ENGlobal Corporation F07 (Fiscal Year End 12/31/2007) Earnings Call Transcript

Apr. 7.08 | About: ENGlobal Corporation (ENG)

ENGlobal Corporation (NASDAQ:ENG)

F07 Earnings Call

March 13, 2008 11:00 am ET

Executives

Natalie Hairston - Vice President, Investor Relations & Chief Governance Officer

William A. Coskey - Chairman of the Board & Chief Executive Officer

Robert W. Raiford - Chief Financial Officer & Treasurer

Analysts

Rich Wesolowski – Sidoti & Co.

Craig Bell – Sanders Morris Harris

Megan Bissell – Energy Research & Capital Partners

[JD Paget] – The Boston Company

Thomas Judson – Husic Capital

[Chad Woodson – Paradigm Capital]

Harold Hoose – Private Investor

Operator

Greetings and welcome to the ENGlobal Corporation year end 2007 earnings conference call. At this time all participants are in a listen only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder this conference is being recorded. It is now my pleasure to introduce your host, Natalie Hairston, Vice President, Investor Relations and Chief Governance Officer. Thank you, Miss Hairston, you may now begin.

Natalie Hairston

Good morning everyone and thank you for joining us today. With me on the call are Bill Coskey, Chairman and CEO of ENGlobal Corporation and Bob Raiford, Chief Financial Officer and Treasurer. In a moment I will turn the call over to Bill Coskey who will highlight management’s perspective on our financial results for the year ended December 31st, 2007 and review other financial points of interest for the fourth quarter. Then both Bill and Bob will be available to answer any questions.

Before I begin, I’d like to remind everyone that some of the information discussed on this call will contain forward-looking statements that involve risks and uncertainties. These statements are based on current expectations. Actual results may differ materially from those set forth in such statements. Additional information concerning factors that may cause actual results to differ is contained in the Risk Factor section of our previously filed Form 10-K and 10-Q. All of those filings area available at the Investor Relations page of www.ENGlobal.com. Our filings with the SEC are also available on the SEC website at www.SEC.gov. In addition, non-GAAP measures may be referenced during this conference call. EBITDA is provided for informational purposes only and is not a measure of financial performance under FAS. It is frequently used as one of the basis for comparing businesses in our industry; however, our measure may not be comparable to similarly titled measures of other companies and it does not represent and should not be considered as an alternative to net income, operating income or other measure for determining operating performance or liquidity calculated in accordance with GAAP. Per usual the Q&A please limit yourself to one question and then one follow up as necessary.

And now I would like to introduce our Chairman and Chief Executive Officer, Mr. Bill Coskey. Go ahead, Bill.

William A. Coskey

Good morning I appreciate the opportunity this morning to give you my perspective of ENGlobal both the current status of our current business and also progress on several subjects that we have been focused on over the last year. But more importantly I will be spending some time this morning discussing our company’s vision for the future.

By most any measure, 2007 was a record year for our company and everyone at ENGlobal can take pride in the fact that our business produced record net income of $0.45 per fully diluted share for the full year. In terms of recent history and when it’s looked at on a full year basis this annual earnings result has to be considered significant mainly because it represents a big turnaround from our loss of $0.13 per share for the full year 2006. But in addition the $0.45 of earnings per share reported today exceeds by a wide margin our previous high water earnings mark which was $0.19 per diluted share in 2005. However our enthusiasm of our results for the full year has been tempered by a seasonal downturn during the fourth quarter and also effects of winding down and demobilizing certain projects late in the year. The biggest shortfall in the fourth quarter came from our Construction group which failed to replace revenues from one project and dropped roughly $2.5 million of gross margin going from the third to the fourth quarter. Adding to all this was the net effect of several fourth quarter financial items and these will be discussed in more detail later.

The major focus of our company has been to improve in the area of collections and management of our working capital and we have recently seen some success in this area. As of 12/31/07 out days sales outstanding our DSO was 61 days down from a high of 70 to 71 days at the end of the first and second quarters, 2007 and 66 days at the end of the third quarter. Our goal for DSOs continues to be in the mid-50’s which we hope to accomplish during 2008.

I’m proud to announce that our operations provided $7.7 million in cash during the cash during the fourth quarter and the outstanding balance under our $50 million working line of credit was reduced from $36 million at the end of the third quarter to $28 million at year end. These are positive trends that we hope to continue. As to the fourth quarter specific financial items, first on the positive side we have been able to reach settlements with both of our clients on the 2006 fixed price projects and these settlements together resulted in a positive adjustment of $2 million in the fourth quarter. Our client on the larger project is currently in the process of commissioning and starting up that facility and the most important thing here to note is that we have little fixed price EPC work in our backlog. The biggest part of our EPC work is now being done on a cost plus basis.

