| ENGLOBAL CORP ITEM 1A RISK FACTORS 16 ITEM 1A RISK FACTORS Set forth below and elsewhere in this Report and in other documents 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 |
| We are engaged in highly competitive businesses and must typically bid against competitors to obtain engineering and service contracts |
| We are engaged in highly competitive businesses in which customer contracts are typically awarded through competitive bidding processes |
| We compete with other general and specialty contractors, both foreign and domestic, including large international contractors and small local contractors |
| Some competitors have greater financial and other resources than we do, which, in some instances, gives them a competitive advantage over us |
| The failure to attract and retain key professional personnel could adversely affect the Company |
| Our success depends on attracting and retaining qualified personnel in a competitive environment |
| We are dependent upon our ability to attract and retain highly qualified managerial, technical and business development personnel |
| Competition for key personnel is intense |
| We cannot be certain that we will retain our key managerial, technical and business development personnel or that we will attract or assimilate key personnel in the future |
| Failure to retain or attract 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 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 |
| 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 16 ITEM 1A RISK FACTORS (Continued) 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 contractapstas estimated risks, revenue and costs, and technical issues |
| Due to the size and nature of many of our contracts, the estimation of overall risk, revenue and cost at completion is complicated and subject to many variables |
| Changes in underlying assumptions, circumstances or estimates may also adversely affect future period financial performance |
| This is a major risk factor that could materially impact our operating results |
| Economic downturns could have a negative impact on our businesses |
| Demand for the services offered by us has been and is expected to continue to be, subject to significant fluctuations due to a variety of factors beyond our control, including demand for engineering services in the petroleum refining, petroleum chemical and pipeline industries and in other industries that we provide services to |
| During economic downturns in these industries, our customerapstas ability to engage us may decline significantly |
| We cannot be certain that economic or political conditions will be generally favorable or that there will not be significant fluctuations adversely affecting our industry as a whole or key markets targeted by us |
| 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 revenues in any one year or over a period of several consecutive years |
| 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 these customers from year to year as their projects with us are completed |
| If we do not replace them with other customers or other projects, our business could be materially adversely affected |
| Additionally, we have long-standing relationships with many of our significant customers |
| Our contracts with these customers, however, are on a project-by-project basis and the customers may unilaterally reduce or discontinue their purchases at any time |
| The loss of business from any one of such customers could have a material adverse effect on our business or results of operations |
| Additional acquisitions may adversely affect our ability to manage our business |
| Acquisitions have contributed to our growth over the past three years and we plan to continue making acquisitions in the future 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, 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 subject acquisitions we believe to be generally consistent with industry practices |
| These reviews, however, may not reveal all existing or potential problems, nor will they permit a buyer to become sufficiently familiar with the target companies to assess fully their deficiencies and capabilities |
| We cannot assure you that we will identify, finance and complete additional suitable acquisitions on acceptable terms |
| We may not successfully integrate future acquisitions |
| Any acquisition may require substantial attention from our management, which may limit the amount of time that management can devote to day-to-day operations |
| Our inability to find additional attractive acquisition candidates or to effectively manage the integration of any businesses acquired in the future could adversely affect our ability to grow profitably or at all |
| Seasonality of our industry may cause our revenues to fluctuate |
| 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 engineering services or capital expenditures during the year |
| The annual budgeting and approval process under which these clients operate is normally not completed until after the beginning of each new year, which can depress results for the first quarter |
| Principally due to these 17 ITEM 1A RISK FACTORS (Continued) factors, our revenues during the first and fourth quarters generally tend to be lower than in the second and third quarters |
| Liability claims could result in losses |
| Providing engineering and design services involves the risk of contract, professional errors and omissions and other liability claims, as well as adverse publicity |
| Further, many of our contracts will require us to indemnify our clients not only for our negligence, if any, but also for the concurrent negligence and in some cases, sole negligence of our clients |
| We currently maintain liability insurance coverage, including coverage for professional errors and omissions |
| However, claims outside of or exceeding our insurance coverage may be made |
| A significant claim could result in unexpected liabilities, take management time away from operations, and have a material adverse impact on our cash flow |
| If the operating result of either segment is adversely affected, an impairment of goodwill could result in a write down |
| Based on factors and circumstances impacting ENGlobal and the business climate in which it operates, the Company may determine that it is necessary to re-evaluate the carrying value of its goodwill by conducting an impairment test in accordance with SFAS Nodtta 142 |
| The Company has assigned goodwill to its two segments based on estimates of the relative fair value of each segment |
| If changes in the industry, market conditions, or government regulation negatively impact either of the Companyapstas segments resulting in lower operating income, if assets are harmed, 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 either segment declining below its carrying value, an impairment to goodwill would be created |
| In accordance with SFAS Nodtta 142, the Company would be required to write down the carrying value of goodwill |
| Our Board of Directors may authorize future sales of ENGlobal common stock, which could result in a decrease in value to existing stockholders of the shares they hold |
| Our Articles of Incorporation authorize our board of directors to issue up to an additional 48cmam058cmam056 shares of common stock and an additional 2cmam265cmam167 shares of preferred stock |
| These shares may be issued without stockholder approval unless the issuance is 20prca or more of our outstanding common stock, in which case the American Stock Exchange requires stockholder approval |
| We may issue shares of stock in the future in connection with acquisitions or financings |
| In addition, we may issue options as incentives under our 1998 Incentive Option 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 |
| Our backlog is subject to unexpected adjustments and cancellations and is, therefore, an uncertain indicator of our future revenues or earnings |
| As of December 31, 2005, our backlog was approximately dlra170 million |
| We cannot assure investors that the revenues projected in our backlog will be realized or, if realized, will result in profits |
| Projects may remain in our backlog for an extended period of time prior to project execution and, once project execution begins, it may occur unevenly over the current and multiple future periods |
| In addition, project terminations, suspensions or reductions in scope may occur from time to time with respect to contracts reflected in our backlog |
| Such backlog reductions would reduce 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 revenues and profits that we actually earn |
| 18 ITEM 1A RISK FACTORS (Continued) 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 |
| In addition, if a subcontractor or supplier is unable to deliver its services or materials according to the negotiated terms for any reason, including the deterioration of its financial condition or over-commitment of its resources, we may be required to purchase the services or materials from another source at a higher price |
| If we are not able to successfully manage our growth strategy, our business and results of operations may be adversely affected |
| We have grown rapidly over the last several years |
| Our growth presents numerous managerial, administrative, operational and other challenges |
| Our ability to manage the growth of our operations will require us to continue to improve our management information systems and maintain discipline in our internal systems and controls |
| Industry trends and our strategy to pursue larger fixed-price EPC projects, our ability to manage and measure project performance will require us to strengthen our internal project and cost control systems within operations that have traditionally operated in a cost plus environment |
| In addition, our growth will increase our need to attract, develop, motivate and retain both our management and professional employees |
| The inability of our management to effectively manage our growth or the inability of our employees to achieve anticipated performance could have a material adverse effect on our business |
| If we are not able to successfully manage internal growth initiatives, our business and results of operations may be adversely affected |
| Our growth strategy is to use our technical expertise in conjunction with industry trends |
| To support this strategy, the Company may elect to fund internal growth initiatives targeted at markets that the Company believes may have significant potential needs for the Companyapstas services |
| The downside risks are that such initiatives could have a negative effect on current earnings until such initiatives reach critical mass or that industry trends have been misread or delayed and continued funding could have a negative impact on long term earnings |
| A small number of stockholders own a significant portion of our outstanding common stock, thus limiting the extent to which other stockholders can effect decisions subject to stockholder vote |
| Directors, executive officers and principal stockholders of ENGlobal and their affiliates, beneficially own approximately 40prca of our outstanding common stock on a fully diluted basis |
| Accordingly, these stockholders, as a group, are able to affect the outcome of stockholder votes, including votes concerning the adoption or amendment of provisions in our Articles of Incorporation or bylaws and the approval of mergers and other significant corporate transactions |
| The existence of these levels of ownership concentrated in a few persons makes it unlikely that any other holder of common stock will be able to affect the management or direction of the Company |
| These factors may also have the effect of delaying or preventing a change in management or voting control of the Company |