption of SFAS No. 165 did not have a material impact on the Company's financial condition or results of operations. The Company has evaluated subsequent events up through the date of the filing of this report with the SEC.
NOTE 3 - SHARE-BASED COMPENSATION
The Company's 1998 Incentive Plan ("Option Plan") that provided for the issuance of options to acquire up to 3,250,000 shares of common stock expired in June 2008. The Option Plan provided for grants of non-statutory options, incentive stock options, restricted stock awards and stock appreciation rights. All stock option grants were for a ten-year term. Stock options issued to executives and management generally vested over a four-year period, one-fifth at grant date and one-fifth at December 31 of each subsequent year until they are fully vested. Stock options issued to directors vested quarterly over a one-year period. As of August 3, 2009, 1,156,104 shares of Common Stock remained subject to outstanding awards previously granted under the Option Plan.
Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
The Company's stockholders approved a new 2009 Equity Incentive Plan
("Equity Plan") in June 2009 that provides for the issuance of up to
480,000 shares of common stock. The Equity Plan provides for grants of
non-statutory options, incentive stock options, restricted stock awards,
performance shares, performance units, restricted stock units and other
stock-based awards. Grants to executives and management, if any, will vest
over four-year periods, one-fifth at grant date and one-fifth at December
31 of each subsequent year until they are fully vested. Grants to directors
vest quarterly over a one-year period. The Company anticipates that the
shares available in this plan will be used primarily to compensate
independent directors.
Total share-based compensation expense in the amount of $197,000 and
$429,000 was recognized during the three months ended June 30, 2009 and
2008, respectively. Total share-based compensation expense in the amount of
$345,000 and $816,000 was recorded during the six months ended June 30,
2009 and 2008, respectively. Share-based compensation expense is recorded
in selling, general and administrative expense.
Stock Options
Compensation expense related to outstanding non-vested stock option awards
under the Option Plan of $481,000 had not been recognized at June 30, 2009.
This compensation expense is expected to be recognized over a
weighted-average period of approximately 22 months.
The following table summarizes stock option activity through the second
quarter of 2009:
Weighted Weighted Average
Average Remaining Aggregate
Number of Exercise Contractual Intrinsic
Options Price Term (Years) Value (000's)*
----------- ------------- ------------ --------------
Balance at December 31, 2008 1,173,206 $ 6.82 5.4 $ 626
Granted - - - -
Exercised - - - -
Canceled or expired (17,102) 8.89 - -
----------- ------------- ---------- ------------
Balance at June 30, 2009 1,156,104 $ 6.79 6.0 $ 1,077
=========== ============= ========== ============
Exercisable at June 30, 2009 1,045,504 $ 6.42 5.7 $ 1,077
=========== ============= ========== ============
*Based on average stock price through the second quarter of 2009 of $4.44
per share. The average stock price for the same period in 2008 was $10.11
per share. The total fair value of vested options outstanding as of June
30, 2009 and 2008 was $1.1 million and $5.0 million, respectively.
The total intrinsic value of options exercised was $967,000 for the six
months ended June 30, 2008. There were no options exercised during the six
months ended June 30, 2009.
Restricted Stock Unit Awards
On August 8, 2008, the Company granted restricted stock units equivalent to
6,420 shares of common stock to each of its three non-employee directors.
These restricted stock units, granted outside of the Option Plan, were
intended to compensate and retain the directors over the one-year service
period commencing July 1, 2008. The fair value of the award was $93,411 per
director based on the market price of $14.55 per share on the date granted.
Upon vesting, which was equally at quarterly intervals, the units were
convertible into cash based on the then market price of the Company's
shares at each respective vesting date. Each director's vested units were
settled for the cash value of $41,698 on or before July 17, 2009.
8
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Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
Restricted Stock Awards
On June 18, 2009, the Company granted restricted stock awards equivalent to
15,625 shares of common stock to each of its three non-employee directors.
These restricted stock awards are intended to compensate and retain the
directors over the one-year service period commencing July 1, 2009. The
fair value of the awards was $80,000 per director based on the market price
of $5.12 per share of the Company's stock on the date the awards were
granted. The restricted stock awards vest in equal quarterly installments
beginning on September 30, 2009, so long as the grantee continues to serve
as an independent director of the Company. Recognition of compensation
expense related to the restricted stock awards of $240,000 will commence in
the third quarter of 2009, to be expensed straight line over the vesting
period.
NOTE 4 - FIXED FEE CONTRACTS
Costs, estimated earnings and billings on uncompleted contracts consisted
of the following at June 30, 2009 and December 31, 2008:
June 30, December 31,
2009 2008
----------------------
(Dollars in thousands)
----------------------
Costs incurred on uncompleted contracts $ 30,685 $ 24,893
Estimated earnings (losses) on uncompleted contracts 6,054 5,280
-------- --------
Earned revenues 36,739 30,173
Less: billings to date 31,591 23,468
-------- --------
Net costs and estimated earnings in excess of billings
on uncompleted contracts $ 5,148 $ 6,705
======== ========
Costs and estimated earnings in excess of billings on uncompleted contracts $ 7,455 $ 6,913
Billings and estimated earnings in excess of cost on uncompleted contracts (2,307) (208)
-------- --------
Net costs and estimated earnings in excess of billings
on uncompleted contracts $ 5,148 $ 6,705
======== ========
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Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
NOTE 5 - LINE OF CREDIT AND DEBT
June 30, December 31,
2009 2008
----------------------
(Dollars in thousands)
----------------------
Schedule of Long-Term Debt:
Comerica Credit Facility - Line of credit, prime (3.00% at June 30, 2009), maturing
in August 2010 $ 13,248 $ 22,530
Cleveland Inspection Services, Inc., CIS Technical Services and F.D. Curtis - Notes
payable, discounted at 5% interest, principal payments in installments of
$100,000 due quarterly, maturing in October 2009 99 293
ATI Technologies - Note payable, interest at 6%, principal payments in installments
of $30,422 including interest due monthly, matured in January 2009 -- 30
Michael Lee - Note payable, interest at 5%, principal payments in installments of
$150,000 plus interest due quarterly, paid in full May 2009 -- 900
Watco Management, Inc. - Note payable, interest at 4%, principal payments in
installments of $137,745 including interest due annually, maturing in
October 2010 260 260
Frank H McIlwain, PC; James A Walters, PC; William M Bosarge, PC; Matthew R Burton,
PC - Notes payable, discounted at 2.38% interest, payments in installments of
$666,667 including interest due annually, maturing in December 2010 1,302 1,287
-------- --------
Total long-term debt 14,909 25,300
-------- --------
Less: current maturities of long-term debt (862) (1,686)
-------- --------
Long-term debt, net of current portion 14,047 23,614
Borrowings under capital lease 332 418
Less: current maturities of capital lease (183) (175)
-------- --------
Total long-term debt $ 14,196 $ 23,857
======== ========
NOTE 6 - SEGMENT INFORMATION
ENGlobal has four reportable segments: Engineering, Construction,
Automation and Land. Our segments are strategic business units that offer
different services and products and therefore require different marketing
and management strategies. Our segments have grown through strategic
acquisitions, which have also served to augment management expertise.
The Engineering segment provides consulting services relating to the
development, management and execution of projects requiring professional
engineering and related project services. Services provided by the
Engineering segment include feasibility studies, engineering, design,
procurement, and construction management. The Construction segment provides
construction management personnel and services in the areas of inspection,
mechanical integrity, vendor and turnaround surveillance, field support,
construction, quality assurance and plant asset management. The Automation
segment provides services related to the design, fabrication, and
implementation of process distributed control and analyzer systems,
advanced automation, and information technology projects. The Land segment
provides land management, right-of-way, environmental compliance, and
governmental regulatory compliance services primarily to pipeline, utility
and telecom companies and other owner/operators of infrastructure
facilities throughout the United States and Canada.
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Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
The accounting policies of each of the segments are the same as those
described in the summary of critical accounting policies referenced in Note
2 above. The Company evaluates performance based on profit or loss from
operations before interest, income taxes and other income or loss, but
after selling, general and administrative expenses attributable to the
reportable segments. Transactions between reportable segments are at market
rates comparable to terms available from unrelated parties.
For the three months ended
June 30, 2009
(Dollars in thousands) Engineering Construction Automation Land All Other Consolidated
-------------------------- ----------- ------------ ---------- --------- --------- ------------
Revenue before eliminations $ 33,475 $ 22,664 $ 15,578 $ 8,412 $ -- $ 80,129
Inter-segment eliminations (21) (228) (1) -- -- (250)
--------- --------- --------- --------- --------- ---------
Revenue 33,454 22,436 15,577 8,412 -- 79,879
--------- --------- --------- --------- --------- ---------
Gross profit 2,753 1,789 1,217 1,288 -- 7,047
SG&A 1,638 418 934 365 3,396 6,751
--------- --------- --------- --------- --------- ---------
Operating income 1,115 1,371 283 923 (3,396) 296
--------- --------- --------- --------- ---------
Other income (expense) (113)
Interest income (expense) (120)
Tax provision (13)
---------
Net income $ 50
=========
For the three months ended
June 30, 2008
(Dollars in thousands)
--------------------------
Revenue before eliminations $ 77,480 $ 38,858 $ 11,411 $ 11,842 $ -- $ 139,591
Inter-segment eliminations (1) (3,204) (375) -- -- (3,580)
--------- --------- --------- --------- --------- ---------
Revenue 77,479 35,654 11,036 11,842 -- 136,011
--------- --------- --------- --------- --------- ---------
Gross profit 12,779 3,988 1,362 2,172 -- 20,301
SG&A 2,262 759 749 881 4,050 8,701
--------- --------- --------- --------- --------- ---------
Operating income 10,517 3,229 613 1,291 (4,050) 11,600
--------- --------- --------- --------- ---------
Other income (expense) 59
Interest income (expense) (413)
Tax provision (4,544)
---------
Net income $ 6,702
=========
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Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
NOTE 6 - SEGMENT INFORMATION (continued)
For the six months ended
June 30, 2009
(Dollars in thousands) Engineering Construction Automation Land All Other Consolidated
---------------------- ----------- ------------ ---------- --------- --------- ------------
Revenue before eliminations $ 76,590 $ 45,214 $ 36,255 $ 17,498 $ -- $ 175,557
Inter-segment eliminations (561) (1,541) (87) -- -- (2,189)
--------- --------- --------- --------- --------- ---------
Revenue 76,029 43,673 36,168 17,498 -- 173,368
--------- --------- --------- --------- --------- ---------
Gross profit 7,369 3,429 4,074 2,659 -- 17,531
SG&A 2,964 894 2,219 1,002 6,779 13,858
--------- --------- --------- --------- --------- ---------
Operating income 4,405 2,535 1,855 1,657 (6,779) 3,673
--------- --------- --------- --------- ---------
Other income (expense) 151
Interest income (expense) (331)
Tax provision (1,430)
---------
Net income $ 2,063
=========
For the six months ended
June 30, 2008
(Dollars in thousands)
------------------------
Revenue before eliminations $ 129,515 $ 65,875 $ 21,968 $ 20,677 $ -- $ 238,035
Inter-segment eliminations (7) (3,321) (530) -- -- (3,858)
--------- --------- --------- --------- --------- ---------
Revenue 129,508 62,554 21,438 20,677 -- 234,177
--------- --------- --------- --------- --------- ---------
Gross profit 22,661 6,016 2,406 3,564 -- 34,647
SG&A 3,557 1,462 1,381 1,558 7,969 15,927
--------- --------- --------- --------- --------- ---------
Operating income 19,104 4,554 1,025 2,006 (7,969) 18,720
--------- --------- --------- --------- ---------
Other income (expense) 85
Interest income (expense) (896)
Tax provision (7,204)
---------
Net income $ 10,705
=========
Financial information about geographic areas
--------------------------------------------
Revenue from the Company's non-U.S. operations is not material. Long-lived
assets (principally leasehold improvements and computer equipment) located
in Canada were valued at $29,000 as of June 30, 2009, net of accumulated
depreciation, stated in U.S. dollars.
12
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Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
NOTE 7 - FEDERAL AND STATE INCOME TAXES
The components of income tax expense (benefit) for the three months and six
months ended June 30, 2009 and 2008 were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
2009 2008 2009 2008
---- ---- ---- ----
(Dollars in thousands)
------------------------------------------
Current $ (123) $ 4,634 $ 1,258 $ 7,384
Deferred 136 (90) 172 (180)
------- ------- ------- -------
Total tax provision (benefit) $ 13 $ 4,544 $ 1,430 $ 7,204
======= ======= ======= =======
Effective tax rate 20.0% 40.4% 40.9% 40.2%
------- ------- ------- -------
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, 2009, are based on results of the 2008 year end and
adjusted for estimates of non-recurring differences from the prior year, as
well as anticipated book to tax differences for 2009.
NOTE 8 - EARNINGS PER SHARE
The following table reconciles the number of shares used to compute basic
earnings per share to the number of shares used to compute diluted earnings
per share ("EPS").
Three Months Ended Six Months Ended
June 30, June 30,
2009 2008 2009 2008
---- ---- ---- ----
(Shares in thousands)
--------------------- -----------------
Weighted average shares outstanding
used to compute basic EPS 27,298 27,096 27,297 27,078
Effect of share-based compensation plans 287 545 245 498
------ ------ ------ ------
Shares used to compute diluted EPS 27,585 27,641 27,542 27,576
====== ====== ====== ======
The Company excluded potentially issuable shares of 638,000 and 345,000
from the computation of diluted EPS, as the effect of including the shares
would have been anti-dilutive for the six month periods ended June 30, 2009
and 2008, respectively.
NOTE 9 -COMMITMENTS AND CONTINGENCIES
Employment Agreements
The Company has employment agreements with certain of its executive
officers and other officers. Such agreements provide for minimum salary
levels, with the severance terms ranging from six to twelve months.
Generally, if the Company terminates the employment of the employee for any
reason other than (1) for cause, as defined in the employment agreement,
(2) voluntary resignation, or (3) the employee's death, the Company is
obligated to provide a severance benefit equal to six or twelve months,
depending on the terms of the agreement, of the employee's salary, and, at
its option, an additional six months at 50% to 100% of the employee's
salary in exchange for an extension of the employee's agreement not to
engage in certain competitive activities. Most of these agreements are
renewable for one year at the Company's option.
13
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Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
Long-term Note Receivable
In the first quarter of 2007, ENGlobal Engineering, Inc. ("EEI") and South
Louisiana Ethanol, LLC ("SLE") executed an agreement for engineering,
procurement and construction (EPC) services relating to the retro-fit of an
ethanol plant in southern Louisiana, (the "SLE project"). In October 2007,
SLE executed a promissory note, or "Hand Note," payable to the Company and
having a principal balance of approximately $12.3 million, constituting
amounts then due to the Company for its work in connection with the
project. The history of the SLE Project is described in Note 12 to the
Company's condensed consolidated financial statements included in its
Quarterly Report on Form 10-Q for the quarter ended September 30, 2007, and
is discussed further in the Company's Annual Reports on Form 10-K for years
ended December 31, 2007 and December 31, 2008, under Litigation, below, and
in Part II, "Item 1 - Legal Proceedings" of this Quarterly Report on Form
10-Q.
Accounts Receivable
On March 13, 2009, the Company entered into a letter agreement (the "letter
agreement") with a significant client resolving the payment of due and past
due Accounts Receivable invoices in the amount of $6.8 million. The
principle terms of the letter agreement included the recovery of interest
in monthly payments beginning in March 2009 and ending with final payment
due in December 2009. Included in the $6.8 million payment plan is $4.6
million in sub-contractor obligations which are part of our Accounts
Payable balances and are scheduled to be paid on a pro-rata basis similar
to the terms of the letter agreement. In connection with this letter
agreement $4.9 million of the remaining receivable balance has been
reclassified to a current note receivable as of June 30, 2009.
Litigation
Due to past due payments on Accounts Receivable invoices for services
provided to Bigler, LP ("Bigler") in the amount of $2,988,000, the Company
exercised its statutory right to file a materialman's and mechanic's lien.
In response, Bigler filed a petition in Harris County Court asking for
relief claiming lack of delivery of notice with respect to the Lien, and
requesting declaratory relief from the Court clearing title of the lien,
and for unspecified monetary damages for breach of contract. ENGlobal
Engineering filed its answer and counterclaim on April 27, 2009 for
collection of the fees due, and for foreclosure on the real property and
improvements for which the services were performed. We believe the invoices
are collectible. In regards to the breach of contract claim, from facts
determinable at present, we have concluded that it is remote that a
liability will be incurred; therefore no loss contingency has been
established.
In 2007, ENGlobal Engineering, Inc. entered into an Engineering,
Procurement & Construction agreement with South Louisiana Ethanol, LLC to
refurbish and upgrade SLE's ethanol facility in Belle Chase, LA. EEI
commenced work in March 2007 but SLE shut down the project in September
2007 after failing to secure permanent financing for the project. Due to
SLE's continued failure to obtain permanent financing, on May 30, 2008, the
Company filed suit in the United States District Court for the Eastern
District of Louisiana, Cause Number 08-3601, seeking damages of $15.8
million and to foreclose on the acquired mechanics liens of its
subcontractors. An independent appraisal, dated March 17, 2008 (the most
recent appraisal the Company has obtained), from the SLE's bridge lending
bank's appraiser, Revpro and Associates, indicated a fair market value of
SLE's assets of $35.8 million, an orderly liquidation value of $25.3
million, and a forced liquidation value of $20.0 million. While the Company
believes that in the event the collateral is liquidated, SLE's obligations
to the Company would be paid in full pursuant to the Collateral Mortgage in
favor of the Company, collectability is not assured at this time. At this
time the Company believes that the ultimate disposition of the SLE
collateral will not materially adversely affect our liquidity or overall
financial position.
From time to time, the Company is involved in various legal proceedings
arising in the ordinary course of business alleging, among other things,
breach of contract or tort in connection with the performance of
professional services, the outcome of which cannot be predicted with
certainty. As of the date of this filing, we are party to several legal
proceedings that we believe have been reserved for or are covered by
insurance, or that, if determined adversely to us individually or in the
aggregate, would not have a material adverse effect on our results of
operations or financial position.
14
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Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
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, director's and officer's
liability insurance and a general umbrella policy. The Company is not aware
of any claims in excess of insurance recoveries. ENGlobal is partially
self-funded for health insurance claims. Provisions for expected future
payments are accrued based on the Company's experience. The self-insurance
liability, which is included in the Accrued Compensation and Benefits line
of the balance sheet, was $1.0 million as of June 30, 2009 and $1.4 million
as of December 31, 2008.
NOTE 10 - ACQUISITIONS
The Company had no acquisitions during the six months ended June 30, 2009.
15
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Statements
--------------------------
Certain information contained in this Quarterly Report on Form 10-Q, the
Company's Annual Report on Form 10-K, as well as other written and oral
statements made or incorporated by reference from time to time by the
Company and its representatives in other reports, filings with the
Securities and Exchange Commission, press releases, conferences, or
otherwise, may be deemed to be forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934. This
information includes, without limitation, statements concerning the
Company's future financial position and results of operations, planned
capital expenditures, business strategy and other plans for future
operations, the future mix of revenues and business, customer retention,
project reversals, commitments and contingent liabilities and future demand
and industry conditions. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable,
it can give no assurance that such expectations will prove to have been
correct. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. Generally, the words "anticipate," "believe,"
"estimate," "expect," "may," and similar expressions, identify
forward-looking statements, which generally are not historical in nature.
Actual results could differ materially from the results described in the
forward-looking statements due to the risks and uncertainties set forth in
this Quarterly Report on Form 10-Q, the specific risk factors identified in
the Company's Annual Report on Form 10-K for the year ended December 31,
2008, and those described from time to time in our future reports filed
with the Securities and Exchange Commission.
The following discussion is qualified in its entirety by, and should be
read in conjunction with, the Company's condensed consolidated financial
statements, including the notes thereto, included in this Quarterly Report
on Form 10-Q and the Company's Annual Report on Form 10-K for the year
ended December 31, 2008.
MD&A Overview
-------------
The following list sets forth a general overview of certain significant
changes in the Company's financial condition and results of operations for
the three months and six months ended June 30, 2009, compared to the
corresponding periods in 2008.
During the three months During the six months
ended June 30, 2009 ended June 30, 2009
----------------------- ---------------------
Revenues Decreased 41.3% Decreased 26.0%
Gross profit Decreased 65.5% Decreased 49.4%
Operating income Decreased 97.4% Decreased 80.2%
SG&A expense Decreased 21.8% Decreased 12.6%
Net income Decreased 99.3% Decreased 80.4%
16
|
Management's Discussion and Analysis (continued)
------------------------------------------------
As of As of As of
Selected Balance Sheet Comparisons June 30, December 31, June 30,
2009 2008 2008
-------- -------- --------
(Dollars in thousands)
------------------------------
Working capital $ 50,904 $ 58,586 $ 53,307
Total assets $124,181 $152,705 $146,175
Long-term debt and capital leases, net of current portion $ 14,196 $ 23,857 $ 26,809
Stockholders' equity $ 79,117 $ 76,766 $ 68,349
Long-term debt and capital leases, net of current portion, decreased 40.6%,
or $9.7 million, from $23.9 million at December 31, 2008 to $14.2 million
at June 30, 2009. As a percentage of stockholders' equity, long-term debt
decreased to 18.0% from 31.1% over this six-month period due primarily to a
$9.3 million pay down on our line of credit. Our days sales outstanding was
69 days for the three-month period ended June 30, 2009, higher than 64 days
for the twelve-month period ended December 31, 2008 and 61 days for the
three-month period ended June 30, 2008. The past due payments on Accounts
Receivable invoices for services provided to one customer negatively
impacted our average days sales outstanding for the three-month period
ended June 30, 2009 by 3 days. The Company manages its billing and client
collection processes toward reducing days sales outstanding to the extent
practicable. We believe that our allowance for bad debt is adequate to
cover any potential non-payment by our customers. As of June 30, 2009, $4.9
million of accounts receivable have been reclassified to a current note
receivable based upon a letter agreement with a significant client,
therefore the amount moved to the current note receivable is no longer
included in our days sales outstanding calculation.
Total stockholders' equity increased 3.0%, or $2.3 million, from $76.8
million as of December 31, 2008 to $79.1 million as of June 30, 2009. The
increase in stockholders' equity compared to June 30, 2008 was 15.8%, or
$10.8 million.
17
|
Management's Discussion and Analysis (continued)
------------------------------------------------
Consolidated Results of Operations for the Three Months
Ended June 30, 2009 and 2008
(Unaudited)
For the three months ended
June 30, 2009
(Dollars in thousands) Engineering Construction Automation Land All Other Consolidated
-------------------------- ----------- ------------ ---------- ---- --------- ------------
Revenue before eliminations $ 33,475 $ 22,664 $ 15,578 $ 8,412 $ -- $ 80,129
Inter-segment eliminations (21) (228) (1) -- -- (250)
--------- --------- --------- --------- --------- ---------
Revenue 33,454 22,436 15,577 8,412 -- 79,879
--------- --------- --------- --------- --------- ---------
Gross profit 2,753 1,789 1,217 1,288 -- 7,047
SG&A 1,638 418 934 365 3,396 6,751
--------- --------- --------- --------- --------- ---------
Operating income 1,115 1,371 283 923 (3,396) 296
--------- --------- --------- --------- ---------
Other income (expense) (113)
Interest income (expense) (120)
Tax provision (13)
---------
Net income $ 50
=========
For the three months ended
June 30, 2008
(Dollars in thousands)
--------------------------
Revenue before eliminations $ 77,480 $ 38,858 $ 11,411 $ 11,842 $ -- $ 139,591
Inter-segment eliminations (1) (3,204) (375) -- -- (3,580)
--------- --------- --------- --------- --------- ---------
Revenue 77,479 35,654 11,036 11,842 -- 136,011
--------- --------- --------- --------- --------- ---------
Gross profit 12,779 3,988 1,362 2,172 -- 20,301
SG&A 2,262 759 749 881 4,050 8,701
--------- --------- --------- --------- --------- ---------
Operating income 10,517 3,229 613 1,291 (4,050) 11,600
--------- --------- --------- --------- ---------
Other income (expense) 59
Interest income (expense) (413)
Tax provision (4,544)
---------
Net income $ 6,702
=========
18
|
Management's Discussion and Analysis (continued)
------------------------------------------------
Consolidated Results of Operations for the Six Months
Ended June 30, 2009 and 2008
(Unaudited)
For the six months ended
June 30, 2009
(Dollars in thousands) Engineering Construction Automation Land All Other Consolidated
------------------------ ----------- ------------ ---------- ---- --------- ------------
Revenue before eliminations $ 76,590 $ 45,214 $ 36,255 $ 17,498 $ -- $ 175,557
Inter-segment eliminations (561) (1,541) (87) -- -- (2,189)
--------- --------- --------- --------- --------- ---------
Revenue 76,029 43,673 36,168 17,498 -- 173,368
--------- --------- --------- --------- --------- ---------
Gross profit 7,369 3,429 4,074 2,659 -- 17,531
SG&A 2,964 894 2,219 1,002 6,779 13,858
--------- --------- --------- --------- --------- ---------
Operating income 4,405 2,535 1,855 1,657 (6,779) 3,673
--------- --------- --------- --------- ---------
Other income (expense) 151
Interest income (expense) (331)
Tax provision (1,430)
---------
Net income $ 2,063
=========
For the six months ended
June 30, 2008
(Dollars in thousands)
------------------------
Revenue before eliminations $ 129,515 $ 65,875 $ 21,968 $ 20,677 $ -- $ 238,035
Inter-segment eliminations (7) (3,321) (530) -- -- (3,858)
--------- --------- --------- --------- --------- ---------
Revenue 129,508 62,554 21,438 20,677 -- 234,177
--------- --------- --------- --------- --------- ---------
Gross profit 22,661 6,016 2,406 3,564 -- 34,647
SG&A 3,557 1,462 1,381 1,558 7,969 15,927
--------- --------- --------- --------- --------- ---------
Operating income 19,104 4,554 1,025 2,006 (7,969) 18,720
--------- --------- --------- --------- ---------
Other income (expense) 85
Interest income (expense) (896)
Tax provision (7,204)
---------
Net income $ 10,705
=========
19
|
We recorded net income of $50,000 or $0.00 per diluted share, for the three months ended June 30, 2009, compared to net income of $6,700,000, or $0.24 per diluted share, for the corresponding period last year. We recorded net income of $2.1 million, or $0.07 per diluted share, for the six months ended June 30, 2009, compared to net income of $10.7 million, or $0.39 per diluted share, for the corresponding period in 2008.
The decline in net income during the three months ended June 30, 2009 was due in part to the effect of lower energy commodity prices, lower oil and gas processing margins, and the generally weak economy. These factors have led our clients to spend less for our services through the deferral or cancellation of both capital and maintenance projects. Competition has increased for the amount of project work on the market, putting pressure on our billing rate structures and profit margins. In response to the economic pressures, we have also increased our sales efforts, therefore increasing costs, to focus on winning new work, expanding into new markets, and increasing our client base.
The Company recognizes service revenue as soon as the services are performed. The majority of the Company's service revenue historically has been provided through cost-plus contracts, whereas a majority of our fabrication and turnkey EPC projects revenue has been earned on fixed-price contracts.
Revenue on fixed-price contracts is recorded primarily using the percentage-of-completion (cost-to-cost) method. Under this method, revenue on long-term contracts is recognized in the ratio that contract costs incurred bear to total estimated contract costs. Revenue and gross margin on fixed-price contracts are subject to revision throughout the lives of the contracts and any required adjustments are made in the period in which the revisions become known. Losses on contracts are recorded in full as they are identified.
In the course of providing our services, we routinely provide engineering, materials, and equipment and may provide construction services on a direct hire or subcontractor basis. Generally, the materials, equipment and subcontractor costs are passed through to our clients and reimbursed, along with fees, which in total are at margins lower than those of our normal core business. In accordance with industry practice and generally accepted accounting principles, all such costs and fees are included in reported revenue. The use of subcontractor services can change significantly from project to project; therefore, changes in revenue and gross profit, SG&A expense and operating income as a percent of revenue may not be indicative of the Company's core business trends.
Operating SG&A expense includes management and staff compensation, office costs such as rents and utilities, depreciation, amortization, travel and other expenses generally unrelated to specific contracts, but directly related to the support of a segment's operations.
All other SG&A expense is comprised primarily of business development costs, as well as costs related to the executive, investor relations/governance, finance, accounting, safety, human resources, project controls, legal and information technology departments, and other costs generally unrelated to specific projects, but which are incurred to support corporate activities and initiatives.
Industry Overview:
Recent deteriorating macroeconomic conditions are creating uncertainty regarding demand in the markets in which we sell our services. Large integrated oil and gas companies, which comprise many of our engineering services customers, typically reduce spending when the price of crude oil does not make their projects financially advantageous. Our developer clients have been negatively impacted by unavailability of funding for projects in which we could participate. Also, we have experienced a slow-down in payments of accounts receivable which could be an indication that the risk of non-collection has also increased.
We believe that our year-to-date revenues have been adversely affected by recent macroeconomic conditions, including the factors noted above, and our revenue for the remainder of fiscal 2009 may continue to decline unless
these conditions improve. Future adverse changes in market conditions or poor operating results could result in losses or an increased inability to recover our accounts receivable. The extent to which these conditions will persist and the overall impact they will have on our customer spending is not clear.
In the past, ENGlobal has benefited from significant capital projects in the downstream refinery market, primarily related to increasing capacity, utilizing heavy or sour crude oil, and rebuilding facilities damaged by accidents or natural disasters. While some such projects are currently underway, some refiners have now chosen to defer significant new spending given the recent economic conditions, lower refining margins and lower refinery utilization. The Company expects that once market conditions improve, there will be a continuation of compliance-driven refining projects, such as EPA environmental initiatives, DOT pipeline integrity requirements, and OSHA safety-related projects, which may result from increased audits of U.S.-based refineries. Also, the Company is seeing opportunities to participate in projects to upgrade obsolete automation and control systems at existing refineries and to plan and manage turnaround projects.
The downstream petrochemical industry has historically been a good source of projects for ENGlobal. We have seen a fairly steady level of both maintenance and small capital projects from this industry. We believe that major grassroots petrochemical projects will continue to be undertaken overseas, either closer to product demand in emerging economies, or located closer to less expensive feedstocks. We expect that future petrochemical work undertaken in the U.S. primarily will consist of smaller capital projects or will be maintenance related.
Despite downturns in the downstream sector, pipeline and other midstream projects have remained fairly constant. Although pipeline projects tend to require fewer engineering man-hours than similarly sized downstream projects, ENGlobal may also provide a pipeline client with several additional services, such as right-of-way acquisition, regulatory permitting, inspection, and construction management. The drivers we see behind growth in domestic pipeline activity include: (1) natural gas transportation away from the Rocky Mountain area and new gas fields in other parts of the country, (2) natural gas transportation related to LNG import facilities, (3) movement of heavy Canadian crude oil into the United States, and (4) movement of refined products from Gulf Coast refineries to the Midwest and Northeast.
Once market conditions improve, the country's focus on alternative energy may present the Company with new project opportunities. To date, ENGlobal has mainly focused its efforts on biomass processes, such as those related to coal-to-liquids projects, the production of ethanol and biofuels, and the gasification of refinery petroleum coke and other feedstocks as an energy source. In addition, the Company has been pursuing business on electric transmission and distribution projects, as a large amount of capital spending is expected for transporting renewable electric energy produced in remote areas to population centers. In many cases, alternative energy projects are being developed by new and smaller firms, rather than our larger, traditional clients. As discussed below, funding continues to be a challenge for these clients.
ENGlobal expects that a majority of the large capital energy-related projects will be built overseas. Therefore the Company is forming business relationships with operating companies and other service providers that may result in an increased amount of engineering and related service work on international projects. The Company has also begun performing engineering services on a small number of civil infrastructure projects, as a means of offsetting reduced workload from our heritage clients.
Tightening credit markets have triggered substantial uncertainty with respect to the funding of capital expenditures by our customers, and oil and natural gas prices have fallen substantially from their highs in spring 2008. These changes have impacted general business conditions and may continue to reduce demand for certain of our products and services. As mentioned above, some refiners have chosen to defer and cancel significant new spending given the recent narrowing of energy processing margins. Although we are not immune to the current financial and economic events as evidenced by lower revenues in our Engineering, Construction and Land segments, as well as by our lower consolidated net profits, we believe each of ENGlobal's business segments is well positioned for growth when market conditions improve for the following reasons:
o About half of the states in the U.S. have enacted Renewable Portfolio Standards, which mandate a timeline and percentage for electricity generation from renewable sources such as wind, solar, geothermal, and biomass. We believe that this factor, together with the U.S. focus on energy independence, environmental concerns and government stimulus should work together to drive demand for alternative and sustainable sources of energy.
o Facilities in the energy industry, as well as in many other industries, are aging. No grass roots refinery has been built in the U.S. since 1976, and many of the country's large pipelines were installed over 50 years ago. We anticipate that maintaining and rebuilding this aging infrastructure - an ENGlobal core competency - will benefit our Company.
o ENGlobal has served many of our valued clients over a long period of time, and these strong relationships are the foundation of our business. While some clients are basing their purchasing decisions on overall costs rather than existing relationships, we are seeing continued project awards from our long-term clients.
o Our business relies primarily on small to mid-sized projects, many of which fall into the "run and maintain" category. We are not as dependent on large capital projects as many of our competitors. Many of the projects we work on are driven by regulatory compliance requirements that are required to be completed in a certain timeline regardless of economic conditions.
o We believe that new pipelines and storage facilities will be required in the U.S. as a result of the need to transport crude oil and natural gas from developing basins and shale plays, such as the Bakken, Haynesville, Marcellus and Rocky Mountain areas. We also see continued need for pipelines to transport imported sources of energy, such as Canadian crude, liquefied natural gas and refined products.
o A significant part of our Automation segment's work is driven by our clients' need to replace aging and obsolete distributed control system (DCS) and analytical equipment. While some of these expenditures can be deferred, the need to replace DCS and other equipment has historically provided a reliable and recurring source of projects. We expect to benefit as manufacturers are currently phasing out their support for heritage DCS platforms with a large installed based, and our clients will therefore need to migrate to newer DCS platforms. We are focusing our efforts on improving operational efficiencies that will allow us to fully capitalize on these opportunities.
Specific segment information contained below in this section provides further detail regarding the reasons for changes in our financial performance from period to period.
Revenue:
Revenue decreased $56.1 million, or 41.3%, to $79.9 million for the three months ended June 30, 2009, from $136.0 million for the comparable prior-year period. Of the decrease, approximately $44.0 million is attributable to our Engineering segment, $13.3 million to our Construction segment, and $3.4 million to our Land segment, offset by an increase of $4.6 million to our Automation segment.
Revenue decreased $60.8 million, or 26.0%, to $173.4 million for the six months ended June 30, 2009, from $234.2 million for the comparable prior-year period. Of the decrease, approximately $53.5 million is attributable to our Engineering segment, $18.9 million to our Construction segment, and $3.2 million to our Land segment, offset by an increase of $14.8 million to our Automation segment.
Many of our clients have delayed or cancelled scheduled capital projects due to the economy in general as well as lower oil prices. They are focusing more on run and maintain type smaller projects. These types of projects focus on work for required maintenance to keep the plant up and running but not on new capital expansions. Competition has increased greatly for the amount of project work on the market.
Gross Profit:
Gross profit decreased $13.3 million, or 65.5%, to $7.0 million for the three months ended June 30, 2009, from $20.3 million for the comparable prior-year period. The $13.3 million decrease in gross profit is attributable to approximately $4.9 million in higher costs and approximately $8.4 million is the result of decreased revenue. As a percentage of revenue, gross profit decreased 6.1 percentage points from 14.9% for the three months ended June 30, 2008, to 8.8% for the three months ended June 30, 2009.
Gross profit decreased $17.1 million, or 49.4%, to $17.5 million for the six months ended June 30, 2009, from $34.6 million for the comparable prior-year period. The $17.1 million decrease in gross profit is attributable to approximately $8.1 million in higher costs and approximately $9.0 million is the result of decreased revenue. As a percentage of revenue, gross profit decreased 4.7 percentage points from 14.8% for the six months ended June 30, 2008, to 10.1% for the six months ended June 30, 2009.
The decrease in gross profit margin as a percentage of revenue primarily relates to lower utilization of our billable resources resulting in increased overhead costs to retain employees, increased overhead costs to expand our marketing to new sectors and new clients, increased per employee costs of benefits, and renegotiations of some existing contracts to lower margins.
Selling, General, and Administrative:
As a percentage of revenue, total SG&A expense increased 2.1 percentage points to 8.5% for the three months ended June 30, 2009, from 6.4% for the comparable period in 2008. Total expense for SG&A decreased $1.9 million, or 21.8%, to $6.8 million for the three months ended June 30, 2009, from $8.7 million for the comparable prior-year period.
As a percentage of revenue, operating SG&A expense increased 0.9 percentage points to 4.3% for the three months ended June 30, 2009, from 3.4% for the comparable prior-year period. Operating SG&A decreased $1.2 million, or 26.1%, to $3.4 million for the three months ended June 30, 2009, from $4.6 million for the comparable prior-year period. Decreases in operating SG&A primarily consisted of decreases in bad debt expense of $1.4 million, $0.5 million in incentive bonus accruals that were for plans that were cancelled or modified, and $0.1 million in salaries and employee related expenses offset by increases of $0.5 million in facilities expense and $0.1 million in depreciation and amortization. Operating SG&A is discussed in further detail in each of the segment sections.
As a percentage of revenue, all other SG&A expense increased 1.3 percentage points to 4.3% for the three months ended June 30, 2009, from 3.0% for the comparable prior-year period. All other SG&A expense decreased approximately $0.7 million, or 17.1%, to $3.4 million for the three months ended June 30, 2009, from $4.1 million for the comparable prior-year period. Decreases in all other SG&A were primarily the result of decreases of $300,000 in incentive bonus accruals that we did not have this year due to underperformance, $352,000 in salaries and employee related expenses, $203,000 in professional services, and $45,000 in depreciation and amortization expense, offset by increases of $134,000 in facilities expenses and $130,000 in office expenses.
As a percentage of revenue, total SG&A expense increased 1.2 percentage points to 8.0% for the six months ended June 30, 2009, from 6.8% for the comparable period in 2008. Total expense for SG&A decreased $2.0 million, or 12.6%, to $13.9 million for the six months ended June 30, 2009, from $15.9 million for the comparable prior-year period.
As a percentage of revenue, operating SG&A expense increased 0.7 percentage points to 4.1% for the six months ended June 30, 2009, from 3.4% for the comparable prior-year period. Operating SG&A expense decreased approximately $0.8 million to $7.1 million, or 11.4%, for the six months ended June 30, 2009, from $7.9 million for the comparable prior-year period. Decreases in operating SG&A primarily consisted of decreases in bad debt expense of $1.4 million and $0.6 million in incentive bonus accruals that were for plans that were cancelled or modified offset by increases of $0.8 million in facilities expense and $0.2 million in depreciation and amortization.
As a percentage of revenue, all other SG&A expense increased 0.5 percentage points to 3.9% for the six months ended June 30, 2009, from 3.4% for the comparable prior-year period. All other SG&A expense decreased approximately $1.2 million, or 15.0%, to $6.8 million for the six months ended June 30, 2009, from $8.0 million for the comparable prior-year period. Decreases in all other SG&A were primarily the result of decreases of $600,000 in incentive bonus accruals that we did not have this year due to underperformance, $653,000 in salaries and employee related expenses, $196,000 in professional services, and $76,000 in depreciation and amortization expense, offset by increases of $220,000 in facilities expenses and $149,000 in office expenses.
Operating Income:
Operating income decreased approximately $11.3 million, or 97.4%, to $0.3 million for the three months ended June 30, 2009, from $11.6 million for the same period in 2008. As a percentage of revenue, operating income decreased 8.1 percentage points to 0.4% for the three months ended June 30, 2009, from 8.5% for the comparable prior-year period.
Operating income decreased approximately $15.0 million, or 80.2%, to $3.7 million for the six months ended June 30, 2009, from $18.7 million for the comparable period in 2008. As a percentage of revenue, operating income decreased 5.9 percentage points to 2.1% for the six months ended June 30, 2009, from 8.0% for the comparable prior-year period.
Operating income decreased due to the lower revenue levels as well as increased costs for both new sales efforts and maintaining core employees at a time when the Company had fewer projects.
Other Income/Expense, net:
Other expense increased $172,000, to $113,000 for the three months ended June 30, 2009, from an income of $59,000 for the comparable prior-year period. The expense for 2009 mainly consists of $101,000 losses in an investment in a Costa Rican company, while the income from 2008 mainly consisted of a gain of $84,000 related to the sale of land.
Other income increased $66,000, to $151,000 for the six months ended June 30, 2009, from $85,000 for the comparable prior-year period. Income from 2009 consisted of $300,000 from insurance proceeds related to Hurricane Ike, offset by expenses of $145,000 in losses in an investment in a Costa Rican company. Income from 2008 consisted of an $84,000 gain on the sale of land, $55,000 of reimbursements for surplus of government tax funds offset by expense of $24,000 in investment losses and $18,000 in tax penalties.
Interest Income/Expense, net:
Interest expense decreased $293,000, to $120,000 for the three months ended June 30, 2009, from $413,000 for the comparable prior-year period. Interest expense decreased $565,000, to $331,000 for the six months ended June 30, 2009, from $896,000 for the comparable prior-year period. Interest has decreased for both the quarter and year to date due to the lower balances on our line of credit and a favorable LIBOR rate option in our Credit Agreement.
Tax Provision:
Income tax expense decreased $4,487,000, or 99.7%, to $13,000 for the three months ended June 30, 2009, from $4,500,000 for the comparable prior-year period. The estimated effective tax rate was 20.0% for the three months ended June 30, 2009, compared to 40.4% for the comparable prior-year period.
Income tax expense decreased $5.8 million, or 80.6%, to $1.4 million for the six months ended June 30, 2009, from $7.2 million for the comparable prior-year period. The estimated effective tax rate was 40.9% for the six months ended June 30, 2009, compared to 40.2% for the comparable prior-year.
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, 2009, are based on results of the 2008 year end and adjusted for estimates of non-recurring differences from the prior year, as well as anticipated book to tax differences for 2009.
Net Income:
As a result of the changes detailed above, net income for the three months ended June 30, 2009 decreased $6,650,000, or 99.3%, to $50,000 from $6,700,000 for the comparable prior-year period. As a percentage of revenue, net income decreased 4.8 percentage points to 0.1% for the three months ended June 30, 2009, from 4.9% for the three months ended June 30, 2008.
As a result of the changes detailed above, net income for the six months ended June 30, 2009 decreased $8.6 million, or 80.4%, to $2.1 million from $10.7 million for the comparable prior-year period. As a percentage of revenue, net income decreased 3.4 percentage points to 1.2% for the six months ended June 30, 2009, from 4.6% for the six months ended June 30, 2008.
Overview
The Company defines liquidity as its ability to pay liabilities as they become due, fund our operations and meet monetary contractual obligations. Our primary source of funds to meet liquidity needs during the period ended June 30, 2009 was borrowings under our senior revolving credit facility. Cash on hand at June 30, 2009 totaled $0.8 million and availability under the credit facility totaled $36.7 million, resulting in cash and previously arranged borrowing capacity to meet additional liquidity needs of $37.5 million. As of June 30, 2009, management believes the Company is positioned to meet its liquidity requirements for the next 12 months.
At June 30, 2009, the amount outstanding on the Company's line of credit was $13.2 million compared to $25.5 million at June 30, 2008.
Although our revenues, profits and opportunities have contracted over the past year, we still believe we are a growth company positioned to continue to expand when general economic conditions improve. We expect to continue to manage our business to achieve reasonable growth objectives that are commensurate with profitable operations given existing and anticipated economic conditions. We believe that when market conditions improve, we will, once again, experience organic growth. In the meantime, we expect to target opportunities to make strategic acquisitions and we intend to continue to meet our incremental liquidity needs through internally generated profits and borrowing arrangements similar to those currently in place.
The current competitive contracting environment exposes us to situations where our clients may become unable or unwilling to complete a contract and meet their obligations to us in the normal course of business. These situations cause unexpected liquidity requirements, lower than expected profits and even losses. We currently are financing more than $8.6 million relating to the SLE Project, described more fully in Note 9 to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q. We are also financing a $4.9 million current note receivable related to a customer account. While these situations have caused the Company to incur higher interest costs than would otherwise have been incurred, our liquidity remains sufficient to meet our objectives.
Despite the Company's favorable liquidity situation, cash and the availability of cash could be materially restricted if:
(1) the Company performs work without proper authorization,
(2) circumstances prevent the timely internal processing of invoices,
(3) amounts billed are not collected or are not collected in a timely
manner,
(4) project mix shifts from cost-reimbursable to fixed-price
contracts,
(5) the Company loses one or more of its major customers,
(6) the Company experiences material cost overruns on fixed-price
contracts,
(7) our client mix shifts from our historical owner-operator client
base to more developer-based clients,
(8) acquisitions are not accretive or are not integrated timely, or
(9) we are unable to meet the covenants of the Credit Facility.
If any such event occurs, we would be forced to consider alternative financing options, if such options are available given current market conditions.
As of August, 2009, our existing credit facility will, by its terms, be required to be classified as a current liability. We are reviewing our options for a possible conversion of this credit facility. We estimate that the initial costs to renegotiate or replace our credit facility will be approximately $0.5 million to $1.0 million and that the interest rates will likely increase to a range between 3.25% and 4.25%.
The Company's Credit Facility requires the Company to maintain certain financial covenants as of the end of each calendar month, including the following:
o Leverage Ratio not to exceed 3.00 to 1.00;
o Asset Coverage Ratio less than 1.00 to 1.00; and
o Net Worth greater than the sum of $40.1 million plus 75% of
positive Net Income earned in each fiscal quarter after January
1, 2007 plus 100% of the net proceeds of any offering, sale or
other transfer of any capital stock or any equity securities.
The Credit Facility also contains covenants that place certain limitations on the Company including limits on new debt, mergers, asset sales, investments, fixed-price contracts, and restrictions on certain distributions.
The Company was in compliance with all covenants under the Credit Facility as of June 30, 2009. During the previous trailing twelve month reporting periods our Leverage Ratio has averaged .74 to 1.00 and our Asset Coverage Ratio has averaged .28 to 1.00. During the three month period ended June 30, 2009 our monthly Leverage Ratio and Asset Coverage Ratio covenant levels have been below their respective trailing twelve month averages. The Company's Net Worth exceeds its covenant requirement by approximately $14.6 million.
Cash Flows from Operating Activities:
Operations generated approximately $14.0 million in net cash during the six months ended June 30, 2009, compared with net cash generated from operations of $4.5 million during the same period in 2008. Operations generated approximately $5.7 million in net cash during the three months ended June 30, 2009, compared to the $4.1 million generated for the three months ended June 30, 2008.
The primary changes in working capital accounts during the six months ended June 30, 2009 were:
o Decreased Trade Receivables - The decrease of $30.0 million from December 31, 2008, was primarily the result of an overall decline in operating activity. Our days sales outstanding has increased from 61 days for the three month period ended June 30, 2008 and 64 days for the twelve month period ended December 31, 2008 to 69 days at the end of the three month period ended June 30, 2009. The past due payments on Accounts Receivable invoices for services provided to one customer negatively impacted our average days sales outstanding for the three-month period ended June 30, 2009 by 3 days. The Company manages its billing and client collection processes toward reducing days sales outstanding to the extent practicable. We believe that our allowance for bad debt is adequate to cover any potential non-payment by our customers. As of June 30, 2009, $4.9 million of accounts receivable have been reclassified to a current note receivable based upon a letter agreement with a significant client, therefore the amount moved to the current note receivable is no longer in our days sales outstanding calculation.
o Decreased Accounts Payable - The decrease of $9.9 million from December 31, 2008, was primarily the result of payouts of vendor and sub-contractor charges incurred by our Automation segment due to increased operating activity during the three months ended December 31, 2008 and the overall decline in operating activity.
o Decreased Accrued Compensation and Benefits - The decrease of $7.6 million from December 31, 2008 was primarily due to timing of bi-weekly payroll and benefits payments at June 30, 2009 as well as a decrease of approximately 270 employees.
Management's Discussion and Analysis (continued)
------------------------------------------------
Engineering Segment Results
---------------------------
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------------- --------------------------------------------
2009 2008 2009 2008
------------------ ------------------- -------------------- --------------------
(Dollars in thousands)
---------------------------------------------------------------------------------------
Revenue before eliminations $ 33,475 $ 77,480 $ 76,590 $ 129,515
Inter-segment eliminations (21) (1) (561) (7)
---------- ---------- ----------- ----------
Total revenue $ 33,454 $ 77,479 $ 76,029 $ 129,508
========== ========== =========== ==========
Detailed revenue:
Detail-design $ 22,140 66.2% $ 46,041 59.4% $ 52,646 69.2% $ 83,976 64.9%
Field services 9,944 29.7% 13,069 16.9% 20,437 26.9% 26,057 20.1%
Procurement services 71 0.2% 17,466 22.5% 380 0.5% 17,500 13.5%
Fixed-price 1,299 3.9% 903 1.2% 2,566 3.4% 1,975 1.5%
---------- ---------- ----------- ----------
Total revenue: $ 33,454 100.0% $ 77,479 100.0% $ 76,029 100.0% $ 129,508 100.0%
Gross profit: 2,753 8.2% 12,779 16.5% 7,369 9.7% 22,661 17.5%
Operating SG&A expense: 1,638 4.9% 2,262 2.9% 2,964 3.9% 3,557 2.7%
---------- ---------- ----------- ----------
Operating income: $ 1,115 3.3% $ 10,517 13.6% $ 4,405 5.8% $ 19,104 14.8%
========== ========== =========== ==========
Overview of Engineering Segment:
Our Engineering segment has been affected by the current economic
conditions. Many of our clients have delayed or canceled scheduled capital
projects due to the economy in general and lower commodity prices, as well
as lower energy processing margins. Instead, they are focusing more on
maintenance ("run and maintain") projects which are smaller than other
projects we might be involved in. Competition has increased greatly for the
amount of project work on the market. Although some of our clients have
gone to different vendors, we still have clients that have been
particularly strong for us who continue to award projects to us. We are
also focusing on increased marketing efforts not only to expand our
opportunities in the chemical, refining and pipeline sectors, but to also
grow into other markets within the energy and infrastructure sector.
Revenue:
Engineering segment revenue decreased $44.0 million, or 56.8%, to $33.5
million for the three months ended June 30, 2009, from $77.5 million for
the comparable prior-year period.
Engineering segment revenue decreased $53.5 million, or 41.3%, to $76.0
million for the six months ended June 30, 2009, from $129.5 million for the
comparable prior-year period.
The decrease in Engineering segment revenue resulted primarily from
decreased demand for engineering and related professional services for
energy related projects. We have also been affected by delayed or cancelled
capital project work by clients in reaction to the current economy.
Our detail-design services revenue decreased 52.0%, or $23.9 million, to
$22.1 million for the three months ended June 30, 2009, from $46.0 million
for the comparable period in 2008. As a percentage of the total Engineering
segment revenue during these periods, detail-design revenue increased 6.8
percentage points to 66.2% in 2009 from 59.4% in 2008. $14.6 million of the
overall decrease is related to the ending of two major projects while the
remainder of the decrease is accounted for by lower availability of work
due to client delays or cancellation of projects.
27
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Management's Discussion and Analysis (continued)
------------------------------------------------
Revenue from detail-design services decreased 37.4%, or $31.4 million, to
$52.6 million for the six months ended June 30, 2009, from $84.0 million
for the comparable period in 2008. As a percentage of the total Engineering
segment revenue during these periods, detail-design revenue increased 4.3
percentage points to 69.2% in 2009 from 64.9% in 2008. $18.6 million of the
overall decrease is related to completion of two major projects while the
remainder of the decrease is accounted for by lower availability of work
due to client delays or cancellation of projects.
Our field services revenues decreased 23.7%, or $3.1 million, to $10.0
million for the three months ended June 30, 2009, from $13.1 million for
the comparable period in 2008. As a percentage of the total Engineering
segment revenue during these periods, field services revenue increased 12.8
percentage points to 29.7% in 2009 from 16.9% in 2008. Field services
revenues have decreased $3.0 million due to the loss of a major client
relationship while the remaining $0.1 million is in response to delayed
projects at our clients' facilities and reduction in billing rates on
existing contracts.
Our field services revenues decreased 21.5%, or $5.6 million, to $20.4
million for the six months ended June 30, 2009, from $26.0 million for the
comparable period in 2008. As a percentage of the total Engineering segment
revenue during these periods, field services revenue increased 6.8
percentage points to 26.9% in 2009 from 20.1% in 2008. Field services
revenues have decreased $5.3 million due to the loss of a major client
relationship while the remaining $0.3 million is in response to delayed
projects at our clients' facilities and reduction in billing rates on
existing contracts.
Revenue from procurement services decreased 99.6%, or $17,395,000, to
$71,000 for the three months ended June 30, 2009, from $17,466,000 for the
comparable period in 2008. As a percentage of the total Engineering segment
revenue, procurement services revenue decreased 22.3 percentage points to
0.2% for the three months ended June 30, 2009, from 22.5% for the
comparable period in 2008. The decrease was caused by the completion in
2008 of a project to rebuild a refinery. Procurement services included
subcontractor placements, equipment purchases, and other procurement
activities necessary to rebuild the damaged facilities.
Revenue from procurement services decreased 97.7%, or $17.1 million, to
$0.4 million for the six months ended June 30, 2009, from $17.5 million for
the comparable period in 2008. As a percentage of the total Engineering
segment revenue, procurement services revenue decreased 13.0 percentage
points to 0.5% for the six months ended June 30, 2009, from 13.5% for the
comparable period in 2008. The decrease was caused by the completion in
2008 of a project to rebuild a refinery. Procurement services included
subcontractor placements, equipment purchases, and other procurement
activities necessary to rebuild the damaged facilities.
Fixed-price revenue increased 44.5%, or $0.4 million, to $1.3 million for
the three months ended June 30, 2009, from $0.9 million for the comparable
period in 2008. As a percentage of the total Engineering segment revenue,
fixed-price revenue increased 2.7 percentage points to 3.9% for the three
months ended June 30, 2009, from 1.2% for the comparable period in 2008.
Due to the current economy, more clients are requesting work to be
performed on a fixed price basis to control their costs and shift risk to
their contractors.
Fixed-price revenue increased 30.0%, or $0.6 million, to $2.6 million for
the six months ended June 30, 2009, from $2.0 million for the comparable
period in 2008. As a percentage of the total Engineering segment revenue,
fixed-price revenue increased 1.9 percentage points to 3.4% for the six
months ended June 30, 2009, from 1.5% for the comparable period in 2008.
Due to the current economy, more clients are requesting work to be
performed on a fixed price basis to control their costs and shift risk to
their contractors.
Gross Profit:
Our Engineering segment's gross profit decreased $10.0 million, or 78.1%,
to $2.8 million for the three months ended June 30, 2009, from $12.8
million for the comparable period in 2008. As a percentage of the total
Engineering segment revenue, gross profit decreased by 8.3 percentage
points to 8.2% from 16.5% for the three months ended June 30, 2009 and
2008, respectively. Of the overall $10.0 million decrease in gross profit,
$2.7 million was attributable to increased costs, while decreased revenues
contributed to $7.3 million of the overall decrease. The decrease is the
result of clients awarding new work based on competitive bidding, resulting
in lower margins. These lower margins along with increased per employee
costs of benefits have accounted for 6.6% of the overall decrease in gross
profit percentage. In response to the decrease in work, we have decreased
our
28
|
Management's Discussion and Analysis (continued)
------------------------------------------------
number of employees. However, realization of the cost savings associated
with reducing our workforce lags a period of increased overhead costs
associated with employees being removed from projects and being carried as
non-billable employees prior to termination. The additional costs of
carrying these extra employees accounts for 1.7% of the overall gross
profit percentage change.
Our Engineering segment's gross profit decreased $15.3 million, or 67.4%,
to $7.4 million for the six months ended June 30, 2009, from $22.7 million
for the comparable period in 2008. As a percentage of the total Engineering
segment revenue, gross profit decreased by 7.8 percentage points to 9.7%
from 17.5% for the six months ended June 30, 2009 and 2008, respectively.
Of the overall $15.3 million decrease in gross profit, $5.9 million was
attributable to increased costs, while decreased revenues contributed to
$9.4 million of the overall decrease. The decrease is the result of clients
awarding new work based on competitive bidding, resulting in lower margins.
These lower margins along with increased per employee costs of benefits
have accounted for 5.1% of the overall decrease in gross profit percentage.
In response to the decrease in work, we have decreased our number of
employees. However, realization of the cost savings associated with
reducing our workforce lags a period of increased overhead costs associated
with employees being removed from projects and being carried as
non-billable employees prior to termination. The additional costs of
carrying these extra employees accounts for 2.7% of the overall gross
profit percentage change.
Selling, General, and Administrative:
Our Engineering segment's SG&A expense decreased $0.7 million, or 30.4%, to
$1.6 million for the three months ended June 30, 2009, from $2.3 million
for the comparable period in 2008. The decrease in the Engineering
segment's SG&A expense is attributable to approximately $0.9 million in
lower bad debt expense, offset by increases of $0.3 million in facilities
expense. As a percentage of the total Engineering segment revenue, the
segment's SG&A costs increased by 2.0 percentage points to 4.9% from 2.9%
for the three months ended June 30, 2009 and 2008, respectively.
Our Engineering segment's SG&A expense decreased $0.6 million, or 16.7% to
$3.0 million, for the six months ended June 30, 2009, from $3.6 million for
the comparable period in 2008. The differences in the Engineering segment's
SG&A expense are attributable to approximately $0.9 million in lower bad
debt expense offset by increases of $0.4 million in facilities expense
relating to our expansion into two new buildings. As a percentage of the
total Engineering segment revenue, the segment's SG&A costs increased by
1.2 percentage points to 3.9% from 2.7% for the six months ended June 30,
2009 and 2008, respectively.
Operating Income:
Operating income for the Engineering segment decreased $9.4 million, or
89.5%, to $1.1 million for the three months ended June 30, 2009, from $10.5
million for the comparable prior-year period. As a percentage of the total
Engineering segment revenue, operating income decreased by 10.3 percentage
points to 3.3% for the three months ended June 30, 2009, from 13.6% for the
comparable prior-year period. 6.6% of the operating income decrease was due
to lower margin work because of client pressures for competitive bidding,
1.7% was due to the additional costs of carrying extra employees and 2.0%
was due to increased SG&A costs for increased facilities expense net of
savings in bad debt expense.
Operating income for the Engineering segment decreased $14.7 million, or
77.0%, to $4.4 million for the six months ended June 30, 2009, from $19.1
million for the comparable prior-year period. As a percentage of the total
Engineering segment revenue, operating income decreased by 9.0 percentage
points to 5.8% for the six months ended June 30, 2009, from 14.8% for the
comparable prior-year period. 5.1% of the operating income decrease was due
to lower margin work because of client pressures for competitive bidding,
2.7% was due to the additional costs of carrying extra employees and 1.2%
was due to increased SG&A costs for increased facilities expense net of
savings in bad debt expense.
29
|
Management's Discussion and Analysis (continued)
------------------------------------------------
Construction Segment Results
----------------------------
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------------- ----------------------------------------
2009 2008 2009 2008
------------------- ------------------ ------------------ -------------------
(Dollars in thousands)
--------------------------------------------------------------------------------------
Revenue before eliminations $ 22,664 $ 38,858 $ 45,214 $ 65,875
Inter-segment eliminations (228) (3,204) (1,541) (3,321)
---------- ---------- ---------- ----------
Total revenue $ 22,436 $ 35,654 $ 43,673 $ 62,554
========== ========== ========== ==========
Detailed revenue:
Inspection $ 18,149 80.9% $ 31,026 87.0% $ 36,352 83.2% $ 54,420 87.0%
Construction services 4,287 19.1% 4,628 13.0% 7,321 16.8% 8,134 13.0%
---------- ---------- ---------- ----------
Total revenue: $ 22,436 100.0% $ 35,654 100.0% $ 43,673 100.0% $ 62,554 100.0%
Gross profit: 1,789 8.0% 3,988 11.2% 3,429 7.9% 6,016 9.6%
Operating SG&A expense: 418 1.9% 759 2.1% 894 2.1% 1,462 2.3%
---------- ---------- ---------- ----------
Operating income: $ 1,371 6.1% $ 3,229 9.1% $ 2,535 5.8% $ 4,554 7.3%
========== ========== ========== ==========
Overview of Construction Segment:
The construction group provides construction management personnel and
services in the areas of mechanical integrity, vendor and turnaround
surveillance, field support, construction, inspection, and high-tech
maintenance. Our construction management business provides project
managers, instrument technicians, CADD operators, clerical staff, and
inspectors.
Revenue:
Our Construction segment's revenue decreased $13.3 million, or 37.3%, to
$22.4 million for the three months ended June 30, 2009, from $35.7 million
for the comparable prior-year period.
Our Construction segment's revenue decreased $18.9 million, or 30.2%, to
$43.7 million for the six months ended June 30, 2009, from $62.6 million
for the comparable prior-year period.
Due to the current economic environment, we have experienced decline in our
inspection related revenue as a result of project delays and competitive
pricing pressure, primarily in the area of pipeline construction. We expect
that the work for this area will begin to recover in the third quarter of
2009, but that it will remain below the highest levels achieved during 2008
for the remainder of this year.
Inspection related revenues decreased $13.0 million, or approximately
41.8%, to $18.1 million for the three months ended June 30, 2009, from
$31.1 million for the comparable prior-year period.
Inspection related revenues decreased $18.0 million, or approximately
33.1%, to $36.4 million for the six months ended June 30, 2009, from $54.4
million for the comparable prior-year period.
Construction services revenues decreased $0.3 million, or 6.5%, to $4.3
million for the three months ended June 30, 2009, from $4.6 million for the
comparable period in 2008. Revenue in this area decreased slightly due to
the delay or cancellation of projects by our clients in response to the
current economy. However, we have been focusing on new opportunities for
both alternative and conventional energy facilities.
30
|
Management's Discussion and Analysis (continued)
------------------------------------------------
Construction services revenues decreased $0.9 million, or 11.0%, to $7.3
million for the six months ended June 30, 2009, from $8.2 million for the
comparable period in 2008.
Gross profit:
Our Construction segment's gross profit decreased approximately $2.2
million, or 55.0%, to $1.8 million for the three months ended June 30,
2009, from $4.0 million for the comparable prior-year period and, as a
percentage of the total Construction segment revenue, gross profit
decreased by 3.2 percentage points to 8.0% from 11.2% for the respective
periods. Of the overall $2.2 million decrease in gross profit, $0.7 million
was attributable to increased costs, while decreased revenues contributed
to $1.5 million of the overall decrease. The decrease in gross profit is
primarily attributable to the overall decrease in available work and
increased overhead costs incurred in connection with our efforts to win new
work. The increased overhead costs for sales effort account for 0.5% of the
overall gross profit percentage change, increased costs for disposal of
assets account for 0.3% while the remainder is due to higher employee
related costs and competitive pressures to lower margins.
Our Construction segment's gross profit decreased approximately $2.6
million, or 43.3%, to $3.4 million for the six months ended June 30, 2009,
from $6.0 million for the comparable prior-year period and, as a percentage
of the total Construction segment revenue, gross profit decreased by 1.7
percentage points to 7.9% from 9.6% for the respective periods. Of the
overall $2.6 million decrease in gross profit, $0.8 million was
attributable to increased costs, while decreased revenues contributed to
$1.8 million of the overall decrease. The decrease in gross profit is
primarily attributable to the overall decrease in available work and
increased overhead costs incurred in connection with our efforts to win new
work. The increased overhead costs for sales effort account for 0.8% of the
overall gross profit percentage change, increased costs for disposal of
assets account for 0.2% while the remainder is due to higher employee
related costs and competitive pressures to lower margins.
Selling, General, and Administrative:
Our Construction segment's SG&A expense decreased approximately $0.4
million, or 50.0%, to $0.4 million for the three months ended June 30,
2009, from $0.8 million for the same period in 2008. As a percentage of the
total Construction segment revenue, SG&A expense decreased by 0.2
percentage points to 1.9% from 2.1% for the respective periods. The
decrease is attributable to $138,000 reduction in bad debt expense,
$171,000 in salaries and related employee expenses and $20,000 in
depreciation and amortization expense.
Our Construction segment's SG&A expense decreased approximately $0.6
million, or 40.0%, to $0.9 million for the six months ended June 30, 2009,
from $1.5 million for the same period in 2008. As a percentage of the total
Construction segment revenue, SG&A expense decreased by 0.2 percentage
points to 2.1% from 2.3% for the respective periods. The decrease is
attributable to $138,000 reduction in bad debt expense, $399,000 in
salaries and related employee expenses and $20,000 in depreciation and
amortization expense.
Operating Income:
Our Construction segment's operating income decreased $1.8 million, or
56.3%, to $1.4 million for the three months ended June 30, 2009, from $3.2
million for the comparable prior-year period. As a percentage of the total
Construction segment revenue, operating income decreased by 3.0 percentage
points to 6.1% for the three months ended June 30, 2009, from 9.1% for the
comparable prior-year period. The decrease in operating income is primarily
attributable to the increased direct and indirect costs of approximately
3.2% offset by a savings in SG&A expenses of 0.2%.
Our Construction segment's operating income decreased $2.1 million, or
45.7%, to $2.5 million for the six months ended June 30, 2009, from $4.6
million for the comparable prior-year period. As a percentage of the total
Construction segment revenue, operating income decreased by 1.5 percentage
points to 5.8% for the six months ended June 30, 2009, from 7.3% for the
comparable prior-year period. The decrease in operating income is primarily
attributable to the increased direct and indirect costs of approximately
1.7% offset by a savings in SG&A expenses of 0.2%.
31
|
Management's Discussion and Analysis (continued)
------------------------------------------------
Automation Segment Results
--------------------------
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------------- ------------------------------------------
2009 2008 2009 2008
------------------- ------------------ ------------------- -------------------
(Dollars in thousands)
----------------------------------------------------------------------------------------
Revenue before eliminations $ 15,578 $ 11,411 $ 36,255 $ 21,968
Inter-segment eliminations (1) (375) (87) (530)
---------- ---------- ---------- ----------
Total revenue $ 15,577 $ 11,036 $ 36,168 $ 21,438
========== ========== ========== ==========
Detailed revenue:
Fabrication $ 8,830 56.7% $ 6,938 62.9% $ 16,024 44.3% $ 13,621 63.5%
Non-fabrication 6,747 43.3% 4,098 37.1% 20,144 55.7% 7,817 36.5%
---------- ---------- ---------- ----------
Total revenue: $ 15,577 100.0% $ 11,036 100.0% $ 36,168 100.0% $ 21,438 100.0%
Gross profit: 1,217 7.8% 1,362 12.3% 4,074 11.3% 2,406 11.2%
Operating SG&A expense: 934 6.0% 749 6.8% 2,219 6.1% 1,381 6.4%
---------- ---------- ---------- ----------
Operating income: $ 283 1.8% $ 613 5.5% $ 1,855 5.2% $ 1,025 4.8%
========== ========== ========== ==========
Overview of Automation Segment:
Our Automation group provides services relating to the implementation of
process controls, advanced automation and information technology projects.
We provide clients with a full range of services including front-end
engineering feasibility studies and the execution of active large scope
engineering, procurement, and construction projects. By focusing on such
large-scope projects, we intend to pursue Distributed Control Systems (DCS)
conversion and new installation projects by utilizing the Automation
segment resources as well as resources from our Engineering segment.
ENGlobal has proven capabilities for plant automation services and products
to respond to an industry progression toward replacing obsolete technology
with new open system architecture DCS.
Our Automation segment is focusing significant efforts not only on
marketing to our existing client base, but also to expanding our client
base outside of the energy sector both domestically and internationally.
Revenue:
Our Automation segment's revenue increased approximately $4.6 million, or
41.8%, to $15.6 million for the three months ended June 30, 2009, from
$11.0 million for the comparable prior-year period. Approximately $1.5
million of our revenue increase came from the acquisition of Advanced
Control Engineering LLC in September 2008. The remainder of the increase is
due to new work acquired as a result of our increased sales effort.
Our Automation segment's revenue increased approximately $14.8 million, or
69.2%, to $36.2 million for the six months ended June 30, 2009, from $21.4
million for the comparable prior-year period. Approximately $3.9 million of
our revenue increase came from the acquisition of Advanced Control
Engineering LLC in September 2008 and approximately $8.8 million of our
revenue increase came from the Ike Recovery project for a specific client.
The remainder of the increase is due to new work acquired as a result of
our increased sales effort.
Gross profit:
The Automation segment's gross profit decreased approximately $0.2 million,
or 14.3%, to $1.2 million for the three months ended June 30, 2009, from
$1.4 million for the comparable prior-year period. As a percentage of the
total Automation segment revenue, gross profit decreased by 4.5 percentage
points to 7.8%, from 12.3% for the three months ended June 30, 2009 and
2008, respectively. Of the overall $0.2 million decrease in gross profit,
32
|
Management's Discussion and Analysis (continued)
------------------------------------------------
$0.8 million was attributable to increased costs offset by increased
revenues of $0.6 million. Of the total gross profit percentage change, an
increase of 0.5% was recognized for cancellation of incentive bonus plans
offset by a decrease of 2.5% for additional indirect costs associated to
the ACE acquisition, 0.6% for lower utilization caused by the move of
offices while the remainder was attributed to unrecognized revenues
associated with pending change orders and client authorizations.
The Automation segment's gross profit increased approximately $1.7 million,
or 70.8%, to $4.1 million for the six months ended June 30, 2009, from $2.4
million for the comparable prior-year period. As a percentage of the total
Automation segment revenue, gross profit increased by 0.1 percentage points
to 11.3%, from 11.2% for the six months ended June 30, 2009 and 2008,
respectively. Of the total gross profit percentage change, an increase of
0.6% was recognized for cancellation of incentive bonus plans offset by
decreases for additional indirect costs associated to the ACE acquisition,
lower utilization caused by the move of offices, and unrecognized revenues
associated with pending change orders and client authorizations.
Selling, General, and Administrative:
Our Automation segment's SG&A expense increased approximately $0.2 million,
or 28.6%, to $0.9 million for the three months ended June 30, 2009, from
$0.7 million for the comparable prior-year period. The increase in SG&A
expense is attributable to increases of $131,000 in depreciation and
amortization expense and $234,000 in facilities expense due to the
relocation of the Houston office, offset by savings of $86,000 in bad debt
expense and $122,000 in salaries and employee related expenses. Of the
$234,000 in facilities expense, $132,000 was additional expenses for the
delay in getting the building inspector's approval for the move to our new
Houston office. As a percentage of the total Automation segment revenue,
SG&A expense decreased by 0.8 percentage points to 6.0%, from 6.8% for the
three months ended June 30, 2009 and 2008, respectively. This decrease in
percentage is directly related to the increase in revenues.
Our Automation segment's SG&A expense increased approximately $0.8 million,
or 57.1%, to $2.2 million for the six months ended June 30, 2009, from $1.4
million for the same period in 2008. The increase in SG&A expense is
attributable to increases of $213,000 in depreciation and amortization
expense, $410,000 in facilities expense due to the relocation of the
Houston office, and $201,000 in salaries and employee related expenses
offset by savings of $86,000 in bad debt. Of the $410,000 in facilities
expense, $132,000 was additional expenses for the delay in getting the
building inspector's approval for the move to our new Houston office. As a
percentage of the total Automation segment revenue, SG&A expense decreased
by 0.3 percentage points to 6.1%, from 6.4% for the six months ended June
30, 2009 and 2008, respectively. This decrease in percentage is directly
related to the increase in revenues.
Operating Income:
As a result of the factors discussed above, the Automation segment's
operating income decreased approximately $0.3 million, or 50.0%, to $0.3
million for the three months ended June 30, 2009, from $0.6 million for the
three months ended June 30, 2008. As a percentage of the total Automation
segment revenue, operating income decreased by 3.7 percentage points to
1.8% for the three months ended June 30, 2009, from 5.5% for the comparable
prior-year period.
As a result of the factors discussed above, the Automation segment's
operating income increased approximately $0.9 million, or 90.0%, to $1.9
million for the six months ended June 30, 2009, compared to operating
income of $1.0 million for the six months ended June 30, 2008. As a
percentage of the total Automation segment revenue, operating income
increased by 0.4 percentage points to 5.2% for the six months ended June
30, 2009, from 4.8% for the comparable prior-year period.
33
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Management's Discussion and Analysis (continued)
------------------------------------------------
Land Segment Results
--------------------
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------------- ----------------------------------------
2009 2008 2009 2008
------------------- ------------------ ----------------- ------------------
(Dollars in thousands)
-------------------------------------------------------------------------------------
Revenue before eliminations $ 8,412 $ 11,842 $ 17,498 $ 20,677
Inter-segment eliminations - - - -
---------- ---------- ---------- ----------
Total revenue $ 8,412 100.0% $ 11,842 100.0% $ 17,498 100.0% $ 20,677 100.0%
========== ========== ========== ==========
Gross profit: 1,288 15.3% 2,172 18.3% 2,659 15.2% 3,564 17.2%
Operating SG&A expense: 365 4.3% 881 7.4% 1,002 5.7% 1,558 7.5%
---------- ---------- ---------- ----------
Operating income: $ 923 11.0% $ 1,291 10.9% $ 1,657 9.5% $ 2,006 9.7%
========== ========== ========== ==========
Overview of Land Segment:
Our Land segment provides land management expertise in title research,
permitting and acquisition. We provide land and right of way consulting
services and a broad menu of complementary solutions primarily to the
energy, utility, transportation, electric power and government sectors. We
have successfully built a reputation for quality, budget management and
focused objectives, as long term alliance partners with our clients.
The Land segment was created as a result of our acquisition of WRC
Corporation in May 2006, and was renamed ENGlobal Land, Inc. in January
2008. The Land segment provides services to a cross-section of clients in
the energy markets. As the country attempts to shift its dependence on
foreign energy to reliance on domestic sources, we anticipate that the Land
segment will have additional project opportunities.
Revenue:
At the beginning of the year, the Land segment was able to sustain its
revenue. However, Land segment revenues are now being impacted by the
economic downturn.
The Land segment's revenue decreased approximately $3.4 million, or 28.8%,
to $8.4 million for the three months ended June 30, 2009, from $11.8
million for the comparable prior-year period. This decrease in Land segment
revenue is primarily attributable to clients delaying capital projects and
competitive pricing pressures as a result of the economic downturn.
The Land segment's revenue decreased approximately $3.2 million, or 15.5%,
to $17.5 million for the six months ended June 30, 2009, from $20.7 million
for the comparable prior-year period. This decrease in Land segment revenue
is primarily attributable to clients delaying capital projects and
competitive pricing pressures as a result of the economic downturn.
Gross profit:
Due to current economic conditions, we are experiencing higher client
demands for lower costs. As a result, some of our contracts provide lower
margins than we have been able to earn in the past. This trend is adversely
affecting our gross profit.
The Land segment's gross profit decreased approximately $0.9 million, or
40.9%, to $1.3 million for the three months ended June 30, 2009, from $2.2
million for the comparable prior-year period. Of the overall $0.9 million
decrease in gross profit, $0.3 million was attributable to increased costs,
while decreased revenues contributed to $0.6 million of the decrease. As a
percentage of the total Land segment revenue, gross profit decreased by 3.0
percentage points to 15.3%, from 18.3% for the three months ended June 30,
2009 and 2008, respectively.
34
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Lower margins resulting from competitive pressures account for approximately 2.6% of the gross profit decrease. The remaining 0.4% decrease is attributable to increased non-billable and indirect costs associated with carrying employees between projects.
The Land segment's gross profit decreased approximately $0.9 million, or 25.0%, to $2.7 million for the six months ended June 30, 2009, from $3.6 million for the comparable prior-year period. Of the overall $0.9 million decrease in gross profit, $0.3 million was attributable to increased costs, while decreased revenues contributed to $0.6 million of the decrease. As a percentage of the total Land segment revenue, gross profit decreased by 2.0 percentage points to 15.2%, from 17.2% for the six months ended June 30, 2009 and 2008, respectively. Lower margins resulting from competitive pressures account for approximately 1.7% of the gross profit decrease. The remaining 0.3% decrease is attributable to increased non-billable and indirect costs associated with compensating employees who are between projects.
Selling, General, and Administrative:
The Land segment's SG&A expense decreased approximately $0.5 million, or 55.6%, to $0.4 million for the three months ended June 30, 2009, from $0.9 million for the same period in 2008. As a percentage of the total Land segment revenue, SG&A expense decreased by 3.1 percentage points to 4.3%, from 7.4% for the three months ended June 30, 2009 and 2008, respectively. Decreases in SG&A costs for the three months ended June 30, 2009, were mainly related to reductions of bad debt expense in the amount of $213,000 and $260,000 in salaries and related employee expenses.
The Land segment's SG&A expense decreased approximately $0.6 million, or 37.5%, to $1.0 million for the six months ended June 30, 2009, from $1.6 million for the same period in 2008. As a percentage of the total Land segment revenue, SG&A expense decreased by 1.8 percentage points to 5.7%, from 7.5% for the six months ended June 30, 2009 and 2008, respectively. Decreases in SG&A costs for the six months ended June 30, 2009, were related to reductions of bad debt expense in the amount of $238,000 and $263,000 in salaries and related employee expenses.
Operating Income:
The Land segment's operating income decreased approximately $0.4 million, or 30.8%, to $0.9 million for the three months ended June 30, 2009, from $1.3 million for the three months ended June 30, 2008. As a percentage of the total Land segment revenue, operating income increased 0.1 percentage points to 11.0% for the three months ended June 30, 2009, from 10.9% for the same period in 2008. The additional direct costs for performing the work were offset by the savings in SG&A expense, resulting in a flat operating income percentage quarter over quarter.
The Land segment's operating income decreased approximately $0.3 million, or 15.0%, to $1.7 million for the six months ended June 30, 2009, from $2.0 million for the six months ended June 30, 2008. As a percentage of the total Land segment revenue, operating income decreased 0.2 percentage points to 9.5% for the six months ended June 30, 2009, from 9.7% for the same period in 2008. The additional direct costs for performing the work were offset by the savings in SG&A expense, resulting in a flat operating income percentage year over year.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our financial instruments include cash and cash equivalents, accounts and notes receivable, accounts payable, notes and capital leases payable, and debt obligations. The book value of cash and cash equivalents, accounts receivable, accounts payable and short-term notes payable are considered to be representative of fair value because of the short maturity of these instruments.
We do not utilize financial instruments for trading purposes and we do not hold any derivative financial instruments that could expose us to significant market risk. In the normal course of business, our results of operations are exposed to risks associated with fluctuations in interest rates and currency exchange rates.
Our exposure to market risk for changes in interest rates relates primarily to our obligations under the Comerica Credit Facility (the "Credit Facility"). As of June 30, 2009, $13.2 million had been borrowed under the Credit Facility, accruing interest at 3.00% per year on prime and between 1.58% and 2.54% on LIBOR, excluding amortization of prepaid financing costs. If it becomes necessary for the Company to replace the Credit Facility in the current economic environment, it may not be able to obtain as favorable a rate structure as the existing arrangement.
In general, our exposure to fluctuating exchange rates relates to the effects of translating the financial statements of our Canadian subsidiary from the Canadian dollar to the U.S. dollar. We follow the provisions of SFAS No. 52 - "Foreign Currency Translation" in preparing our condensed consolidated financial statements. Currently, we do not engage in foreign currency hedging activities.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures of a registrant that are designed to ensure that information required to be disclosed by the registrant in the reports that it files or submits under the Exchange Act is properly recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's ("SEC") rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a registrant in the reports that it files or submits under the Exchange Act is accumulated and communicated to the registrant's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow for timely decisions regarding required disclosure.
We evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2009, as required by Rule 13a-15 of the Exchange Act. Based on the evaluation described above, our Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2009, our disclosure controls and procedures were effective insofar as they are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms. Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
No changes in our internal control over financial reporting occurred during the six months ended June 30, 2009, that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 1. LEGAL PROCEEDINGS
The Company received notice of an action filed in the 234th District Court for Harris County, TX on or about March 20, 2009, seeking declaratory relief to clear title to real property and improvements owned by Bigler Chemical on which ENGlobal Engineering, Inc. ("EEI") had filed a statutory mechanics lien statement in the amount of $2,988,000 on or about February 18, 2009. Bigler also claims breach of contract by EEI and monetary damages. The Company filed its Answer and Counterclaim for damages on breach of contract, for its attorneys' fees and costs, and to foreclose on its lien interest on April 27, 2009. We have concluded that it is remote that a liability will be incurred; therefore no loss contingency has been established.
As discussed in Note 9 above, in the first quarter of 2007 ENGlobal's Engineering segment 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 is described in Note 12 to the Company's condensed consolidated financial statements included in its Quarterly Report on Form 10-Q for the quarter ended September 30, 2007, and is discussed further in the Company's Annual Report on Form 10-K for the year ended December 31, 2007. Due to the continued failure of SLE to obtain permanent financing, on May 30, 2008, the Company filed suit to begin foreclosure proceedings in the United States District Court for the Eastern District of Louisiana, Cause Number 08-3601. The Company is seeking damages of $15.8 million.
From time to time, the Company and its subsidiaries become parties to various legal proceedings arising in the ordinary course of normal business activities. While we cannot predict the outcome of these proceedings, in our opinion and based on reports of counsel, any liability arising from such matters, individually or in the aggregate, is not expected to have a material effect upon the consolidated financial position or operations of the Company.
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part I, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2008, which outlines factors that 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
On June 18, 2009, the Company held its Annual Meeting of Stockholders. The Company's stockholders elected the following four persons as directors, each to serve until the next Annual Meeting of Stockholders or until his successor is elected or appointed: William A. Coskey, P.E., David W. Gent, P.E., Randall B. Hale, and David C. Roussel. The Company's stockholders also voted to approve the adoption of the ENGlobal Corporation 2009 Equity Incentive Plan authorizing 480,000 shares, the equivalent number of shares remaining under the expired ENGlobal Corporation 1998 Incentive Plan previously approved by stockholders on June 14, 2007.
The number of shares voted and withheld with respect to each director were as
follows:
Election of Directors For Withheld
--------------------- --- --------
William A. Coskey, P.E. 23,584,054 2,213,967
David W. Gent, P.E. 18,629,284 7,168,737
Randall B. Hale 22,381,943 3,416,078
David C. Roussel 22,991,935 2,806,086
The number of shares voted for and against the approval of the adoption of the
ENGlobal Corporation 2009 Equity Incentive Plan were as follows:
For Against Abstain
--- ------- -------
11,130,687 9,611,280 18,332
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
Incorporated by Reference to:
------------------------------------------------
Exhibit Form or Exhibit Filing Date SEC File
No. Description Schedule No. with SEC Number
------- ----------- -------- ------- ----------- --------
3.1 Restated Articles of Incorporation of Registrant 10-Q 3.1 11/14/02 001-14217
dated August 8, 2002
3.2 Amendment to the Restated Articles of 8-A12B 3.1 12/17/07 001-14217
Incorporation of the Registrant, filed with the
Nevada Secretary of State on June 2, 2006
3.3 Amended and Restated Bylaws of Registrant dated 10-K 3.3 03/28/08 001-14217
November 6, 2007
3.4 Amendments to Amended and Restated Bylaws of 10-Q 3.2 05/07/08 001-14217
Registrant dated April 29, 2008.
*10.1 Form of Restricted Stock Award Agreement of 2009
Equity Incentive Plan between Registrant and its
independent directors
*31.1 Certifications Pursuant to Rule 13a - 14(a) of
the Securities Exchange Act of 1934 for the
Second Quarter 2009
*31.2 Certifications Pursuant to Rule 13a - 14(a) of
the Securities Exchange Act of 1934 for the
Second Quarter 2009
*32.0 Certification Pursuant to Rule 13a - 14(b) of the
Securities Exchange Act of 1934 and 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 for the Second
Quarter 2009
* Filed herewith
38
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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 10, 2009
By: /s/ Robert W. Raiford
-------------------------
Robert W. Raiford
Chief Financial Officer and Treasurer
|
Exhibit 10.1
ENGLOBAL CORPORATION
2009 EQUITY INCENTIVE PLAN
You have been granted a right to acquire restricted Common Stock of the Company (the "Stock Award"), subject to the terms and conditions of this Notice of Stock Award (the "Notice"), the ENGlobal Corporation 2009 Equity Incentive Plan (the "Plan"), and the attached Stock Award Agreement (the "Award Agreement"). Unless otherwise defined in this Notice, all terms used in this Notice that are defined in the Plan shall have the meaning as defined in the Plan.
Name and Address of Participant:
Total Number of Shares of Common Stock
Granted (the "Shares"):
Purchase Price Per Share
Fair Market Value Per Share:
Date of Grant:
Vesting Schedule:
Subject to the Participant's continuous
status as a ________________ and other
limitations set forth in this Notice,
the Award Agreement and the Plan, the
Shares shall vest _______________. In
accordance with Section 4 of the Award
Agreement, all Shares that are unvested
as of the date the Participant ceases to
qualify as a ________________ shall
immediately and automatically be
forfeited and returned to the Company.
In the event of a Change in Control, the
Shares shall automatically become fully
vested immediately prior to the
specified effective date of such Change
of Control.
[SIGNATURES ON FOLLOWING PAGE]
By your signature and the signature of the Company's representative, you and the Company agree that the Shares granted are governed by the terms and conditions of this Notice, the Award Agreement, and the Plan, all of which are attached to and made a part of this document.
ENGLOBAL CORPORATION
Chief Executive Officer
The Participant acknowledges receipt of a copy of the Award Agreement and the Plan, and represents that he or she is familiar with the provisions thereof, and hereby accepts the Shares subject to all of the terms and provisions hereof and thereof. The Participant has reviewed this Notice, the Award Agreement and the Plan in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Notice, and fully understands all provisions of this Notice, the Award Agreement and the Plan. The Participant hereby agrees that all questions of interpretation and administration relating to this Notice, the Award Agreement and the Plan shall be resolved by the Committee. The Participant further agrees to the venue selection in accordance with Section 16 of the Award Agreement.
ENGLOBAL CORPORATION
2009 EQUITY INCENTIVE PLAN
1. Grant of Shares. Subject to the terms and provisions of the ENGlobal Corporation 2009 Equity Incentive Plan (the "Plan"), the Notice of Stock Award (the "Notice"), and this Stock Award Agreement (the "Award Agreement"), the Company hereby grants to the Participant named in the Notice, the Total Number of Shares of Common Stock Granted (the "Shares"). Unless otherwise defined herein, all terms used in this Award Agreement that are defined in the Plan shall have the meaning as defined in the Plan.
2. Purchase Price Per Share. If the granted Shares are subject to a purchase price, as set forth in the Notice, the Participant shall have the right to purchase such Shares at the specified purchase price in accordance with such procedures as may be established by the Committee from time to time.
3. Vesting. The Shares shall vest in accordance with the vesting schedule set forth in the Notice (the "Vesting Schedule").
4. Risk of Forfeiture.
4.1 General Rule. The Shares shall initially be subject to a risk of forfeiture. The Participant may not transfer, assign, encumber, or otherwise dispose of any Shares subject to a risk of forfeiture other than in accordance with the Notice, Award Agreement and the Plan. If the Participant transfers any such Shares in accordance with the terms of the Notice, Award Agreement and the Plan, then this Section 4 shall apply to the transferee to the same extent as to the transferor.
4.2 Lapse of Risk of Forfeiture. The risk of forfeiture shall lapse as the Participant vests in the Shares in accordance with the Vesting Schedule.
4.3 Forfeiture of Shares. The Shares subject to a risk of forfeiture shall automatically be forfeited and immediately returned to the Company upon the Participant ceasing to qualify as a ________________.
5. Transfer Restrictions. The Shares issued to the Participant hereunder may not be sold, transferred by gift, pledged, hypothecated, or otherwise transferred or disposed of by the Participant prior to the date when the Shares become vested pursuant to the Vesting Schedule. Any attempt to transfer Shares in violation of this Section 5 shall be null and void and shall be disregarded.
6. Escrow of Shares. For purposes of facilitating the enforcement of the provisions of this Award Agreement, the Participant agrees, immediately upon receipt of the certificate(s) for the Shares, to deliver such certificate(s), together with an Assignment Separate from Certificate in the form attached hereto as Exhibit A, executed in blank by the Participant with respect to each such stock certificate, to the Secretary of the Company, or their designee, to hold in escrow for so long as such Shares have not vested pursuant to the Vesting Schedule, with the authority to take all such actions and to effectuate all such transfers and/or releases as may be necessary or appropriate to accomplish the objectives of this Award Agreement in accordance with the terms hereof. The Participant hereby acknowledges that the appointment of the
Secretary of the Company (or their designee) as the escrow holder hereunder with the stated authorities is a material inducement to the Company to make this Award Agreement and that such appointment is coupled with an interest and is accordingly irrevocable. The Participant agrees that such escrow holder shall not be liable to any party hereto (or to any other party) for any actions or omissions unless such escrow holder is grossly negligent relative thereto. The escrow holder may rely upon any letter, notice or other document executed by any signature purported to be genuine and may resign at any time. Upon the vesting of Shares, the escrow holder shall, without further order or instruction, transmit to the Participant the certificate evidencing such Shares, subject, however, to satisfaction of any withholding obligations provided in Section 9.
7. Additional Securities. Any securities or cash received (other than a "Regular Dividend," as defined in Section 8, as the result of ownership of the Shares (the "Additional Securities"), including, but not by way of limitation, warrants, options and securities received as a stock dividend or stock split, or as a result of a recapitalization or reorganization or other similar change in the Company's capital structure, shall be retained in escrow in the same manner and subject to the same conditions and restrictions as the Shares with respect to which they were issued, including, without limitation, the Vesting Schedule. The Participant shall be entitled to direct the Company to exercise any warrant or option received as Additional Securities upon supplying the funds necessary to do so, in which event the securities so purchased shall constitute Additional Securities, but the Participant may not direct the Company to sell any such warrant or option (notwithstanding, if under the Vesting Schedule the Additional Securities are forfeited, the funds supplied by the Participant to purchase the Additional Securities shall be paid to the Participant). If Additional Securities consist of a convertible security, the Participant may exercise any conversion right, and any securities so acquired shall constitute Additional Securities. In the event of any change in certificates evidencing the Shares or the Additional Securities by reason of any recapitalization, reorganization or other transaction that results in the creation of Additional Securities, the escrow holder is authorized to deliver to the issuer the certificates evidencing the Shares or the Additional Securities in exchange for the certificates of the replacement securities.
8. Distributions. The Company shall disburse to the Participant all Regular Dividends with respect to the Shares and Additional Securities, whether vested or otherwise, less any applicable withholding obligations. For purposes of Sections 7 and 8, the term Regular Dividends means any distribution of cash or property other than securities that is considered to be received as a result of a sale or exchange of the Shares for purposes of the Code.
9. Taxes.
9.1 Tax Liability. The Participant is ultimately liable and responsible for all taxes owed by the Participant in connection with the grant of the Shares, regardless of any action the Company or any affiliate takes with respect to any tax withholding obligations that arise in connection with the grant of such Shares. Neither the Company nor any affiliate makes any representation or undertaking regarding the treatment of any tax withholding in connection with the grant, vesting or the subsequent sale of Shares. The Company and its affiliates do not commit and are under no obligation to structure the grant of the Shares to reduce or eliminate the Participant's tax liability.
9.2 Payment of Withholding Taxes. Prior to any event in connection with the Shares (e.g., vesting) that the Company determines may result in any tax withholding obligation, whether United States federal, state, local or
non-U.S., including any employment tax obligation, the Participant must arrange for the satisfaction of the minimum amount of such tax withholding obligation in accordance with Section 19(c) of the Plan, but only to the extent as permitted by the Committee in its sole and absolute discretion.
10. Stop-Transfer Notices. In order to ensure compliance with the restrictions on transfer set forth in this Award Agreement, the Notice or the Plan, the Company may issue appropriate "stop transfer" instructions to its transfer agent, if any, and, if the Company transfers its own securities, it may make appropriate notations to the same effect in its own records.
11. Refusal to Transfer. The Company shall not be required (i) to transfer on its books any Shares that have been sold or otherwise transferred in violation of any of the provisions of this Award Agreement or (ii) treat as owner of such Shares or to accord the right to vote or pay dividends to any purchaser or other transferee to whom such Shares shall have been so transferred.
12. Restrictive Legends. The certificates evidencing the Shares shall bear legends substantially equivalent to the following:
"THE SHARES REPRESENTED BY THIS CERTIFICATE ARE RESTRICTED BY THE TERMS OF THAT CERTAIN STOCK AWARD AGREEMENT BETWEEN ENGLOBAL CORPORATION (THE "COMPANY") AND THE NAMED STOCKHOLDER. THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE TRANSFERRED ONLY IN ACCORDANCE WITH SUCH AWARD AGREEMENT, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY."
13. Entire Agreement/Governing Law. The Notice, this Award Agreement, and the Plan constitute the entire contract between the parties hereto with regard to the subject matter hereof. They supersede any other agreements, representations, or understandings (whether oral or written and whether express or implied) that relate to the subject matter hereof. Except to the extent of a conflict in Section 78 of the Nevada Revised Statutes, these agreements and all related matters are governed by the laws of the State of Texas without giving effect to any choice of law rule that would cause the application of the laws of a different state. If any provision of the Notice, this Award Agreement or the Plan be determined to be illegal or unenforceable, the other provisions shall nevertheless remain effective and shall remain enforceable.
14. Construction. The captions used in the Notice and this Award Agreement are inserted for convenience and shall not be deemed a part of the Shares for construction or interpretation. Except when otherwise indicated by the context, the singular shall include the plural and the plural shall include the singular. Use of the term "or" is not intended to be exclusive, unless the context clearly requires otherwise.
15. Administration and Interpretation. Any question or dispute regarding the administration or interpretation of the Notice, this Award Agreement or the Plan shall be submitted by the Participant or by the Company to the Committee for its exclusive determination. The resolution of such question or dispute by the Committee shall be final and binding on all persons.
16. Venue. The Company, the Participant and the Participant's assignees agree that any suit, action or proceeding arising out of or related to the Notice, this Award Agreement or the Plan shall be brought in the United States
District Court for the Southern District of Texas (or should such court lack jurisdiction to hear such action, suit or proceeding, in a Texas state court in the County of Harris) and that all parties shall submit to the jurisdiction of such court. The parties irrevocably waive, to the fullest extent permitted by law, any objection the party may have to the laying of venue for any such suit, action or proceeding brought in such court. If any one or more provisions of this Section 16 shall for any reason be held invalid or unenforceable, it is the specific intent of the parties that such provisions shall be modified to the minimum extent necessary to make it or its application valid and enforceable.
17. Notices. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery, upon deposit for delivery by an internationally recognized express mail courier service or upon deposit in the United States mail by certified mail (if the parties are within the United States), with postage and fees prepaid, addressed to the other party at its address as shown in these instruments, or to such other address as such party may designate in writing from time to time to the other party.
* * * * *
ENGLOBAL CORPORATION
2009 EQUITY INCENTIVE PLAN
[Please sign this document but do not date it. The date and information of the transferee will be completed if and when the shares are assigned.]
FOR VALUE RECEIVED, ____________________________ hereby sells, assigns and transfers unto ___________________, _________________ (_________) shares of the Common Stock of ENGlobal Corporation, a Nevada corporation (the "Company"), standing in his name on the books of the Company represented by Certificate No. ______________ herewith, and does hereby irrevocably constitute and appoint the Secretary of the Company attorney to transfer the said stock in the books of the Company with full power of substitution.
Exhibit 31.1
CERTIFICATION
I, William A. Coskey, certify that:
1. I have reviewed this quarterly report on Form 10-Q for the quarter ended June 30, 2009 of ENGlobal Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: August 10, 2009 By: /s/ William A. Coskey
-------------------------
William A. Coskey
Chief Executive Officer
|
Exhibit 31.2
CERTIFICATION
I, Robert W. Raiford, certify that:
1. I have reviewed this quarterly report on Form 10-Q for the quarter ended June 30, 2009 of ENGlobal Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: August 10, 2009 By: /s/ Robert W. Raiford
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Robert W. Raiford
Chief Financial Officer
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Exhibit 32.0
CERTIFICATION
Each of the undersigned hereby certifies, for the purposes of section 1350 of chapter 63 of title 18 of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in his capacity as an officer of ENGlobal Corporation ("ENGlobal"), that, to his knowledge, the Quarterly Report of ENGlobal on Form 10-Q for the period ended June 30, 2009, fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that the information contained in such report fairly presents, in all material respects, the financial condition and results of operation of ENGlobal. This written statement is being furnished to the Securities and Exchange Commission as an exhibit to such Form 10-Q. A signed original of this statement has been provided to ENGlobal and will be retained by ENGlobal and furnished to the Securities and Exchange Commission or its staff upon request.
Date: August 10, 2009 By: /s/ William A. Coskey
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William A. Coskey
Chief Executive Officer
Date: August 10, 2009 By: /s/ Robert W. Raiford
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Robert W. Raiford
Chief Financial Officer and
Treasurer
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