The second item I would like to discuss relates to a $3.2 million third quarter reserve taken against a note receivable from a Louisiana ethanol client. As you might remember we suspended work on this project early in the fourth quarter of last year and ENGlobal is owed approximately $14.6 million from this client. The decision was made at the end of the third quarter to convert the related accounts receivable into a note and in the fourth quarter we have elected to write the value of this note down to $9.2 million which is the estimated value that could be expected in the event of a forced liquidation such as a foreclosure. But based on my recent discussions with the owner and their lender, I’m optimistic that all parties will be able to work together to avoid a forced liquidation. A more orderly sale process through an investment banker should be preferable for all the parties and will provide ENGlobal with a better recovery in future months than what would be provided via foreclosure. Obviously the company has been and will continue to work very hard to see that we are paid everything we are owed.

The third financial item relates to a $432,000 non-cash charge we took in the fourth quarter for impairment of goodwill in our Automation group. The associated goodwill was related to the Fabrication business unit of our Automation group, it’s what we used to refer to as our Systems segment which mainly fabricates remote instrument enclosures and process analyzer systems in a shop environment. The major action we have taken here is to bring back a successful Operations Manager and based on recent financial trends its resulting cost reductions and streamlining of this unit appear to be paying off.

Pro forma of these three items just discussed our earnings for 2007 would have been $0.49 per share on a fully diluted basis. In addition if you add back our non-cash stock compensation expense for the year along with these three items on a pro forma basis our 2007 earnings would have been $0.52 per share fully diluted.

Going into 2008 there are many reasons to be encouraged. Our backlog is up approximately 1% year-over-year to $289 million at year end and most all of our businesses are currently hiring in order to staff recently awarded work. I’m also encouraged by the number, variety and overall potential of the new client relationships that have recently been established. Both our business development staff and operations people are doing a great job at working together to sell ENGlobal’s wide range of capabilities. It sounds like a minor point but to me it’s a really major one. It’s important for you to know that we have entered into what I would call a new era for ENGlobal’s branding strategy.

Many of you remember us when we were called by eight or 10 different business names. Then in 2002 we adopted Global but still our sold services as many different companies. Now in our third generation so to speak we will market our services as one name and one company, ENGlobal. Under this one name we have now organized as four businesses or groups, these being Engineering, Construction, Automation and Land. Over the years we at ENGlobal have put together an impressive list of capabilities that span much of the project’s life cycle. The mission is for all of our employees and for all of our clients to understand and be able to utilize ENGlobal’s full range of services. I believe that this new way of thinking about ourselves as one company is a big positive step in that direction.

In addition if you haven’t seen our new website at www.ENGlobal.com please check it out. I think it does a much better job of explaining to investors all that we do and also this new way we are presenting our company.

As to our vision for the future my rough expectation and goals for ENGlobal in 2008 is to increase our staff by approximately 8 to 10% which is about what we did last year. We would expect to see our top line grow around 15% plus or minus but the quality of the mix of revenues and earnings per share is what we’re going to continue focusing on. Our expectation for improving margin and some overhead leverage should allow earnings to grow faster than our top line hopefully about twice as fast over time. We as a company need to do nothing else than to continue focusing on getting our operating margins to the 8% plus level in 2008 and if we can show some discipline and do that then the results for the year will be very good.

In terms of external growth ENGlobal over the last couple years has looked at several significant acquisition opportunities. One up to $150 million in enterprise value and also a number of ones just a fraction of that size. For us I would categorize a significant acquisition as those that exceed $30 million in enterprise value. At this time it is unlikely that we will pursue such a large acquisition simply because it wouldn’t seem to make sense for the company to take on a large amount of debt together with the significant dilution to our stockholders that would likely be required to complete such a transaction. However we intend to continue pursuing smaller tuck in acquisition opportunities that present good values especially those that provide new capabilities that can be offered to our core energy related clients for those that provide us a good start new markets that we would like to serve.

We believe that a plan of continued organic growth together with selected smaller acquisitions will provide a good total and balanced growth opportunity for our stockholders without the risks that would come with a much larger deal. We have and will however consider a large strategic merger as long as this type of transaction doesn’t result in a lot of debt for the resulting company, that there are efficiencies to be gained that can be identified in advance and as long as the strategic reasons for the doing the combination are easy for everyone to understand.

As I will soon reach my one year anniversary as the company’s CEO I would certainly like to thank all of our investors on this call for their confidence. At this milestone it would be wrong of me not also to thank our valued clients for their support and also your business. It’s been my pleasure to meet with many of you over this last year to learn about your operations and also to hear some valuable feedback. Finally I sincerely thank everyone at our company for being part of what we’re doing and also to stress that each of you play a big part in making ENGlobal successful. 2008 is going to be another great year and together working now under one banner we are going to achieve even greater things.

Thank you for your time this morning. I will now turn the call over to the Operator.

Question-And-Answer Session

Operator

We will now conduct a question-and-answer session. (Operator Instructions) Our first question is from Rich Wesolowski from Sidoti & Company. Please proceed with your question.

Rich Wesolowski – Sidoti & Co.

Bill, can you elaborate a little bit on some of the comments you made on the top of the prepared remarks about the seasonal downturn in business and also the $2.5 million drop from gross profit from the Construction segment in 4Q?

William A. Coskey

What happens to a company like ours that bills hours is in the fourth quarter people obviously have holiday benefits, people utilize the vacation they’ve accrued during the year and so the fourth quarter we just normally bill less hours as a company and I think that added to that effect was the fact that this year we had a project rolling off which was the Louisiana ethanol project and it was a large project especially for our construction group and we failed to replace that work. My guess is we held some people on overhead and we dropped some gross margin, I think I said $2.5 million in gross margin, from one quarter to the next which was really the most significant dynamic thing that happened one quarter going to the next.

Rich Wesolowski – Sidoti & Co.

So you kept extra people on overhead, that’s overhead reflected in the cost of sales and not in the SG&A?

William A. Coskey

Not in the SG&A. It’ll be variable overhead that’s in the direct cost.

Rich Wesolowski – Sidoti & Co.

And along the same lines, the SG&A you guys showed a lot better leverage here in the December quarter than you had in September. I’m just curious how those costs can fluctuate so widely from one period to the next. Can you help me understand that?

William A. Coskey

Bob, can you help me with that one?

Robert W. Raiford

Some of it I guess the write down on the note as a bad debt expense but also the write down on the goodwill impairment went to amortization expense both down in SG&A. We have I guess made some considerations going forward trying to flatten out our SG&A with our budgeting process going forward so you won’t see material variances on our SG&A numbers and everything that’s associated with our reimbursable work is going to be up in our charges.

Rich Wesolowski – Sidoti & Co.

I wasn’t curious why it was so high, I was curious why it was so low because if you strip those costs out and you look at it through the year you had basically an average of $7.5 million in every quarter but September which was $8.6 million, a good deal higher. I was just curious what exactly can prompt that kind of volatility in that line item.

Robert W. Raiford

With SG&A going up like that?

Rich Wesolowski – Sidoti & Co.

Just in September and then again coming down in December.

Robert W. Raiford

It would have to be primarily our salaries is the most prominent thing in our SG&A number unless we had an adjustment and I don’t have that number. I’ll have to get that for you, why the extreme volatility in that.

Rich Wesolowski – Sidoti & Co.

And lastly the cash flow was a big rebound –

William A. Coskey

Rich, I would add to that, that we hope to maintain the target of $30 million of SG&A going into this year as well. We’ve kind of stuck by that number and hope to be around there somewhere for the full year.

Rich Wesolowski – Sidoti & Co.

Okay, that’s a big help. Lastly on the cash flow you had a big rebound there. I know you’ve been making strides at getting payments from the accounts who are way overdue, but I have to assume that the current operations generated cash as well. Is that correct?

Robert W. Raiford

Yes.

Operator

Our next question is from Craig Bell with S&H Capital. Please proceed with your question.

Craig Bell – Sanders Morris Harris

Just wanted to touch on your collections there first, obviously you had the good improvement there and I know you’ve been working on the past due ones, is this something that we should think of that you can now sustain going forward? You’ve had some difficulties over the past year or longer with collections, but do you feel like you’ve really turned the corner on that now?

William A. Coskey

I think the biggest culture – I’ll let Bob speak as well, but the biggest cultural change we made is to get operations involved in the collections process in talking with the correspondent project managers at our client company and I believe we’ve made a lot of efforts to improve the cycle of our billings, getting our invoices out the door. And so I think those two things primarily, I mean operations being actively involved in collections and improving our billing cycle has been the two major things. Bob, would you like to add to that?

Robert W. Raiford

I would agree. I think Bill focused on that with operations and they’ve really taken the charge to jump in and help that effort and Bill mentioned the turn around in getting our billings out the door as quickly as possible and also following up with clients and making sure we get paid promptly. And I would say that yes I would think we would be able to continue the, we’ve maintained in the fourth quarter into the future quarters and we still, as Bill said, we look to bring our DSOs down. We’re still shooting for a target in the mid-50’s.

Craig Bell – Sanders Morris Harris

And then, Bill, on this ethanol project, I guess last quarter you were talking about the possibility of the owner getting new financing on it and then proceeding ahead with it and now it sounds like it’s more trying to get a sale of the project. Just wondering if there’s any larger concerns out there beyond this project? Is this just specific to this one project, one owner or do you see any broader concerns out there?

William A. Coskey

We haven’t seen any broader concerns but we mostly do business with large companies and so it isn’t a concern. I think a small part of our business is from developers. It’s probably a growing part of our business, is the developer business. But it’s still small. On the ethanol project they’re continuing their financing efforts and they’re continuing to seek out equity partners. It’s just that we’re losing patience and we feel like the best result for all parties would be to go hire an investment banker and put a book together and go sell the plant. And we have a very specific timeframe for when that process has to be started, otherwise our only alternative is to go into a foreclosure process which we don’t feel would be beneficial to any of the parties.

Craig Bell – Sanders Morris Harris

And you could proceed with that because of the lien you have on it, correct?

William A. Coskey

Yes, we have several legal opinions from Louisiana counsel and we know exactly where we stand from a legal standpoint and we could proceed on those. Yes.

Craig Bell – Sanders Morris Harris

And then back to the Construction business, how is that looking in terms of your backlog going forward? Is there a significant amount there? Do you think that you’re going to get sort of back on track in the coming quarters here?

William A. Coskey

Actually it turns out if you look at the way our backlog went from last year to this year, gain – I forget the exact numbers, but maybe $100 million of gain in backlog or something like that – about half of that came from our Engineering group and half of that came from our Construction group. So the Construction group has done a good job of adding backlog. My guess is they continue to be a little – and from what I hear – anecdotally I think that their business continued to be a little in January but now I understand in the last couple months they’re putting people out into the field and got everybody busy again. That’s what I’m understanding about our Construction business.

Craig Bell – Sanders Morris Harris

And then just real quickly, last one on the tax rate in the quarter was quite a bit lower than it has been. Was that in any related to some of the charges there or how should we think about that tax rate going forward?

Robert W. Raiford

I think it’s going to probably continue to level. Hopefully we can continue to keep it under – the numbers start with a four and a lot of that had to do with some tax planning that we implemented and we think that’s going to continue. So we expect it to be under 40%

Craig Bell – Sanders Morris Harris

So as we look at like the fourth quarter number then, does that sort of imply that you had sort of over accrued earlier in the year for that on the rates?

Robert W. Raiford

Right. And some of it had to do with the write down of the note and the loss that we took there.

Operator

Our next question from Megan Bissell with SIG Partners. Please proceed with your question.

Megan Bissell – Energy Research & Capital Partners

I wanted to just check on something, in the past few earnings releases you guys have pointed out your bi-weekly billable hours but that was omitted from this press release. What was that number in the fourth quarter?

William A. Coskey

I don’t think we have that for the fourth quarter. We’ll put it in our 10-K and I’m sorry it was omitted. Oversight on our part.

Megan Bissell – Energy Research & Capital Partners

I guess then looking at the employees that you guys had at the end of the fourth quarter, 2,443, that’s down about 65 people sequentially from the third quarter and honestly is below second quarter’s level. Was there anything in particular that happened in the fourth quarter? Can you just kind of talk about that?

William A. Coskey

I think it was probably kind of de-staffing in our Construction group primarily, again as a result of this one project that we demobilized and our failure to be able to replace that work in a timely manner. It took us a few months to replace that work.

Megan Bissell – Energy Research & Capital Partners

So you probably de-staffed right at the end of the quarter then since you pointed to the fact that they were still on board as being part of what drove gross profit down?

William A. Coskey

That was going on right at the end of the third quarter and the first of the fourth quarter and I have the full year numbers on billable hours. During 2007 ENGlobal averaged 189,700 billable hours for a two week period a 35% increase when compared to the 140,000 billable hours in 2006. We reached a high during the year of 212,300 in a two week period which I think happened in early November. So our 2006 high was 162,700. That’s the data points I have on our billable hours.

Robert W. Raiford

I guess at the end of the third quarter when we suspended the work on the ethanol project there is some residual work that has to be done, we just can’t pull the plug. So there’s some carry over. So from a timing standpoint the numbers of employee headcount probably kind of created a problem because it just didn’t happen clean cut off at the end of the third quarter. We had the demobilization that we had to experience on that project to keep our numbers up for a week or two and then we dropped off considerably.

Megan Bissell – Energy Research & Capital Partners

But it was the fact that you guys still had them on the payroll and that was the overhead that drove the gross margin in the fourth quarter, but the fact that the employee count is for the end of the quarter you had already let the people go by the time you recorded that number?

Robert W. Raiford

That’s correct.

Megan Bissell – Energy Research & Capital Partners

A couple of housekeeping items, what did you guys have for DD&A for the quarter?

Robert W. Raiford

I’m sorry?

Megan Bissell – Energy Research & Capital Partners

For depreciation, DD&A?

Robert W. Raiford

I don’t have that here in front of me.

Megan Bissell – Energy Research & Capital Partners

The annual number is fine, I can back into it.

Robert W. Raiford

Hang on just a minute.

Megan Bissell – Energy Research & Capital Partners

And while you’re looking for that, I welcome the increased transparency in the different divisions and the gross profit levels that I’m – the operating income levels in those divisions, are we going to be getting a quarterly break out so that we can kind of look at trends as far as being able to forecast our 08 quarters?

Robert W. Raiford

Yes, we’ll have those within our K.

Megan Bissell – Energy Research & Capital Partners

That’ll be in the K?

Robert W. Raiford

Yeah. Depreciation was a little less than $5 million, depreciation and amortization.

Megan Bissell – Energy Research & Capital Partners

For the year?

Robert W. Raiford

Yes.

Megan Bissell – Energy Research & Capital Partners

And in that number is going to be the $432,000 goodwill right down?

Robert W. Raiford

That’s correct.

Operator

Our next question is from [JD Paget] with The Boston Company. Please proceed with your question.

[JD Paget] – The Boston Company

One, the 15% growth that you talked about in the script, is that I would take away from it organic target for 08?

Robert W. Raiford

Yes, that’s what you should think about.

[JD Paget] – The Boston Company

So a little bit better than I think you’ve been looking for in the past?

Robert W. Raiford

Well, we’ve been saying 12.5. I’ll tell you how I arrived at that number, we had 20% growth from 2006 to 2007, we have a staff that roughly 75 to 76% of that growth came organically, we increased our staff about 10% so I put all that together and I say we should be about a 15% organic growth rate. Basically we added staff like I talked about.

[JD Paget] – The Boston Company

Okay. Then previous questioner was talking about the headcount, is that something that’s built back up now as it sounds like you’ve won some additional jobs and are putting people back out in the field?

Robert W. Raiford

I think the fair statement is that we’re in the process of building that up. I’ve talked to all the operation managers and everybody that I’ve talked to is in the process of adding staff and hiring to staff up new work. So, I think we’re in that process right now.

[JD Paget] – The Boston Company

How are you finding the hiring environment?

Robert W. Raiford

It’s difficult as always, it’s probably one of the biggest hurdles we jump every day.

[JD Paget] – The Boston Company

It’s nothing new though, right?

Robert W. Raiford

That’s nothing new, it really hasn’t changed. We have an excellent recruiting staff. That’s something we’ve had to do in the last couple of years is really build a top notch recruiting staff as part of our business.

[JD Paget] – The Boston Company

Can you just remind me as well the new revenue segments what’s in each one?

William A. Coskey

Sure. We have an engineering group and the engineering folks provide work both in our offices and also second personnel to our client locations or outsource personnel to our client locations.

[JD Paget] – The Boston Company

And the P&C, the old P&C is going to fall in there, right?

William A. Coskey

P&C?

[JD Paget] – The Boston Company

The procurement construction?

William A. Coskey

Yes, I would say so.

[JD Paget] – The Boston Company

Okay.

William A. Coskey

We have a construction group which is construction activities, construction management, commissioning of plans, turnaround management. Really again, we’re not a construction company, everything involved on a construction site that doesn’t involve construction contracting along with inspection. We have an automation group that designs and programs and also fabricates control systems and process analyzer systems.

[JD Paget] – The Boston Company

So that’s some of the old systems business plus the auto [inaudible].

William A. Coskey

That’s our old system segment plus some of the engineering group we’ve broke up.

[JD Paget] – The Boston Company

Okay.

William A. Coskey

Then our land group as a result of the acquisition we did in June, 2006 which was roughly 300 right-of-way agents, that acquire right-of-way for pipelines and in some cases power transmission lines.

[JD Paget] – The Boston Company

Okay. Was that WR?

William A. Coskey

WRC, yeah.

[JD Paget] – The Boston Company

Okay. So, that’s the only thing that’s in there?

William A. