ENGlobal Corporate Office
654. N. Sam Houston Pkwy. E., Suite 400
Houston, Texas 77060-5914
Phone: 281.878.1000
Fax: 281.878.1010
Toll-Free: 800.570.3935
www.ENGlobal.com
ENGLOBAL CORPORATION
2009 ANNUAL R E P O R T
In
an
effort
to
conserve
resources
and
reduce
printing/mailing
expenses,
ENGlobal
has
intentionally eliminated color and downgraded paper quality
for
its printed 2009 Annual Report on Form 10-K.
April 30, 2010
To Our Stockholders:
Economic and industry conditions slowed midstream and downstream project activity in the second half
of 2008 and intensified throughout 2009. Our year end financial results demonstrate the reality of the
current market for ENGlobal’s services in the midstream and downstream domestic energy sectors. Many
of our clients dramatically contracted their project spending during the year and continue to do so. Many
types of our services – from engineering front end development studies to pipeline inspection work – are
immediately impacted. Our assessment of our 2009 operations can be summarized as follows:
1. Our heritage operating clients deferred both capital and maintenance projects;
2. A large part of our work is performed on domestic projects, which was affected to a greater extent
than international work; and
3. Many of our engineering and related project services occur early in a project cycle, which tend to
drop off sooner from any downturn in new project awards, as opposed to construction activity.
To corroborate our assessment, Industrial Info Resources, Inc., an industrial market intelligence firm
(“IIR”), recently reported that the dollar value of new capital and maintenance projects in the U.S.
refining, petrochemical, and pipeline industries – which are our primary markets – decreased an average
of 68% from 2008 to 2009. This compares to a 16% decrease in dollar value for all U.S. industries over
the same period. This direct market information indicates the severity in which our clients have reduced
spending during the last year. The same report showed that capital and maintenance spending in our
primary markets is expected to be in line on average in 2010, compared to 2009 levels.
For several years, ENGlobal has talked about sustainable and recurring sources of revenue from a variety
of long term sources, which typically represent about “two-thirds” of our revenue. This recurring work is
sustaining us, but has produced lower profit margin. The part of our business we basically lost was the
“other third” of our business, which is derived from our work on capital projects. During 2009, our
business primarily operated on the following sources of activities:
1.
2.
3.
4.
5.
In-Plant personnel staffing, personnel that we second to client work locations, both in
their office and in the field, which has proven to be very stable during the downturn.
Small “run and maintain” maintenance related projects. Although clients have cut their
maintenance budgets, these projects never go completely away.
Work that is provided as a result of our “Alliance” or “Preferred Provider” long-term
client relationships.
Projects created by technological obsolescence of automated control equipment, such as
retrofitting old distributed control systems and analyzer equipment with newer
technology in process plants.
Regulatory projects that are mandated by various agencies of the federal government for
compliance goals like reducing plant emissions (EPA), process safety improvement
(OSHA), and pipeline integrity (DOT).
In addition to lower margins, during the lean times, it becomes much more difficult to maintain utilization
of our resources at historical levels. Downtrend in billable hours resulted in necessary reductions in our
work force. During 2009, we experienced about one-third lower levels of billable man-hours than we
enjoyed in 2008, while our employee count decreased to approximately 2,000 from a high of 2,900.
Letter to Stockholders
Page 2
As a recap of ENGlobal’s performance, our business trends such as revenue, gross profit margins,
backlog, and billable man-hours all decreased roughly 30% year over year. Looking forward, we have
started to see billable man-hours and utilization metrics trending upward, which we believe is an early,
but still an encouraging sign within our Company. We have also been encouraged by improving signs
within the industry, such as increased proposal activity and client spending plans.
As you know, ENGlobal has a seasonal business with its strongest performance during the second and
third quarters, while the first and fourth quarters are typically weaker due to: (1) general market softness,
(2) abundant vacations and holidays, and (3) projects “ramping down” at year end and “ramping up” at
the first of the year. It seems that this seasonality is the same in good times and bad, with occasional
exceptions.
Historically, ENGlobal’s Engineering segment, and specifically the services we perform in our offices,
has contributed a majority of the profit for our Company over many years. Over the course of 2009, In-
Office Engineering has been impacted mainly due to reduced capital and maintenance spending in the
U.S. midstream and downstream industries. Our In -Plant staffing has remained the relatively steady
during the downturn, while the engineering work we perform in our offices has been hurt the most.
Our Construction and Land segments have been impacted by market conditions, but not to the same
extent as Engineering, as they both primarily benefit from ongoing pipeline work that’s generated by
newer oil and gas shale plays around the country. Reduced revenue in Construction was primarily driven
by a lower numbers of pipeline inspectors in the field. Our inspection numbers are expected to pick up
again, which are likely to be driven by major pipeline construction projects getting underway. Similarly,
the Land group has been our steadiest performer during the downturn and its results were roughly in line
with those from the prior year. We expect to see increased pipeline right-of-way acquisition work, and a
growing amount of electric transmission activity.
Our Automation group had a successful year in 2009, driven to a large extent by capitalizing on remote
instrument buildings and control system sales for large, international grass roots projects, mainly in the
Middle East. In addition, Automation’s downstream clients – large integrated oil and gas companies and
some Tier One engineering and construction firms – have an ongoing need to replace their obsolete
distributed control systems and process analyzer equipment with newer technology. During the year, the
Automation group moved into a new, 85,000 square foot fabrication facility in Houston, and benefited
from a higher level of backlog than in the past.
ENGlobal’s business development strategy changed during 2009. Our basic mission is to replace the
higher-margin revenue that we lost from our heritage markets, which has forced us to look farther and
wider for work. In fact, we have never had a more active sales effort in our Company’s history. And this
is not just from our dedicated Business Development professionals, but also from our entire management
and operations staff in what we call “Team Sales.”
On a positive note, we believe the Company is well positioned to participate in what we believe will be a
slowly improving market over the next several years for the following reasons:
•
a much higher level of proposal activity from our heritage clients – refiners, chemical and
petrochemical plants, and pipeline operators – have increased proposal activity;
•
recent awards and initiatives in areas that are new to ENGlobal, such as infrastructure;
•
the renewal of many of our existing master service agreements with long-term clients;
•
the signing of twelve new preferred provider agreements with new or long-term clients; and
• generally improving trends we see from our internal metrics, like billable hours, utilization, and
employee count.
Letter to Stockholders
Page 3
ENGlobal has been spreading its wings into new areas, to make up for the current reduced activity in our
heritage energy-related, domestic project work. Basically, we will work to gain access to a new
marketplace for our core services. We are pursing new, unique strategic directions for our business,
which mainly involves a push into the following active markets:
1.
2.
3.
4.
5.
6.
UPSTREAM. Historically, ENGlobal has grown by focusing on the midstream and
downstream energy sectors, while most of our clients tend to spend the majority of their
capital budgets on the upstream sector. In pursuing this initiative, we expect to find better
margin opportunities, while our core client base of large, integrated oil and gas companies
wouldn’t change dramatically. We acquired Houston-based Control Dynamics International
in April 2010 in an effort to gain expertise and promote opportunities in this area.
INTERNATIONAL. We plan to expand our international marketing efforts, where we
already have a significant résumé. Although ENGlobal has been primarily known as a
domestic engineering and construction firm, we are looking to change that perception over
time as ENGlobal becomes more “global.” International project activity, especially for the
downstream sector, is currently much stronger than in the U.S. Through relationships we
have developed the U.S., ENGlobal will be able to submit proposals for international
projects, mainly on facilities in the Middle East.
ENGLOBAL POWER GROUP. For some time, our Company has focused on increasing our
capabilities in power, and we are now closer to achieving that objective. We acquired PCI
(formerly Power Consultants Inc.) in Chicago in August 2009 which adds a power
engineering and design platform. PCI has impressive project histories and our combined goal
will be to expand ENGlobal’s participation in power-related projects and the value we can
earn from them. ENGlobal’s Power Group will be pursuing projects for smaller power
generating facilities, combined heat and power, renewable energy, substations, transmission
line projects.
ALLIANCE RELATIONSHIPS. Our business model is based on supporting the same group
of clients over many years – which is called an alliance or preferred provider relationship.
This has many advantages for clients, and for us as well, given the benefit of a steady stream
of work. ENGlobal is somewhat unique in our industry in that we offer a full range of
capabilities. Our sales effort has already resulted in twelve new alliance relationships for the
Company to date in 2010.
PURSUIT OF LOW-RISK EPC PROJECTS. Getting more value out of each project
represents a big opportunity for ENGlobal, as typically, the engineering portion of a project is
about 10% of the total installed cost. In order for us take on the procurement and
construction responsibilities, there has to be a repeatable process for managing and
minimizing risk. To that end, we recently formed a new EPC Committee, led by our CFO,
with several experienced members from our senior management team. This new process
should allow our segments to seamlessly work together under a common EPC platform.
TUCK-IN ACQUISITIONS. Successfully integrating newly acquired firms has been a core
competency of ENGlobal for many years. We have an active acquisition program in place
and are currently evaluating a number of opportunities. We are successful in cross-selling
those newly acquired capabilities, and providing growth for firms that join ENGlobal. The
fact that we are essentially debt free should also serve our Company well by continuing to
make smaller strategic acquisitions at reasonable valuations.
Letter to Stockholders
Page 4
In summary, the current business environment remains uncertain and sluggish. However, our updated
strategy and growth initiatives will help ENGlobal compete effectively and will diversify our business.
ENGlobal will work to control expenses and invest in long-term opportunities that deliver quality and
value to our clients and stockholders. Operating in this manner has allowed ENGlobal to keep its core
business structure intact, thus preserving our ability to respond quickly to our customers’ needs when
capital spending in our market rebounds. I am proud of our management team, first for their actions and
response to challenging industry conditions, and second, for their efforts to position our business in a way
that maximizes results for our stockholders.
Finally, I wanted to take this opportunity to publicly welcome Edd Pagano to ENGlobal. After a long
search process, the Board enthusiastically and unanimously selected Edd to serve as CEO, effective
May 3, 2010. Going forward, I plan to do everything possible to support Edd as he leads our Company.
In December 2009, when the search process began, we stated that we were looking for someone that
could take ENGlobal to the next level. Our longer range goals call for significant growth, with a focus on
much improved profitability. I truly believe that Edd is the right person to serve our stockholders by
accomplishing our collective goals, and I wish him the very best along the way.
Sincerely,
William A. Coskey, P.E.
Chairman of the Board and Chief Executive Officer
Special Note Regarding Forward-looking Statements
Certain matters discussed in this letter constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Some of the forward-looking statements can be identified by the
use of forward-looking words such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,”
“estimates," “anticipates,” and the negative of those words or other comparable terminology. The discussion of financial trends, strategy, plans
or intentions may also include forward-looking statements. Forward-looking statements involve risks and uncertainties that could cause actual
events and results to differ materially from those projected. These include, but are not limited to, the factors discussed in the Company’s Annual
Report on Form 10-K that accompanies this letter.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
X
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2009
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
or
Commission File No. 001-14217
ENGlobal Corporation
(Exact name of registrant as specified in its charter)
Nevada
(State or other jurisdiction of
incorporation or organization)
88-0322261
(I.R.S Employer Identification No.)
654 North Sam Houston Parkway East, Suite 400
(Address of principal executive offices)
77060-5914
(Zip code)
Registrant’s telephone number, including area code: (281) 878-1000
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class
Common Stock, $0.001 par value
Name of each exchange on which registered
NASDAQ
Securities registered pursuant to Section 12(g) of the Exchange Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Act
Yes ___ No X
Yes ___ No X
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shortened period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the
Yes X No ___
past 90 days.
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
Yes ___ No ___
and post such files).
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the
registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
X
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the
definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Non-accelerated filer
Accelerated filer X
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
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant on March 1, 2010 was $56,821,417 (based upon the closing price
for shares of common stock as reported by the NASDAQ on that date).
$0.001 Par Value Common Stock
The number of shares outstanding of the registrant’s common stock on March 1, 2010 is as follows:
27,444,659 shares
DOCUMENTS INCORPORATED BY REFERENCE
Responses to Items 10, 11, 12, 13 and 14 of Part III of this report are incorporated herein by reference to certain information contained in the Company’s definitive
proxy statement for its 2010 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission on or before April 30, 2010.
ENGLOBAL CORPORATION
2009 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
ITEM 1.
BUSINESS
ITEM 1A. RISK FACTORS
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2.
PROPERTIES
ITEM 3.
LEGAL PROCEEDINGS
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5.
PART II
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
ITEM 6.
SELECTED FINANCIAL DATA
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
ITEM 9A. CONTROLS AND PROCEDURES
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
PART III
ITEM 11.
EXECUTIVE COMPENSATION
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 15.
EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES
PART IV
SIGNATURES
SIGNATURES
PAGE
1
15
21
21
22
23
23
26
28
51
51
82
82
84
84
84
84
84
85
89
i
PART I
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (“Report”), including “Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” as well as oral statements made by the Company and its officers, directors or
employees, contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act
of 1934, as amended (the “Exchange Act”). Such forward-looking statements are based on Management’s beliefs,
current expectations, estimates and projections about the industries that the Company and its subsidiaries’ serve,
the economy and the Company in general. The words “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,”
“estimate” and similar expressions are intended to identify such forward-looking statements; however, this Report
also contains other forward-looking statements in addition to historical information. Although we believe that the
expectations reflected in the forward-looking statements are reasonable, such forward-looking statements are not
guarantees of future performance and are subject to risks, uncertainties and other factors that may cause the actual
results, performance or achievements of the Company to differ materially from historical results or from any results
expressed or implied by such forward-looking statements. The Company cautions readers that the following
important factors and the risks described in the section of this report entitled “Risk Factors,” among others, could
cause the Company’s actual results to differ materially from the forward-looking statements contained in this
Report: (i) the effect of changes in the business cycle and downturns in local, regional and national economy and
our ability to respond appropriately to the current worldwide economic financial situation; (ii) our ability to collect
accounts receivable in a timely manner; (iii) our ability to accurately estimate costs and fees on fixed-price
contracts; (iv) the effect of changes in laws and regulations with which the Company must comply, and the
associated costs of compliance with such laws and regulations, either currently or in the future, as applicable; (v)
the effect of changes in accounting policies and practices as may be adopted by regulatory agencies, as well as by
the Financial Accounting Standards Board; (vi) the effect of changes in the Company’s organization, compensation
and benefit plans; (vii) the effect on the Company’s competitive position within its market area in view of, among
other things, the increasing consolidation within its services industries, including the increased competition from
larger regional and out-of-state engineering and professional service organizations; (viii) the effect of increases and
decreases in oil prices; (ix) the availability of parts from vendors; (x) our ability to increase or renew our line of
credit; (xi) our ability to identify attractive acquisition candidates, consummate acquisitions on terms that are
favorable to the Company and integrate the acquired businesses into our operations; (xii) our ability to hire and
retain qualified personnel; (xiii) our ability to retain existing customers and get new customers; (xiv) our ability to
mitigate losses; (xv) our ability to achieve our business strategy while effectively managing costs and expenses; (xvi)
our ability to estimate exact project completion dates; (xvii) our ability to effectively monitor business done outside
of the United States; and (xviii) the performance of the energy sector. The Company cautions that the foregoing list
of important factors is not exclusive. We are under no duty and have no plans to update any of the forward-looking
statements after the date of this Report to conform such statements to actual results.
ii
ITEM 1.
BUSINESS
Overview
ENGlobal Corporation (which may be referred to as “ENGlobal,” the “Company,” “we,” “us” or “our”),
incorporated in the State of Nevada in June 1994, is a leading provider of engineering and professional services
principally to the energy sector. ENGlobal’s net revenue from continuous operations has grown from $89.1 million
in 2002 to $343.5 million in 2009, a compounded annual growth rate of approximately 21.3%, even after taking into
account significant declines in 2009. We have accomplished this growth by expanding our engineering and
professional service capabilities and our geographic presence through internal growth, including new initiatives, and
through a series of strategic acquisitions.
We now have about 2,000 full-time equivalent employees in 19 offices and 496,000 square feet of office and
manufacturing fabrication space strategically located in the following cities: Houston, Beaumont, Clear Lake and
Freeport, Texas; Baton Rouge and Lake Charles, Louisiana; Tulsa, Cleveland and Blackwell, Oklahoma;
Broomfield, Colorado; Mobile, Alabama; Schaumburg, Illinois; and Calgary, Alberta, Canada.
The Engineering Segment
The Engineering segment provides consulting services relating to the development, management and execution of
projects requiring professional engineering and related project services. Services provided by the Engineering
segment include feasibility studies, engineering, design, procurement, and construction management. The
Engineering segment provides these services to the upstream, midstream and downstream segments of the oil and
gas industry, utilities, alternative energy developers and governmental entities including branches of the U.S.
military. In some instances, it delivers its services via in-plant personnel assigned throughout the United States and
internationally.
The Construction Segment
The Construction segment provides personnel and services primarily in the areas of inspection, and also in the areas
of construction, construction management, process plant turnaround management, plant asset management,
commissioning and start-up. Its customers include the pipeline, refining, utility, chemical, petrochemical,
alternative energy and power industries throughout the United States. Construction segment personnel are typically
assigned to client facilities and construction sites throughout the United States.
The Automation Segment
The Automation segment provides services related to the design, fabrication, and implementation of process
distributed control and analyzer systems, advanced automation, information technology, and heat tracing projects.
The Automation segment’s customers primarily include domestic and foreign energy related industries. Automation
segment personnel assist in on-site commissioning, start-up and training for the Company’s specialized systems.
The Land Segment
The Land segment provides land management, right-of-way, environmental compliance, legislative affairs support
and governmental regulatory compliance services, primarily to pipeline, utility and other owner/operators of
infrastructure facilities throughout the United States and Canada. Land segment personnel are typically assigned to
client projects and facilities throughout North America.
Available Information
We are currently subject to the information reporting requirements of the Securities Exchange Act and we file
annual, quarterly and special reports and other information with the SEC. Our SEC filings are available to the public
over the Internet at the SEC’s web site at http://www.sec.gov. Our SEC filings are also available at our website at
www.englobal.com. You may also read and copy any document we file at the SEC’s public reference room at 100 F.
1
ITEM 1.
BUSINESS (Continued)
Street, N.E., Washington, D.C. 20002. Please call the SEC at 1-800-SEC-0330 for further information on the public
reference room.
ENGlobal Website
You can find financial and other information about ENGlobal at the Company’s website at the URL address
www.englobal.com. Copies of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange
Act are provided free of charge through the Company’s website and are available as soon as reasonably practicable
after filing electronically or otherwise furnishing reports to the SEC. Information relating to corporate governance at
ENGlobal, including: (i) our Code of Business Conduct and Ethics for all of our employees, including our Chief
Executive Officer and Chief Financial Officer; (ii) our Code of Ethics for our Chief Executive Officer and Senior
Financial Officers; (iii) information concerning our Directors and our Board Committees, including Committee
charters; and (iv) information concerning transactions in ENGlobal securities by Directors and officers, is available
on our website under the Investor Relations link. Our website and the information contained therein or connected
thereto are not intended to be incorporated into this Annual Report on Form 10-K. We will provide any of the
foregoing information, for a reasonable fee, upon written request to Investor Relations, ENGlobal Corporation, 654
North Sam Houston Parkway East, Suite 400, Houston, Texas 77060-5914.
Business Segments
ENGlobal has four reporting segments: Engineering, Construction, Automation and Land. Our segments are
strategic business units that offer different services and products and therefore require different marketing and
management strategies. In addition to internal growth, our segments have grown through strategic acquisitions,
which have also served to augment management expertise.
Segments
Engineering
Construction
Automation
Land
Engineering Segment
Revenue
Operating profit
Total assets
General
2009
Percentage of Revenue
2008
2007
40.5 %
29.1 %
21.1 %
9.3 %
100.0 %
$
$
$
51.0 %
28.3 %
12.1 %
8.6 %
100.0 %
61.0 %
20.2 %
10.4 %
8.4 %
100.0 %
Selected Financial Data
2008
(amounts in thousands)
$
$
$
251,702
31,786
71,954
$
$
$
2009
139,064
4,090
48,256
2007
221,787
28,784
63,265
The Engineering segment provides consulting services relating to the development, management and execution of
projects requiring professional engineering and related project services. Our Engineering segment offers
engineering consulting services primarily to clients in the petroleum refining, petrochemical, pipeline, production
and alternative energy industries for the development and management of engineering projects throughout the
United States.
2
ITEM 1.
BUSINESS (Continued)
The engineering staff has the capability of developing a project from the initial planning stages through detailed
design and construction management. Our engineering services include:
•
•
•
•
conceptual studies;
project definition;
cost estimating;
engineering design;
•
environmental compliance;
• material procurement; and
•
project management.
The Engineering segment offers a wide range of services from a single source provider.
The Engineering segment currently operates
through ENGlobal's wholly-owned subsidiaries, ENGlobal
Engineering, Inc. (“EEI”) and ENGlobal Technical Services, Inc. (“ETS”). EEI focuses primarily on providing its
services to the upstream, midstream and downstream segments of the oil and gas industry, utilities and alternative
energy developers. In some instances, it delivers its services via in-plant personnel assigned throughout the United
States. ETS primarily provides automated fuel handling systems and services to branches of the U.S. military and
public sector entities. The Engineering segment derives revenue primarily from cost-plus fees charged for
professional and technical services. We also enter into contracts providing for the execution of projects on a fixed-
price basis, whereby some or all of the project activities related to engineering, material procurement and
construction (EPC) are performed for a fixed-price amount. As a service-based business, the Engineering segment
is more labor than capital intensive. Our results primarily depend on our ability to generate revenue and collect cash
under cost-plus contracts in excess of any cost for employees and benefits, material, equipment and subcontracts,
plus our selling, general and administrative (SG&A) expenses.
As a result of dramatic decreases in prices for energy commodities, lower profit spreads for downstream operators
and a more difficult financing environment we experienced a dramatic decrease in spending by the majority of our
clients in 2009. This reduction is most evident in the domestic refining and petrochemical industries, with much of
our work in this area now consisting of maintenance, small capital retrofit and regulatory and compliance driven
work. Competition has also increased greatly for the limited amount of project work on the market. However, for
the most part, clients are choosing to defer new capital projects into future years, as opposed to canceling projects
outright.
The Engineering segment has existing blanket service contracts under which it provides clients either with services
on a time-and-materials basis or with services on a fixed-price basis. The Company strives to establish longer term
“alliance” or “preferred provider” relationships with its clients that can be expected to provide a steadier stream of
work. In addition, the Company has found that the outsourcing of its personnel to client facilities currently
contributes to a stable business mix. Our Engineering segment operates out of offices in Baton Rouge and Lake
Charles, Louisiana; Beaumont, Houston and Freeport, Texas; Tulsa, Oklahoma; and Broomfield, Colorado.
Competition
Our Engineering segment competes with a large number of public and private firms of various sizes, ranging from
the industry’s largest firms, which operate on a worldwide basis, to much smaller regional and local firms. Many of
our competitors are larger than we are and have significantly greater financial and other resources available to them
than we do. However, the largest firms in our industry are sometimes our clients, as they perform as program
managers for very large scale projects and then subcontract a portion of their work to ENGlobal.
Competition is primarily centered on performance and the ability to provide the engineering, planning and project
execution skills required for completing projects in a timely and cost-efficient manner. The technical expertise of
our management team and technical personnel and the timeliness and quality of our support services are key
competitive factors. Larger projects, especially international work, typically include pricing alternatives designed to
shift risk to the service provider, or at least to cause the service provider to share a portion of the risks associated
3
ITEM 1.
BUSINESS (Continued)
with cost overruns in service delivery. These alternatives include fixed-price, guaranteed maximum price, not-to-
exceed, incentive fee, competitive bidding and other “value based” pricing arrangements.
Construction Segment
Revenue
Operating profit
Total assets
General
$
$
$
Selected Financial Data
2008
(amounts in thousands)
$
$
$
139,360
7,459
23,581
$
$
$
2009
100,118
5,291
19,674
2007
73,210
7,133
17,226
Our Construction segment focuses on energy infrastructure projects in the United States by offering personnel and
services primarily in the area of inspection but also in the areas of construction, construction management, process
plant turnaround management, plant asset management, commissioning and start-up. Our Construction segment’s
clients include operators and developers of pipeline, refining, utility, chemical, petrochemical, alternative energy
and power facilities throughout the United States. The Construction segment operates through our wholly-owned
subsidiary ENGlobal Construction Resources, Inc. (“ECR”). The Construction segment primarily derives revenue
from cost-plus fees charged for professional and technical services. As a service business, the construction segment
is more labor than capital intensive. We also enter into contracts providing for the execution of projects on a fixed-
price basis, whereby some, or all, of the project activities related to EPC are performed for a fixed-price amount.
Accordingly, our results primarily depend on our ability to generate revenue and collect cash under cost-plus or
fixed-price contracts in excess of any cost for employees and benefits, material, equipment and subcontracts, plus
our SG&A expenses.
In August 2009, the Company acquired the operations PCI Management and Consulting Company (“PCI”), a private
Illinois based power consulting business. PCI provides engineering, consulting and project management services,
specializing in projects related to the generation, transmission and distribution of energy. These services
complement the other services historically provided by our Construction segment and we anticipate that PCI’s
location in the Chicago, Illinois area, will allow us to expand the Construction segment’s service territory and
establish a strong base from which to serve the power market.
Our Construction segment operates out of offices in Baton Rouge and Lake Charles, Louisiana; Beaumont, Clear
Lake and Freeport, Texas; Schaumburg, Illinois; and Cleveland, Blackwell and Tulsa, Oklahoma.
Competition
Our Construction segment competes with a range of mostly private small and midsize inspection and construction
management and alternative energy service companies. The principal elements of competition among these types of
companies are rates, terms of service and flexibility and reliability of services. The inspection and construction
management business is affected by industry pressure on costs, fueled by intense competition for contracts. Our
Construction segment believes that its alliances with technology providers, especially in the area of alternative
energy, may enhance its competitive position in the construction management business.
Competition is primarily centered on performance and the ability to provide services in a timely and cost-efficient
manner. The technical expertise of our personnel is a key competitive factor. Inspection specialists must have a
thorough understanding of governmental and public regulatory factors. The Company strives to establish longer
term client relationships that can often provide a stream of work that is less susceptible to competitive pressures. In
addition, the Company has found that the inspection of pipelines and client facilities are services offered that are less
susceptible to competitive pressures than other services that the Company provides.
4
ITEM 1.
BUSINESS (Continued)
Automation Segment
Revenue
Operating profit (loss)
Total assets
General
$
$
$
Selected Financial Data
2008
(amounts in thousands)
$
$
$
59,730
3,744
36,553
$
$
$
2009
72,322
4,568
23,523
2007
37,766
(58 )
17,468
The Automation segment provides services related to the design, fabrication, and implementation of process
distributed control and analyzer systems, advanced automation, information technology and heat tracing projects.
This segment also designs, assembles, integrates and services control and instrumentation systems for specific
applications in the energy and processing related industries. These services are offered to clients in the petroleum
refining, petrochemical, pipeline, production, process and pulp and paper industries throughout the United States
and Canada as well as the Middle East and the Caribbean. The Automation segment currently operates through
ENGlobal Automation Group, Inc. (“EAG”), a wholly-owned subsidiary of ENGlobal, and EAG's wholly owned
subsidiaries, ENGlobal Systems, Inc. (“ESI”) and ENGlobal Canada ULC (“ECAN”). EAG and ECAN focus
primarily on providing automation related design and engineering services, while ESI primarily provides fabrication,
testing and integration services of automation related enclosures. The Automation segment derives revenue from
both cost-plus fees and fees charged for professional and technical services on a fixed-price basis. As a service
provider, our Automation segment is more labor than capital intensive. The segment’s results primarily depend on
our ability to accurately estimate costs on fixed-price contracts, generate revenue and collect amounts due under
cost-plus contracts in excess of the cost of employees and benefits, material, equipment and subcontracts, plus
applicable SG&A expenses.
Our Automation segment operates out of offices in Baton Rouge, Louisiana; Beaumont and Houston, Texas;
Mobile, Alabama; and Calgary, Alberta.
In September 2008, EAG purchased Advanced Control Engineering, LLC (“ACE”), a Mobile, Alabama based
engineering firm. ACE provides control system and related technical services to a variety of industries and its
geographic location expands the Automation segment’s service territory.
Competition
Our Automation segment competes with a large number of public and private firms of various sizes, ranging from
the industry’s largest firms, which operate on a worldwide basis, to much smaller regional and local firms. Many of
our competitors are larger than we are and have significantly greater financial and other resources available to them
than we do.
Competition is primarily centered on performance and the ability to provide the engineering, assembly and
integration required to complete projects in a timely and cost-efficient manner. The technical expertise of our
management team and technical personnel and the timeliness and quality of our support services, are key
competitive factors.
Land Segment
Revenue
Operating profit
Total assets
$
$
$
5
Selected Financial Data
2008
(amounts in thousands)
$
$
$
42,540
4,114
13,482
$
$
$
2009
31,958
2,691
10,468
2007
30,464
2,105
15,096
ITEM 1.
BUSINESS (Continued)
General
Our Land segment provides land management, right-of-way, environmental compliance, legislative affairs support
and governmental regulatory compliance services primarily to pipeline, utility and other owner/operators of
infrastructure facilities throughout the United States and Canada. The need to transport new sources of energy is the
primary driver that results in demand for our rights-of-way services (pipelines and electric power transmission
lines). As examples, rights-of-way are required for pipelines that transport oil and gas from imported sources, and
from newly developed oil reserve basins in the U.S. Rights-of-way are also required for new electric power
transmission lines, needed to decongest circuits near population centers and to transport a growing amount of wind
and solar power located in remote areas.
The Land segment operates through the Company's wholly-owned subsidiary, ENGlobal Land, Inc. (“ELI”),
formerly known as WRC Corporation, and its wholly-owned subsidiary WRC Canada (“WRC Canada”). ELI
provides land management, environmental compliance and governmental regulatory services to pipeline, utility and
telecom companies and other owner/operators of infrastructure facilities. WRC Canada provides land management
and inspection services. The Land segment derives revenue from cost-plus fees charged for professional and
technical services. As a service company, ELI is more labor than capital intensive. Our results primarily depend on
our ability to generate revenue and collect cash under cost-plus contracts in excess of any cost for employees and
benefits, material, equipment and subcontracts, plus our SG&A expenses.
Our Land segment operates out of offices in Houston, Texas; Broomfield, Colorado; and Calgary, Alberta, as well as
other satellite offices across the United States.
Competition
The Land segment competes with a range of small and midsize firms that provide right-of-way mapping, title
assistance, appraisals and landowner negotiations.
Competition is primarily centered on retaining experienced landmen and other qualified professionals. Land and
right-of-way specialists must have a thorough understanding of governmental and public regulatory requirements.
These professionals must consider socioeconomic and environmental factors and coordinate planning for the
relocation of utilities, displaced persons and businesses. Also, they must often assist in developing replacement
housing units, which may involve the expenditure of large sums, condemnation, damages, restriction of access, and
similar complicating factors. Retaining these qualified, skilled professionals is crucial to the operation of our Land
segment.
Acquisitions and Sales
We have grown our business over the past several years through both internal initiatives and through strategic
mergers and acquisitions. These mergers and acquisitions have allowed us to (i) expand our client base and the
range of services that we provide to our clients; (ii) add new technical capabilities that can be marketed to our
existing client base, (iii) grow our business geographically, and (iv) capture more of each project’s value. We
expect to continue evaluating and assessing acquisition opportunities that will either complement our existing
business base or that will provide ENGlobal with additional capabilities or geographical coverage. We believe that
strategic acquisitions will enable us to more efficiently serve the technical needs of national and international clients
and strengthen our financial performance. In 2010, we have a stated objective to increase the size of the Company
by approximately 12.5% through various types of acquisitions, although our acquisition strategy may continue to be
negatively impacted by adverse economic conditions.
6
ITEM 1.
BUSINESS (Continued)
The following table lists the businesses we have acquired during the five-year period ended December 31, 2009.
Name/Location/Business Unit
Date Acquired
Primary Services
Analyzer Technology International, Inc.
Houston, TX
Operates as a part of ESI
WRC Corporation and WRC Canada
Denver, CO
Operates as ELI, formerly WRC
PEI Investments
Beaumont, TX
Watco Management, Inc.
Clearlake, TX
Operates as a Division of ECR
EMC Design & Consulting, Inc.
Houston, TX
Operates as a Division of EEI
Advanced Control Engineering, LLC
Mobile, AL
Operates as a Division of EAG
PCI Management and Consulting Company
Chicago, IL
Operates as a Division of ECR
January 2006
Process Analyzer Systems
May 2006
Integrated Land Management
May 2006
Real Estate
October 2006
Turnaround Planning, Asset Management,
Project Commissioning Construction
Management
September 2008
Product Terminals
Engineering and Design
September 2008
Control Systems Engineering and Design
August 2009
Electric Power Consulting and
Construction Management
ENGlobal Corporation transitions acquisitions under the ENGlobal brand name as soon as feasible, given the size
and scope of the acquisition, but typically within two years. This strengthens ENGlobal’s market position as a
diversified supplier of engineering and related services and focuses on the quality of the ENGlobal name. Smaller
acquisitions are almost immediately identified as a division of an existing segment.
Business Strategy
Our objective is to strengthen the Company’s position as a leading full service provider of services to the energy
industry by enhancing our overall range of capabilities in the areas of engineering, construction, automation, and
land management services. To achieve this objective, we have developed a strategy comprised of the following key
elements:
• Maintain High Quality Service. To maintain high quality service, we focus on being responsive to our
customers, working diligently and responsibly, and maintaining safety standards, schedules and budgets.
ENGlobal has a quality control and assurance program to maintain standards and procedures for
performance and documentation.
•
Improve Utilization of Resources. We have developed a work-sharing program that gives our staff and our
clients’ access to technical resources located in any of our offices and allows for higher utilization of
human and computer resources. We believe the work-sharing program helps reduce employee turnover and
7
ITEM 1.
BUSINESS (Continued)
provides for a more stable work environment. We believe our ongoing program to standardize all of our
processes and procedures among our offices will enhance our work-sharing ability and provide our clients
with more consistent and higher quality services.
• Enhance and Strengthen Our Ability to Perform Engineering, Procurement and Construction Projects. We
rely heavily on repeat business and referrals from existing customers, industry members and other business
representatives. One of our Company’s goals is to increase revenue by developing and marketing its ability
to perform full service projects, also called EPC (Engineering, Procurement and Construction), with
contracting strategies that are evaluated and authorized by the Company. By applying the wide range of
capabilities offered by our four operating segments to any given project, we are able to capture a greater
percentage of the project’s total installed cost.
• Recruit and Retain Qualified Personnel. We believe recruiting and retaining qualified, skilled
professionals is crucial to our success and growth. As a result, we have a dedicated recruiting staff focused
on recruiting qualified personnel with experience in the energy industry. While the economy has forced us
to reduce some of the employee benefits we previously offered, we believe that our employee benefits are
still competitive with those offered by our competitors and together with various incentive programs, they
have helped us to retain valued employees.
• Expand and Enhance Technical Capabilities. We believe that it is important to develop and enhance our
overall technical capabilities in the markets we serve. To achieve this objective in the area of advanced
computer-aided process simulation, design and drafting, we utilize technical software from numerous
suppliers. By being vendor neutral, ENGlobal is able to provide high quality technology and platforms for
the design of plant systems such as 3D modeling, process simulation and other technical applications. We
find it beneficial to match the design tools we use with those being utilized by our clients, many of whom
are currently utilizing these design platforms.
• Growth Through Acquisitions. We follow a balanced growth strategy for our business, utilizing both
external acquisitions as well as internal initiatives. The internal initiatives will continue to include an
active business development program covering all of our business segments. Our external growth will
likely come from relatively small acquisitions and mergers that allow us to: (i) offer expanded engineering
and professional services to a broad energy complex; (ii) add new technical capabilities that can be
marketed to our existing client base; (iii) expand our business geographically; and (iv) capture more of each
project’s value. In 2010, we have a stated objective to increase the size of the Company by approximately
12.5% through various types of acquisitions, although our acquisition strategy may continue to be
negatively impacted by adverse economic conditions.
• Enter New Markets. Given reduced spending by our clients for domestic midstream and downstream
projects, the Company has implemented strategies to pursue work in additional markets where it believes
project activity is more robust. We plan to utilize our existing client relationships along with added
marketing resources to pursue projects related to public infrastructure, alternative energy and electric
power, as well as applying our heritage energy related expertise on international projects.
• Building our Brand. We intend to continue to present a more unified corporate identity for the Company
with our ongoing efforts to enhance ENGlobal's branding and increase its name recognition. In 2008, we
redesigned our website to highlight our four businesses: Engineering, Construction, Automation and Land.
In the same year, we focused on branding all of our businesses with the ENGlobal name. Our new image
presents ENGlobal as one company, where our four business segments work together as a single unit to
offer their many products and services seamlessly, with one consistent message and a continued focus on
better serving our clients.
8
ITEM 1.
BUSINESS (Continued)
Sales and Marketing
ENGlobal derives revenue primarily from three sources: (1) in-house direct sales, (2) preferred provider/alliance
agreements with strategic clients, and (3) referrals from existing customers and industry members. We currently
employ 29 full-time professional in-house marketers in business development.
Our Senior Vice President of Business Development supervises our in-house sales managers assigned to our
Engineering and Construction segments, clients and territories within the United States. In addition, our Senior Vice
President of Project Development focuses on partnering with consultants or creating new business initiatives that
allow us to undertake types of projects we did not pursue in the past. These partnerships include civil infrastructure
projects, such as jails, hospitals, and other municipal projects not previously pursued by our business development
group. We have also formed relationships with consultants that have an international presence and may be able to
involve us on international projects. However, we will only pursue international opportunities if we believe the risk
profile is appropriate. Additionally, ENGlobal expects to provide services for international clients from its U.S.
offices rather than opening offices overseas. Finally, since our clients typically consist of large integrated oil and
gas companies with worldwide business operations, we will attempt to leverage our existing client relationships to
showcase our capabilities for their international projects.
Sales and marketing efforts for our Automation and Land segments are supervised by the respective entity
presidents which we believe results in increased account penetration and enhanced customer service, which should,
in turn, create and maintain the foundation for long-term customer relationships. In addition, client relationships can
be nurtured by our geographic advantage of having office locations near our larger customers. By having clients in
close proximity, we are able to provide single, dedicated points of contact. Our growth depends not only on the
world economic situation but also, in large measure, on our ability to attract and retain qualified business
development managers and business development personnel with a respected reputation in the energy industry.
Management believes that in-house marketing allows for more accountability and control, thus increasing
profitability.
Products and services are also promoted through trade advertising, participation in industry conferences and online
Internet communication via our corporate home page at www.englobal.com. The ENGlobal site provides
information about our four operating segments and illustrates our Company’s full range of services and capabilities.
We use internal and external resources to maintain and update our website on an ongoing basis. Through the
ENGlobal website, we seek to provide visitors with a single point of contact for obtaining information on
ENGlobal’s services.
Our business development focuses on building long-term relationships with customers and providing our customers
and potential clients with solutions throughout the life-cycle of their facilities. Additionally, we seek to capitalize on
cross-selling opportunities among our various segments – Engineering, Construction, Automation and Land. Sales
leads are often jointly developed and pursued by the sales personnel from these various segments.
ENGlobal develops preferred provider/alliance agreements with clients in order to facilitate repeat business. These
preferred provider agreements, also known as master services agreements or umbrella agreements are typically two
to three years in length. Although the agreement is not a guarantee for work under a certain project, ENGlobal
generally offers a slightly reduced billing structure to clients willing to commit to arrangements that are expected to
provide a steady stream of work. With the terms of the contract settled, add-on projects with these customers are
easier to negotiate. Management believes that these agreements can serve to stabilize project centered operations in
the engineering and construction industry.
Much of our business is repeat business and we are introduced to new customers in many cases by referrals from
existing customers and industry members. Management believes referral marketing provides the opportunity for
increased profitability because referrals do not involve direct selling. Rather, they allow satisfied customers to sell
9
ITEM 1.
BUSINESS (Continued)
our services and products on our behalf. ENGlobal strives to develop our clients’ trust, and then benefits by word-
of-mouth referrals.
Our past acquisition program has provided the benefit of expanding our existing customer base. Management
believes that cross-selling among our businesses is an effective way to build client loyalty by solidifying the client
relationship, thereby reducing attrition and increasing the lifetime profitability of each project. The Company also
believes that cross-selling can help ensure more predictable revenue and can be a cost effective way to grow our
business.
Customers
Our customer base consists primarily of Fortune 500 companies in the energy industry. While we do not have
continuing dependence on any single client or a limited group of clients, one or a few clients may contribute a
substantial portion of our revenue in any given year or over a period of several consecutive years due to major
projects. ENGlobal may work for many different subsidiaries or divisions of our clients, which involves multiple
parties to material contracts. The loss of a single contract award would not likely have a material impact on our
financial statements. In 2010, the Company will continue to focus substantial attention on improving customer
services in order to enhance satisfaction and increase customer retention.
Revenue generated through sources such as in-plant staffing and preferred provider relationships are longer-term in
nature and are not typically limited to one project. For example, our Engineering segment provides outsourced
technical and other personnel that are assigned to work at client locations. In the past, these assignments often span
multiple projects and multiple years, and although these engagements involve a lower margin, they help to
contribute to a steady stream of work.
A major long-term trend among our clients and their industry counterparts has been toward outsourcing engineering
services, and more recently, sole-sourcing. This trend has fostered the development of ongoing, longer-term client
arrangements, rather than one-time limited engagements. These arrangements vary in scope, duration and degree of
commitment. While there is typically no guarantee of work that will result from these agreements, often they form
the basis for a longer-term client relationship. Despite their variety, we believe that these partnering relationships
have a stabilizing influence on our revenue. At December 31, 2009, we maintained some form of partnering or
preferred provider/alliance arrangement with approximately 20 major oil and chemical companies. These
engagements may provide for:
•
•
•
•
a minimum number of work man-hours over a specified period;
the provision of at least a designated percentage of the client’s requirements;
the designation of the Company as the client’s sole or preferred source of engineering at specific locations;
or
a non-binding preference or intent, or a general contractual framework, for what the parties expect will be
an ongoing relationship.
Overall, our ten largest customers, who vary from one period to the next, accounted for 50% of our total revenue for
2009, 62% of total revenue for 2008 and 57% of total revenue for 2007. Most of our projects are specific in nature
and we generally have multiple projects with the same clients. If we were to lose one or more of our significant
clients and were unable to replace them with other customers or other projects, our business would be materially
adversely affected. Our top three clients in 2009 were ExxonMobil, Spectra Energy and Enbridge Energy Company.
Even though we frequently receive work from repeat clients, our client list may vary significantly from year to year.
We continue to see a change in our business mix year over year, depending on mid-size or developer clients’ ability
to receive funding for their projects. Our potential revenue in all segments is dependent on continuing relationships
with our customers.
10
ITEM 1.
BUSINESS (Continued)
Engineering Segment:
In the Engineering segment, our ten largest customers vary from one period to the next. These customers accounted
for 72% of our total revenue for 2009, 77% of total revenue for 2008 and 74% of total revenue for 2007. Our top
three clients in 2009 were ExxonMobil, BASF Corporation and Motiva.
Though the Engineering segment frequently receives work from repeat clients, its client list may vary significantly
from year to year. In order to generate revenue in future years, we must continue efforts to obtain new engineering
projects. The majority of the revenue for the Engineering segment is generated through sources such as in-plant
staffing and client relationships that we consider longer-term in nature and that are not typically limited to one
project.
Construction Segment:
In the Construction segment, our ten largest customers vary from one period to the next. These customers accounted
for 82% of our total revenue for 2009, 91% of total revenue for 2008 and 82% of total revenue for 2007. Our top
three clients in 2009 were Spectra Energy, Enbridge Energy Company and Magellan Midstream Partners.
The revenue for the Construction segment is generated through sources such as providing inspection and
construction related personnel at field locations. While we have ongoing business relationships with many of our
clients in the Construction segment, this business tends to be more cyclical than our Engineering segment, as it is
more project-driven and dependent on field construction activity, such as pipeline inspection.
Automation Segment:
In the Automation segment, our ten largest customers vary from one period to the next. These customers accounted
for 76% of our total revenue for 2009, 66% of total revenue for 2008 and 73% of total revenue for 2007. Our top
three clients in 2009 were ExxonMobil, Emerson Process Management and Hovensa, LLC. Total foreign customers
accounted for 16% of our Automation segment revenue for 2009, 14% of Automation segment revenue for 2008 and
22% of Automation segment revenue for 2007. During 2009, 3% of our revenue came from our Canadian
operations compared to 4% in 2008 and 3% in 2007.
Although the Automation segment frequently receives work from repeat clients, its client list may vary significantly
from year to year. The Automation Segment’s clients are primarily in the downstream process industries, and their
needs result primarily from requirements to upgrade obsolete distributed control systems or process analytical
equipment.
Land Segment:
In the Land segment, our ten largest customers vary from one period to the next. These customers accounted for
78% of our total revenue for 2009, 72% of total revenue for 2008 and 70% of total revenue for 2007. Our top three
clients in 2009 were TransCanada, Spectra Energy and El Paso Corporation. The Land segment’s clients currently
consist primarily of pipeline operators or electric utilities, with both types of clients having needs to acquire rights-
of-way for pipelines or electric transmission.
Though the Land segment frequently receives work from repeat clients, its client list may vary significantly from
year to year with outsourced right-of-way and other personnel assigned to work at project sites across the United
States and Canada. Factors affecting our Land business that are beyond our control include regulatory requirements,
title assistance, landowner negotiations and eminent domain-condemnation proceedings.
11
ITEM 1.
BUSINESS (Continued)
Contracts
We generally enter into two principal types of contracts with our clients: time-and-materials contracts and fixed-
price contracts. Our mix of net revenue between time-and-materials and fixed-price contracts is shown in the table
below. Our clients typically determine the type of contract to be utilized for a particular engagement, with the
specific terms and conditions of a contract resulting from a negotiation process between the Company and our client.
Time-and-material
%
Fixed-price
%
(revenue in thousands)
Engineering
Construction
Automation
Land
Total company
$
$
135,278
100,028
36,583
31,855
303,744
88.4%
$
$
3,786
90
35,739
103
39,718
11.6%
• Time-and-materials. Under our time-and-materials contracts, we are paid for labor at either negotiated
hourly billing rates or we are reimbursed for allowable hourly rates and other expenses. We are paid for
material and contracted services at an agreed upon multiplier of our cost, and at times we pass non-labor
costs for equipment, materials and subcontractor services through with no profit. Profitability on these
contracts is driven by billable headcount, the amount of non-labor related services and cost control. Some
of these contracts may have upper limits, referred to as “not-to-exceed.” If our scope is not defined under a
“not-to-exceed” agreement, we are not under any obligation to provide services beyond the limits of the
contract, but if we generate costs and billings that exceed the contract ceiling or are not allowable, we will
not be able to obtain reimbursement for the excess cost. Further, the continuation of each contract partially
depends upon the customer’s discretionary periodic assessment of our performance on that contract.
• Fixed-price. Under a fixed-price contract, sometimes referred to as “guaranteed maximum,” we provide
the customer a total project for an agreed-upon price, subject to project circumstances and changes in
scope. Fixed-price projects vary in scope, including some engineering activities and related services, and
responsibility for procurement of material and construction. Fixed-price contracts carry certain inherent
risks, including risks of losses from underestimating costs, delays in project completion, problems with new
technologies, the impact of the economy on labor shortages, increases in equipment and materials costs,
natural disasters, and other events and changes that may occur over the contract period. Another risk is our
ability to secure written change orders prior to commencing work on contract changes in scope, without
which we may not receive payment for work performed. Consequently, the profitability of fixed-price
contracts may vary substantially.
Backlog
Backlog represents gross revenue of all awarded contracts that have not been completed and will be recognized as
revenue over the life of the project. Although backlog reflects business that we consider to be firm, cancellations or
scope adjustments may occur. Further, most contracts with clients may be terminated at will, in which case the
client would only be obligated to us for services provided through the termination date. We have adjusted backlog
to reflect project cancellations, deferrals and revisions in scope and cost (both upward and downward) known at the
reporting date; however, future contract modifications or cancellations may increase or reduce backlog and future
revenue. As a result, no assurances can be given that the amounts included in backlog will ultimately be realized.
In addition, it is not clear how our backlog will be impacted by the current economy.
At December 31, 2009, our backlog was $227.0 million compared to an estimated $325.7 million at
December 31, 2008. We expect a majority of the $227.0 million in backlog to be completed during 2010.
12
ITEM 1.
BUSINESS (Continued)
The backlog at December 31, 2009 consists of $201.3 million with commercial customers and $25.7 million with
the United States government. Backlog on federal programs includes only the portion of the contract award that has
been funded. The backlog for each of our segments at December 31, 2009 was as follows:
Engineering segment
Construction segment
Automation segment
Land segment
$
100.4 million
71.4 million
22.5 million
32.7 million
Backlog includes gross revenue under two types of contracts: (1) contracts for which work authorizations have been
received on a fixed-price basis or time-and-material projects that are well defined, and (2) time-and-material
evergreen contracts at an assumed 12 month run-rate, under which we place employees at our clients’ site to perform
day-to-day project efforts. There is no assurance as to the percentage of backlog that will be recognized.
Customer Service and Support
We provide service and technical support to our customers in varying degrees depending upon the business line and
on customer contractual arrangements. The Company’s technical staff provides initial telephone support services
for its customers. These services include isolating and verifying reported failures and authorizing repair services in
support of customer requirements. We also provide on-site engineering support if a technical issue cannot be
resolved over the telephone. On projects for which we have provided engineering systems, we provide on-site
factory acceptance tests and worldwide start-up and commissioning services. We also provide the manufacturers’
limited warranty coverage for products we re-sell.
Dependence Upon Suppliers
Our ability to provide clients with services and systems in a timely and competitive manner depends on the
availability of products and parts from our suppliers at competitive prices and on reasonable terms. Our suppliers
are not obligated to have products on hand for timely delivery nor can they guarantee product availability in
sufficient quantities to meet our demands. There can be no assurance that we will be able to obtain necessary
supplies at prices or on terms we find acceptable. However, in an effort to maximize availability and maintain
quality control, we generally procure components from multiple distributors on our clients’ behalf and in some cases
we can take advantage of national agreements our clients may have entered into.
For example, all of the product components used by our Automation segment are fabricated using components and
materials that are available from numerous domestic manufacturers and suppliers. There are approximately five
principal suppliers of distributed control systems, each of which can be replaced by an equally viable competitor,
and our clients typically direct the selection of their preferred supplier. No one manufacturer or vendor provides
products that account for more than 2% of our revenue. Thus, we anticipate little or no difficulty in obtaining
components in sufficient quantities and in a timely manner to support our manufacturing and assembly operations.
Units produced through the Automation segment are normally not produced for inventory and component parts;
rather, they are typically purchased on an as-needed basis. By being relatively vendor neutral, ENGlobal is able to
provide quality technology and platforms for the design of plant systems such as 3D modeling, process simulation
and other technical applications.
Despite the foregoing, some of our subsidiaries rely on certain suppliers for necessary components and there can be
no assurance that these components will continue to be available on acceptable terms. If a subsidiary or one of its
suppliers terminates a long-standing supply relationship, it may be difficult to obtain alternative sources of supply
without a material disruption in our ability to provide products and services to our customers. While we do not
believe that such a disruption is likely, if it did occur, it could have a material adverse effect on our financial
condition and results of operations.
13
ITEM 1.
BUSINESS (Continued)
Patents, Trademarks, Licenses
Our success depends in part upon our ability to protect our proprietary technology, which we do primarily through
protection of our trade secrets and confidentiality agreements. In addition, the U.S. Patent and Trademark Office
registered our “Integrated Rack”TM patent application in 2008.
Our trade names are protected by registration as well as by common law trademark rights. Our trademark for the
use of “ENGlobal”® in connection with our products is registered with the U.S. Patent and Trademark Office and we
claim common law trademark rights for “ENGlobal”TM in connection with our services. We also have pending
trademark applications for “Engineered for Growth”® and we claim common law trademark rights for “Global
Thinking…Global Solutions”TM, “CARES – Communicating Appropriate Responses in Emergency Situations”TM,
“Flare-Mon”TM, “Purchased Data”TM, “viMAC” TM, “ENGlobal Vu”TM, and “riFAT”TM.
There can be no assurance that the protective measures we currently employ will be adequate to prevent the
unauthorized use or disclosure of our technology, or the independent third party development of the same or similar
technology. Although our competitive position to some extent depends on our ability to protect our proprietary and
trade secret information, we believe that other factors, such as the technical expertise and knowledge base of our
management and technical personnel, as well as the timeliness and quality of the support services we provide, will
also help us to maintain our competitive position.
Government Regulations
ENGlobal and certain of our subsidiaries are subject to various foreign, federal, state, and local laws and regulations
relating to our business and operations, and various health and safety regulations established by the Occupational
Safety and Health Administration (OSHA). The Company and our professional staff are subject to a variety of state,
local and foreign licensing, registration and other regulatory requirements governing the practice of engineering and
other professional disciplines. For example, OSHA requires Process Safety Management to prevent the release of
hazardous chemicals, the Department of Transportation (DOT) requires that pipeline operators are in full
compliance with pipeline safety regulations, and the Environmental and Protection Agency (EPA) provides
incentives to reduce chemical emissions. Currently, we are not aware of any situation or condition relating to the
regulation of the Company, its subsidiaries, or personnel that we believe is likely to have a material adverse effect
on our results of operations or financial condition.
Employees
As of December 31, 2009, the Company and its subsidiaries employed 1,999 individuals. Of these employees, 716
were employed in engineering and related positions, 533 were employed as inspectors, 253 were employed as
project support staff, 246 were employed in technical production positions, 223 were employed in administration,
finance and management information systems and 28 were employed in sales and marketing. We believe that our
ability to recruit and retain highly skilled and experienced technical, sales and management personnel has been and
will continue to be critical to our ability to execute our business plan. None of our employees is represented by a
labor union or is subject to a collective bargaining agreement. We believe that relations with our employees are
good.
Benefit Plans
ENGlobal sponsors a 401(k) profit sharing plan for its employees. Until January 2009, the Company made
matching contributions equal to 66.66% of employee contributions up to 6% of employee compensation for regular
(as distinguished from project or contract) employees. All other employees except our pipeline inspectors were
matched at 50% of employee contribution up to 6% of compensation, as defined by the plan. The Company, at the
direction of the Board of Directors, may make other discretionary contributions. Our employees may elect to make
contributions pursuant to a salary reduction agreement upon meeting age and length-of-service requirements.
14
ITEM 1.
BUSINESS (Continued)
On January 1, 2009, due to economic conditions, the Company elected to reduce its match on regular employees to
50% and all other employees except our pipeline inspectors to 33.33% of employee contributions up to 6% of
employee compensation. On April 4, 2009, the Company elected to eliminate its match on all employees. The
Company made contributions of approximately $982,000, $3,049,000, and $2,147,000, respectively, for the years
ended December 31, 2009, 2008, and 2007.
Geographic Areas
In 2005, the Company formed ENGlobal Canada ULC, located in Calgary, Alberta to expand our Automation
segment into Canada. In 2006, we acquired WRC Corporation and its subsidiary, WRC Canada, to expand our Land
segment into Canada. While this gives us opportunities for expansion, our Canadian operations are small in
comparison to the Company as a whole and have declined in size since their inception.
2009
2008
(dollars in thousands)
2007
US operations revenue
Canadian operations revenue
Total revenue
$
$
341,629
1,833
343,462
$
$
490,584
2,748
493,332
Long-lived assets consist of property, plant and equipment, net of depreciation (“PPE”).
US operations PPE
Canadian operations PPE
Total PPE
ITEM 1A.
RISK FACTORS
2009
2008
(dollars in thousands)
$
$
5,967
16
5,983
$
$
5,703
41
5,744
$
$
$
$
360,309
2,918
363,227
2007
6,378
94
6,472
Set forth below and elsewhere in this Report and in other documents that we file with the SEC are risks and
uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking
statements contained in this Report. You should be aware that the occurrence of any of the events described in these
risk factors and elsewhere in this Report could have a material adverse effect on our business, financial condition
and results of operations and that upon the occurrence of any of these events, the trading price of our common stock
could decline.
Economic downturns could have a negative impact on our businesses.
Demand for the services offered by us has been and is expected to continue to be, subject to significant fluctuations
due to a variety of factors beyond our control, including demand for engineering services in the energy industry, and
in other industries that we provide services to. During macroeconomic or industry downturns, our customers' need
to engage us may decline significantly and projects may be delayed or cancelled. We cannot predict how long the
current economic downturn will last or when the various sectors of the energy complex will recover. However,
these factors have caused our profitability to decline significantly.
Our future revenue depends on our ability to consistently bid and win new contracts and to maintain and renew
existing contracts. Our failure to effectively obtain future contracts could adversely affect our profitability.
Our future revenue and overall results of operations require us to successfully bid on new contracts and renew
existing contracts. Contract proposals and negotiations are complex and frequently involve a lengthy bidding and
selection process, which is affected by a number of factors, such as market conditions, financing arrangements and
15
ITEM 1A.
RISK FACTORS (Continued)
required governmental approvals. For example, a client may require us to provide a bond or letter of credit to
protect the client should we fail to perform under the terms of the contract. If negative market conditions arise, or if
we fail to secure adequate financial arrangements or required governmental approvals, we may not be able to pursue
particular projects, which could adversely affect our profitability.
We are engaged in highly competitive businesses and must typically bid against competitors to obtain engineering
and service contracts.
We are engaged in highly competitive businesses in which customer contracts are typically awarded through
competitive bidding processes. We compete with other general and specialty contractors, both foreign and
domestic, including large international contractors and small local and regional contractors. Some competitors have
greater financial and other resources than we do, which, in some instances, gives them a competitive advantage over
us. In addition, smaller contractors may have lower overhead cost which gives them a competitive advantage.
If we are unable to collect our receivables, our results of operations and cash flows could be adversely affected.
Our business depends on our ability to successfully obtain payment from our clients of the amounts they owe us for
work performed and materials supplied. We bear the risk that our clients will pay us late or not at all. Though we
evaluate and attempt to monitor our clients’ financial condition, there is no guarantee that we will accurately assess
their creditworthiness. Even if they are creditworthy, they may delay payments in an effort to manage their cash
flow. Financial difficulties or business failure experienced by one or more of our major customers could have a
material adverse affect on both our ability to collect receivables and our results of operations.
The failure to attract and retain key professional personnel could adversely affect the Company.
Our success depends on attracting and retaining qualified personnel in a competitive environment. We are
dependent upon our ability to attract and retain highly qualified managerial, technical and business development
personnel. While competition for lower level personnel has declined over the last two years, competition for key
management personnel continues to be intense. We cannot be certain that we will retain our key managerial,
technical and business development personnel or be able to attract or assimilate key personnel in the future. Failure
to attract and retain such personnel would materially adversely affect our businesses, financial position, results of
operations and cash flows. This is a major risk factor that could materially impact our operating results.
Our dependence on one or a few customers could adversely affect us.
One or a few clients have in the past and may in the future contribute a significant portion of our consolidated
revenue in any one year or over a period of several consecutive years. In 2009, our top three clients, ExxonMobil,
Spectra Energy and Enbridge Energy Company, accounted for approximately 16%, 6% and 5% of our revenue
respectively. As our backlog frequently reflects multiple projects for individual clients, one major customer may
comprise a significant percentage of our backlog at any point in time. Because these significant customers generally
contract with us for specific projects, we may lose them in other years as their projects with us are completed. If we
do not continually replace them with other customers or other projects, our business could be materially adversely
affected. Also, the majority of our contracts can be terminated at will. We have long-standing relationships with
many of our significant customers. Our contracts with these customers, however, are on a project-by-project basis
and the customers may unilaterally reduce or discontinue their purchases at any time. The loss of business from any
one of such customers could have a material adverse effect on our business or results of operations.
Our business and operating results could be adversely affected by our inability to accurately estimate the overall
risks, revenue or costs on a contract.
We generally enter into two principal types of contracts with our clients: time-and-materials contracts and fixed-
price contracts. Under our fixed-price contracts, we receive a fixed-price irrespective of the actual costs we incur
and, consequently, we are exposed to a number of risks. These risks include underestimation of costs, problems
with new technologies, unforeseen expenditures or difficulties, delays beyond our control and economic and other
changes that may occur during the contract period. Our ability to secure change orders on scope changes and our
ability to invoice for such changes poses an additional risk. In 2006, we suffered significant losses as a result of two
16
ITEM 1A.
RISK FACTORS (Continued)
fixed-price contracts. In fiscal 2009, approximately 11.6% of our net revenue was derived from fixed-price
contracts, as compared with 6.0% was in 2008. Given the economic downturn, it is possible that we will enter into a
greater number of fixed-price contracts in the future as customers shift more risk to their suppliers.
Under our time-and-materials contracts, we are paid for labor at negotiated hourly billing rates or reimbursement at
specified mark-up hourly rates and negotiated rates for other expenses. Profitability on these contracts is driven by
billable headcount and cost control. Some time-and-materials contracts are subject to contract ceiling amounts,
which may be fixed or performance-based. If our costs generate billings that exceed the contract ceiling or are not
allowable under the provisions of the contract or any applicable regulations, we may not be able to obtain
reimbursement for all of our costs.
Revenue recognition for a contract requires judgment relative to assessing the contract’s estimated risks, revenue
and costs, and technical issues. Due to the size and nature of many of our contracts, the estimation of overall risk,
evenue and cost at completion is complicated and subject to many variables. Changes in underlying assumptions,
circumstances or estimates may also adversely affect future period financial performance.
Our backlog is subject to unexpected adjustments and cancellations and is, therefore, an uncertain indicator of
our future revenue or earnings, particularly in light of the current economy.
As of December 31, 2009, our backlog was approximately $227.0 million. We cannot assure investors that the
revenue projected in our backlog will be realized or, if realized, will result in profits. Projects currently in our
backlog may be cancelled or may remain in our backlog for an extended period of time prior to project execution
and, once project execution begins, it may occur unevenly over the current and multiple future periods. In addition,
project terminations, suspensions or reductions in scope may occur from time to time with respect to contracts
reflected in our backlog, reducing the revenue and profit we actually receive from contracts reflected in our backlog.
Future project cancellations and scope adjustments could further reduce the dollar amount of our backlog and the
revenue and profits that we actually earn. These adjustments may be exacerbated by current economic conditions.
The terms of our contracts could expose us to unforeseen costs and costs not within our control, which may not
be recoverable and could adversely affect our results of operations and financial condition.
Under fixed-price contracts, we agree to perform the contract for a fixed price and, as a result, can improve our
expected profit by superior contract performance, productivity, worker safety and other factors resulting in cost
savings. However, we could incur cost overruns above the approved contract price, which may not be recoverable.
Under certain incentive fixed-price contracts, we may agree to share with a customer a portion of any savings we are
able to generate while the customer agrees to bear a portion of any increased costs we may incur up to a negotiated
ceiling. To the extent costs exceed the negotiated ceiling price we may be required to absorb some or all of the cost
overruns.
Fixed-price contract prices are established based largely upon estimates and assumptions relating to project scope
and specifications, personnel and material needs. These estimates and assumptions may be inaccurate or conditions
may change due to factors out of our control, resulting in cost overruns which we may be required to absorb. This
could have a material adverse effect on our business, financial condition and results of operations. In addition, our
profits from these contracts could decrease and we could experience losses if we incur difficulties in performing the
contracts or are unable to secure fixed-pricing commitments from our manufacturers, suppliers and subcontractors at
the time we enter into fixed-price contracts with our customers.
Under cost-plus contracts, we perform our services in return for payment of our agreed upon reimbursable costs plus
a profit. The profit component is typically expressed in the contract either as a percentage of the reimbursable costs
we actually incur or is factored into the rates we charge for labor or for the cost of equipment and materials, if any,
we are required to provide. Some cost-plus contracts provide for the customer’s review of the accounting and cost
control systems used by us to calculate these labor rates and to verify the accuracy of the reimbursable costs
invoiced. These reviews could result in reductions in amounts previously billed to the customer and in an
adjustment to amounts previously reported by us as our profit on the contract.
17
ITEM 1A.
RISK FACTORS (Continued)
Many of our fixed-price or cost-plus contracts require us to satisfy specified progress milestones or performance
standards in order to receive a payment. Under these types of arrangements, we may incur significant costs for
labor, equipment and supplies prior to receipt of payment. If the customer fails or refuses to pay us for any reason,
there is no assurance that we will be able to collect amounts due to us for costs previously incurred. In some cases,
we may find it necessary to terminate work on the project. In addition, if the contract permits, we may attempt to
recoup some or all of the cost overruns by entering into a claims recovery process by retaining a third party
consultant to assist us with necessary due diligence. However, there can be no assurance that we would be able to
recover some or all of the cost overruns through the claims recovery process or on terms favorable to the Company.
Liability claims could result in losses.
Providing engineering and design services involves the risk of contract, professional errors and omissions and other
liability claims, as well as adverse publicity. Further, many of our contracts require us to indemnify our clients not
only for our negligence, if any, but also for the concurrent negligence and, in some cases, sole negligence of our
clients. We currently maintain liability insurance coverage, including coverage for professional errors and
omissions. However, claims outside of or exceeding our insurance coverage may be made. A significant claim
could result in unexpected liabilities, take management time away from operations, and have a material adverse
impact on our cash flow.
We may incur significant costs in providing services in excess of original project scope without having an
approved change order.
After commencement of a contract, we may perform, without the benefit of an approved change order from the
customer, additional services requested by the customer that were not contemplated in our contract price due to
customer changes or to incomplete or inaccurate engineering, project specifications, and other similar information
provided to us by the customer. Our construction contracts generally require the customer to compensate us for
additional work or expenses incurred under these circumstances.
A failure to obtain adequate written approvals prior to performing the work or appropriate reimbursements for the
work performed could require us to record an adjustment to revenue and profit recognized in prior periods under the
percentage-of-completion accounting method. Any such adjustments, if substantial, could have a material adverse
effect on our results of operations and financial condition, particularly for the period in which such adjustments are
made. We cannot assure you that we will be successful in obtaining, through negotiation, arbitration, litigation or
otherwise, approved change orders in an amount sufficient to compensate us for our additional, unapproved work or
expenses.
If we are not able to successfully manage changes in the size of our business, our business and results of
operations may be adversely affected.
Until recently, we have been known as a rapidly growing company. In the last two years, our revenues, employees
and profits have decreased. Both increases and decreases in the size of our business present us with numerous
managerial, administrative, operational and other challenges and they require us to continually adjust the size and
scope of our management information systems, maintain discipline in our internal systems and controls, adjust the
size of our employee pool, and effectively manage our fixed overhead. The inability of our management to
effectively manage changes in the size of our business could have a material adverse effect on our business.
Failure to maintain adequate internal controls could adversely affect us.
Failure to achieve and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley
Act could have a material adverse effect on our business and stock price. Our internal controls over financial
reporting may not be adequate and our independent auditors may not be able to certify as to their adequacy.
If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial
results or prevent fraud. If we identify deficiencies in our internal control over financial reporting, our business and
our stock price could be adversely affected. We have, in the past, identified material weaknesses in our internal
18
ITEM 1A.
RISK FACTORS (Continued)
controls, and while these have been cured, if we determine that we have further material weaknesses, it could affect
our ability to ensure timely and reliable financial reports and the ability of our auditors to attest to the effectiveness
of our internal controls. If our independent auditors are not able to certify the adequacy of our internal controls, it
could have a significant adverse effect on our business and reputation.
If the operating result of any component in one of our segments is adversely affected, an impairment of goodwill
could result in a write down.
Based on factors and circumstances impacting ENGlobal and the business climate in which it operates, the Company
may determine that it is necessary to re-evaluate the carrying value of its goodwill by conducting an impairment test
in accordance with ASC 350, Goodwill and Other Intangible Assets. The Company has assigned goodwill to its
segments based on estimates of the relative fair value of each of its business segments. If changes in the industry,
market conditions, or government regulation negatively impact any of the Company’s segments resulting in lower
operating income, if assets are damaged, if anticipated synergies or cost savings are not realized with newly acquired
entities, or if any circumstance occurs which results in the fair value of any segment declining below its carrying
value, an impairment to goodwill would be created. In accordance with ASC 350, the Company would be required
to write down the carrying value of goodwill. For example, in 2007, the Company determined that goodwill within
the Automation segment was impaired in the amount of $432,000.
Our indebtedness could limit our ability to finance future operations or engage in other business activities.
As of December 31, 2009, we had $6.0 million of total outstanding indebtedness against our revolving line of credit,
which is currently limited to $25.0 million. Significant factors that could increase our indebtedness and/or limit our
ability to finance future operations include:
our inability to collect accounts receivable within contractual terms;
client demands for extending contract payment terms;
•
•
• material losses and/or negative cash flows on significant projects;
•
•
clients' failure to pay our invoices timely due to economic conditions or causes; and
our ability to meet current credit facility financial ratios and covenants.
Although we are in compliance with all current credit facility covenants and we believe our line of credit is
sufficient to cover current and future business operating requirements, our indebtedness could limit our ability to
finance future operations or engage in other business activities.
Seasonality of our industry may cause our revenue to fluctuate.
Holidays and employee vacations during our fourth quarter of each calendar year exert downward pressure on
revenue for that quarter, which is only partially offset by the year-end efforts on the part of many clients to spend
any remaining funds budgeted for services and capital expenditures during the year. The annual budgeting and
approval process under which these clients operate is normally not completed until after the beginning of each year,
which can depress results for the first quarter. Principally due to these factors, our first and fourth quarters may be
less robust in terms of financial results, billable hours, and utilization than our second and third quarters.
Unsatisfactory safety performance can affect customer relationships, result in higher operating costs and result
in high employee turnover.
Our workers are subject to the normal hazards associated with providing services on constructions sites and
industrial facilities. Even with proper safety precautions, these hazards can lead to personal injury, loss of life,
damage to, or destruction of property, plant and equipment, and environmental damages. We are intensely focused
on maintaining a safe environment and reducing the risk of accidents across all of our jobsites. However, poor
safety performance may limit or eliminate potential revenue streams from many of our largest customers and may
materially increase our future insurance and other operating costs. In hiring new employees, we normally target
experienced personnel; however, we also hire inexperienced employees. Even with thorough safety training,
inexperienced employees have a higher likelihood of injury which could lead to higher operating costs and insurance
rates.
19
ITEM 1A.
RISK FACTORS (Continued)
If we are not able to successfully manage internal growth initiatives, our business and results of operations may
be adversely affected.
Our growth strategy is to use our technical expertise in conjunction with industry trends. To support this strategy,
the Company may elect to fund internal growth initiatives targeted at markets that we believe may have significant
potential needs for the Company’s services. However, these initiatives may not be successful. For instance, the
Company may misread industry trends; during economic downturns, the needs of our targeted customers may
decline significantly; it may take an extended period of time before a new initiative becomes profitable; or the
Company may not be able to successfully execute on these initiatives. In these cases, the internal initiatives could
have a negative impact on earnings.
Additional acquisitions may adversely affect our ability to manage our business.
Acquisitions have contributed to our growth in the past and we plan to continue making acquisitions on terms
management considers favorable to us. The successful acquisition of other companies involves an assessment of
future revenue opportunities, operating costs, economies and earnings after the acquisition is complete, and potential
industry and business risks and liabilities beyond our control. This assessment is necessarily inexact and its
accuracy is inherently uncertain. In connection with our assessments, we perform reviews of the acquisition target
that we believe to be generally consistent with industry practices. These reviews, however, may not reveal all
existing or potential problems, nor will they permit a buyer to become sufficiently familiar with the target
companies to assess fully their deficiencies and capabilities. We cannot assure you that we will identify, finance and
complete additional suitable acquisitions on acceptable terms or that acquisitions we consummate will be profitable.
In addition, we may not be able to successfully integrate future acquisitions. Any acquisition may require
substantial attention from our management, which may limit the amount of time that management can devote to day-
to-day operations. Our current annual growth objective through acquisitions is approximately 12.5%; however,
there is no assurance that this objective will be met. Our inability to find additional attractive acquisition candidates
or to effectively manage the integration of businesses we acquire could adversely affect our profitability.
Our dependence on subcontractors and equipment manufacturers could adversely affect us.
We rely on third party subcontractors as well as third party suppliers and manufacturers to complete our projects.
To the extent that we cannot engage subcontractors or acquire supplies or materials, our ability to complete a project
in a timely fashion or at a profit may be impaired. If the amount we are required to pay for these goods and services
exceeds the amount we have estimated in bidding for fixed-price or cost-plus contracts, we could experience losses
on these contracts. In addition, if a subcontractor or supplier is unable to deliver its services or materials according
to the negotiated contract terms for any reason, including the deterioration of its financial condition or over-
commitment of its resources, we may be required to purchase the services or materials from another source at a
higher price. This may reduce the profit to be realized or result in a loss on a project for which the services or
materials were needed.
Force majeure events such as natural disasters could negatively impact the economy and the industries we
service, which may negatively affect our financial condition, results of operations and cash flows.
Force majeure events, such as hurricanes, could negatively impact the economies of the areas in which we operate.
For example, during 2008, Hurricanes Gustav and Ike caused considerable damage along the Gulf Coast not only to
the refining and petrochemical industry, but also the commercial segment which competes for labor, materials and
equipment resources needed throughout the entire United States. In some cases, we remain obligated to perform our
services after such a natural disaster even though our contracts may contain force majeure clauses. In those cases, if
we are not able to react quickly and/or negotiate contractual relief on favorable terms to the Company, our
operations may be significantly and adversely effected, which would have a negative impact on our financial
condition, results of operations and cash flows.
20
ITEM 1A.
RISK FACTORS (Continued)
Our Board of Directors may authorize future sales of ENGlobal common stock, which could result in a decrease
in the market value to existing stockholders of the shares they hold.
Our Articles of Incorporation authorize our Board of Directors to issue up to an additional 44,209,716 shares of
common stock and an additional 2,000,000 shares of blank check preferred stock as of the date of filing. These
shares may be issued without stockholder approval unless the issuance is 20% or more of our outstanding common
stock, in which case the NASDAQ requires stockholder approval. We may issue shares of stock in the future in
connection with acquisitions or financings. In addition, we may issue restricted stock or options under our 2009
Equity Incentive Plan. Future issuances of substantial amounts of common stock, or the perception that these sales
could occur, may affect the market price of our common stock. In addition, the ability of the Board of Directors to
issue additional stock may discourage transactions involving actual or potential changes of control of the Company,
including transactions that otherwise could involve payment of a premium over prevailing market prices to holders
of our common stock.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2.
PROPERTIES
Facilities
We lease space in 19 buildings in the U.S. and Canada totaling approximately 496,000 square feet. The leases have
remaining terms ranging from monthly to nine years and are on terms that we consider commercially reasonable.
ENGlobal has no major encumbrances related to these properties. A discussion of the locations of the various
segments is included in Item 7. On May 26, 2006, the Company entered into an exclusive agreement with a third
party, national real estate firm for tenant representation services that covers most of our facilities.
Our principal office locations are in Houston and Beaumont, Texas; and Tulsa, Oklahoma. We have other offices in
Clear Lake and Freeport, Texas; Baton Rouge and Lake Charles, Louisiana; Cleveland and Blackwell, Oklahoma;
Broomfield, Colorado; Mobile, Alabama; Schaumburg, Illinois; and Calgary, Alberta, Canada. Approximately
380,000 square feet of our total office space is designated for our professional, technical and administrative
personnel. We believe that our office and other facilities are well maintained and adequate for existing and planned
operations at each operating location.
Our Automation segment performs fabrication assembly in two shop facilities. One facility is in Houston, Texas
with approximately 81,000 square feet of space and a second facility is in Beaumont, Texas with approximately
30,000 square feet of space. In March 2009, the Houston facility was moved from a 63,000 square foot location to
our current facility.
In May 2008, the Company sold the land on which our Beaumont, Texas office building, destroyed by Hurricane
Rita in 2005, was located to a third party developer and entered into a build-to-suit lease agreement for a new office
building. In February 2009, the Company occupied the new 52,500 square foot facility.
On March 2, 2007, the Company, through its wholly-owned subsidiary, ENGlobal Automation Group, Inc.
(“EAG”), entered into a 39-month lease agreement for approximately 4,500 square feet of office space in Alpharetta,
Georgia, a suburb of Atlanta. On January 27, 2009, EAG closed this operation and subleased the space for the
remaining term to an unrelated third party.
On June 28, 2007, the Company, through its wholly-owned subsidiary, RPM Engineering, Inc. (“RPM”), sold the
Company’s property located in Baton Rouge, Louisiana. The purchase price was approximately $1.9 million with
20% of the purchase price being paid at closing and the balance self-financed for a period of 60 months. On
21
ITEM 2.
PROPERTIES (Continued)
July 24, 2008 the purchaser of the Baton Rouge building paid all outstanding principal owed on the note. The
Company has leased approximately 34,000 square feet of space in two separate facilities to house its Engineering
and Automation operations in Baton Rouge.
On September 29, 2008, the Company, through its wholly-owned subsidiary ENGlobal Automation, Group
(“EAG”), acquired the operations of ACE Management and Consulting Company. As a part of this acquisition, the
Company assumed the facility lease of approximately 17,600 square feet in Mobile, Alabama.
On August 14, 2009, the Company, through its wholly-owned subsidiary ENGlobal Construction Resources, Inc.
(“ECR”), acquired the operations of PCI Management and Consulting Company (“PCI”), a private Illinois based
power consulting business. As part of this acquisition the Company assumed the facility lease of approximately
4,000 square feet of office space in Schaumburg, Illinois.
ITEM 3.
LEGAL PROCEEDINGS
From time to time, ENGlobal or one or more of its subsidiaries is involved in various legal proceedings or are
subject to claims that arise in the ordinary course of business alleging, among other things, claims of breach of
contract or negligence in connection with the performance or delivery of goods and/or services, and the outcome of
any such claims or proceedings cannot be predicted with certainty. As of the date of this filing, all such active
proceedings and claims of substance that have been raised against any subsidiary business entity have been
adequately reserved for, or are covered by insurance, such that, if determined adversely to those entities,
individually or in the aggregate, they would not have a material adverse effect on our results of operations or
financial position.
In June 2008, ENGlobal filed an action in the United States District Court for the Eastern District of Louisiana;
Cause No. 08-3601, against South Louisiana Ethanol LLC (“SLE”) entitled ENGlobal Engineering, Inc. and
ENGlobal Construction Resources, Inc. v. South Louisiana Ethanol, LLC. The lawsuit seeks to enforce collection of
$15.8 million owed to ENGlobal and its affiliates for services performed on an ethanol plant in Louisiana. In
August 2009, SLE filed for Chapter 11 protection in the United States Bankruptcy Court for the Eastern District of
Louisiana, Case number 09-12676.
In November 2009, the Company filed a petition entitled ENGlobal Engineering, Inc. v. Alon USA, L.P., Alon USA
GP, LLC and Alon USA Refining, Inc. in the 162nd District Court of Dallas County, Case Number 09-15915-I. The
lawsuit seeks to enforce the collection of the $3.0 million owed to ENGlobal for services performed for a refinery
rebuild project that is remaining as amounts due on a letter payment agreement between ENGlobal and Alon USA,
LP (“Alon”) and to foreclose on its lien. The Company had previously filed a materialman’s and mechanic’s lien
on ebruary 13, 2009. In Alon’s answer, Alon has pled that the Company is not entitled to any recovery because it
committed a prior material breach, has not given offsets for deficient work, has billed for work that it did not
perform or was not authorized to perform and is obligated to furnish Alon a recoupment of previous monies paid in
offset of the current debt.
Due to past due payments on accounts receivable invoices for services provided to Bigler, LP (“Bigler”) in the
amount of $3.0 million, the Company filed a materialman’s and mechanic’s lien on the property on which the
services were performed. In response, Bigler filed a petition entitled Bigler, L.P. f/k/a Bigler Trading Company, Inc.
and Bigler Land, LLC v. ENGlobal Engineering, Inc. in the 234th District Court of Harris County, Case Number
2009-15676, asking for declaratory relief clearing title of the lien and seeking unspecified monetary damages.
ENGlobal Engineering has filed a counterclaim for collection of the fees due and foreclosure of its lien. The court
has denied Bigler’s pre-trial motion to vacate the lien, preserving ENGlobal’s secured status. On October 30, 2009,
Bigler filed a petition in U.S. Bankruptcy Court for the Southern District of Texas (Houston), Bankruptcy Petition
#09-38188. The bankruptcy has stayed ENGlobal’s collection proceedings. ENGlobal has been listed by Bigler as a
disputed, un-liquidated secured creditor. All the other lien claimants have been listed by Bigler as disputed.
22
ITEM 3.
LEGAL PROCEEDINGS (Continued)
ENGlobal was named as a defendant in a lawsuit entitled EcoProduct Solutions, L.P. v. ENGlobal Engineering and
Swenson Technology, Inc. The lawsuit was filed on October 8, 2009 in the 270th Judicial District Court of Harris
County, Texas, Case Number 2009-64881, and was based on a contract for engineering services performed between
November 2004 and August 2005 and for which ENGlobal received approximately $700,000. EcoProduct claimed
that it incurred actual damages of $45 million and sought to recover actual, consequential and punitive damages. On
January 28, 2010, the court granted ENGlobal’s Motion for Summary Judgment and dismissed with prejudice
EcoProduct’s claims against ENGlobal in their entirety. This judgment is subject to appeal. Based on information
available to us at this time, we do not believe this litigation will have a material adverse effect on our financial
condition.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of stockholders during the quarter ended December 31, 2009.
PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information and Holders
The Company’s common stock has been quoted on the NASDAQ Global Stock Market (NASDAQ) since
December 18, 2007, and is traded under the symbol “ENG.” From June 16, 1998 to December 18, 2007, the
Company’s stock was traded on the American Stock Exchange. Newspaper stock listings identify us as
“ENGlobal.”
The following table sets forth the high and low sales prices of our common stock for the periods indicated.
Fiscal Year Ended December 31
First quarter
Second quarter
Third quarter
Fourth quarter
2008
High
2009
High Low
Low
$4.95 $2.44 $ 10.61 $ 8.35
8.74
6.34
11.58
5.15
2.35
4.13
14.24
17.85
12.30
4.42
3.97
2.78
The foregoing figures, based on information published by NASDAQ, do not reflect retail mark-ups or markdowns
and may not represent actual trades.
As of December 31, 2009, approximately 240 stockholders of record held the Company’s common stock. We do
not have current information regarding the number of holders of beneficial interest holding our common stock.
A new class of capital stock of ENGlobal, consisting of 2,000,000 shares of Preferred Stock, par value $0.001 per
share (the “Preferred Stock”) was approved by the Company’s stockholders at its June 2006 meeting. The Board of
Directors has the authority to approve the issuance of all or any of these shares of Preferred Stock in one or more
series, to determine the number of shares constituting any series and to determine any voting powers, conversion
rights, dividend rights, and other designations, preferences, limitations, restrictions and rights relating to such shares
without any further action by the stockholders. The designations, preferences, limitations, restrictions and rights of
any series of Preferred Stock designated by the Board of Directors will be set forth in an amendment to the
Amended and Restated Articles of Incorporation (“Amended Articles”) filed in accordance with Nevada law.
23
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES (Continued)
The Preferred Stock is referred to as a “blank check” because the Board of Directors, in its discretion, is authorized
to provide for the issuance of all or any shares of the stock in one or more classes or series, specifying the terms of
the shares, subject to the limitations of Nevada law. The Board of Directors would make a determination as to
whether to approve the terms and issuance of any shares of Preferred Stock based on its judgment as to the best
interests of the Company and its stockholders.
The reason for authorizing blank check Preferred Stock is to provide the Company with flexibility in connection
with its future growth. Although the Company presently has no intentions of issuing shares of Preferred Stock,
opportunities may arise that require the Board to act quickly, such as businesses becoming available for acquisition
or favorable market conditions for the sale of a particular type of Preferred Stock. The Board believes that the
authorization to issue Preferred Stock enhances the Company’s ability to respond to these and similar opportunities.
Performance Graph
The following graph compares the five-year cumulative total stockholder return of ENGlobal Corporation as
compared to the NASDAQ Market Index and a self-instructed peer group index, consisting of the following
companies: Furmanite Corporation (formerly Xanser Corporation), Michael Baker Corporation, Matrix Service
Company, Tetra Tech, Inc., Willbros Group, and VSE Corporation. The graph assumes an investment of $100.00 in
our common stock and each index (including reinvestment of dividends) on December 31, 2004 and shown through
December 31, 2009.
THE STOCK PRICE PERFORMANCE SHOWN ON THE GRAPH BELOW REPRESENTS HISTORICAL
PRICE PERFORMANCE AND IS NOT NECESSARILY INDICATIVE OF ANY FUTURE STOCK PRICE
PERFORMANCE.
Comparison of 5 Year Cumulative Total Return
Assumes Initial Investment of $100
December 2009
400.00
350.00
300.00
250.00
200.00
150.00
100.00
50.00
0.00
2004
2005
2006
2007
2008
2009
ENGlobal Corporation
NASDAQ Stock Market (US Companies)
Peer Group
Company
Initial ($)
2004
2005
2006
2007
2008
2009
ENGLOBAL
NASDAQ Stock Market (US)
Peer Group
100.00
100.00
100.00
157.39
102.13
93.70
426.49
112.18
113.50
326.45
121.67
180.19
576.74
58.64
111.86
164.99
84.30
136.74
158.85
102.13
93.70
24
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES (Continued)
Notwithstanding anything to the contrary set forth in any of the Company’s previous filings under the Securities Act
of 1933, as amended, or the Exchange Act, which might incorporate future filings made by the Company under
those statutes, the Company’s Stock Performance Graph will not be incorporated by reference into any of those prior
filings, nor will such report or graph be incorporated by reference into any future filings made by the Company
under those Acts.
Equity Compensation Plan Information
The following table sets forth certain information concerning the Company’s equity compensation plans as of
December 31, 2009. See Note 13 in the attached financial statements.
Number of Securities to
be Issued Upon Exercise
of Outstanding Options,
Warrants and Rights (a)
Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights (b)
Equity compensation plan
approved by security holders
Equity incentive plan
approved by security holders
1,091,104
23,439
(1)
(2)
$7.12
$5.12
Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation Plans
[Excluding Securities in
Column (a)] (c)
0
433,125
The Company’s 1998 Incentive Plan expired in June 2008. At the June 18, 2009 Annual Meeting of Stockholders,
the Company’s stockholders voted to approve the adoption of the ENGlobal Corporation 2009 Equity Incentive Plan
authorizing 480,000 shares, the equivalent number of shares that remained under the expired ENGlobal Corporation
1998 Incentive Plan.
Dividend Policy
The Company has never declared or paid a cash dividend on its common stock. The Company intends to retain any
future earnings for reinvestment in its business and does not intend to pay cash dividends in the foreseeable future.
In addition, restrictions contained in our loan agreements governing our credit facility with Wells Fargo Bank limit
the amount of dividends that can be paid on our common stock. The payment of dividends in the future will depend
on numerous factors, including the Company’s earnings, capital requirements, and operating and financial position
as well as general business conditions.
Stock Repurchase Policy
Restrictions contained in our loan agreements governing our credit facility with Wells Fargo Bank limit the amount
of our common stock that we can repurchase.
Includes options issued through our 1998 Incentive Plan. For a brief description of the material features of the Plan, see
(1)
Note 13 of the Notes to the Consolidated Financial Statements.
(2)
features of the Plan, see Note 13 of the Notes to the Consolidated Financial Statements.
Includes unvested restricted stock awards issued through our 2009 Incentive Plan. For a brief description of the material
25
ITEM 6.
SELECTED FINANCIAL DATA
Summary Selected Historical Consolidated Financial Data
The following tables set forth our selected financial data. The data for the years ended December 31, 2009, 2008,
and 2007 have been derived from the audited financial statements appearing elsewhere in this document. The data
as of December 31, 2006 and 2005 have been derived from audited financial statements not appearing in this
document. You should read the selected financial data set forth below in conjunction with our financial statements
and the notes thereto included in Part II, Item 8; Part II, Item 7, “Management’s Discussion and Analysis of
Financial Condition and Results of Operations;” and other financial information appearing elsewhere in this
document.
2009
Years Ended December 31,
2007
(in thousands, except per share amounts)
2008
2006
2005
Statement of Operations
Revenue
Engineering
Construction
Automation
Land
Total revenue
Costs and expenses
Engineering
Construction
Automation
Land
Selling, general and administrative
Total costs and expenses
Operating income (loss)
Interest income (expense), net
Other income (expense), net
Foreign currency gain (loss)
Income (loss) from continuing operations before provision
for income taxes
Provision for income taxes
Net income (loss)
$ 139,064 $ 251,702 $ 221,787 $ 215,306 $ 193,376
21,898
18,311
--
$ 343,462 $ 493,332 $ 363,227 $ 303,090 $ 233,585
139,360
59,730
42,540
100,118
72,322
31,958
73,210
37,766
30,464
36,128
34,888
16,768
128,616
92,993
63,619
27,181
28,027
181,821
63,486
34,382
25,921
34,291
212,833
128,908
52,245
35,539
32,208
199,645
32,403
30,400
14,378
29,884
169,773
19,483
16,056
--
19,689
$ 340,436 $ 461,733 $ 339,901 $ 306,710 $ 225,001
8,584
$
(800 )
116
(2 )
23,326 $
(2,514 )
(138 )
(1 )
31,599 $
(1,636 )
64
(4 )
(3,620 ) $
(1,312 )
652
(19 )
3,026 $
(573 )
173
1
$
$
2,627 $
1,394
1,233 $
30,023 $
11,765
18,258 $
20,673 $
8,209
12,464 $
(4,299 ) $
(813 )
(3,486 ) $
7,898
3,116
4,782
26
ITEM 6.
SELECTED FINANCIAL DATA (Continued)
2009
Years Ended December 31,
2007
(in thousands, except per share amounts)
2006
2008
2005
Per Share Data
Basic earnings (loss) per share
Continuing operations
Discontinued operations
Net income (loss) per share
Weighted average common
shares outstanding – basic (000’s)
Diluted earnings (loss) per share
Continuing operations
Discontinued operations
Net income (loss) per share
Weighted average common
shares outstanding – diluted (000’s)
Cash Flow Data
Operating activities, net
Investing activities, net
Financing activities, net
Exchange rate changes
Net change in cash and cash equivalents
Balance Sheet Data
Working capital
Property and equipment, net
Total assets
Long-term debt, net of current portion
Long-term capital leases, net of current portion
Stockholders’ equity
Material Events and Uncertainties
$
$
$
$
$
$
0.05 $
--
0.05 $
0.67 $
--
0.67 $
0.46 $
--
0.46 $
(0.13 ) $
--
(0.13 ) $
0.20
--
0.20
27,330
27,180
26,916
26,538
24,300
0.04 $
--
0.04 $
0.66 $
--
0.66 $
0.45 $
--
0.45 $
(0.13 ) $
--
(0.13 ) $
0.19
--
0.19
27,567
27,672
27,435
26,538
25,250
23,002 $
(4,205 )
(19,673 )
19
(857 ) $
8,346 $
(2,871 )
(5,273 )
(110 )
92 $
(1,980 ) $
(1,614 )
3,074
25
(495 ) $
(8,953 ) $
(9,330 )
19,553
(26 )
1,244 $
(920 )
(2,418 )
3,493
(4 )
151
36,308 $
5,983 $
58,586 $
5,744 $
42,915 $
6,472 $
35,187 $
$
$
8,725 $
$ 110,635 $ 152,705 $ 119,590 $ 106,227 $
27,162 $
$
-- $
$
40,862 $
$
29,318 $
-- $
55,797 $
23,614 $
243 $
76,766 $
6,098 $
51 $
78,711 $
21,825
6,861
75,936
5,228
--
39,864
The Company is currently seeking to recover $15.8 million due from South Louisiana Ethanol (“SLE”) relating to
work performed in 2007. The Company believes that, given the value of the collateral securing this debt and its
collateral position, the amount due is collectible. However, collectability is not assured and failure to collect the
amount due could have a negative impact on future earnings which is estimated (based on the current year's tax rate)
to be approximately $0.02 cents per share per million of unrecovered exposure. More information relating to the
SLE matter is included under “Legal Proceedings.”
The Company is currently seeking to recover $3.0 million from Alon USA, LP (“Alon”) under a letter agreement
entered into on March 13, 2009. Based on information currently available, the Company believes this amount is
collectible. However, collectability is not assured and failure to collect the amount due could have a negative
impact on future earnings which is estimated (based on the current year's tax rate) to be approximately $0.06 per
share. More information relating to the Alon matter is included under “Legal Proceedings.”
27
ITEM 6.
SELECTED FINANCIAL DATA (Continued)
The Company is currently seeking to recover $3.0 million from Bigler, LP (“Bigler”) relating to work performed in
2008. Bigler has filed for protection under the United States bankruptcy laws, but the Company believes that, given
the value of the collateral securing this debt and its collateral position, the amount due is collectible. However,
collectability is not assured and failure to collect the amount due could have a negative impact on future earnings
which is estimated (based on the current year's tax rate), to be approximately $0.06 per share. More information
relating to the Bigler matter is included under “Legal Proceedings.”
Current Efforts to Mitigate Losses
The Company will continue to monitor all of the above mentioned proceedings and vigorously defend our position
in all legal matters. We will pursue all available remedies to recover its claims.
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion is qualified in its entirety by, and should be read in conjunction with, our Consolidated
Financial Statements including the Notes thereto, included elsewhere in this Annual Report on Form 10-K. Note 17
to the Financial Statements contain segment information.
Overview
Results of Operations
The Engineering segment provides consulting services relating to the development, management and execution of
projects requiring professional engineering and related project services. Services provided by the Engineering
segment include feasibility studies, engineering, design, procurement, and construction management. The
Construction segment provides construction management personnel and services in the areas of inspection,
construction, construction management, process plant turnaround management, plant asset management,
commissioning and start-up. The Automation segment provides services related to the design, fabrication, and
implementation of process distributed control and analyzer systems, advanced automation, information technology
and heat tracing projects. The Land segment provides land management, right-of-way, environmental compliance,
legislative affairs support and governmental regulatory compliance services primarily to pipeline, utility and other
owner/operators of infrastructure facilities throughout the United States and Canada.
The Company’s revenue is composed of engineering, procurement and construction service revenue and engineered
systems sales. The Company recognizes service revenue as soon as the services are performed. The majority of the
Company’s engineering services have historically been provided through cost-plus contracts whereas a majority of
the Company’s engineered system sales are earned on fixed-price contracts.
In the course of providing our services, we routinely provide engineering, materials, and equipment and may provide
construction services on a direct hire or subcontractor basis. Generally, these materials, equipment and
subcontractor costs are passed through to our clients and reimbursed, along with fees, which in total are at margins
lower than those of our normal core business. In accordance with industry practice and generally accepted
accounting principles, all costs and fees are included in revenue. The use of subcontractor services can change
significantly from project to project; therefore, changes in revenue may not be indicative of business trends.
Operating SG&A expense includes management and staff compensation, office costs such as rents and utilities,
depreciation, amortization, travel and other expenses generally unrelated to specific client contracts, but directly
related to the support of a segment’s operation.
Corporate SG&A expense is comprised primarily of marketing costs, as well as costs related to executive,
governance/investor relations, finance, accounting, safety, human resources, project controls and information
28
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
technology departments and other costs generally unrelated to specific client projects. Corporate SG&A expense
may vary as costs are incurred to support corporate activities and initiatives. The following table sets forth, for the
periods indicated, certain financial data derived from our consolidated statements of operations.
Consolidated Results of Operations for the Twelve Months
Ended December 31, 2009, 2008 and 2007
For the twelve months ended
December 31, 2009
(dollars in thousands)
Engineering Construction
Automation
Land
Corporate Consolidated
Revenue before eliminations
Inter-segment eliminations
Revenue
Gross profit
SG&A
Operating income
Other income (expense)
Interest income (expense)
Tax provision
Net income
Diluted earnings per share
For the twelve months ended
December 31, 2008
$
139,652 $
(588 )
139,064
10,448
6,358
4,090
101,808
(1,690 )
100,118
7,125
1,834
5,291
$
72,418 $ 31,958 $
(96 )
72,322
8,703
4,135
4,568
--
31,958
4,777
2,086
2,691
-- $
--
--
--
13,614
(13,614 )
$
$
345,836
(2,374
343,462 100.0%
9.1%
8.2%
0.9%
0.1%
(0.2%)
(0.4%)
0.4%
31,053
28,027
3,026
174
(573
(1,394
1,233
0.04
(dollars in thousands)
Engineering Construction
Automation
Land
Corporate Consolidated
Revenue before eliminations
Inter-segment eliminations
Revenue
Gross profit
SG&A
Operating income
Other income (expense)
Interest income (expense)
Tax provision
Net income
Diluted earnings per share
$
252,711 $
(1,009 )
251,702
38,869
7,083
31,786
147,714
(8,354 )
139,360
10,452
2,993
7,459
$
60,372 $ 42,540 $
(642 )
59,730
7,485
3,741
3,744
--
42,540
7,001
2,887
4,114
-- $
--
--
--
15,504
(15,504 )
$
$
503,337
(10,005)
493,332 100.0%
12.9%
6.5%
6.4%
0.0%
(0.3%)
(2.4%)
3.7%
63,807
32,208
31,599
60
(1,636)
(11,765)
18,258
0.66
29
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Increase/(Decrease) in 2009
to 2008 Operating Results
(dollars in thousands)
Engineering Construction
Automation
Land
Corporate Consolidated
Revenue before eliminations
Inter-segment eliminations
Revenue
Gross profit
SG&A
Operating income
Other income (expense)
Interest income (expense)
Tax provision
Net income
Diluted earnings per share
For the twelve months
ended December 31, 2007
(dollars in thousands)
$ (113,059 ) $
421
(112,638 )
(28,421 )
(725 )
(27,696 )
(45,906 ) $
6,664
(39,242 )
(3,327 )
(1,159 )
(2,168 )
12,046 $ (10,582 ) $
546
12,592
1,218
394
824
--
(10,582 )
(2,224 )
(801 )
(1,423 )
-- $
--
--
--
(1,890 )
1,890
$
$
(157,501 )
7,631
(149,870 )
(32,754 )
(4,181 )
(28,573 )
114
1,063
10,371
(17,025 )
(0.62)
(30.4 %)
(51.3 %)
(13.0 %)
(90.4 %)
190.0 %
65.0 %
(88.2 %)
(93.2 %)
Engineering Construction Automation
Land
Corporate Consolidated
221,802 $
(15 )
221,787
39,966
11,182
28,784
86,811
(13,601 )
$
73,210
9,724
2,591
7,133
Revenue before eliminations $
Inter-segment eliminations
Revenue
Gross profit
SG&A
Operating income
Other income (expense)
Interest income (expense)
Tax provision
Net income
Diluted earnings per share
--
39,115 $ 30,464 $
(1,349 )
37,766
3,384
3,442
(58 )
30,464
4,543
2,438
2,105
-- $
--
--
--
14,638
(14,638 )
$
$
378,192
(14,965 )
363,227
57,617
34,291
23,326
(139 )
(2,514 )
(8,209 )
12,464
0.45
100.0 %
15.9 %
9.5 %
6.4 %
0.0 %
(0.7 %)
(2.3 %)
3.4 %
Increase/(Decrease) in 2008
to 2007 Operating Results
(dollars in thousands)
Engineering Construction Automation
Land
Corporate Consolidated
Revenue before eliminations $
Inter-segment eliminations
Revenue
Gross profit
SG&A
Operating income
Other income (expense)
Interest income (expense)
Tax provision
Net income
Diluted earnings per share
30,909 $
(994 )
29,915
(1,097 )
(4,099 )
3,002
60,903
5,247
66,150
728
402
326
$
21,257 $ 12,076 $
707
21,964
4,101
299
3,802
--
12,076
2,458
449
2,009
-- $
--
--
--
866
(866 )
$
$
125,145
4,960
130,105
6,190
(2,083 )
8,273
199
878
(3,556 )
5,794
0.21
35.8 %
10.8 %
(6.1 %)
35.5 %
143.2 %
34.9 %
43.3 %
46.5 %
30
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
OVERALL COMPARISONS
Revenue
Of the $149.9 million overall decrease in revenue for the twelve months ended December 31, 2009, approximately
$112.6 million was attributable to our Engineering segment, $39.3 million to our Construction segment and
$10.6 million to our Land segment, offset by an increase of $12.6 million in our Automation segment. Of our
overall revenue in 2009, $6.7 million, or 2.0% was a result of the incremental revenue contribution from the August
2009 acquisition of PCI Management and Consulting, and the September 2008 acquisition of Advance Control
Engineering. We had decreases in revenue in 2009 of $29.6 million, or 19.8%, related to material and subcontractor
purchases. Revenue also decreased in 2009 as a result of our clients' continued cancellation or delay of scheduled
capital projects due to the economy in general, lower energy commodity prices and lower energy processing
margins. Our clients are continuing to perform “run and maintain” type smaller projects which focus on work for
required maintenance to keep the plant up and running but not on new capital expansions. Competition has also
increased greatly for the amount of project work on the market.
Approximately 39% of our revenue growth from 2007 to 2008 was due to additional work created by Hurricane Ike
and from a refinery rebuild project. Both of these projects included large amounts of material and subcontractor
purchases and were completed by the first quarter of 2009. The balance of the revenue growth from 2007 to 2008
was due to an overall higher level of project activity in the markets we serve and in particular from the increased
capital spending in the pipeline area which affected our construction, engineering and land segments.
Gross Profit
The decrease in gross profit as a percentage of revenue in 2009 relative to 2008 was caused by several factors
including lower utilization of our billable resources resulting in increased overhead costs to retain employees,
increased overhead costs to expand our marketing to new sectors and new clients, increased per-employee costs of
benefits and market pressure to renegotiate some of our existing contracts, resulting in lower margins.
The major factor that contributed to lower gross profit margins in 2008 relative to 2007 was an increase of
$24.6 million in revenues related to low-margin and pass-through procurement and subcontracted construction
revenue. The remaining decline was due to increased work on lower margin services such as pipeline inspection.
Selling, General and Administrative (“SG&A”) Expenses
The decrease in operating SG&A expense for the twelve months ended December 31, 2009, as compared to the
comparable 2008 period, primarily consisted of decreases in bad debt expense of $1.9 million, $1.3 million in
incentive bonus accruals for cancelled or modified plans, $0.2 million in salaries and employee related expenses and
$0.4 million in office and marketing expenses, offset by increases of $1.2 million in facilities expense and $0.3
million in depreciation and amortization expense.
The decrease in operating SG&A expense for the twelve months ended December 31, 2008, as compared to the
comparable 2007 period, primarily consisted of decreases in bad debt expense of $2.3 million, $0.8 million in
salaries and employee related expenses, $0.5 million in depreciation and amortization expense, and $0.1 million in
professional services, offset by increases of $0.2 million in facilities expense. In 2007, the bad debt expense
increased due to the creation of the reserve on the notes receivable for the SLE project and amortization increased by
$432,000 due to the goodwill impairment in the Automation segment. In 2007, we also realized a gain of $484,000
from the sale of our building in Baton Rouge. Even though we did not have the significant increase in bad debt due
to the SLE project in 2008, we did have increased amounts of general bad debt expense due to the economic
instability that has caused some customers to file bankruptcy or to otherwise be unable to pay.
31
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
The decrease in corporate SG&A expense for the twelve months ended December 31, 2009, as compared to the
comparable 2008 period, was primarily the result of decreases of $1.0 million in incentive bonus accruals for
cancelled or modified plans, $0.6 million in salaries and employee related expenses, $0.5 million in stock
compensation expense and $0.2 million in depreciation and amortization expense, offset by increases of $0.2 million
in facilities expenses and $0.2 million in office expenses. As a percentage of revenue, all other SG&A expense
increased to 4.0% for the twelve months ended December 31, 2009, from 3.2% for the comparable prior year period.
The increase in corporate SG&A expense for the twelve months ended December 31, 2008, as compared to the
comparable period in 2007, was primarily the result of increases of $0.7 million in salaries and employee-related
expenses, $0.2 million in facilities expense, $0.1 million in professional services for items such as Sarbanes-Oxley
(“SOX”) compliance and professional consulting services, and $0.2 million in amortization and depreciation
expense. These increases were offset by a decrease in stock compensation expense of $0.3 million. As a percentage
of revenue, corporate SG&A decreased from 4.0% in 2007 to 3.2% in 2008.
Operating Profit
The decrease in operating income for the twelve months ended December 31, 2009, as compared to the comparable
2008 period, was attributable to lower revenue levels as well as increased costs for both new sales efforts and
maintaining core employees at a time when the Company had fewer projects. These increased costs contributed to
lower operating income as a percentage of revenue as well as decreased contract margins in response to market
pressures.
The increase in operating income for the twelve months ended December 31, 2008, as compared to the comparable
2007 period, was primarily the result of higher levels of project activity in the markets we serve, along with savings
in SG&A.
Other Income (Expense)
Other income in 2009 mainly consisted of $315,000 from insurance proceeds related to Hurricane Ike offset by
expense of $145,000 in losses from an investment in a Costa Rican company. Other income for the same period in
2008 mainly consisted of an $84,000 gain on the sale of land not related to operations, $55,000 of reimbursements
for surplus of government tax funds, offset by expense of $56,000 in investment losses and $18,000 in tax penalties.
Other income in 2007 was derived mainly from a loss of $104,000 on the sale of assets from the closing of our
Dallas office.
Interest Income (Expense)
Interest expense decreased between 2009 and 2008 and between 2008 and 2007 due to the lower balances on our
line of credit and a favorable LIBOR rate option in our Credit Agreement.
Net Income
As a result of changes detailed above, Net Income decreased $17.1 million to $1.2 million in 2009 from $18.3
million in 2008, decreasing as a percentage of total revenue from 3.7% in 2008 to 0.4% in 2009. Net Income
increased $5.8 million to $18.3 million in 2008 from $12.5 million in 2007, increasing as a percentage of total
revenue from 3.4% in 2007 to 3.7% in 2008.
32
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
2009 Compared to 2008 and 2008 Compared to 2007
Engineering Segment:
Revenue before eliminations
Inter-segment eliminations
Total revenue
Detailed revenue:
Detail-design
Field services
Procurement services
Fixed-price
Total revenue:
Gross profit:
Operating SG&A expense:
Operating income:
Twelve Months Ended December 31,
2009
139,652
(588 )
139,064
92,000
42,879
399
3,786
139,064
10,448
6,358
4,090
$
$
$
$
$
2008
(dollars in thousands)
Increase/(Decrease)
$ 252,711
(1,009 )
$ 251,702
$ 168,079
50,647
30,038
2,938
$ 251,702
66.8%
20.1%
11.9%
1.2%
100.0%
$
$
$
$
(113,059)
421
(112,638)
(76,079)
(7,768)
(29,639)
848
(112,638)
(45.3%)
(15.3%)
(98.7%)
28.9%
(44.8%)
38,869
15.4%
(28,421)
(73.1%)
7,083
2.8%
(725)
(10.2%)
66.2%
30.8%
0.3%
2.7%
100.0%
7.5%
4.6%
2.9%
$
31,786
12.6%
$
(27,696)
(87.1%)
Twelve Months Ended December 31,
2008
2007
Increase/(Decrease)
(dollars in thousands)
Revenue before eliminations
Inter-segment eliminations
Total revenue
$
252,711
(1,009 )
$
251,702
$
$
221,802
(15 )
221,787
$
$
30,909
(994 )
29,915
Detailed revenue:
Detail-design
Field services
Procurement services
Fixed-price
Total revenue:
$
$
168,079
50,647
30,038
2,938
251,702
66.8 % $
20.1 %
11.9 %
1.2 %
100.0 % $
132,210
56,379
16,011
17,187
221,787
59.6 % $
25.4 %
7.2 %
7.8 %
100.0 % $
35,869
(5,732 )
14,027
(14,249 )
29,915
27.1 %
(10.2 %)
87.6 %
(82.9 %)
13.5 %
Gross profit:
38,869
15.4 %
39,966
18.0 %
(1,097 )
(2.7 %)
Operating SG&A expense:
7,083
2.8 %
11,182
5.0 %
(4,099 )
(36.7 %)
Operating income:
$
31,786
12.6 % $
28,784
13.0 % $
3,002
10.4 %
33
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
ITEM 7.
Revenue
Engineering revenue accounted for 40.5% of our total revenue for 2009. Our Engineering segment has been
significantly affected by the current economic conditions. Many of our clients have delayed or canceled scheduled
capital projects due to the economy in general and lower energy commodity prices, as well as lower energy
processing margins. Our clients are continuing to perform maintenance (“run and maintain”) projects which are
smaller than many of the other projects we have historically been involved in. Competition has increased greatly for
the amount of project work on the market. Although some of our clients have chosen different vendors, we still
have a base of significant clients who continue to award projects to us. We are also focusing on increased marketing
efforts not only to expand our opportunities in the domestic chemical, refining and pipeline sectors, but to also
expand into other markets within the energy and infrastructure sector. Renewable energy and applying
Engineering’s capabilities on international projects appear to be areas of potential growth. The Engineering
segment’s estimated backlog at December 31, 2009 was $100.4 million.
The increase in engineering revenue in 2008, as compared to 2007, was primarily brought about by increased
midstream and downstream capital spending in the energy industry. Refining related activity was particularly
strong, including projects to satisfy environmental mandates, expand existing facilities and utilize heavier sour
crude. Capital spending in the pipeline area also trended higher.
Our detail design services have been affected the most by the current economy. After a 27.1% increase from 2007
to 2008, these revenues decreased in 2009 by 45.3%. The decrease in 2009 is mainly due to decreased demand for
engineering and related professional services for energy related projects. We have also been affected by delayed or
cancelled capital project work by clients in reaction to the current economy. In 2008, the increase was mainly due to
a refinery rebuild project.
Our field services revenues decreased by 10.2% from 2007 to 2008 and again by 15.3% from 2008 to 2009 due to
general decreases in demand from our existing customers for in-plant resources. We are beginning to see some new
opportunities for growth in this area and are exploring the possibility of acquiring new clients.
Revenue from procurement services decreased 98.7% in 2009 but had increased by 87.6% in 2008. Both the
significant decrease in 2009 and increase in 2008 is primarily related to a large project to rebuild a client facility
which was completed in 2008. The level of procurement services varies over time depending on the volume of
procurement activity our customers choose to do themselves as opposed to using our services.
Fixed-price revenues increased 28.9% in 2009, as compared to 2008, but had decreased 82.9% in 2008, as compared
with 2007. The decrease in 2008 was the result of the Company’s decision to be more selective in the fixed-price
contracts it undertakes due to the risk of loss if the contract costs are not estimated accurately. However, due to the
current economy, more clients are requesting work to be performed on a fixed-price basis to control their costs and
shift risk to their contractors.
Gross Profit
Our Engineering segment's total gross profit decreased 73.1% in 2009, as compared with 2008, and decreased 2.7%
in 2008, as compared with 2007. Of the overall decrease in gross profit for 2009, $11.0 million was attributable to
increased costs, while decreased revenues contributed to $17.4 million of the overall decrease. As a percentage of
the Engineering revenue, the Engineering segment's gross profit decreased from 18.0% in 2007 to 15.4% in 2008
and to 7.5% in 2009. The decrease in 2009 is partially the result of clients' awarding new work based on
competitive bidding, resulting in lower margins. These lower margins along with increased per employee costs of
benefits accounted for 3.4% of the overall decrease in gross profit percentage. In response to the decrease in work,
we have decreased our number of employees. However, realization of the cost savings associated with reducing our
34
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
workforce lags a period of increased overhead costs associated with employees being removed from projects and
being carried as non-billable employees prior to termination. The additional costs of carrying these extra employees
accounts for 4.5% of the overall gross profit percentage decline.
The decrease in total gross profit percentages for 2008 was due to the increase in low margin procurement services
revenue. We earn a lower margin on procurement services than we earn on our core engineering services. For
example, procurement services for 2008 produced a 7.6% gross profit margin, whereas core engineering services
produced a gross profit margin of 20.7%. If the Company's business shifts away from predominantly engineering
projects to EPC projects which include material procurement and construction responsibility, engineering gross
profit as a percentage of revenue will be negatively impacted. This shift would precipitate lower gross profit
because higher cost-plus margins on engineering labor, recognized during the period in which it was earned, would
be combined with the lower margins on procurement services and construction subcontractor charges and recorded
throughout the duration of the projects. In addition, if our business shifts more to fixed-price work, our risk
assessment and project management tools will be critical to our continued successful operations.
Operating Selling, General and Administrative (“SG&A”) Expenses
The decrease in the Engineering segment’s SG&A expense in 2009 from 2008 was mainly attributable to decreases
of $1.3 million in bad debt expense, $0.2 million in professional expenses, $0.2 million in office expenses and
$0.1 million in salaries and employee related expenses, offset by increases of $0.9 million in facilities expenses and
$0.1 million in depreciation and amortization expenses. The decrease in the Engineering segment’s SG&A expenses
in 2008 from 2007 was a result of decreases of $3.1 million in bad debt expense almost entirely related to the
creation of the reserve against the SLE notes receivable in 2007. Also, amortization and depreciation decreased $0.2
million, salaries and related employee expenses decreased $1.2 million, and we realized a gain of $484,000 from the
sale of our building in Baton Rouge.
Operating Income
Of the overall decrease in the Engineering segment’s operating income for 2009 stated as a percent of revenues,
3.4 percentage points of change was due to lower margin work because of client pressures for competitive bidding,
4.5 percentage points of change was due to the costs of carrying under-utilized employees and 1.8 percentage points
of change was due to increased SG&A expenses.
Of the overall decrease in the Engineering segment’s operating income for 2008 stated as a percent of revenues,
1.7 percentage points of change was due to lower margin procurement work, 0.9 percentage points of change was
due to the additional costs of proposal work, offset by 2.2 percentage points of change due to decreased SG&A
expenses.
35
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Construction Segment:
Twelve Months Ended December 31,
2009
2008
(dollars in thousands)
Increase/(Decrease)
Revenue before eliminations
Inter-segment eliminations
Total revenue
$
101,808
(1,690 )
$
100,118
$
$
147,714
(8,354 )
139,360
$
$
(45,906 )
6,664
(39,242 )
Detailed revenue:
Inspection
Construction services
Total revenue:
Gross profit:
Operating SG&A expense:
$
$
85,507
14,611
100,118
85.4 % $
14.6 %
100.0 % $
125,731
13,629
139,360
90.2 % $
9.8 %
100.0 % $
(40,224 )
982
(39,242 )
(32.0 %)
7.2 %
(28.2 %)
7,125
1,834
7.1 %
1.8 %
10,452
7.5 %
(3,327 )
(31.8 %)
2,993
2.1 %
(1,159 )
(38.7 %)
Operating income:
$
5,291
5.3 % $
7,459
5.4 % $
(2,168 )
(29.1 %)
Twelve Months Ended December 31,
2008
2007
(dollars in thousands)
Increase/(Decrease)
Revenue before eliminations
Inter-segment eliminations
Total revenue
$
147,714
(8,354 )
$
139,360
$
$
86,811
(13,601 )
73,210
$
$
60,903
5,247
66,150
Detailed revenue:
Inspection
Construction services
Total revenue:
Gross profit:
Operating SG&A expense:
$
$
125,731
13,629
139,360
90.2 % $
9.8 %
100.0 % $
60,430
12,780
73,210
82.5 % $
17.5 %
100.0 % $
65,301
849
66,150
108.1 %
6.7 %
90.4 %
10,452
2,993
7.5 %
2.1 %
9,724
13.3 %
728
7.5 %
2,591
3.5 %
402
15.5 %
Operating income:
$
7,459
5.4 % $
7,133
9.8 % $
326
4.6 %
On August 14, 2009, the Construction segment purchased the consulting operations of PCI Management and
Consulting (PCI). PCI provides consulting and project management services specializing in projects relating to the
generation, transmission and distribution of energy. These services complement the other services provided by our
Construction segment and we anticipate that PCI’s location, in the Chicago, Illinois area, will allow us to expand
the Construction segment’s service territory and that PCI will produce EPC power project opportunities for the
Company.
As a result of the acquisition, ENGlobal expects to offer expanded services in the Chicago and surrounding areas.
Results of operations are included in the construction segment beginning August 15, 2009.
36
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
ITEM 7.
Revenue
The Construction segment contributed 29.1% of our total revenue for 2009. Our Construction segment has been
adversely affected by the current economic conditions. As a result of the lower commodity prices, narrowing of
energy processing margins and a difficult project financing environment, the Construction segment’s clients have
chosen to defer and cancel significant capital projects and reduce maintenance spending. These factors have
contributed to our decrease in revenues for 2009. Increased capital spending in the pipeline area in 2008,
particularly in inspection services, contributed to the overall increase in revenues for 2008.
The Construction segment’s estimated backlog at December 31, 2009 was $71.4 million but the backlog and
previously anticipated growth expected for pipeline and OSHA plant inspections, as well as plant turnaround and
construction management support projects and high-tech maintenance services, may be negatively impacted by
current economic conditions.
The revenue from this segment comes entirely from field services that are not typically limited to one project. The
Company’s past experience with this activity is that the term of these assignments on average spans multiple
projects and multiple years.
Gross Profit
Of the overall decrease in our Construction segment’s gross profit for 2009, $0.4 million was attributable to
increased costs, while decreased revenues contributed to $2.9 million of the overall decrease. The decrease in gross
profit is primarily attributable to the overall decrease in available work and increased overhead costs incurred in
connection with our efforts to win new work. Competitive pressures to lower margins has also contributed to the
decrease in gross profit as well as increased employee related costs.
Gross profit as a percentage of the Construction segment’s revenue decreased in 2008 while revenues increased
significantly due to the changing mix of work being performed in this segment. The main increase in work was in
pipeline inspection related revenues which typically carry lower margins than our other revenues.
Operating Selling, General and Administrative (“SG&A”) Expenses
The overall decrease in our Construction segment’s SG&A expense for 2009 was mainly attributable to decreases of
$225,000 in bad debt expense, $801,000 in incentive bonus accruals for cancelled or modified plans and $136,000 in
depreciation and amortization expenses.
The overall increase in our Construction segment’s SG&A expense for 2008 was mainly due to increases in salaries
and related employee expenses of $239,000, amortization and depreciation expense of $128,000 and allowances for
bad debt of $174,000. These increases were offset by savings of $120,000 in professional services and $24,000 in
facilities expense.
Operating Income
The overall decrease in our Construction segment’s operating income for 2009 was primarily attributable to the
increased direct and indirect costs of approximately 0.4%, offset by a savings in SG&A expenses of 0.3%.
The overall decrease in our Construction segment’s operating income for 2008 was primarily attributable to the
lower margin pipeline work of approximately 5.8%, offset by a savings in SG&A expenses of 1.4%.
37
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Automation Segment:
Twelve Months Ended December 31,
2009
2008
Increase/(Decrease)
(dollars in thousands)
Revenue before eliminations
Inter-segment eliminations
Total revenue
$
72,418
(96 )
$
72,322
$
$
60,372
(642 )
59,730
$
$
12,046
546
12,592
Detailed revenue:
Fabrication
Non-fabrication
Total revenue:
$
$
35,792
36,530
72,322
49.5 % $
50.5 %
100.0 % $
28,266
31,464
59,730
47.3 % $
52.7 %
100.0 % $
7,526
5,066
12,592
26.6 %
16.1 %
21.1 %
Gross profit:
8,703
12.0 %
7,485
12.6 %
1,218
16.3 %
Operating SG&A expense:
4,135
5.7 %
3,741
6.3 %
394
10.5 %
Operating income:
$
4,568
6.3 % $
3,744
6.3 % $
824
22.0 %
Twelve Months Ended December 31,
2008
2007
Increase/(Decrease)
(dollars in thousands)
Revenue before eliminations
Inter-segment eliminations
Total revenue
$
60,372
(642 )
$
59,730
$
$
39,115
(1,349 )
37,766
$
$
21,257
707
21,964
Detailed revenue:
Fabrication
Non-fabrication
Total revenue:
$
$
28,266
31,464
59,730
47.3 % $
52.7 %
100.0 % $
22,814
14,952
37,766
60.4 %
39.6 %
100.0 %
$
$
5,452
16,512
21,964
23.9 %
110.4 %
58.2 %
Gross profit:
7,485
12.6 %
3,384
9.0 %
4,101
121.2 %
Operating SG&A expense:
3,741
6.3 %
3,442
9.1 %
299
8.7 %
Operating income:
$
3,744
6.3 % $
(58 )
(0.1 %)
$
3,802
6555.2 %
Revenue
The Automation segment contributed 21.1% of our total revenue for the year. Of the overall increase in our
Automation segment’s revenue from 2008 to 2009, approximately $5.6 million was derived from non-fabrication
services that we were able to provide as a result of the September 2008 acquisition of Advanced Control
Engineering LLC. This acquisition also allowed the Automation segment to expand its geographic reach and
customer base to include specialty chemicals and pulp and paper markets. The remainder of the 2009 increase is
38
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
due to new work acquired as a result of our increased sales effort. Unlike our other segments, our Automation
segment is currently benefiting from greater capital spending on international downstream projects.
Of the overall increase in our Automation segment’s revenue from 2007 to 2008, approximately $8.9 million was a
result of the Hurricane Ike rebuilding project.
The Automation segment’s estimated backlog at December 31, 2009 was $22.5 million, but the backlog could be
negatively impacted by the current and possible future economic conditions.
Gross Profit
The overall increase in our Automation segment’s gross profit from 2008 to 2009 is entirely attributable to increased
revenues. Of the total gross profit percentage decrease, 0.3 percentage points were attributable to indirect costs
associated with salaries and employee related expenses as a percentage of revenue being higher than the comparable
prior year period, while the remainder of the decrease is due to higher direct costs, as a percentage of revenue.
Of the total gross profit percentage increase from 2007 to 2008, 2.0 percentage points were attributable to indirect
costs associated with salaries and employee related expenses as a percentage of revenue being lower than the
comparable prior year period, while the remainder of the increase is due to lower direct costs, as a percentage of
revenue, associated with more efficiently managing projects. In 2007, an unanticipated shortage of available
experienced labor caused an increase in labor hourly rates.
Selling, General and Administrative (“SG&A”) Expenses
The overall increase in our Automation segment’s SG&A expense from 2008 to 2009 was attributable to increases
of $327,000 in depreciation and amortization expenses, $298,000 in facilities expenses due to the relocation of the
Houston manufacturing facility, $119,000 in salaries and employee related expenses and the remainder in
professional services expense offset by savings in bad debt of $439,000.
The overall increase in our Automation segment’s SG&A expense from 2007 to 2008 was mainly due to increases in
allowances for bad debt of $452,000, facilities expense of $138,000 and stock compensation expense of $129,000.
These increases were offset by savings in amortization and depreciation expense of $365,000 due to the goodwill
impairment of $432,000 that was taken in 2007. In 2008, $100,000 of amortization was recorded in connection with
the intangible assets created from the acquisition of Advance Control Engineering, LLC and additional savings of
$61,000 was recognized in professional services.
Operating Income
The overall increases in our Automation segment’s operating income for both 2009 and 2008 are mainly due to the
increased levels of work along with the better project management.
39
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Land Segment:
Twelve Months Ended December 31,
2009
2008
Increase/(Decrease)
(dollars in thousands)
Revenue before eliminations
Inter-segment eliminations
Total revenue
$
$
31,958
--
31,958
$
$
42,540
--
42,540
100.0 %
100.0 %
$
$
(10,582 )
--
(10,582 )
(24.9 %)
Gross profit:
4,777
14.9 %
7,001
16.5 %
(2,224 )
(31.8 %)
Operating SG&A expense:
2,086
6.5 %
2,887
6.8 %
(801 )
(27.7 %)
Operating income:
$
2,691
8.4 %
$
4,114
9.7 %
$
(1,423 )
(34.6 %)
Twelve Months Ended December 31,
2008
2007
Increase/(Decrease)
(dollars in thousands)
Revenue before eliminations
Inter-segment eliminations
Total revenue
$
$
42,540
--
42,540
$
$
30,464
--
30,464
100.0 %
100.0 %
$
$
12,076
--
12,076
39.6 %
Gross profit:
7,001
16.5 %
4,543
14.9 %
2,458
54.1 %
Operating SG&A expense:
2,887
6.8 %
2,438
8.0 %
449
18.4 %
Operating income:
$
4,114
9.7 %
$
2,105
6.9 %
$
2,009
95.4 %
Revenue
The Land segment contributed 9.3% of our total revenues for 2009. The overall decrease in our Land segment’s
revenue from 2008 to 2009 was primarily attributable to clients delaying capital projects and competitive pricing
pressures as a result of the economic downturn.
In 2008, a general increase in capital spending by our clients contributed to the increase in Land segment revenue as
compared to its 2007 revenue. We were also able to increase our client base in 2008.
The Land segment’s estimated backlog at December 31, 2009 was $32.7 million. However, the backlog may be
negatively impacted by current and possible future economic conditions.
Gross Profit
Due to current economic conditions, we are experiencing client demands for lower costs. As a result, some of our
contracts provide lower margins than we have earned in the past. This trend is adversely affecting gross profit in our
Land segment.
40
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Of the overall decrease in our Land segment’s gross profit from 2008 to 2009, $0.5 million was attributable to
increased costs, while decreased revenues contributed to $1.7 million of the decrease. Lower margins resulting from
competitive pressures account for approximately 0.6% of the gross profit decrease. The remaining 1.0% decrease is
attributable to increased non-billable and indirect costs associated with compensating employees who are between
projects.
The overall increase in gross profit from 2007 to 2008 is attributed to the ability to renegotiate our existing contracts
to cover our increased costs. Also, as a percent of revenue, gross profit increased by 1.6% from 14.9% in 2007 to
16.5% in 2008.
Selling, General and Administrative (“SG&A”) Expenses
The overall decrease in our Land segment’s SG&A expense for 2009 was attributable to decreases of $205,000 in
marketing expenses, $628,000 in incentive bonus accruals for cancelled or modified plans and $117,000 in salaries
and employee related expenses offset by an increase in bad debt expense of $141,000.
The overall increase in our Land segment’s SG&A expense for 2008 was primarily due to increases of $227,000 in
salaries and related employee expenses, $100,000 in allowance for bad debt, and $80,000 in marketing expenses
with the remainder of the increase occurring in facilities, professional and insurance expense.
Operating Income
The overall $1.4 million decrease in our Land segment’s operating income for 2009, as compared to 2008, was due
to the delayed and canceled work as well as increased costs due to competitive pressures.
The overall $2.0 million increase in our Land segment’s operating income for 2008, as compared to 2007, was due
to the increased sales volume as well as better negotiations on contract terms.
Liquidity and Capital Resources
Overview
The Company defines liquidity as its ability to pay liabilities as they become due, fund business operations and meet
monetary contractual obligations. Our primary source of liquidity at December 31, 2009 was borrowings under our
senior revolving credit facility with Wells Fargo Bank, discussed under “Senior Revolving Credit Facility” below
(the “Wells Fargo Credit Facility”). Cash on hand at December 31, 2009 totaled $143,000 and availability under the
Wells Fargo Credit Facility totaled $18.4 million resulting in total liquidity of $18.5 million. We believe that we
have sufficient available cash required for operations for the next 12 months. However, cash and the availability of
cash could be materially restricted if:
revenues decline as a result of the decline in the price of oil or other economic factors,
amounts billed are not collected or are not collected in a timely manner,
circumstances prevent the timely internal processing of invoices,
project mix shifts from cost-reimbursable to fixed-price contracts during significant periods of growth,
the Company loses one or more of its major customers,
the Company experiences cost overruns on fixed-price contracts,
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii) our client mix shifts from our historical owner-operator client base to more developer based clients,
(viii) future acquisitions are not integrated timely, or
(ix) we are not able to meet the covenants of the Wells Fargo Credit Facility.
If any such event occurs, we would be forced to consider alternative financing options.
41
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Cash Flows from Operating Activities
Operating activities provided $23.0 million and $8.4 million in net cash in 2009 and 2008 respectively but required
the use of $2.0 million in net cash in 2007. For the year ended December 31, 2009, the changes in working capital
were primarily due to the decreased trade receivables of $48.3 million, decreased accounts payable of $10.6 million
and decreased accrued compensation and benefits of $12.9 million. The decrease in trade receivables was primarily
the result of an overall decline in operating activity. Our days sales outstanding has decreased from 64 days for the
twelve month period ended December 31, 2008 to 55 days for the twelve month period ended December 31, 2009.
In June 2009, $4.9 million of accounts receivable were reclassified to a current note receivable based upon a letter
agreement with a significant client. Therefore, the remaining amount on the current note receivable of $3.0 million
is no longer included in our days sales outstanding calculation. The Company manages its billing and client
collection processes toward reducing days sales outstanding to the extent practicable. We believe that our allowance
for bad debt is adequate to cover any potential non-payment by our customers. The decrease in accounts payable
was primarily the result of payouts of vendor and subcontractor charges incurred by our Automation segment due to
the increased activity during the three months ended December 31, 2008, payments of $2.7 million in subcontractor
obligations related to a note receivable and the overall decline in operating activity. The decrease in accrued
compensation and benefits was primarily due to timing of bi-weekly payroll.
In 2007, the note receivable re-classification on the SLE project was related to the client’s obligation in the principal
amount of $12.3 million.
Cash Flows from Investing Activities
Investing activities used cash totaling $4.2 million in 2009, compared to $2.9 million in 2008 and $1.6 million in
2007. In 2009, investing activities were primarily used for capital additions and the investment made to acquire the
operations of PCI. In 2008, investing activities were primarily used for capital additions and the investment made to
acquire ACE. In 2007, our investing activities consisted of capital additions primarily for computers and technical
software applications.
Future investing activities are anticipated to remain consistent with prior years and include capital additions for
leasehold improvements, technical applications software, and equipment, such as upgrades to computers. The Wells
Fargo Credit Facility discussed under “Senior Revolving Credit Facility” below limits annual capital expenditures to
$3.5 million.
Cash Flows from Financing Activities
Financing activities used cash totaling $19.7 million and $5.3 million in 2009 and 2008, respectively, but provided
cash totaling $3.1 million in 2007. During 2009, our primary financing mechanism was our line of credit under the
Comerica Credit Facility. The line of credit was used principally to finance working capital requirements. During
2009, our borrowings on the line of credit were $92.8 million in the aggregate, and we repaid an aggregate of
$115.4 million on our short-term and long-term bank and other debt. During 2008, our borrowings on the line of
credit were $296.0 million in the aggregate, and we repaid an aggregate of $301.3 million on our short-term and
long-term bank and other debt. On December 29, 2009, the Comerica Credit Facility was replaced by the Wells
Fargo Credit Facility. Our borrowings on the new line of credit were $6.0 million in the aggregate for 2009.
We anticipate that future cash flows from financing activities will be borrowings, payments on the line of credit and
payments on long-term debt instruments. Line of credit fluctuations are a function of timing related to operations,
obligations and payments received on accounts receivable. We estimate that payments on long-term debt, including
interest for the coming year, will be $1.2 million.
42
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Senior Revolving Credit Facility
Historically, we have satisfied our cash requirements through operations and borrowings under a revolving credit
facility. During December 2009, the Company entered into a new credit agreement with Wells Fargo Bank, which
provides a twenty-eight month, $25 million senior secured revolving credit facility (“Wells Fargo Credit Facility”).
The Wells Fargo Credit Facility is guaranteed by substantially all of Company’s subsidiaries, is secured by
substantially all of the Company’s assets, and positions Wells Fargo as senior to all other debt. The Wells Fargo
Facility replaced a $50 million senior revolving credit facility with Comerica Bank that would have expired in
August 2010. The outstanding balance on the Wells Fargo Credit Facility as of December 31, 2009 was $6.0 million
at a fluctuating rate per terms of the Wells Fargo Credit Facility. The remaining borrowings available under the
Wells Fargo Credit Facility as of December 31, 2009 were $18.4 million after consideration of loan covenant
restrictions.
At the Company’s option, amounts borrowed under the Wells Fargo Credit Facility will bear interest at either a
fluctuating rate per annum two percent (2%) above the Daily One Month LIBOR Rate in effect from time to time or
a fixed rate per annum determined by Wells Fargo to be two percent (2%) above LIBOR in effect on the first day of
an applicable fixed rate term. The Wells Fargo Credit Facility includes a commitment fee of 30 basis points for the
unused portion of the $25 million credit facility.
At any time any portion of the debt under the Wells Fargo Credit Facility bears interest determined in relation to
LIBOR for a Fixed Rate Term, it may be continued by the Company at the end of the Fixed Rate Term applicable
thereto so that all or a portion thereof bears interest determined in relation to the Daily One Month LIBOR Rate or to
LIBOR for a new Fixed Rate Term designated by the Company.
The Company’s Credit Facility requires the Company to maintain certain financial covenants as of the end of each
calendar quarter, including the following:
• Total Liabilities to Tangible Net Worth Ratio not greater than 2.25 to 1.00;
• Asset Coverage Ratio not less than 2.00 to 1.00; and
• Fixed Charge Coverage Ratio not less than 1.75 to 1.00;
“Total Liabilities” is defined as the aggregate of current liabilities and non-current liabilities. “Tangible Net Worth”
is defined as the aggregate of total stockholders' equity less any intangible assets and less any loans or advances to,
or investments in, any related entities or individuals. “Asset Coverage Ratio” is defined as accounts receivable
divided by revolver balance. “Fixed Charge Coverage Ratio” is determined on a rolling four-quarter basis and is
defined as EBITDA minus cash taxes, divided by interest expense, plus the current maturity of long term debt,
where EBITDA is net income, plus interest expense, plus income taxes, plus depreciation and amortization, plus
stock compensation expense.
The Company was in compliance with all covenants under the Credit Facility as of December 31, 2009. During the
previous quarterly reporting period our Total Liabilities to Tangible Net Worth Ratio ranged from 1.07 to 0.61; our
Asset Coverage Ratio ranged from 3.76 to 8.45; and our Fixed Charge Ratio ranged from 8.47 to 2.91. During the
twelve month period ended December 31, 2009 we expended or committed approximately 92%, or $3.2 million, of
the $3.5 million fiscal year covenant limitation on capital expenditures. Our office expansion in Beaumont and the
relocation of our manufacturing facility in Houston account for $1.1 million and $1.6 million respectively in
leasehold and equipment costs. The $0.5 million balance of our capital expenditures for the twelve month period
has been for normal operating requirements including office furniture, computers, software and vehicles.
For the quarterly period ended December 31, 2009 our Total Liabilities to Tangible Net Worth Ratio and Asset
Coverage Ratio covenant levels improved over their respective average ratios for the three previous quarterly
43
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
periods. The Company’s Fixed Charge Coverage Ratio for the quarterly period ended December 31, 2009 declined
53% from the average ratio of the three previous quarterly periods.
The Wells Fargo Credit Facility also contains covenants that place certain limitations on the Company including
limits on capital expenditures, other indebtedness, mergers, asset sales, investments, guaranties, restrictions on
certain distributions and pledges of assets. The Company was in compliance with all covenants under the Wells
Fargo Credit Facility as of December 31, 2009.
Letters of Credit
As of December 31, 2009, the Company had outstanding letters of credit totaling $611,000 primarily to cover self-
insured deductibles under both our general liability and workers’ compensation insurance policies.
Long-term Debt
Our total long-term debt outstanding on December 31, 2009 was $7.2 million (see Note 10 to Consolidated Financial
Statements), a decrease from $25.7 million as of December 31, 2008.
The following table summarizes our contractual obligations as of December 31, 2009:
Long-term debt
Capital Lease
Contractual interest
and discount on certain notes1
Subtotal long-term debt
Operating leases
Total contractual cash obligations
$
$
Payments Due by Period
2010
2011
874 $
190
96 $
53
2012
2013
(in thousands)
6,000 $
--
2014 and
thereafter
Total
-- $
--
-- $
--
6,970
243
178
1,242
5,583
6,825 $
140
289
4,539
4,828 $
45
6,045
3,022
9,067 $
--
--
1,553
1,553 $
--
--
5,227
5,227 $
363
7,576
19,924
27,500
1Future interest consists primarily of interest on the line of credit under the Wells Fargo Credit Facility. The rate applicable
to debt outstanding at December 31, 2009 was 2.25% and fluctuates with the prime rate. Interest and discount rates on the
remainder of the Company’s notes payable vary from 2.38% to 6.25%, with the weighted average being 3.28% at December
31, 2009.
2009 Non-Cash Transactions
In 2009, non-cash transactions included $0.2 million discounted notes payable in connection with the acquisition of
PCI’s operations. In 2008, non-cash transactions included $1.9 million discounted notes payable issued in
connection with the acquisition of ACE. In 2007, non-cash transactions included a $1.5 million note receivable
issued upon the sale of a building the Company owned in Baton Rouge, Louisiana and a note receivable in the
principal amount of $12.3 million issued to South Louisiana Ethanol (“SLE”) and evidenced by a hand note. To see
details of the hand note, see Exhibits 10.19, 10.20 and 10.21 filed with the 2007 10-K. We also acquired insurance
with notes payable of $1.6 million and $1.2 million in 2008 and 2007, respectively.
44
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Derivative Financial Instruments
We do not hold any derivative financial instruments for trading purposes or otherwise. Furthermore, we have not
engaged in energy or commodity trading activities and do not anticipate doing so in the future, nor do we have any
transactions involving unconsolidated entities or special purpose entities.
Long-term Notes Receivable
In the first quarter of 2007, ENGlobal Engineering, Inc. (“EEI”) and South Louisiana Ethanol, LLC (“SLE”)
executed an agreement for EPC services relating to the retro-fit of an ethanol plant in southern Louisiana. The
history of the SLE project (the “Project”) is described in Note 12 to the Company's financial statements included in
its Quarterly Report on Form 10-Q for the quarter ended September 30, 2007.
After funding certain initial stages of the Project with cash, SLE obtained temporary financing from its bridge
lending bank in the amount of $20 million until it could obtain permanent financing for the Project. The parties
anticipated that permanent financing would be obtained from other lenders no later than August 31, 2007. SLE had
engaged a major commercial bank to assist with finding permanent financing. Further, SLE informed EEI that this
commercial bank had obtained permanent financing for numerous other ethanol facilities. Based on this, as well as
on conversations between the Company's Chief Executive Officer and representatives of this commercial bank, EEI
expected the financing for the Project to be consummated on a timely basis. Given this expectation, together with
the favorable prices for corn and for ethanol, and the robust credit markets, EEI believed that the Project would be
successful and commenced work in the fourth quarter of 2006.
In the late summer of 2007, although SLE was current in its payments it had not obtained permanent financing,
corn prices began to increase and ethanol prices began to decline. Accordingly the Company decided that it was
advisable to obtain security for the amount due. On August 31, 2007, SLE executed a collateral mortgage, a
collateral note, and a promissory note in the amount of up to $15 million, securing payment of the amount due, and
the Company re-classed the amounts receivable from SLE to a Note Receivable. In connection with this
promissory note, and as provided for under Louisiana law, SLE executed another promissory note (the “Hand
Note”) on or about October 22, 2007. The Hand Note had a principal balance of approximately $12.3 million,
constituting all amounts then due.
SLE was current on all invoices through September 18, 2007. However, on September 20, 2007, SLE requested that
EEI immediately demobilize its activity and instruct its subcontractors to do the same. EEI complied with this
request. Because collectability was not assured, the Company reserved the amounts which were in excess of the
Hand Note. As a result, in the fourth quarter of 2007 the Company recorded a valuation reserve and subsequent
charge against bad debt expense in the amount of $3.2 million to reduce the book value of the Note Receivable. In
the fourth quarter of 2008, the Company increased the valuation reserve and subsequent charge against Bad Debt
expense in the amount of $559,000. As of December 31, 2008, the Company performed its impairment analysis for
the asset group classified as long-term notes receivable, particularly Notes Receivable – South Louisiana Ethanol, of
$8.6 million.
In August 2009, SLE filed for Chapter 11 protection in the U.S. Bankruptcy Court in New Orleans. Due to the
ongoing discovery and analysis currently in process on our SLE litigation we cannot yet determine the actual
proceeds that would be generated for ENGlobal when the courts determine the status of each asset and the relative
lien priorities of SLE's creditor’s, and then such assets are sold. However, at this time management believes that,
given the Company's lien position as documented in public records, the value of the collateral will cover the current
balance sheet exposure. Any additional charge, or negative determination by the courts, could have a negative
impact on future earnings estimated at 2.1 cents per share per million of un-recovered exposure as a result of a non-
cash charge to operations. However, at this time the Company believes that the ultimate disposition of the SLE
collateral will not materially adversely affect our liquidity or overall financial position.
45
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
The Company will continue to evaluate the SLE situation and, if required in the future, make adjustments to the
reserve as necessary to remain in compliance with generally accepted accounting principles.
On March 13, 2009, the Company entered into a letter agreement (the “letter agreement”) with Alon USA, LP
(“Alon”) resolving the payment of due and past due accounts receivable invoices in the aggregate amount of
$6.8 million. The principal terms of the letter agreement include the recovery of amounts due in monthly payments
beginning in March 2009 and ending with final payment in December 2009. The $6.8 million payment plan
included $4.6 million in subcontractor obligations which are included in our Accounts Payable balances. The
Company received all scheduled payments from March 2009 through September 2009, but did not receive the full
amount of the scheduled $800,000 monthly payment due on October 20, 2009, nor did the Company receive what
would have been the final payments scheduled per the letter agreement during the months of November and
December. Instead, Alon notified the Company that it had a claim against the Company relating to a separate,
completed project, in the amount of the balance due under the letter agreement and further, that it was offsetting the
amount of its claim against the amount it owed the Company under the letter agreement. As of December 31, 2009,
the Company’s note and its subcontractor obligations were $3.0 million and $2.0 million respectively. The
Company had previously filed a materialman’s and mechanic’s lien on February 13, 2009, from the facts
determinable at present, we believe all amounts are collectible but, due to the legal claim, we have reclassified this
note from current to long-term.
Contingent Liabilities and Commitments
To our knowledge, the Company is not exposed to any environmental liability.
The Company does not have any product liability issues. Lease commitments are included in Footnote 11 of the
consolidated financial statements. The Company leases all of its office space.
The Company has no off-balance sheet financing arrangements.
Income Tax Provision
On July 13, 2006, the FASB issued FIN 48, “Accounting for Uncertainty in Income Taxes, and Related
Implementation Issues,” which is now codified under ASC 740, Income Taxes. This standard provides guidance on
the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions that a
company has taken or expects to take on a tax return. Under ASC 740, financial statements should reflect expected
future tax consequences of such positions presuming the taxing authorities have full knowledge of the position and
all relevant facts. This interpretation also revises the disclosure requirements and was adopted by the Company
effective as of January 1, 2007. There are currently no material tax positions identified as uncertain for the
Company or its subsidiaries.
We recognize interest related to uncertain tax positions in interest expense and penalties related to uncertain tax
positions in governmental penalties. As of December 31, 2009, we have not recognized interest or penalties relating
to any uncertain tax positions.
The Company is subject to federal and state income tax audits from time to time that could result in proposed
assessments. The Company cannot predict with certainty the timing of such audits, how these audits would be
resolved and whether the Company would be required to make additional tax payments, which may or may not
include penalties and interest.
The Company is not currently the subject of any examination by the Internal Revenue Service, and the open years
subject to audit are tax years 2006-2008. For most states where the Company conducts business, the Company is
subject to examination for the preceding three to six years.
46
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Asset Management
We typically sell our products and services on short-term credit and seek to minimize our credit risk by performing
credit checks and conducting our own collection efforts. Our trade accounts receivable decreased to $47.7 million
from $96.0 million as of December 31, 2009 and 2008, respectively. The number of days sales outstanding for trade
accounts receivable decreased from 64 days at December 31, 2008, to 55 days at December 31, 2009. In June 2009,
$4.9 million of accounts receivable were reclassified to a current note receivable based upon a letter agreement with
a significant client. Therefore, the remaining amount on the current note receivable of $3.0 million is no longer
included in our days sales outstanding calculation. This reclassification affected the days sales outstanding by three
days. The remaining reduction was due to improved billing and collection processes. Bad debt expense was
approximately 0.2% and 0.5% of revenue for the years ended December 31, 2009 and 2008. We decreased our
allowance for doubtful accounts from $2.3 million to $1.9 million or 2.4% and 4.0% of trade accounts receivable
balance for each of the years 2008 and 2009, respectively. While we continue to manage this portion of our
business very carefully, it is possible that our days sales outstanding, bad debt expense and allowance for doubtful
accounts will deteriorate if the economy continues to decline.
Risk Management
In performing services for our clients, we could potentially face liability for breach of contract, personal injury,
property damage or negligence, including professional errors and omissions. We often agree to indemnify our
clients for losses and expenses incurred as a result of our negligence and, in certain cases, the sole or concurrent
negligence of our clients. Our quality control and assurance program includes a control function to establish
standards and procedures for performance and for documentation of project tasks, and an assurance function to audit
and to monitor compliance with procedures and quality standards. We maintain liability insurance for bodily injury
and third party property damage, professional errors and omissions, and workers compensation coverage, which we
consider sufficient to insure against these risks, subject to self-insured amounts.
Seasonality
Holidays and employee vacations during our fourth quarter exert downward pressure on revenues for that quarter,
which is only partially offset by the year-end efforts on the part of many clients to spend any remaining funds
budgeted for services and capital expenditures during the year. The annual budgeting and approval process under
which these clients operate is normally not completed until after the beginning of each year, which can depress
results for the first quarter. Principally due to these factors, our first and fourth quarters may be less robust than our
second and third quarters.
Critical Accounting Policies
Revenue Recognition
Because the majority of the Company’s revenue is recognized under cost-plus contracts, significant estimates are
generally not involved in determining revenue recognition.
Most of our contracts are with Fortune 500 companies. As a result, collection risk is generally not a relevant factor
in the recognition of revenue. However, timing of accounts receivable collections could have a serious impact in the
Company’s liquidity. Also, the Company is engaging in more development contracts with smaller companies. We
anticipate that collection risk will be greater on these projects and have instituted new policies relating to
ascertaining the creditworthiness of new customers. It is not clear how changes in the economy will impact smaller
companies’ ability to undertake and finance these projects.
Our revenue is largely composed of engineering service revenue and product sales. The majority of our services are
provided through time-and-material contracts (also referred to as cost-plus contracts). Some contracts have
47
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
not-to-exceed provisions that place a cap on the revenue that we may receive under a particular contract. The
contract is awarded with the maximum aggregate revenue, referred to as the not-to-exceed amount. The Company
does not earn revenue over the not-to-exceed amount unless we obtain a change order. The Company is not
obligated to complete the contract once the not-to-exceed amount has been reached. However, if the Company
performs work over the not-to-exceed amount prior to obtaining a valid change order, it could impact our gross
profit margins. Billings on time-and-material contracts are produced every two weeks.
On occasion, we serve as purchasing agent by procuring subcontractors, material and equipment on behalf of a client
and passing the cost on to the client with no mark-up or profit. In accordance with ASC 605-35, “Revenue
Recognition for Construction type contracts,” revenue and cost for these types of purchases are not included in total
revenue and cost. For financial reporting this “pass-through” type of transaction is reported net. During 2007, pass-
through transactions totaled $0.5 million. We had no pass-through transactions in 2008 and 2009.
Profits and losses on fixed-price contracts are recorded on the percentage-of-completion method of accounting,
measured by the percentage of contract costs incurred to date to estimated total contract costs for each contract.
Contract costs include amounts paid for materials, equipment and subcontractors. Anticipated losses on
uncompleted construction contracts are charged to operations as soon as such losses can be estimated. Changes in
job performance, job conditions, estimated profitability and final contract settlements may result in revisions to costs
and income and are recognized in the period in which the revisions are determined.
The asset, “costs and estimated earnings in excess of billings on uncompleted contracts,” represents revenue
recognized in excess of amounts billed on fixed-price contracts. The Company’s inability to manage significant
levels or increases in “costs and estimated earning in excess of billings on uncompleted contracts” could have a
serious impact on the Company’s cash flow. The liability “billings in excess of costs and estimated profits on
uncompleted contracts” represents amounts billed in excess of revenue recognized on fixed-price contracts.
Change Orders
Change orders are modifications of an original contract that effectively change deliverables under a contract without
adding new provisions. Either we or our clients may initiate change orders. Change orders may include changes in
specifications or design, manner of performance, equipment, materials, scope of work, and/or the period of
completion of the project.
Change orders occur when changes are experienced once a contract is begun. Change orders are sometimes
documented and in most cases the terms of change orders are agreed upon with the client before the work is
performed. Other times, circumstances may require that work progress without the client’s written agreement before
the work is performed. In those cases, we are taking a risk that the customer will not sign a change order or at a later
time the customer will seek to negotiate the pricing of the additional work. Costs related to change orders are
recognized when they are incurred. Change orders are included in the total estimated contract revenue when it is
more likely than not that the change orders will result in a bona fide addition to value that can be reliably estimated.
We have a favorable history of negotiating and collecting for work performed under change orders and our bi-
weekly billing cycle has proven to be timely enough to properly account for change orders.
Goodwill
Goodwill and intangible assets with indefinite useful lives are not amortized and are tested at least annually for
impairment. We perform our annual analysis as of the fourth quarter of each fiscal year and in any period in which
indicators of impairment warrant an additional analysis. Goodwill represents the excess of the purchase price of
acquisitions over the fair value of the net assets acquired. Reporting units for the purpose of goodwill impairment
calculations are components one level below our reportable operating segments. Goodwill is tested for impairment
48
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
using a two-step process. In step one of the goodwill impairment test, the fair value of each reporting unit is
determined and compared to the carrying value of the reporting unit. In step two, if the fair value of the reporting
unit is less than the carrying value, including goodwill, then the goodwill is written down to the implied fair value of
the goodwill through a charge to expense.
Management utilizes a discounted cash flow analysis to determine the estimated fair value of our reporting units.
Significant judgments and assumptions including determination of an appropriate discount rate, projecting revenue
growth and gross margins, estimating operating and interest expense and projecting capital expenditure levels are
involved in making these fair value estimates, with the most critical estimates being projected growth rate and
discount rate. The projected growth rate incorporates the Company’s 2010 budget and management’s estimate of the
long-term growth rate of the Company based on certain internal estimates and external data. The discount rate
utilized in the analysis was a weighted average cost of capital (WACC). WACC is an estimate of the overall after-
tax rate of return required by equity and debt market participants of a business enterprise, with the weighting of
returns based on the capitalization of comparable companies. While we use the best available information to prepare
our cash flow projections and WACC assumptions, actual future cash flows, costs of capital or market conditions
could differ significantly resulting in future impairment and charges related to recorded goodwill balances.
Our methodologies for performing our goodwill impairment analysis have not changed from the prior year.
However, we did incorporate changes relating to growth rate in response to current economic condition. The
discount rate increased approximately 1% for the current year analysis. Except for Automation, the fair value of all
of our reporting units substantially exceeded their carrying value. The fair value for Automation, which has $1.8
million of goodwill recorded as of December 31, 2009, exceeded carrying value by 7%. Deterioration in our
expected operating results or increases in our cost of capital could have a negative effect on fair value and lead to an
impairment in the future.
A 20% decrease in our projected growth rate (holding all other assumptions constant) would have the following
impact on the estimated fair value of our reporting units, summarized by segment:
Segment
Estimated Fair Value
Engineering
Construction
Automation
Land
($6.2 million)
($1.2 million)
($0.6 million)
($0.1 million)
These hypothetical changes would not cause step 2 of the goodwill impairment test to be required for any of our
reporting units.
A 1% increase in our assumed discount rate (holding all other assumptions constant) would have the following
impact on the estimated fair value of our reporting units, summarized by segment:
Segment
Estimated Fair Value
Engineering
Construction
Automation
Land
($4.0 million)
($3.0 million)
($1.6 million)
($0.4 million)
These hypothetical changes would not cause step 2 of the goodwill impairment test to be required for the reporting
units within the Engineering, Construction or Land segments. However, step 2 of the goodwill impairment test
would be required for the Automation segment.
49
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
The results of our annual goodwill impairment analysis for the years ended December 31, 2009 and
December 31, 2008 indicated no impairment to the recorded value of our goodwill assets. The Company recognized
$432,000 of impairment in our Automation segment in 2007. If the economic downturn causes the value of one or
more of the Company's subsidiaries to decline, the Company might have goodwill impairment in future years.
Deferred Tax
The Company had net deferred tax asset balances of $3.9 million and $4.4 million as of December 31, 2009 and
December 31, 2008, respectively. These net deferred tax assets are identified in Footnote 15 to the financial
statements.
The Company had a federal net operating loss carry-forward at December 31, 2009 of approximately $18,000.
Earlier utilization of the net operating loss on the Company’s 2002 and 2003 consolidated tax returns was
disallowed by the IRS which resulted in a reinstated carry-forward that will be available for utilization from 2008
through 2010.
The Company also has a foreign net operating loss carry-forward at December 31, 2009 of approximately $1.4
million. This loss is available for utilization from 2008 through 2017; however, application of the net operating loss
is restricted to the income of ENGlobal Canada. The Company is unsure of its ability to fully utilize the foreign net
operating loss. Therefore, the Company has set up a valuation allowance of $567,000 against the entire net
operating loss.
Recent Accounting Pronouncements
On July 1, 2009, the FASB issued the authoritative version of the Accounting Standards Codification TM
(Codification or ASC) as the single source of authoritative nongovernmental U.S. generally accepted accounting
principles (U.S. GAAP). The Codification was effective for interim and annual periods ended after
September 15, 2009 and all previous level (a)-(d) U.S. GAAP standards issued by a standard setter are superseded.
The Company has adopted the provisions of the Codification with its reporting period ended September 30, 2009.
Adoption of the new guidance did not materially impact the Company’s financial statements.
On May 28, 2009, the FASB issued FAS 165, Subsequent Events, now codified as ASC 855, Subsequent Events,
which provides guidance on management’s assessment of subsequent events. Historically, management had relied
on U.S. auditing literature for guidance on assessing and disclosing subsequent events. ASC 855 represents the
inclusion of guidance on subsequent events in the accounting literature and is directed specifically to management,
since management is responsible for preparing an entity’s financial statements. ASC 855 clarifies that management
must evaluate, as of each reporting period, events or transactions that occur after the balance sheet date through the
date that the financial statements are issued. ASC 855 was effective prospectively for interim and annual financial
periods ending after June 15, 2009. The Company has adopted the provisions of ASC 855 effective with its
reporting period ending June 30, 2009. The adoption of ASC 855 did not have a material impact on the Company’s
financial condition or results of operations. The Company has evaluated subsequent events up through the date of
the filing of this report with the SEC.
In December 2007, the FASB issued FAS 141(R), Business Combinations, now codified as ASC 805, Business
Combinations. ASC 805 significantly changes the accounting for business combinations. Under ASC 805, an
acquiring entity is required to recognize, with limited exceptions, all the assets acquired and liabilities assumed in a
transaction at the acquisition-date fair value. ASC 805 changes the accounting treatment for certain specific
acquisition related items including, among other items: (1) expensing acquisition related costs as incurred, (2)
valuing non-controlling interests at fair value at the acquisition date, and (3) expensing restructuring costs
associated with an acquired business. ASC 805 also includes a substantial number of new disclosure requirements.
The Company adopted the provisions of ASC 805 on January 1, 2009. The full impact to the Company, which
could be material, will be dependent upon any individual transactions consummated.
50
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Inflation and Changing Prices
The Company is planning to incorporate certain provisions in its future fixed-price contracts that would allow the
Company to recover a portion of certain unforeseen price changes in materials and labor that are not in the range of
normally expected inflation.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of December 31, 2009 and 2008, the Company did not participate in any derivative financial instruments or other
financial and commodity instruments for which fair value disclosure would be required under ASC 825, Financial
Instruments or ASC 815, Derivatives and Hedging. There are no material investments at December 31, 2009.
Accordingly, the Company has no quantitative information concerning the market risk of participating in such
investments.
The Company’s primary interest rate risk relates to its variable-rate line of credit debt obligation, which totaled
$6.0 million and $22.5 million as of December 31, 2009 and 2008, respectively. Assuming a 10% increase in the
interest rate on this variable-rate debt obligation i.e., an increase from the actual average interest rate of 2.25% as of
December 31, 2009, to an average interest rate of 2.48%, annual interest expense would have been approximately
$28,300 higher in 2009 based on our annual average line of credit obligation. Due to the current credit market, a
greater concern might be the impact of a material violation of certain financial covenants in our Credit Agreement
resulting in a re-pricing of that agreement. This could not only result in the increased annual interest expense but
also a renewal or origination fee of equal proportion on a similar Credit Agreement. The Company does not have
any interest rate swap or exchange agreements.
The Company has no market risk exposure in the areas of interest rate risk from investments because the Company
did not have an investment portfolio as of December 31, 2009. Currently, the Company does not engage in foreign
currency hedging activities. Transactions in Canadian dollars in our Canadian subsidiary have been translated into
U.S. dollars using the current rate method, such that assets and liabilities are translated at the rates of exchange in
effect at the balance sheet date and revenue and expenses are translated at the average rates of exchange during the
appropriate fiscal period. As a result, the carrying value of the Company’s investments in Canada is subject to the
risk of foreign currency fluctuations. Additionally, any revenue received from the Company’s international
operations in other than U.S. dollars will be subject to foreign exchange risk. The percentage of revenue received
from foreign customers is identified in the discussion of segment revenue. Most revenue received from foreign
customers is paid to the Company in U. S. currency, except for revenue collected by our Canadian subsidiaries. The
Canadian dollar is not subject to volatile price fluctuations compared to the U.S. dollar.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The audited consolidated balance sheets for ENGlobal Corporation, as of December 31, 2009 and 2008 and
statements of income, cash flows and stockholders’ equity for the three-year period ended December 31, 2009, are
attached hereto and made part hereof.
51
INDEX
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON CONSOLIDATED
FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL
CONTROL OVER FINANCIAL REPORTING
CONSOLIDATED BALANCE SHEETS
December 31, 2009 and 2008
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2009, 2008 and 2007
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Years Ended December 31, 2009, 2008 and 2007
CONSOLIDATED STATEMENTS OF CASH FLOW
Years Ended December 31, 2009, 2008 and 2007
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SCHEDULE II
Valuation and Qualifying Accounts
PAGE
53
54
55
56
57
58
59
82
52
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
CONSOLIDATED FINANCIAL STATEMENTS
Board of Directors
ENGlobal Corporation
Houston, Texas
We have audited the accompanying consolidated balance sheets of ENGlobal Corporation and subsidiaries (the
“Company”) as of December 31, 2009 and 2008, and the related consolidated statements of operations,
stockholders’ equity, and cash flows for each of the years in the three year period ended December 31, 2009. We
have also audited the schedule listed in the accompanying Item 8. These consolidated financial statements and
schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements and schedule are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements
and schedule, assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the consolidated financial statements and schedule. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of ENGlobal Corporation and subsidiaries at December 31, 2009 and 2008, and the results of their
operations and their cash flows for each of the years in the three year period ended December 31, 2009 in
conformity with accounting principles generally accepted in the United States of America.
Also, in our opinion, the schedule presents fairly, in all material respects, the information set forth, therein in
relation to the financial statements taken as a whole.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the Company’s internal control over financial reporting as of December 31, 2009, based on the criteria
established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission, and our report dated March 8, 2010, expressed an unqualified opinion on the Company’s
internal control over financial reporting.
Hein & Associates LLP
Houston, Texas
March 8, 2010
53
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL
REPORTING
To the Board of Directors and Stockholders
ENGlobal Corporation
We have audited ENGlobal Corporation's internal control over financial reporting as of December 31, 2009, based
on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). ENGlobal Corporation's management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting included in the accompanying Management’s Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on the company's internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material respects. Our audit
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company's internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
In our opinion, ENGlobal Corporation maintained effective internal control over financial reporting as of
December 31, 2009, based on criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated balance sheets of ENGlobal Corporation as of December 31, 2009 and 2008, and the
related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the
period ended December 31, 2009, of ENGlobal and our report dated March 8, 2010 expressed an unqualified
opinion thereon.
Hein & Associates LLP
Houston, Texas
March 8, 2010
54
ENGLOBAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2009 AND 2008
(dollars in thousands)
ASSETS
Current Assets
2009
2008
Cash and cash equivalents
Trade receivables, net of allowances of $1,868 and $2,288
Prepaid expenses and other current assets
Current portion of notes receivable
Costs and estimated earnings in excess of billings on uncompleted contracts
Federal and state income taxes receivable
Deferred tax asset
Total current assets
Property and equipment, net
Goodwill
Other intangible assets, net
Long-term trade and notes receivable, net of current portion and allowances
Deferred tax asset, non-current
Other assets
Total assets
Current Liabilities
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable
Accrued compensation and benefits
Notes payable
Current portion of long-term debt and leases
Deferred rent
Billings in excess of costs and estimated earnings on uncompleted contracts
Federal and state income taxes payable
Other
Total current liabilities
Long-term Debt, net of current portion
Long-term Leases, net of current portion
Total liabilities
Commitments and Contingencies (Notes 3, 10, 11, 15, and 18)
Stockholders’ Equity
Common stock - $0.001 par value; 75,000,000 shares authorized; 27,407,159 and
27,294,852 shares outstanding issued at December 31, 2009 and 2008,
respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss)
Total stockholders’ equity
Total liabilities and stockholders’ equity
$
$
$
$
143
47,715
2,182
15
6,557
2,221
3,250
62,083
5,983
22,291
4,238
14,621
607
812
1,000
96,023
2,392
59
6,913
--
4,281
110,668
5,744
21,457
5,000
8,636
153
1,047
$
110,635
$
152,705
$
$
$
$
$
$
$
8,252
11,511
--
1,064
613
3,601
--
734
25,775
6,098
51
18,830
24,432
1,058
1,861
416
208
2,472
2,805
52,082
23,614
243
31,924
$
75,939
27
37,108
41,672
(96)
78,711
110,635
$
$
27
36,415
40,439
(115 )
76,766
152,705
See accompanying notes to these consolidated financial statements.
55
ENGLOBAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Operating Revenue
Operating Costs and Expenses:
Operating Costs
Selling, General, and Administrative Expenses
Total Operating Costs and Expenses
Operating Income (Loss)
Interest income/(expense), net
Other income/(expense), net
Income (loss) before provision for income taxes
Provision for Income Taxes
Net Income (Loss)
Basic earnings (loss) per common share
Weighted average common shares outstanding
Diluted earnings (loss) per common share
Years Ended December 31,
(dollars in thousands)
2008
2007
2009
$
343,462
$
493,332
$
363,227
312,409
28,027
340,436
3,026
(573 )
174
2,627
1,394
1,233
0.05
$
$
$
$
429,525
32,208
461,733
31,599
(1,636 )
60
30,023
11,765
18,258
0.67
$
$
$
$
305,610
34,291
339,901
23,326
(2,514 )
(139 )
20,673
8,209
12,464
0.46
27,330
27,180
26,916
0.04
$
0.66
$
0.45
$
$
$
$
$
Weighted average common shares outstanding
27,567
27,672
27,435
See accompanying notes to these consolidated financial statements.
56
ENGLOBAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
(in thousands)
2009
2008
2007
$
$
27
--
--
27
$
28
--
(1)
27
28
--
--
28
31,147
1,007
1,439
--
33,593
9,717
12,464
22,181
(30)
25
(5)
36,415
136
557
--
37,108
40,439
1,233
41,672
33,593
1,338
1,171
313
36,415
22,181
18,258
40,439
(5)
(110)
(115)
Common Stock
Balance at beginning of year
Common stock issued
Retirement of treasury stock
Balance at end of year
Paid-in Capital
Balance at beginning of year
Common stock issued
Stock based compensation
Deferred tax adjustment
Balance at end of year
Retained Earnings
Balance at beginning of year
Net income (loss)
Balance at end of year
Accumulated Other Comprehensive Income (Loss), net of taxes
Balance at beginning of year
Foreign currency translation adjustment
Balance at end of year
(115)
19
(96)
Total Stockholders' Equity
$
78,711
$
76,766
$
55,797
See accompanying notes to these consolidated financial statements.
57
ENGLOBAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
Years Ended December 31,
(in thousands)
2008
2007
2009
$
1,233
$
18,258
$
12,464
Cash Flows from Operating Activities
Net income (loss)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities --
Depreciation and amortization
Goodwill impairment
Stock based compensation
Deferred income tax expense
(Gain) Loss on disposal of property, plant and
equipment
Changes in current assets and liabilities, net of
acquisitions –
Trade receivables
Notes receivable
Reserve on notes receivable
Costs and estimated earnings in excess of billings
Prepaid expenses and other assets
Long term trade receivables
Accounts payable
Accrued compensation and benefits
Billings in excess of costs and estimated earnings
Other liabilities
Income taxes receivable (payable)
Net cash provided by (used in) operating
activities
Cash Flows from Investing Activities
Purchase of property and equipment
Additional consideration for acquisitions
Acquisitions of businesses, net of cash acquired
Proceeds from asset sales
Proceeds from note receivable
Net cash (used in) investing activities
Cash Flows from Financing Activities
Borrowings on line of credit
Payments on line of credit
Proceeds from issuance of common stock
Borrowings (payments) on capital lease
Payments on other long-term debt
Net cash provided by (used in) financing activities
4,795
--
683
577
47
48,307
(3,013 )
--
356
(127 )
(2,988 )
(10,578 )
(12,921 )
3,393
(2,069 )
(4,693 )
4,642
--
1,233
(1,276 )
(100 )
(30,145 )
--
558
68
(716 )
--
8,185
7,729
(755 )
(844 )
1,509
23,002
8,346
(3,217 )
--
(1,050 )
4
58
(4,205 )
98,827
(115,357 )
72
(175 )
(3,040 )
(19,673 )
(1,920 )
--
(2,843 )
398
1,494
(2,871 )
295,982
(301,287 )
1,650
418
(2,036 )
(5,273 )
Effect of Exchange Rate Changes on Cash
Net change in cash and cash equivalents
Cash and Cash Equivalents – beginning of year
Cash and Cash Equivalents – end of year
19
(857 )
1,000
143
$
(110 )
92
908
1,000
$
$
See accompanying notes to these consolidated financial statements.
58
4,550
432
1,439
(1,962 )
(408 )
(3,894 )
(12,329 )
3,150
(1,591 )
(1,652 )
--
(4,190 )
3,375
423
(3,416 )
1,629
(1,980 )
(2,195 )
18
--
470
93
(1,614 )
175,674
(171,802 )
1,007
--
(1,805 )
3,074
25
(495 )
1,403
908
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – ORGANIZATION AND BASIS OF PRESENTATION
Organization and Operations
ENGlobal Corporation is a Nevada corporation formed in 1994. Unless the context requires otherwise, references to
“we”, “us”, “our”, “the Company” or “ENGlobal” are intended to mean the consolidated business and operations of
ENGlobal Corporation.
Our business operations consist of providing engineering and other professional project services related to design,
fabrication, procurement, maintenance, environmental and other governmental compliance and construction
management, primarily with respect to energy sector infrastructure facilities throughout the United States and
Canada. Please see “Note 17-Segment Information” for a description of our segments and segment operations.
Basis of Presentation
The accompanying consolidated financial statements and related notes present our consolidated financial position as
of December 31, 2009 and 2008, and the results of our operations, cash flows and changes in stockholders' equity
for the years ended December 31, 2009, 2008 and 2007. They are prepared in accordance with accounting
principles generally accepted in the United States of America. Certain amounts for prior periods have been
reclassified to conform to the current presentation. In preparing financial statements, management makes informed
judgments and estimates that affect the reported amounts of assets and liabilities as of the date of the financial
statements and affect the reported amounts of revenues and expenses during the reporting periods. On an ongoing
basis, management reviews its estimates, including those related to percentage-of-completion contracts in progress,
litigation, income taxes, impairment of long-lived assets and fair values. Changes in facts and circumstances or
discovery of new information may result in revised estimates. Actual results could differ from these estimates.
NOTE 2 –ACCOUNTING POLICIES AND NEW ACCOUNTING PRONOUNCEMENTS
On July 1, 2009, the FASB issued the authoritative version of the Accounting Standards CodificationTM
(Codification or ASC) as the single source of authoritative nongovernmental U.S. generally accepted accounting
principles (U.S. GAAP).
interim and annual periods ended after
September 15, 2009 and all previous level (a)-(d) U.S. GAAP standards issued by a standard setter are superseded.
The Company has adopted the provisions of the Codification with its reporting period ended September 30, 2009.
Adoption of the new guidance did not materially impact the Company’s financial statements.
The Codification
is effective for
Cash and cash equivalents
Cash and cash equivalents include all cash on hand, demand deposits, and investments with original maturities of
three months or less. We consider cash equivalents to include short-term, highly liquid investments that are readily
convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.
The company utilizes a cash management system whereby bank accounts are swept daily to reduce outstanding
balances on the Company’s line of credit. Major operating bank accounts are automatically replenished daily to
meet check-clearing requirements. Outstanding checks are recorded as a reduction of cash when they are issued.
Our checks that have not yet been paid by banks at a reporting date are reclassified to accounts payable in the
financial statements. Amounts reclassified to accounts payable for outstanding checks were $1.3 million and $3.0
million as of December 31, 2009 and 2008 respectively.
Consolidation Policy
Our consolidated financial statements include our accounts and those of our majority-owned subsidiaries in which
we have a controlling interest after the elimination of all material inter-company accounts and transactions.
Currently, all of our subsidiaries are wholly-owned. We also consolidate other entities and ventures in which we
possess a controlling interest. We evaluate our financial interests in business enterprises to determine if they
represent variable interest entities where we are the primary beneficiary. If such criteria are met, we consolidate the
financial statements of such businesses with those of our own. We do not currently hold such interests.
59
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 –ACCOUNTING POLICIES AND NEW ACCOUNTING PRONOUNCEMENTS (Continued)
While we do not currently own any significant equity interests in unconsolidated affiliates and do not frequently
conduct our business through such entities, it is our policy to follow the equity method of accounting if our
ownership interest is between 20% and 50% and we exercise significant influence over the operating and financial
policies of an entity. Our proportionate share of profits and losses from transactions with equity method
unconsolidated affiliates is eliminated in consolidation to the extent such amounts are material and remain on our
equity method investees’ balance sheet in inventory or similar accounts.
If our ownership interest in an investee does not provide us with either control or significant influence over the
investee, we account for the investment using the cost method.
Comprehensive Income
Comprehensive income includes net income and other comprehensive income. Currently our other comprehensive
income is comprised of unrealized foreign exchange gains and losses.
Accumulated other comprehensive income is as follows:
2009
2008
2007
(in thousands)
Net income (loss)
Foreign currency translation adjustment
Comprehensive income (loss)
$1,233 $ 18,258
(115)
$1,137 $ 18,143
(96 )
$ 12,464
(5)
$ 12,459
Concentration of Credit Risk
Financial instruments which potentially subject ENGlobal to concentrations of credit risk consist primarily of trade
accounts and notes receivable. Although our services are provided largely to the energy sector, management believes
the risk due to this concentration is limited because a significant portion of our services are provided under contracts
with major integrated oil and gas companies and other industry leaders. To the extent that the Company has entered
into contracts with smaller customers, it has incurred an increased credit risk.
We extend credit to customers and other parties in the normal course of business. We have established various
procedures to manage our credit exposure, including initial credit approvals, credit limits and terms, letters of credit,
and occasionally through rights of offset. We also use prepayments and guarantees to limit credit risk to ensure that
our established credit criteria are met. Our most significant exposure to credit risks relates to situations under which
we provide services early in the life of a project that is dependent on financing. Certain of these development
projects are susceptible to unforeseen delays and other issues that expose us to reduced margins and possible losses.
Risks increase in times of general economic crisis and under conditions that threaten project feasibility.
Estimated losses on accounts receivable are provided through an allowance for doubtful accounts. In evaluating the
level of established reserves, we make judgments regarding each party’s ability to make required payments,
economic events and other factors. As the financial condition of any party changes, circumstances develop or
additional information becomes available, adjustments to the allowance for doubtful accounts may be required.
Earnings per share
The Company’s basic earnings per share (EPS) amounts have been computed based on the average number of shares
of common stock outstanding for the period. Diluted EPS amounts include the effect of our outstanding stock
options, restricted stock awards and restricted stock units under the treasury stock method, if including such
potential shares of common stock is dilutive. See Note 5.
Debt Issue Costs
Costs incurred in connection with the issuance of long-term debt are capitalized and charged to interest expense over
the term of the related debt on a straight-line basis, which approximates the interest method.
60
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 –ACCOUNTING POLICIES AND NEW ACCOUNTING PRONOUNCEMENTS (Continued)
Goodwill and other intangible assets
Goodwill represents the excess of the purchase price of acquisitions over the fair value of the assets acquired and
liabilities assumed. The Company assesses the carrying amount of goodwill by testing the goodwill for impairment
annually. We perform a test for impairment as of the fourth quarter of each fiscal year and in any period in which
impairment indicators arise. The impairment test requires allocating goodwill and all other assets and liabilities to
business units referred to as reporting units. The fair value of each reporting unit is determined and compared to the
carrying value of the reporting unit. If the fair value of the reporting unit is less than the carrying value, including
goodwill, then the goodwill is written down to the implied fair value of the goodwill through a charge to expense.
Reporting units for the purpose of goodwill impairment calculations are components one level below our operating
segments.
Changes in goodwill may result from, among other things, changes in deferred income tax liabilities related to
previous acquisitions, impairments, future acquisitions or future divestitures.
Intangible assets are comprised primarily of non-compete covenants and customer relationships acquired through
acquisitions and are amortized using the straight-line method based on the estimated useful life of the intangible
assets.
We review intangible assets for impairment whenever events or changes in circumstances indicate that the carrying
amount of such assets may not be recoverable. This review consists of comparing the carrying value of the asset
with the asset’s expected future undiscounted cash flows. Estimates of expected future cash flows represent
management’s best estimate based on reasonable and supportable assumptions. If such a review should indicate that
the carrying amount of intangible assets is not recoverable, we reduce the carrying amount of such assets to fair
value.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed
using the straight-line method over the estimated useful lives of the assets. The estimated service lives of our asset
groups are as follows:
Asset Group
Machinery and equipment
Furniture and fixtures
Computing equipment and automobiles
Software
Range of Years
7-10
5-7
3-5
3-5
Leasehold improvements are amortized over the term of the related lease. See Note 7 for details related to property
and equipment and related depreciation. Expenditures for maintenance and repairs are expensed as incurred. Upon
disposition or retirement of property and equipment, any gain or loss is charged to operations.
The Company reviews property and equipment and identifiable intangible assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss
is recognized when estimated future cash flows expected to result from the use of an asset and its eventual
disposition is less than its carrying amount.
Pre-Contract Costs
The Company expenses pre-contract costs as they are incurred. Pre-contract costs, otherwise called Proposal costs,
are recorded in accordance with ASC 605-35, “Revenue Recognition-Construction-Type Contracts”, which requires
that costs that are incurred for a specific anticipated contract and that will result in no future benefits unless the
contract is obtained should not be included in contract costs or inventory before the receipt of the contract. Costs
related to anticipated contracts are charged to expenses as incurred because their recovery is not considered probable
and they are not reinstated by a credit to income on the subsequent receipt of the contract.
61
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 –ACCOUNTING POLICIES AND NEW ACCOUNTING PRONOUNCEMENTS (Continued)
Income Taxes
The Company accounts for deferred income taxes in accordance with the asset and liability method, whereby
deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted
statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the
respective tax basis of its assets and liabilities. The provision for income taxes represents the current taxes payable
or refundable for the period plus or minus the tax effect of the net change in the deferred tax assets and liabilities
during the period. Valuation allowances are provided for deferred tax assets when their recovery is doubtful.
The Company files income tax returns in federal, state and foreign jurisdictions as more fully described in Note 15.
It has not taken an uncertain tax position as defined by authoritative accounting literature and does not expect to take
such a position on a tax return not yet filed.
Revenue Recognition
Our revenue is comprised of engineering, construction management and procurement service fees and sales of
control systems that we design and fabricate. In general, we recognize revenues when all of the following criteria are
met: (1) persuasive evidence of an exchange arrangement exists, if applicable, (2) delivery has occurred or services
have been rendered, (3) the price is fixed or determinable, and (4) collection is reasonably assured. The Company
recognizes service revenue as the services are performed. The majority of the Company’s engineering services are
provided under cost-plus contracts. A majority of sales of fabricated systems are under fixed-price contracts that
may also include a service element covered under that contract price.
We also sometimes serve as purchasing agent by procuring subcontractors, materials and equipment on behalf of a
client and pass the cost on to the client with no mark-up or profit. In accordance with ASC 605-35, revenues and
costs for these types of “pass-through” transactions are reported net. During 2009 and 2008, we had no pass-
through transactions but in 2007, pass-through transactions totaled $0.5 million.
Profits and losses on our fixed-price contracts are recognized on the percentage-of-completion method of
accounting, measured by the percentage-of-contract cost incurred to date relative to estimated total contract cost.
Contract costs used for estimating percentage-of-completion factors include professional compensation and related
benefits, materials, subcontractor services and other direct cost of projects. Freight charges and inspection costs are
charged directly to the projects to which they relate. Costs recognized for labor include all actual employee
compensation plus a burden factor to cover estimated variable labor expenses. These variable labor expenses
consist of payroll taxes, self-insured medical plan expenses, workers compensation insurance, general liability
insurance, and paid time off. These estimated amounts are adjusted to actual costs incurred at the end of each
quarter.
Under the percentage-of-completion method, revenue recognition is dependent upon the accuracy of a variety of
estimates, including the progress of engineering and design efforts, material installation, labor productivity, cost
estimates and others. These estimates are based on various professional judgments and are difficult to accurately
determine until projects are significantly underway. Due to uncertainties inherent to the estimation process, it is
possible that actual percentage-of-completion may vary materially from our estimates. Estimating errors may cause
errors in revenue recognition on uncompleted contracts and may even result in losses on the contracts. Anticipated
losses on uncompleted contracts are charged to operations as soon as such losses can be estimated. Changes in job
performance, job conditions, estimated profitability and final contract settlements may result in revisions to costs
and revenues and are recognized in the period in which the revisions are determined.
Occasionally, it is appropriate for us to combine or segment contracts in order to meet requirements of ASC 605-35.
Contracts are combined in those limited circumstances when they are negotiated as a package in the same economic
environment with an overall profit margin objective and constitute, in essence, an agreement to do a single project.
In such cases, we recognize revenue and cost over the performance period of the combined contracts as if they were
one. Contracts may be segmented if the customer has the right to accept separate elements of a contract
62
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 –ACCOUNTING POLICIES AND NEW ACCOUNTING PRONOUNCEMENTS (Continued)
and the total economic returns and risks of the separate contract elements are similar to the economic returns and
risks of the overall contract. For segmented contracts, we recognize revenue as if they were separate contracts over
the performance periods of the individual elements or phases.
Software Development Costs
ENGlobal capitalizes costs associated with software developed or acquired for internal use when these criteria are
met - the preliminary project stage is completed, management authorizes funding for the project and the project is
deemed probable of completion. Capitalized costs include external costs of materials and services incurred in
obtaining and developing the software and payroll and payroll related costs for employees in proportion to time
devoted to the project. Capitalization of these costs ceases no later than the point at which the project is
substantially complete and the software is ready for its intended use. Software development costs are included in
property and equipment and are amortized on the straight-line basis over five years.
Stock-Based Compensation
The Company accounts for stock-based compensation at fair value. The company grants various types of stock-
based awards including stock options and non-vested equity shares (restricted stock awards and units). The fair
value of stock option awards is determined using the Black-Scholes option pricing model. Restricted stock awards
and units are valued using the market price of ENGlobal common stock on the grant date. The Company records
compensation cost for stock-based compensation awards over the requisite service period (usually a vesting period).
Compensation expense is recognized net of estimated forfeitures. As each award vests, adjustments are made to
compensation cost for any difference between estimated forfeitures and the actual forfeitures related to the awards.
Significant Commercial Relationships
The following table lists the percentage of our consolidated sales by customer, which accounted for 10% or more of
our consolidated revenues for the years indicated:
ExxonMobil
Spectra Energy
Conoco Phillips
Motiva
Alon USA
2009 2008 2007
9%
7%
16%
4%
10%
6%
10%
6%
4%
8%
3%
11%
10% <1%
<1%
Impairment of Long-Lived Assets
Management reviews property and equipment for impairment whenever events or changes in circumstances indicate
that the carrying amount of such assets may not be recoverable. The carrying amount is deemed not recoverable if it
exceeds the undiscounted sum of the cash flows expected to result from the use and eventual disposition of the asset.
Estimates of expected future cash flows represent management’s best estimate based on reasonable and supportable
assumptions. If the carrying amount is not recoverable, the impairment loss is measured as the excess of the asset’s
carrying value over its fair value. Management assesses the fair value of long-lived assets using commonly accepted
techniques, and may use more than one method, including, but not limited to, recent third party comparable sales,
internally developed discounted cash flow analysis and analysis from outside advisors.
Recent Accounting Pronouncements
Certain recently issued accounting standards that apply to our business are discussed below in terms of their effect
on the Company’s financial statements.
On May 28, 2009, the FASB issued FAS 165, Subsequent Events, now codified as ASC 855, Subsequent Events,
which provides guidance on management’s assessment of subsequent events. Historically, management had relied
on U.S. auditing literature for guidance on assessing and disclosing subsequent events. ASC 855 represents the
63
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 –ACCOUNTING POLICIES AND NEW ACCOUNTING PRONOUNCEMENTS (Continued)
inclusion of guidance on subsequent events in the accounting literature and is directed specifically to management,
since management is responsible for preparing an entity’s financial statements. ASC 855 clarifies that management
must evaluate, as of each reporting period, events or transactions that occur after the balance sheet date through the
date that the financial statements are issued. ASC 855 is effective prospectively for interim and annual financial
periods ending after June 15, 2009. The Company has adopted the provisions of ASC 855 effective with its
reporting period ending June 30, 2009. The adoption of ASC 855 did not have a material impact on the Company’s
financial condition or results of operations. The Company has evaluated subsequent events up through the date of
the filing of this report with the SEC.
In December 2007, the FASB issued FAS 141(R), Business Combinations, now codified as ASC 805, Business
Combinations. ASC 805 significantly changes the accounting for business combinations. Under ASC 805, an
acquiring entity is required to recognize, with limited exceptions, all the assets acquired and liabilities assumed in a
transaction at the acquisition-date fair value. ASC 805 changes the accounting treatment for certain specific
acquisition related items including, among other items: (1) expensing acquisition related costs as incurred, (2)
valuing non-controlling interests at fair value at the acquisition date, and (3) expensing restructuring costs
associated with an acquired business. ASC 805 also includes a substantial number of new disclosure requirements.
The Company adopted the provisions of ASC 805 on January 1, 2009. The full impact to the Company, which
could be material, will be dependent upon any individual transactions consummated.
NOTE 3 – ACQUISITIONS
PCI Management and Consulting Company
A subsidiary of the Company acquired the operations of PCI Management and Consulting Company (“PCI”), a
private Illinois based power consulting business, through an immaterial business combination which closed
August 14, 2009. Consideration approximated $1,050,000 in cash and $200,000 in the form of a note. PCI
provides engineering, consulting and project management services, specializing in projects related to the
generation, transmission and distribution of energy. PCI’s services complement the services historically provided
by our Construction segment, and the Company anticipates that PCI’s location in the Chicago, Illinois area will
allow the Company to establish a strong regional base from which to serve the power market. Results of operations
are included in the Construction segment beginning August 15, 2009.
The acquisition, which was structured as a taxable transaction that excluded all monetary assets and liabilities and
all contingencies of the acquired business, was accounted for following the requirements of ASC 805. The
Company recognized customer relationships and non-compete covenants as intangible assets. The intangible assets
were recognized at their fair values on the acquisition date of $353,000 and $177,000 respectively, and are being
amortized over five years. The fair values were determined using an income approach methodology that is
consistent with previous similar acquisitions.
The residual portion of consideration $702,000 was recognized as goodwill, all of which is deductible for income
tax purposes. Goodwill represents management’s estimate of the cost associated with acquiring PCI’s power
consulting reputation, technical expertise, workforce and the potential synergies with our other energy
infrastructure consulting businesses. Acquisition cost of $6,000 was incurred and expensed as general and
administrative expenses during the nine months ended September 30, 2009.
Advanced Control Engineering, LLC
On September 29, 2008, we acquired all of the business of Advanced Control Engineering, LLC (“ACE”) for
$4,484,000, including acquisition related costs. Advanced Control provides control systems and related technical
services for a broad range of industries including the mid-stream oil and gas and refining industry. We acquired
ACE to complement the services of our existing Automation Segment and to expand our technical intellectual talent
base and geographical and industry coverage. ACE is included in our consolidated results of operations from
64
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – ACQUISITIONS (Continued)
October 1, 2008. We accounted for this acquisition in accordance with ASC 805, Business Combinations. The
purchase price was allocated to assets acquired and liabilities assumed based on estimated fair values of the
respective assets and liabilities at the time of closing. Amounts allocated to non-compete covenants and customer
relationships were recorded at their estimated fair values of approximately $471,000 and $1,568,000, respectively,
resulting in approximately $1,017,000 of the purchase price being allocated to goodwill. The allocation is
summarized below.
Current assets
Property and equipment
Other assets
Intangible assets
Goodwill
Current liabilities
Deferred tax liability
Total
$
$
(in thousands)
1,948
244
2
2,039
1,017
(689)
(77)
4,484
Amounts allocated to non-compete covenants and customer relationships are subject to amortization with an
amortization period of five years and no estimated residual values. All of the intangible assets and goodwill are
deductible for income tax purposes.
The following table presents summarized pro forma information for ENGlobal as if the ACE acquisition occurred on
January 1, 2008 and 2007.
2008
Total Revenue $ 500,391
18,177
Net Income
0.66
EPS (Diluted)
$
$
2007
372,759
12,408
0.45
The pro forma information is presented for illustration purposes only, in accordance with the assumptions set forth
below, and is not necessarily indicative of the operating results that would have occurred had the acquisition been
completed at the assumed date, nor is it necessarily indicative of future operating results of the combined enterprise.
The pro forma information does not reflect any cost savings or other synergies that might be anticipated or any
future acquisition-related expenses. The pro forma adjustments are based on estimates and assumptions.
The pro forma information for 2008 and 2007 is a result of combining the income statement of ENGlobal with the
pre-acquisition results from January 1, 2008 and 2007 of ACE adjusted for 1) recording pro forma interest expense
on debt incurred to acquire ACE; 2) amortization expense for intangible assets recognized in applying the purchase
method of accounting; and 3) the related income tax effects of these adjustments and recognition of income taxes
not previously recognized by ACE because of its status as a limited liability company, based on applicable statutory
tax rates.
NOTE 4 – GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
The Company recognized goodwill of $702,000 associated with the acquisition of PCI Management and Consulting
Company during 2009 and $1,017,000 associated with the acquisition of Advanced Control Engineering during
2008 as discussed in Note 3.
Changes in the carrying amount of goodwill by segment for 2008 and 2009 are summarized in the following table.
65
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 – GOODWILL AND OTHER INTANGIBLE ASSETS (Continued)
Engineering Automation Construction Land Total
(in thousands)
Balance at December 31, 2007
Contingent consideration paid
Acquisition additions
Balance at December 31, 2008
Contingent consideration paid
Acquisition additions
Balance at December 31, 2009
$
$
$
13,187 $
231
--
13,418 $
--
--
13,418 $
699 $
--
1,017
1,716 $
46
--
1,762 $
284
--
2,116 $ 3,924 $ 19,926
--
515
-- 1,017
2,400 $ 3,924 $ 21,458
131
702
3,187 $ 3,924 $ 22,291
--
--
85
702
Our annual goodwill impairment analysis for the years ended December 31, 2009 and 2008 indicated that no
goodwill impairments were required for any of our reporting units for the period. Our methodologies for performing
our goodwill impairment analysis have not changed from the prior year. However, we did incorporate changes
relating to growth rate in response to current economic condition, and the discount rate increased approximately 1%
for the current year analysis. Except for Automation, the fair value of all of our reporting units substantially
exceeded their carrying value. The fair value for Automation, which has $1.8 million of goodwill recorded as of
December 31, 2009, exceeded carrying value by 7%. Deterioration in our expected operating results or increases in
our cost of capital could have a negative effect on fair value and lead to an impairment in the future.
The results of our annual goodwill impairment analysis for the year ended December 31, 2007 indicated impairment
to goodwill recorded in our Automation segment. As a result, the Company recorded an impairment charge of
$432,000 during the fourth quarter of 2007. The impairment stemmed primarily from a continuing decline in the
reporting unit cash flows. The charge was a full impairment of the goodwill recorded as a result of the merger
between Industrial Data Systems Corporation and Petrocon Engineering, Inc. in December 2001.
Intangible Assets
The Company recognized $530,000 of intangible assets during 2009 in connection with the acquisition of PCI
Management and Consulting Company. The Company recognized $2,039,000 of intangible assets during 2008 in
connection with the acquisition of Advanced Control Engineering. Our identifiable intangible assets are comprised
primarily of non-compete covenants and customer relationships acquired through acquisitions. All are being
amortized. The following table summarizes the cost and accumulated amortization for each of our identifiable
intangible asset groups as of December 31, 2009 and 2008. See Note 17 for the reportable segments to which
intangible assets are assigned.
Non-Compete Covenants Customer Relationships Total
(in thousands)
As of December 31, 2009
Intangible assets
Less: accumulated amortization
Intangible assets, net
$
$
As of December 31, 2008
Intangible assets
Less: accumulated amortization
Intangible assets, net
$
$
4,531 $
2,854
1,677 $
4,626 $
2,737
1,889 $
4,833 $ 9,364
2,272
5,126
2,561 $ 4,238
4,486 $ 9,112
1,375
4,112
3,111 $ 5,000
Intangible assets are amortized using the straight-line method based on their estimated useful lives. Expected
amortization expense related to our amortizable intangible assets is as follows:
66
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 – GOODWILL AND OTHER INTANGIBLE ASSETS (Continued)
Years Ending December 31,
2010
2011
2012
2013
2014
Non-Compete Covenants Customer Relationships Total
(in thousands)
709 $
706
129
106
27
1,677 $
933 $ 1,642
885
1,591
384 513
306 412
80
53
2,561 $ 4,238
$
$
Weighted average amortization
period remaining at December 31, 2009 (years)
3.1
2.8
Amortization expense was $1,779,000, $1,846,000 and $1,630,000 for the three years 2009, 2008 and 2007,
respectively.
NOTE 5 – EARNINGS PER SHARE
Earnings per share were computed as follows:
Net Income (Loss)
Weighted average number of shares outstanding for basic
Weighted average number of shares outstanding for diluted
Net income (loss) per share available for common stock
2009
Basic Diluted
Reconciliation of Earnings per Share Calculation
2008
2007
Basic
Diluted Basic Diluted
(in thousands, except per share amounts)
$ 1,233 $ 1,233 $ 18,258 $ 18,258 $ 12,464 $ 12,464
--
27,435
0.45
26,916
--
0.46 $
27,180
--
0.67 $
27,330
--
0.05 $
--
27,672
--
27,567
0.66 $
0.04 $
$
Diluted earnings per share are computed including the impact of all potentially dilutive securities. The following
table sets forth the shares outstanding for the earnings per share calculations for the years ended December 31, 2009,
2008 and 2007.
2009
2008 2007
Common stock issued – beginning of year
Weighted average common stock issued (repurchased)
Shares used in computing basic earnings per share
Assumed conversion of dilutive stock options
Shares used in computing diluted earnings per share
35
(in thousands)
27,295 27,052 26,807
109
27,330 27,180 26,916
519
27,567 27,672 27,435
492
128
237
The Company excluded potentially issuable shares of 788,000 and 673,000 from the computation of diluted EPS, as
the effect of including the shares would have been anti-dilutive for the three and twelve month periods ended
December 31, 2009 and 2008, respectively.
NOTE 6 – STATEMENT OF CASH FLOWS SUPPLEMENTAL INFORMATION
The following table presents a listing of the Company’s significant non-cash transactions and amounts of cash paid
for interest and income taxes.
67
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 – STATEMENT OF CASH FLOWS SUPPLEMENTAL INFORMATION (Continued)
Years Ended December 31,
2008
(in thousands)
2009
2007
Non-Cash Transactions:
Acceptance of notes for asset sales
Issuance of note for insurance
Issuance of notes in connection with acquisitions:
$
ACE
PCI
Cash paid:
Interest
State and federal income taxes
-- $
--
-- $ 1,480
1,296
1,595
--
182
1,942
--
--
--
$
958 $
5,474
1,703 $ 2,575
9,025
11,256
NOTE 7 – PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 2009 and 2008:
Computer equipment and software
Shop equipment
Furniture and fixtures
Building and leasehold improvements
Autos and trucks
Accumulated depreciation and amortization
Leasehold Improvements and Software Implementations in process
Property and equipment, net
2009
1,379
1,590
3,364
433
2008
(in thousands)
$ 10,600 $ 12,612
1,439
964
2,229
466
$ 17,366 $ 17,710
(11,763 ) (12,115 )
$ 5,603 $ 5,595
149
$ 5,983 $ 5,744
380
Depreciation expense has been $2,996,000, $2,804,000 and $2,911,000 for the three years 2009, 2008 and 2007,
respectively.
NOTE 8 – DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
The components of trade receivables as of December 31, 2009 and 2008 are as follows:
Amounts billed
Amounts unbilled
Retainage
Less: Allowance for uncollectible accounts
Trade receivables, net
2008
2009
(in thousands)
$ 38,381 $ 63,765
34,157
389
(2,288 )
$ 47,715 $ 96,023
10,864
338
(1,868 )
Subject to our reserve for uncollectible accounts, all amounts listed are believed to be collectible within a year. The
billed accounts receivable amount includes $716,000 in claims subject to uncertainty concerning their determination
or ultimate realization due to bankruptcy issues. These claims are fully accounted for in our reserve for
uncollectible accounts. There are no amounts unbilled representing claims or other similar items subject to
uncertainty concerning their determination or ultimate realization. In estimating the allowance for uncollectible
accounts, we consider the length of time receivable balances have been outstanding, historical collection experience,
68
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 – DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS (Continued)
current economic conditions and customer specific information. When we ultimately conclude that a receivable is
uncollectible, the balance is charged against the allowance for uncollectible accounts.
The components of long-term receivables as of December 31, 2009 and 2008 are as follows:
Notes receivable – South Louisiana Ethanol (“SLE”)
Less: Reserve on long-term notes receivable
Other notes and claims receivable
2008
2009
(in thousands)
$ 12,329 $ 12,329
(3,709 )
16
$ 14,621 $ 8,636
(3,709 )
6,001
On August 31, 2007, SLE executed a Collateral Mortgage, a Collateral Note, and a Promissory Note in the amount
of up to $15 million, securing payment of the amounts due. In connection with this Promissory Note, and as
provided for under Louisiana law, SLE executed another promissory note (the “Hand Note”) on or about October
22, 2007. The Hand Note had a principal balance of approximately $12.3 million, constituting all amounts then
due.
As a result, in the fourth quarter of 2007, the Company recorded a valuation reserve and subsequent charge against
Bad Debt expense in the amount of $3.2 million to reduce the book value of the Note Receivable. In the fourth
quarter of 2008, the Company increased the valuation reserve and subsequent charge against Bad Debt expense in
the amount of $559,000. As of December 31, 2008, the Company performed its impairment analysis for the asset
group classified as long-term notes receivable, particularly Notes Receivable – South Louisiana Ethanol, of $8.6
million.
In August 2009, SLE filed for Chapter 11 protection in the U.S. Bankruptcy Court in New Orleans. Due to the
ongoing discovery and analysis currently in process on our SLE litigation, we cannot yet determine the actual
proceeds that would be generated for ENGlobal when the courts determine the status of each asset and the relative
lien priorities of SLE's creditors, and then such assets are sold. However, at this time, management believes that,
given the Company's lien position as documented in public records, the value of the collateral will cover the current
balance sheet exposure. Any additional charge, or negative determination by the courts, could have a negative
impact on future earnings estimated at 2.1 cents per share per million of un-recovered exposure as a result of a non-
cash charge to operations. However, at this time the Company believes that the ultimate disposition of the SLE
collateral will not materially adversely affect our liquidity or overall financial position.
The Company continues to believe that, because of the potential liquidation value of the Collateral and the
Company’s favorable lien status, the Note Receivable should be substantially collectible. Specifically, an appraisal
in December 2008 from the bridge lending bank’s appraiser indicates a fair market value of $22.1 million, an
orderly liquidation value of $14.9 million, and a forced liquidation value of $11.7 million.
The Company has reclassified the notes receivable of $3.0 million related to the Alon USA, LP litigation to a long-
term notes receivable. From the facts determinable at present, we believe all amounts are collectible. However, if
the Company is unsuccessful in collecting the entire amount due, based on the current year’s tax rate, the future
financial impact to EPS would be approximately $0.06 per share.
The Company has reclassified the accounts receivable balance of $3.0 million related to the Bigler, L.P. litigation
and subsequent bankruptcy filing to a long term claims receivable. The Company believes the lien position is
favorable and there is sufficient collateral to cover any amounts due to the Company. However, the company
continues to assess its lien priorities and other matters related to the distribution of assets. A failure to collect a
material portion of this claim could have a material financial impact, but should not impact the Company’s liquidity
position as charge-backs would be non-cash in nature. If the Company was unsuccessful in collecting the entire
69
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 – DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS (Continued)
amount of the current balance of $3.0 million, based on the current year’s tax rate, the future financial impact to EPS
would be approximately $0.06 per share. The Company plans to closely monitor the bankruptcy claims and will
continue to pursue all available remedies to recover on its claims. At this time, the Company considers the claim to
be collectible. The Company has not recorded a reserve against the account balance but has created a reserve to
cover its anticipated legal expenses.
The components of other current liabilities as of December 31, 2009 and 2008 are as follows:
2009
2008
(in thousands)
Reserve for known contingencies $ 676 $ 2,266
255
Accrued interest
Other
284
$ 734 $ 2,805
Other current liabilities
2
56
Our reserve for known contingencies consists primarily of litigation accruals and related legal fees and earnout
amounts that may become due under the terms of acquisition agreements.
NOTE 9 – FIXED-PRICE CONTRACTS
Costs, estimated earnings and billings on uncompleted contracts consisted of the following at December 31, 2009
and 2008:
Costs incurred on uncompleted contracts
Estimated earnings (losses) on uncompleted contracts
Earned revenue
Less: Billings to date
Net costs and estimated earnings in excess of billings on uncompleted contracts
2008
2009
(in thousands)
$ 32,984 $ 24,893
5,280
30,173
23,468
$ 2,956 $ 6,705
5,784
38,768
35,812
Costs and estimated earnings in excess of billings on uncompleted contracts
Billings in excess of costs and estimated earnings on uncompleted contracts
Net costs and estimated earnings in excess of billings on uncompleted contracts
$ 6,557 $ 6,913
(208 )
$ 2,956 $ 6,705
(3,601 )
NOTE 10 – LINE OF CREDIT AND DEBT
Effective December 29, 2009, the Company entered into a new credit agreement with Wells Fargo Bank, which
provides a twenty-eight month, $25 million senior secured revolving credit facility (“Wells Fargo Credit Facility”).
The Wells Fargo Credit Facility is guaranteed by substantially all of the Company’s subsidiaries, is secured by
substantially all of the Company’s assets, and positions Wells Fargo as senior to all other debt. The Wells Fargo
Facility replaced a $50 million senior revolving credit facility with Comerica Bank that would have expired in
August 2010. The outstanding balance on the Wells Fargo Credit Facility as of December 31, 2009 was $6.0 million
borrowed at a fluctuating rate per the terms of the Wells Fargo Credit Facility. The remaining borrowings available
under the Wells Fargo Credit Facility as of December 31, 2009 were $18.4 million after consideration of loan
covenant restrictions.
At the Company’s option, amounts borrowed under the Wells Fargo Credit Facility will bear interest at either a
fluctuating rate per annum two percent (2%) above the Daily One Month LIBOR Rate in effect from to time to time
or a fixed rate per annum determined by Wells Fargo to be two percent (2%) above LIBOR in effect on the first day
of an applicable fixed rate term. The Wells Fargo Credit Facility includes a commitment fee of 30 basis points for
the unused portion of the $25 million credit facility.
70
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 – LINE OF CREDIT AND DEBT (Continued)
At any time any portion of the debt under the Wells Fargo Credit Facility bears interest determined in relation to
LIBOR for a Fixed Rate Term, it may be continued by the Company at the end of the Fixed Rate Term applicable
thereto so that all or a portion thereof bears interest determined in relation to the Daily One Month LIBOR Rate or to
LIBOR for a new Fixed Rate Term designated by the Company.
The Company’s Credit Facility requires the Company to maintain certain financial covenants as of the end of each
calendar quarter, including the following:
• Total Liabilities to Tangible Net Worth Ratio not greater than 2.25 to 1.00;
• Asset Coverage Ratio not less than 2.00 to 1.00; and
• Fixed Charge Coverage Ratio not less than 1.75 to 1.00;
“Total Liabilities” is defined as the aggregate of current liabilities and non-current liabilities. “Tangible Net Worth”
is defined as the aggregate of total stockholders' equity less any intangible assets and less any loans or advances to,
or investments in, any related entities or individuals. “Asset Coverage Ratio” is defined as accounts receivable
divided by revolver balance. “Fixed Charge Coverage Ratio” is determined on a rolling four-quarter basis and is
defined as EBITDA minus cash taxes, divided by interest expense, plus the current maturity of long term debt,
where EBITDA is net income, plus interest expense, plus income taxes, plus depreciation and amortization, plus
stock compensation expense.
The Company was in compliance with all covenants under the Credit Facility as of December 31, 2009. During the
previous quarterly reporting period our Total Liabilities to Tangible Net Worth Ratio ranged from 1.07 to 0.61; our
Asset Coverage Ratio ranged from 3.76 to 8.45; and our Fixed Charge Ratio ranged from 8.47 to 2.91. During the
twelve month period ended December 31, 2009, we expended or committed approximately 92%, or $3.2 million, of
the $3.5 million fiscal year covenant limitation on capital expenditures. Our office expansion in Beaumont and the
relocation of our manufacturing facility in Houston account for $1.1 million and $1.6 million respectively in
leasehold and equipment costs. The $0.5 million balance of our capital expenditures for the twelve month period
has been for normal operating requirements including office furniture, computers, software and vehicles.
For the quarterly period ended December 31, 2009, our Total Liabilities to Tangible Net Worth Ratio and Asset
Coverage Ratio covenant levels improved over their respective average ratios for the three previous quarterly
periods. The Company’s Fixed Charge Coverage Ratio for the quarterly period ended December 31, 2009 declined
53% from the average ratio of the three previous quarterly periods.
The Wells Fargo Credit Facility also contains covenants that place certain limitations on the Company including
limits on capital expenditures, other indebtedness, mergers, asset sales, investments, guarantees, restrictions on
dividends and certain distributions and pledges of assets. The Company was in compliance with all covenants under
the Wells Fargo Credit Facility as of December 31, 2009.
Letters of Credit
As of December 31, 2009, the Company had outstanding letters of credit totaling $611,000 primarily to cover self-
insured deductibles under both our general liability and our workers’ compensation insurance policies.
Long-term debt consisted of the following at December 31, 2009 and 2008:
71
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 – LINE OF CREDIT AND DEBT (Continued)
Comerica Credit Facility
Wells Fargo Credit Facility
The following notes are subordinate to the credit facility and are unsecured:
Cleveland Inspection Services, Inc., CIS Technical Services and F.D. Curtis
ATI Technologies
Michael Lee
Watco Management, Inc.
Frank H McIlwain, PC; James A Walters, PC; William M Bosarge, PC; Matthew R Burton, PC
IPC Transco
Total long-term debt
Less: Current maturities of long-term debt
Long-term debt, net of current portion
Borrowings under capital lease
Less: Current maturities of capital lease
Total long-term
Maturities of long-term debt as of December 31, 2009, are as follows:
2009
2008
$
--
6,000
$ 22,530
--
--
--
--
132
651
187
6,970
(872)
$ 6,098
243
(192)
$ 6,149
293
30
900
260
1,287
--
25,300
(1,686 )
$ 23,614
418
(175 )
$ 23,857
Years Ending December 31,
2010
2011
2012
Total long-term debt
Maturities
(in thousands)
$
$
1,064
149
6,000
7,213
NOTE 11 –OPERATING LEASES
The Company leases equipment and office space under long-term operating lease agreements. The future minimum
lease payments on leases (with initial or remaining non-cancelable terms in excess of one year) as of
December 31, 2009 are as follows:
Years Ending December 31,
2010
2011
2012
2013
Total minimum lease payments
2014 and after
Operating
(in thousands)
$
$
5,583
4,539
3,022
1,553
5,227
19,924
Rent expense for the years ended December 31, 2009, 2008 and 2007 was $5,939,000, $4,311,000 and $3,875,000,
respectively. Certain of our lease agreements may include items such as abated lease payments, capital
improvement funding, step rent provisions and escalation clauses that affect the lease payment schedule and do not
qualify as contingent rentals. These items have been included in the minimum lease payment amount on a straight-
line basis over the minimum lease term. Any lease payments that are dependent on a factor related to the future use
of the property have been excluded from the minimum lease payment amount and are recognized as incurred.
72
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 – EMPLOYEE BENEFIT PLANS
ENGlobal sponsors a 401(k) profit sharing plan for its employees. Until January 2009, the Company made
matching contributions equal to 66.66% of employee contributions up to 6% of employee compensation for regular
(as distinguished from project or contract) employees. All other employees except our pipeline inspectors were
matched at 50% of employee contribution up to 6% of compensation, as defined by the plan. The Company, at the
direction of the Board of Directors, may make other discretionary contributions. Our employees may elect to make
contributions pursuant to a salary reduction agreement upon meeting age and length-of-service requirements. On
January 1, 2009 due to the current economic conditions, the Company elected to reduce its match on regular
employees to 50% and all other employees except our pipeline inspectors to 33.33% of employee contributions up to
6% of employee compensation. On April 4, 2009, the Company elected to eliminate its match on all employees.
The Company made contributions of approximately $982,000, $3,049,000, and $2,147,000, respectively, for the
years ended December 31, 2009, 2008, and 2007.
NOTE 13 – STOCK COMPENSATION PLANS
The Company’s 1998 Incentive Plan (“Option Plan”) that provided for the issuance of options to acquire up to
3,250,000 shares of common stock expired in June 2008. The Option Plan provided for grants of non-statutory
options, incentive stock options, restricted stock awards and stock appreciation rights. All stock option grants were
for a ten-year term. Stock options issued to executives and management generally vest over a four-year period, one-
fifth at grant date and one-fifth at December 31 of each year until they are fully vested. Stock options issued to
directors under the Option Plan vested quarterly over a one-year period. In 2008, options were granted to employees
to acquire 140,000 shares. In 2007, no stock options were granted to employees. At the 2007 Annual Meeting of
Directors, grants of stock options were approved for 50,000 shares to each non-employee director. All stock options
granted had a strike price equal to the market value of the Company’s stock on the date of the grant by the
Compensation Committee of the Board of Directors.
In June 2009, the Company’s stockholders approved a new 2009 Equity Incentive Plan (“Equity Plan”) that provides
for the issuance of up to 480,000 shares of common stock. The Equity Plan provides for grants of non-statutory
options, incentive stock options, restricted stock awards, performance shares, performance units, restricted stock
units and other stock-based awards. Grants to employees, if any, will vest over a four-year period, one-fifth at grant
date and one-fifth at December 31 of each year until they are fully vested. Grants to non-employee directors will
vest quarterly over a one-year period. The Company anticipates that the shares available in the Equity Plan will be
used primarily to compensate non-employee directors.
Stock Options
Consistent with ASC 718, Stock Compensation, the Company recognizes stock compensation expense relating to
share-based payments in net income using the fair-value measurement method. Under the fair value method, the
estimated fair value of awards is charged to expense over the requisite service period, which is generally the vesting
period.
The fair value of the 2008 and 2007 options granted to employees is estimated on the date of grant using the Black-
Scholes option-pricing model as follows:
73
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 – STOCK COMPENSATION PLANS (Continued)
2008
Series
Grant date
Number of options granted
Strike Price
Market price – date of grant
Total compensation at grant date
Weighted average fair value at grant date
Assumptions
Expected life (months)
Risk-free rate of return
Expected volatility
Expected dividend yield
Expected forfeiture rate
$
$
$
9.44
3/12/2008
140,000
9.44
9.44
766,784
5.48
$
$
$
2007
10.93
6/14/2007
150,000
10.93
10.93
1,058,361
7.06
70.8
2.49 %
71.1141 %
0.00 %
9.39 %
75
4.93 %
76.275 %
0.00 %
9.10 %
The Company did not grant any stock options in 2009.
We estimate the volatility of our stock price by using historical volatility looking back 156 weeks. We have
considered using a combination of historical and implied volatility derived from traded options on our stock but do
not believe that it would materially impact the company’s estimates of future volatility over the expected life of the
options. The expected term of options granted has been derived from the simplified method, due to changes in
vesting terms and contractual lives of current options compared to our historical grants. We base the estimate of the
risk-free interest rate on the United States Treasury zero-coupon yield curve in effect at the time of grant. We have
never paid cash dividends and do not currently intend to pay cash dividends; accordingly, we have assumed a 0%
dividend yield.
The following table summarizes total aggregate stock option activity for the period December 31, 2006 through
December 31, 2009:
Vested & Exercisable
Balance
Number of Shares
Outstanding
Weighted Average Exercise
Price
1,422,494
150,000
(244,306 )
(21,688 )
1,306,500
140,000
(243,086 )
(30,208 )
1,173,206
--
(55,000 )
(27,102 )
1,091,104
5.16
10.93
3.05
2.38
6.26
9.44
5.52
5.24
6.82
--
1.32
6.07
7.12
Balance at December 31, 2006
Granted
Exercised
Canceled or expired
Balance at December 31, 2007
Granted
Exercised
Canceled or expired
Balance at December 31, 2008
Granted
Exercised
Canceled or expired
Balance at December 31, 2009
1,072,294
1,099,300
1,050,606
1,043,104
74
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 – STOCK COMPENSATION PLANS (Continued)
The following table summarizes information concerning outstanding and exercisable Company common stock
options at December 31, 2009.
Exercise
Prices1 Outstanding at Contractual And Exercisable at
(series) December 31, 2009
Options
Life
Average
Remaining
Options
Fully-Vested
Un-vested Options
Balance at
December 31, 2009 December 31, 2009
0.96
$
1.00
$
1.81
$
1.87
$
2.05
$
2.32
$
2.50
$
3.75
$
6.83
$
9.15
$
$ 11.97
$ 10.93
$ 9.44
51,104
20,000
40,000
20,000
57,000
40,000
75,000
150,000
25,000
150,000
193,000
150,000
120,000
1,091,104
0.8
1.2
4.5
3.3
4.2
3.4
5.2
5.5
6.9
6.4
6.3
7.5
8.2
51,104
20,000
40,000
20,000
57,000
40,000
75,000
150,000
25,000
150,000
193,000
150,000
72,000
1,043,104
--
--
--
--
--
--
--
--
--
--
--
--
48,000
48,000
1The exercise price indicates the market value at grant date and is the strike price at exercise. For
each series, the exercise price is the weighted average exercise price of the series.
At December 31,
2009
2008
2007
(dollars in thousands)
Total intrinsic value of options:
Outstanding
Exercisable
Exercised during the year
Available for grant at December 31, 2009
433,125
Weighted-average remaining life of all options outstanding at December 31, 2009 3.6 years
1,060 $
1,060
1,416
737 $
737
107
6,775
6,463
1,605
$
Restricted Stock Units
On August 8, 2008, the Company granted restricted stock units equivalent to 6,420 shares of common stock to each
of its three non-employee directors. These restricted stock units, granted outside of the Option Plan, were intended
to compensate and retain the directors over the one-year service period commencing July 1, 2008. The fair value of
the awards was $93,411 per director based on the market price of $14.55 per share on the date granted. Upon
vesting, which was equally at quarterly intervals, the units became convertible into cash based on the then market
price of the Company’s shares at each respective vesting date. Each director’s vested units were settled for the cash
value of $41,698 on or before July 17, 2009.
Restricted Stock Awards
On June 18, 2009, the Company granted restricted stock awards of 15,625 shares of common stock to each of its
three non-employee directors. These restricted stock awards are intended to compensate and retain the directors
75
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 – STOCK COMPENSATION PLANS (Continued)
over the one-year service period commencing July 1, 2009. The restricted stock awards vest in equal quarterly
installments beginning on September 30, 2009, so long as the grantee continues to serve as a director of the
Company.
The following is a summary of the Company’s restricted stock awards for the year ended December 31, 2009:
Unvested restricted shares at December 31, 2008
Granted in 2009
Vested in 2009
Forfeited in 2009
Unvested restricted shares at December 31, 2009
Number of Restricted Shares Weighted Average Fair Value
--
5.12
3.63
--
5.12
-- $
46,875 $
(23,436 ) $
-- $
23,439 $
The total fair value of the restricted stock that vested in the year end December 31, 2009 was $85,000. The
weighted-average remaining life of restricted stock awards outstanding at December 31, 2009 was 0.5 years.
Compensation Expense
The Company recognized non-cash compensation expense related to its stock compensation plans of $0.7 million,
$1.3 million and $1.4 million for the fiscal years ended December 31, 2009, 2008 and 2007, respectively. As of
December 31, 2009, unrecognized compensation expense was approximately $383,000. The weighted average
period over which total compensation related to stock options and restricted stock awards is expected to be
recognized in 18 months.
NOTE 14 –REDEEMABLE PREFERRED STOCK AUTHORIZED
During 2006, a new class of capital stock of the Company, consisting of 2,000,000 shares of Preferred Stock, par
value $0.001 per share (the “Preferred Stock”), was approved by the Company’s stockholders to replace previously
authorized but not issued preferred shares. The Board of Directors has the authority to approve the issuance of all or
any portion of these shares of Preferred Stock in one or more series, to determine the number of shares constituting
any series and to determine any voting powers, conversion rights, dividend rights, and other designations,
preferences, limitations, restrictions and rights relating to such shares without any further action by the stockholders.
The designations, preferences, limitations, restrictions and rights of any series of Preferred Stock designated by the
Board of Directors will be set forth in an amendment to the Amended and Restated Articles of Incorporation
(“Amended Articles”) filed in accordance with Nevada law.
The reason for authorizing this Preferred Stock is to provide the Company with flexibility in connection with its
future growth. Although the Company presently has no intentions of issuing shares of Preferred Stock,
opportunities may arise that require the Board to act quickly, such as businesses becoming available for acquisition
or favorable market conditions for the sale of a particular type of Preferred Stock. The Board believes that the
authorization to issue Preferred Stock is advisable in order to enhance the Company’s ability to respond to these and
similar opportunities.
NOTE 15 – FEDERAL AND STATE INCOME TAXES
The components of income tax expense (benefit) from continuing operations for the years ended December 31,
2009, 2008 and 2007 were as follows:
76
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 – FEDERAL AND STATE INCOME TAXES (Continued)
2009
2008
(in thousands)
2007
Current
Federal
Foreign
State
Deferred
Federal
$
(91 ) $ 10,853 $ 8,619
42
30
70
1,510
2,158
838
10,171
13,041
817
Foreign
State
524
(3 )
56
577
(1,125 )
16
(167 )
(1,276 )
(1,890 )
4
(76 )
(1,962 )
Total tax provision
$ 1,394 $ 11,765 $ 8,209
The components of the deferred tax asset (liability) consisted of the following at December 31, 2009 and 2008:
Deferred tax asset
Allowance for doubtful accounts
Net operating loss carry-forward
Accruals not yet deductible for tax purposes
Stock options
Deferred tax assets
Less: Valuation allowance
Deferred tax assets
Deferred tax liabilities
Depreciation
Prepaid expenses
Goodwill
Deferred tax liability
Deferred tax asset, net
2009
2008
(in thousands)
$ 2,063 $ 2,280
680
2,632
1,073
6,665
(553 )
6,112
573
2,074
1,063
5.773
(567 )
5,206
(369 )
(670 )
(310 )
(1,349 )
(358 )
(601 )
(719 )
(1,678 )
$ 3,857 $ 4,434
The following is a reconciliation of expected to actual income tax expense from continuing operations:
2009
2008
2007
(in thousands)
Federal income tax expense at 35% for 2009, 35% for 2008 and 35% for 2007, respectively $ 891 $ 10,507 $ 7,235
935
State and foreign taxes, net of federal income tax effect
106
Nondeductible expenses
(268 )
Stock compensation expense
--
Foreign investment
208
Valuation allowance
--
Prior year provision to return
--
Domestic production activity deduction
(7 )
Other, net
$ 1,394 $ 11,765 $ 8,209
1,296
105
133
--
37
--
(366 )
53
585
122
116
21
14
(302 )
--
(53 )
Total tax provision
The Company had a federal net operating loss carry-forward at December 31, 2009 of approximately $18,000.
Earlier utilization of the net operating loss on the Company’s 2002 and 2003 consolidated tax returns was
disallowed by the IRS which resulted in a reinstated carry-forward that will be available for utilization from 2008
through 2010.
77
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 – FEDERAL AND STATE INCOME TAXES (Continued)
The Company also has a foreign net operating loss carry-forward at December 31, 2009 of approximately $1.4
million. This loss is available for utilization from 2008 through 2017; however, application of the net operating loss
is restricted to the income of ENGlobal Canada. The Company is unsure of its ability to fully utilize the foreign net
operating loss. Therefore, the Company has set up a valuation allowance of $567,000 against the entire net
operating loss.
On July 13, 2006, the FASB issued FIN 48, “Accounting for Uncertainty in Income Taxes, and Related
Implementation Issues,” which is now codified under ASC 740, Income Taxes. This standard provides guidance on
the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions that a
company has taken or expects to take on a tax return. Under ASC 740, financial statements should reflect expected
future tax consequences of such positions presuming the taxing authorities have full knowledge of the position and
all relevant facts. This interpretation also revises the disclosure requirements and was adopted by the Company
effective as of January 1, 2007. There are currently no material tax positions identified as uncertain for the
Company or its’ subsidiaries.
We recognize interest related to uncertain tax positions in interest expense and penalties related to uncertain tax
positions in governmental penalties. As of December 31, 2009, we have not recognized interest or penalties relating
to any uncertain tax positions.
During 2007, the Company’s subsidiary, ENGlobal Land, Inc. was audited for the pre-acquisition fiscal year ended
September 30, 2005. There was no material adjustment as a result of this audit, and it has been closed. The
Company is currently not the subject of any examination by the Internal Revenue Service, and the open years
subject to audit are currently tax years 2006-2008. In most states where the Company conducts business, the
Company is subject to examination for the preceding three to six years.
NOTE 16 – SALE OF ASSET
During May 2008, the Company received cash proceeds of $382,000 upon completion of the sale of property owned
through, PEI Investments. The Company recognized a gain of $84,000 on the transaction.
During June 2007, the Company completed the sale of a building in Baton Rouge, Louisiana and recognized a gain
of $483,000 on the transaction. The total sales price was $1.85 million consisting of cash of $370,000 and a Note
Receivable for the remaining $1.48 million. During July 2008, the note was paid in full.
NOTE 17 – SEGMENT INFORMATION
ENGlobal has four reportable segments: Engineering, Construction, Automation and Land. Our segments are
strategic business units that offer different services and products and therefore require different marketing and
management strategies.
The Engineering segment provides consulting services relating to the development, management and execution of
projects requiring professional engineering and related project services. Services provided by the Engineering
segment include feasibility studies, engineering, design, procurement, and construction management. The
Construction segment provides construction management personnel and services in the areas of inspection, vendor
and turnaround management, plant asset management, commissioning and start-up, instrumentation and electrical,
mechanical integrity, field support and quality assurance. The Automation segment provides services related to the
design, fabrication, and implementation of process distributed control and analyzer systems, advanced automation,
information technology and heat tracing projects. The Land segment provides land management, right-of-way,
environmental compliance, legislative affairs support and governmental regulatory compliance services primarily to
the pipeline, utility and telecom companies and other owner/operators of infrastructure facilities throughout the
United States and Canada.
78
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 – SEGMENT INFORMATION (Continued)
Sales, operating income, identifiable assets, capital expenditures and depreciation for each segment are set forth in
the following table. The amount identified as Corporate includes those activities that are not allocated to the
operating segments and include costs related to business development, executive functions, finance, accounting,
safety, human resources and information technology that are not specifically identifiable with the segments. The
Corporate function supports all business segments and therefore cannot be specifically assigned to any specific
segment. A significant portion of corporate costs are allocated to each segment based on each segment’s revenue
and subsequently eliminated in consolidation.
Financial information about geographic areas
Revenue from the Company’s non-U.S. operations is currently not material. Long-lived assets located in Canada are
currently not material. Segment information for 2009, 2008 and 2007 is as follows:
EngineeringConstructionAutomation Land Corporate Total
(in thousands)
2009
Net sales from external customers $
Inter-segment sales
Operating profit (loss)
Depreciation and amortization
Tangible assets
Goodwill
Other intangible assets
Capital expenditures
139,064 $
588
4,090
1,589
34,791
13,418
48
1,090
2008
Net sales from external customers $
Inter-segment sales
Operating profit (loss)
Depreciation and amortization
Tangible assets
Goodwill
Other intangible assets
Capital expenditures
251,702 $
1,009
31,786
1,557
58,416
13,418
120
684
2007
100,118 $
1,690
5,291
497
15,983
3,187
504
25
139,360 $
8,354
7,459
580
21,101
2,400
80
166
72,322 $31,958 $
96
4,568
1,208
19,273
1,762
2,488
1,797
--
2,691
664
5,345
3,924
1,198
88
-- $343,462
2,374
--
3,026
(13,614)
4,775
817
84,106
8,714
22,291
--
4,238
--
3,217
217
59,730 $42,540 $
642
3,744
848
31,834
1,716
3,003
103
--
4,114
646
7,761
3,924
1,797
52
-- $493,332
10,005
--
(15,504) 31,599
1,019
4,650
7,136 126,248
21,458
5,000
1,920
--
--
915
Net sales from external customers $
Inter-segment sales
Operating profit (loss)
Depreciation and amortization
Tangible assets
Goodwill
Other intangible assets
Capital expenditures
221,787 $
15
28,784
1,910
50,077
13,187
1
1,123
73,210 $
13,601
7,133
436
14,928
2,116
182
24
37,766 $30,464 $
1,349
(58)
1,186
15,393
699
1,376
420
--
2,105
640
8,775
3,924
2,397
7
-- $363,227
14,965
--
(14,638) 23,326
4,973
95,552
19,926
3,956
2,195
801
6,379
--
--
621
The Engineering segment contributed 40.5% of our total revenue for 2009, as its revenue decreased $112.6 million,
or 44.8%, from $251.7 million in 2008 to $139.1 million in 2009. The revenue in 2008 for this segment increased
13.5%, or $29.9 million, from $221.8 million in 2007.
79
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 – SEGMENT INFORMATION (Continued)
2009
2008
(dollars in thousands)
2007
Total Engineering revenue:
Detail-design
Field services
Procurement services
Fixed-price
Total Engineering revenue:
92,000 66.2 % 168,079 66.8 % 132,210 59.6 %
42,879 30.8 % 50,647 20.1 % 56,379 25.4 %
0.3 % 30,038 11.9 % 16,011 7.2 %
1.2 % 17,187 7.8 %
2.7 %
$ 139,064 100.0 % $ 251,702 100.0 % $ 221,787 100.0 %
399
3,786
2,938
The Construction segment contributed 29.1% of our total revenue for 2009, as its revenue decreased $39.3 million,
or 28.2%, from $139.4 million in 2008 to $100.1 million in 2009. The revenue in 2008 for this segment increased
90.4%, or $66.2 million, from $73.2 million in 2007.
2009
2008
(dollars in thousands)
2007
Total Construction revenue:
Pipeline
Non-pipeline
Total Construction revenue:
85,507 85.4 % 125,731 90.2 % 60,430 82.5 %
9.8 % 12,780 17.5 %
14,611 14.6 % 13,629
$ 100,118 100.0 % $ 139,360 100.0 % $ 73,210 100.0 %
The Automation segment contributed 21.1% of our total revenue for 2009, as its revenue increased $12.6 million, or
21.1%, from $59.7 million in 2008 to $72.3 million in 2009. The revenue in 2008 for this segment increased 58.2%,
or $21.9 million, from $37.8 million in 2007.
2009
2008
(dollars in thousands)
2007
Total Automation revenue:
Fabrication
Non-fabrication
35,792 49.5 % 28,266 47.3 % 22,814 60.4 %
36,530 50.5 % 31,464 52.7 % 14,952 39.6 %
Total Automation revenue: $ 72,322 100.0 % $ 59,730 100.0 % $ 37,766 100.0 %
Tangible assets include cash, accounts receivable, costs in excess of billings, prepaid expenses, income tax
receivables, deferred tax assets, property and equipment and deferred financing. Goodwill, other intangible assets,
investments in subsidiaries, and inter-company accounts receivables and payables are excluded.
NOTE 18 – COMMITMENTS AND CONTINGENCIES
Employment Agreements
The Company has employment agreements with certain of its executive officers and certain other officers, the terms
of which expire in December 2010, with the severance terms ranging from six to twelve months. Such agreements
provide for minimum salary levels. If employment is terminated for any reason other than 1) termination for cause,
2) voluntary resignation, or 3) employee’s death, the Company is obligated to provide a severance benefit equal to
between six and twelve months of the employee’s salary, and, at its option, an additional six months at 50% to 100%
of the employee’s salary in exchange for an extension of a non-competition agreement. These agreements are
renewable for an additional one-year term at the Company’s option. No liability is recorded for the Company’s
obligations under employment agreements as the amounts that will ultimately be paid cannot be reasonably
estimated, if any.
80
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 – COMMITMENTS AND CONTINGENCIES
Litigation
From time to time, the Company or one or more of its subsidiaries is involved in various legal proceedings or is
subject to claims that arise in the ordinary course of business alleging, among other things, claims of breach of
contract or negligence in connection with the performance or delivery of goods and/or services, and the outcome of
any such claims or proceedings cannot be predicted with certainty. As of the date of this filing, all such active
proceedings and claims of substance that have been raised against any subsidiary business entity have been
adequately reserved for, or are covered by insurance, such that, if determined adversely to those entities individually
or in the aggregate, they would not have a material adverse effect on our results of operations or financial position.
Insurance
The Company carries a broad range of insurance coverage, including general and business automobile liability,
commercial property, professional errors and omissions, workers’ compensation insurance and a general umbrella
policy. The Company is not aware of any claims in excess of insurance recoveries. ENGlobal is partially self-
funded for health insurance claims. Provisions for expected future payments are accrued based on the Company’s
experience. Specific stop loss levels provide protection for the Company with $200,000 per occurrence and
approximately $15.7 million in the aggregate for each policy year being covered by a separate insurance policy.
The self-insurance liability, which is included in the Accrued Compensation and Benefits line of the balance sheet,
was $0.9 million as of December 31, 2009 and $1.4 million as of December 31, 2008.
NOTE 19 – SUBSEQUENT EVENTS
On January 28, 2010, the court granted ENGlobal’s Motion for Summary Judgment and dismissed with prejudice
EcoProduct’s claims against ENGlobal in their entirety. This judgment is subject to appeal. Based on information
available to us at this time, we do not believe this litigation will have a material adverse effect on our financial
condition.
NOTE 20 – QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
For the Quarters Ended - 2009
March
June
September
December
(dollars in thousands, except per share amounts)
Revenue per segment
Engineering
Construction
Automation
Land
Total
Gross profit per segment
Engineering
Construction
Automation
Land
Total
$ 42,575 45.5 % $ 33,454 41.9 % $ 32,008 36.7 % $ 31,027 37.5 %
28,473 32.6 % 27,972 33.7 %
21,237 22.8 % 22,436 28.1 %
19,540 22.4 % 16,614 20.1 %
20,591 22.0 % 15,577 19.5 %
7,210 8.7 %
9.7 % 8,412 10.5 %
9,086
$ 93,489 100.0 % $ 79,879 100.0 % $ 87,271 100.0 % $ 82,823 100.0 %
8.3 %
7,250
$ 4,616
1,640
2,857
1,371
4.9 % $ 2,753
1.7 % 1,789
3.1 % 1,217
1.5 % 1,288
$ 10,484 11.2 % $ 7,047
3.5 % $
2.2 %
1.5 %
1.6 %
8.8 % $
1,569
1,802
2,748
1,049
7,168
1.8 % $
2.1 %
3.1 %
1.2 %
8.2 % $
1,510 1.8 %
1,894 2.3 %
1,881 2.3 %
1,069 1.3 %
6,354 7.7 %
Net income
$ 2,013
Earnings per share – basic
$ 0.07
Earnings per share – diluted
$ 0.07
$
$
$
50
0.00
0.00
$
$
$
(69 )
0.00
0.00
$
$
$
(761 )
(0.03 )
(0.03 )
81
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20 – QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (Continued)
Revenue per segment
Engineering
Construction
Automation
Land
Total
Gross profit per segment
Engineering
Construction
Automation
Land
Total
March
For the Quarters Ended - 2008
September
June
December
(dollars in thousands, except per share amounts)
$ 52,029 53.0 % $ 77,479 57.0 % $ 63,110 51.2 % $ 59,084 43.4 %
35,896 26.4 %
26,900 27.4 % 35,654 26.2 %
30,396 22.4 %
8.1 %
10,402 10.6 % 11,036
10,612 7.8 %
8.7 %
9.0 % 11,842
8,835
$ 98,166 100.0 % $ 136,011 100.0 % $ 123,167 100.0 % $ 135,988 100.0 %
40,910 33.2 %
6.5 %
7,896
9.1 %
11,251
$ 9,882 10.1 % $ 12,779
3,988
2.1 %
1,362
1.1 %
2,172
1.4 %
7,344 5.4 %
1,671 1.2 %
4,925 3.6 %
1,586 1.2 %
$ 14,346 14.7 % $ 20,301 14.9 % $ 13,634 11.1 % $ 15,526 11.4 %
7.2 % $
2.2 %
0.2 %
1.5 %
9.4 % $
2.9 %
1.0 %
1.6 %
8,864
2,765
154
1,851
2,028
1,044
1,392
Net income
$ 4,003
Earnings per share – basic
$ 0.15
Earnings per share – diluted
$ 0.15
$
$
$
6,702
0.25
0.24
Schedule II
$
$
$
3,495
$
4,059
0.13
0.13
$
$
0.15
0.15
ENGlobal Corporation
VALUATION AND QUALIFYING ACCOUNTS
Description
Allowance for doubtful accounts
For year ended December 31, 2009
For year ended December 31, 2008
For year ended December 31, 2007
Balance -
Beginning
of Period Additions
Deductions-
Write offs
(dollars in thousands)
Balance -
End of
Period
$
$
$
2,288 $
728 $
(1,148 ) $ 1,868
1,405 $
1,620 $
(737 ) $ 2,288
670 $
840 $
(105 ) $ 1,405
Reserve on current notes receivable for the year ended December 31, 2009
$
120 $
Reserve on long-term notes receivable for the year ended December 31, 2009 $
3,709 $
-- $
-- $
(120 ) $
--
-- $ 3,709
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A.
CONTROLS AND PROCEDURES
a) Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures of a registrant designed to ensure that
information required to be disclosed by the registrant in the reports that it files or submits under the Exchange Act is
82
ITEM 9A.
CONTROLS AND PROCEDURES (Continued)
properly recorded, processed, summarized, and reported, within the time periods specified in the Securities and
Exchange Commission's (“SEC”) rules and forms. Disclosure controls and procedures include processes to
accumulate and evaluate relevant information and communicate such information to a registrant's management,
including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions
regarding required disclosures.
We evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of
December 31, 2009, as required by Rule 13a-15 of the Exchange Act. Based on the evaluation described above, our
Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2009, our disclosure
controls and procedures were effective insofar as they are designed to ensure that information required to be
disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Commission’s rules and forms. Our disclosure controls and
procedures include, without limitation, controls and procedures designed to ensure that information required to be
disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to
our management, including our principal executive and principal financial officers, or persons performing similar
functions, as appropriate to allow timely decisions regarding required disclosure.
b) Changes in Internal Control Over Financial Reporting
No changes in our internal control over financial reporting occurred during the twelve months ended
December 31, 2009, that materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as
that term is defined in Exchange Act Rule 13a-15(f). Our internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our
financial statements for external reporting purposes in accordance with generally accepted accounting principles
(“GAAP”). Our internal control over financial reporting includes those policies and procedures that (i) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of
our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of our
financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in
accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material
effect on our financial statements.
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting
objectives because of its inherent limitations. Internal control over financial reporting is a process that involves
human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human
failures. Internal control over financial reporting also can be circumvented by collusion or improper management
override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on
a timely basis by internal control over financial reporting. However, these inherent limitations are known features of
the financial reporting process. Therefore, it is possible to design safeguards into the process to reduce, although not
eliminate, this risk. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions or because the degree of compliance with the
policies or procedures may deteriorate.
In order to evaluate the effectiveness of our internal control over financial reporting as of December 31, 2009, as
required by Section 404 of the Sarbanes-Oxley Act of 2002, our management conducted an assessment, including
testing, based on the criteria set forth in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (the “COSO Framework”). A material weakness is a
control deficiency, or a combination of control deficiencies, that results in more than a remote likelihood that a
material misstatement of our annual or interim financial statements will not be prevented or detected. In assessing
83
ITEM 9A.
CONTROLS AND PROCEDURES (Continued)
the effectiveness of our internal control over financial reporting, management did not identify a material weakness in
internal control over financial reporting as of December 31, 2009. We have concluded that our internal control over
financial reporting at December 31, 2009, was effective.
The Company's independent registered public accounting firm, Hein & Associates, has issued the attestation report
on the Company's internal control over financial reporting as stated on page 57.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by Items 401, 405, 406, and 407(c)(3), (d)(4), and (d)(5) of Regulation S-K will appear
under the captions “Election of Directors,” “Section 16(a) Beneficial Ownership Reporting Compliance” and
“Corporate Governance” in our 2009 Proxy Statement. For the limited purpose of providing the information
necessary to comply with this Item 10, the 2009 Proxy Statement is incorporated herein by this reference. We have
adopted a written code of conduct that applies to our directors, officers, and employees. In addition, we have a code
of ethics specific for our chief executive officer, chief financial officer, and senior accounting officers or persons
performing similar functions. Both codes can be found on our web site, which is located at www.englobal.com, and
are also exhibits to this report. We intend to make all required disclosures concerning any amendments to, or
waivers from, our code of ethics on our web site.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 402 and paragraphs (e)(4) and (e)(5) of Item 407 of Regulation S-K will appear
under the captions “Director Compensation” and “Executive Compensation Tables” including “Compensation
Discussion and Analysis,” “Compensation Committee Interlocks and Insider Participation” and “Compensation
Committee Report” in our 2009 Proxy Statement. For the limited purpose of providing the information necessary to
comply with this Item 11, the 2009 Proxy Statement is incorporated herein by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Items 201(d) and 403 of Regulation S-K will appear under the headings “Beneficial
Ownership of Common Stock” and “Securities Authorized for Issuance under Equity Compensation Plans” in our
2009 Proxy Statement. For the limited purpose of providing the information necessary to comply with this Item 12,
the 2009 Proxy Statement is incorporated herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Items 404 and 407(a) of Regulation S-K will appear under the captions “Certain
Relationships and Related Transactions” and “Director Independence” in our 2009 Proxy Statement. For the limited
purpose of providing the information necessary to comply with this Item 13, the 2009 Proxy Statement is
incorporated herein by this reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
This information required by Item 9(e) of Schedule 14A will appear under the caption “Principal Auditor Fees and
Services” in our 2009 Proxy Statement. For the limited purpose of providing the information necessary to comply
with this Item 14, the 2009 Proxy Statement is incorporated herein by this reference.
84
ITEM 15.
EXHIBITS, FINANCIAL STATEMENTS SCHEDULES
PART IV
(a)(1) Financial Statements
The consolidated financial statements filed as part of this Form 10-K are listed and indexed in Part II,
Item 8.
(a)(2)
Schedules
All schedules have been omitted since the information required by the schedule is not applicable, or is
not present in amounts sufficient to require submission of the schedule, or because the information
required is included in the consolidated financial statements and notes thereto.
(a)(3) Exhibits
EXHIBIT INDEX
Exhibit
No.
Description
Incorporated by Reference to:
Form or
Schedule
Exhibit No.
Filing Date
with SEC
SEC File
Number
3.1 Restated Articles of Incorporation of Registrant dated
10-Q
3.1
11/14/02
001-14217
August 8, 2002
3.2 Amendment to the Restated Articles of Incorporation of
the Registrant, filed with the Nevada Secretary of State
on June 2, 2006
8-A12B
3.1
12/17/07
001-14217
3.3 Amended and Restated Bylaws of Registrant dated
10-K
3.3
03/28/08
001-14217
November 6, 2007
3.4 Amendments to Amended and Restated Bylaws of
10-Q
3.2
05/07/08
001-14217
Registrant dated April 29, 2008
4.1 Registrant’s specimen common stock certificate
4.2 Registration Rights Agreement by and among Registrant
and Certain Investors named therein dated
September 29, 2005
S-3
S-3
4.1
4.2
10/31/05
333-129336
10/31/05
333-129336
4.3 Securities Purchase Agreement by and between Tontine
S-3
4.5
10/31/05
333-129336
Capital Partners, L.P. and Registrant dated
September 29, 2005
4.4 Form of Subscription Agreement by and among
S-3
4.6
10/31/05
333-129336
Registrant, Michael L. Burrow, Alliance 2000, Ltd. and
certain subscribers
10.1 Option Pool Agreement by and between Industrial Data
10-KSB
10.48
04/01/02
001-14217
Systems Corporation and Alliance 2000, Ltd. dated
December 21, 2001
10.2 Amended and Restated Alliance Stock Option Pool
10-K
10.2
03/28/08
001-14217
Agreement effective December 20, 2006
10.3 Second Amended and Restated Alliance Stock Option
8-K
10.2
05/23/07
001-14217
Agreement dated December 20, 2006
10.4 ENGlobal Corporation Incentive Bonus Plan Dated
8-K
10.1
08/17/09
001-14217
effective July 1, 2009
85
Exhibit
No.
Description
10.5 Purchase Agreement by and between ENGlobal and
Advanced Control Engineering, LLC dated
September 25, 2008
Incorporated by Reference to:
Form or
Schedule
Exhibit No.
Filing Date
with SEC
SEC File
Number
10-Q
10.1
11/07/08
001-14217
10.6 Promissory Note Payable between Registrant and Frank
10-Q
10.2
11/07/08
001-14217
H McIlwain dated September 30, 2008
10.7 Promissory Note Payable between Registrant and James
10-Q
10.3
11/07/08
001-14217
A Walters dated September 30, 2008
10.8 Promissory Note Payable between Registrant and
10-Q
10.4
11/07/08
001-14217
William M Bosarge dated September 30, 2008
10.9 Promissory Note Payable between Registrant and
Matthew R Burton dated September 30, 2008
10.10 Second Amended and Restated Lease Agreement
10-Q
10-Q
10.5
11/07/08
001-14217
10.63
08/12/02
001-14217
between Petrocon Engineering, Inc. and Corporate
Property Associates dated February 28, 2002 (Exec I)
10.11 Guaranty and Suretyship Agreement between Industrial
10-Q
10.64
08/12/02
001-14217
Data Systems Corporation and Corporate Property
Associates dated April 26, 2002 (Exec I)
10.12 Amended and Restated 1998 Incentive Plan of
10-K
10.6
03/28/08
001-14217
Registrant dated June 8, 2006
10.13 First Amendment to the Amended and Restated 1998
10-K
10.7
03/28/08
001-14217
Incentive Plan of Registrant dated June 14, 2007
10.14 Form of Incentive Stock Option Award Agreement of
10-K
10.8
03/28/08
001-14217
1998 Incentive Plan of Registrant
10.15 Form of Non-qualified Stock Option Agreement
S-8
10.80
08/24/05
333-127803
Granted Outside of 1998 Incentive Plan of Registrant
10.16 Form of Restricted Stock Unit Award Agreement
10-Q
10.2
08/11/08
001-14217
between Registrant and its Independent Non-employee
Directors
10.17 Form of Restricted Stock Award Agreement of 2009
10-Q
10.1
08/10/09
001-14217
Equity Incentive Plan between Registrant and its
independent directors
10.18 Lease Agreement between Oral Roberts University and
10-K
10.11
03/28/08
001-14217
ENGlobal Engineering, Inc. dated January 27, 2005
10.19 First Amendment to the Lease Agreement between Oral
10-K/A
10.26
03/29/07
001-14217
Roberts University and ENGlobal Engineering, Inc.
dated April 5, 2005
10.20 Second Amendment to the Lease Agreement between
10-K/A
10.27
03/29/07
001-14217
Oral Roberts University and ENGlobal Engineering, Inc.
dated June 15, 2005
10.21 Third Amendment to the Lease Agreement between
10-K/A
10.28
03/29/07
001-14217
Oral Roberts University and ENGlobal Engineering, Inc.
dated December 28, 2005
86
Exhibit
No.
Description
Incorporated by Reference to:
Form or
Schedule
Exhibit No.
Filing Date
with SEC
SEC File
Number
10.22 Fourth Amendment to the Lease Agreement between
10-K/A
10.29
03/29/07
001-14217
Oral Roberts University and ENGlobal Engineering, Inc.
dated February 27, 2006
10.23 Fifth Amendment to the Lease Agreement between Oral
10-K/A
10.30
03/29/07
001-14217
Roberts University and ENGlobal Engineering, Inc.
dated July 28, 2006
10.24 Sixth Amendment to the Lease agreement between Oral
10-K
10.17
03/28/08
001-14217
Roberts University and ENGlobal Engineering, Inc.
dated June 20, 2007
10.25 Build-to-suit Lease Agreement between Clay Real
Estate Development, L.P. and ENGlobal Corporate
Services, Inc., executed March 6, 2008
*10.26 First Amendment to the Lease Agreement between Clay
Real Estate Development, L.P. and ENGlobal Corporate
Services, Inc. executed January 15, 2009
10-Q
10.1
05/07/08
001-14217
10.27 Credit agreement by and between Wells Fargo Bank and
Registrant and its subsidiaries dated December 29, 2009
8-K
10.1
01/11/10
001-14217
10.28 Hand Note between South Louisiana Ethanol LLC and
10-Q
10.2
11/09/07
001-14217
ENGlobal Engineering, Inc dated October 22, 2007
10.29 Collateral Mortgage between South Louisiana Ethanol
LLC, and ENGlobal Engineering, Inc. dated
August 26, 2007
10.30 Collateral Mortgage between South Louisiana Ethanol
LLC and ENGlobal Engineering, Inc. dated
August 31, 2007
10-Q
10.3
11/09/07
001-14217
10-Q
10.4
06/14/07
001-14217
10.31 Amended and Restated ENGlobal 401(k) Plan effective
10-K/A
10.22
03/29/07
001-14217
October 1, 2005
10.32 First Amendment of the ENGlobal 401(k) Plan effective
10-K/A
10.21
03/29/07
001-14217
December 21, 2001
10.33 Second Amendment to the ENGlobal 401(k) Plan
10-K/A
10.23
03/29/07
001-14217
effective April 1, 2006
10.34 Third Amendment to the ENGlobal 401(k) Plan
10-K/A
10.24
03/29/07
001-14217
effective July 1, 2006
10.35 Fourth Amendment to the ENGlobal 401(k) Plan
10-K
10.33
03/16/09
001-14217
effective July 1, 2008
10.36 Fifth Amendment to the ENGlobal 401(k) Plan effective
10-Q
10.1
05/11/09
001-14217
January 1, 2009
10.37 Regulations Amendment to the ENGlobal 401(k) Plan
10-K
10.21
03/16/07
001-14217
effective January 1, 2006
10.38
Key Managers Incentive Plan of Registrant effective
January 1, 2007
8-K
10.43
04/10/07
001-14217
10.39 Key Executive Employment Agreement between
10-K/A
10.39
03/29/07
001-14217
Registrant and William A. Coskey effective
January 1, 2006
87
Exhibit
No.
Description
Incorporated by Reference to:
Form or
Schedule
Exhibit No.
Filing Date
with SEC
SEC File
Number
10.40 Key executive Employment Agreement between
10-K
10.37
03/16/09
001-14217
Registrant and Robert W. Raiford effective
August 9, 2008
*10.41 Key Executive Employment Agreement between
Registrant and Michael M. Patton effective
October 13, 2009
10.42 Key executive Employment Agreement between
10-K
10-39
03/16/09
001-14217
Registrant and R. David Kelley effective August 9, 2008
10.43 Form of Indemnification Agreement between Registrant
10-Q
10.1
08/11/08
001-14217
and its Directors and Executive Officers
10.44
Security Agreement by and between Wells Fargo Bank
and ENGlobal Corporation and its subsidiaries dated
December 29, 2009
10.45
Security Interest Agreement and Acknowledgment by
and between Wells Fargo Bank and ENGlobal
Corporation and its subsidiaries dated
December 29, 2009
10.46
Letter of Termination by and between Comerica Bank
and ENGlobal Corporation and its subsidiaries dated
December 30, 2009
8-K
10.2
01/11/10
001-14217
8-K
10.3
01/11/10
001-14217
8-K
10.4
01/11/10
001-14217
11.1 Statement Regarding Computation of Per Share
10-K
11.1
03/28/08
001/14217
Earnings is included as Note 2 to the Notes to
Consolidated Financial Statements
*14.1 Code of Business Conduct and Ethics of Registrant
dated June 18, 2009
*14.2 Code of Ethics for Chief Executive Officer and Senior
Financial Officers of Registrant dated June 18, 2009
*21.1 Subsidiaries of the Registrant
*23.1 Consent of Hein & Associates LLP
*31.1 Certification of Chief Executive Officer pursuant to
Exchange Act Rules 13a-14 or 15d-14
*31.2 Certification of Chief Financial Officer pursuant to
Exchange Act Rules 13a-14 or 15d-14
*32.1 Certification of Chief Executive Officer pursuant to
Exchange Act Rules 13a-14(b) or 15d-14(b) and 18
U.S.C. Section 1350
*32.2 Certification of Chief Financial Officer pursuant to
Exchange Act Rules 13a-14(b) or 15d-14(b) and U.S.C.
Section 1350
* Filed herewith
88
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused this
Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
ENGLOBAL CORPORATION
Dated: March 8, 2010
By: //s// William A. Coskey
William A. Coskey, P.E.,
Chief Executive Officer, Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated:
By: //s// William A. Coskey
William A. Coskey, P.E.
Chief Executive Officer, Director
By: //s// William A. Coskey
William A. Coskey, P.E.
Chairman of the Board, Director
By: //s// Robert W. Raiford
Robert W. Raiford
Chief Financial Officer, Treasurer
By: //s// Meredith N. Barnes
Meredith N. Barnes, CMA
Controller
By: //s// David W. Gent
David W. Gent, P.E., Director
By: //s// Randall B. Hale
Randall B. Hale, Director
By: //s// David C. Roussel
David C. Roussel, Director
89
BOARD OF DIRECTORS
William A. Coskey, P.E.
Chairman of the Board
ENGlobal Corporation
David W. Gent, P.E.
Senior Vice President
Bray International, Inc.
Randall B. Hale
Managing Director
Rock Hill Capital Group, LLC
David C. Roussel
Senior Vice President
Jefferies & Company, Inc.
CORPORATE INFORMATION
OFFICERS
Edward L. Pagano
President and Chief Executive Officer
Robert W. Raiford
Chief Financial Officer and Treasurer
Michael M. Patton, P.E.
Senior Vice President – Project Development
R. David Kelley
Senior Vice President – Corporate Services
J. Michael Harrison
Senior Vice President – Business Development
Natalie S. Hairston
Vice President – Investor Relations,
Chief Governance Officer and Corporate Secretary
SECURITIES LISTING
INDEPENDENT ACCOUNTANTS
The common stock of ENGlobal Corporation
is listed on the NASDAQ Stock Market
under the trading symbol ENG.
Hein & Associates LLP
Houston, Texas
STOCK TRANSFER AGENT
CORPORATE COUNSEL
Computershare Investor Services LLC
Providence, RI
ENGlobal Hotline: 312-588-4652
Winstead PC
Austin, Texas
INVESTOR INFORMATION
PRINCIPAL CORPORATE OFFICE
ENGlobal Corporation
Attention: Investor Relations
654 N. Sam Houston Parkway E., Suite 400
Houston, Texas 77060-5914
IR Hotline: 281-878-1043
email: ir@englobal.com
www.englobal.com
ENGlobal Corporation
654 N. Sam Houston Parkway E., Suite 400
Houston, Texas 77060-5914
281-878-1000
281-878-1011 Fax
The statements in this annual report that relate to the future are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934 and involve risks and uncertainties, and are based on
assumptions that the Company believes are in good faith are reasonable but which may be materially different from actual results.
Readers are encouraged to refer to the risk disclosures in the Company’s reports on Form 10-K, 10-Q, and 8-K, as applicable.
ENGlobal Corporate Office
654. N. Sam Houston Pkwy. E., Suite 400
Houston, Texas 77060-5914
Phone: 281.878.1000
Fax: 281.878.1010
Toll-Free: 800.570.3935
www.ENGlobal.com
ENGLOBAL CORPORATION
2009 ANNUAL R E P O R T
an
conserve
In
intentionally eliminated color and downgraded paper quality
resources
reduce
for
effort
and
to
printing/mailing
has
expenses,
its printed 2009 Annual Report on Form 10-K.
ENGlobal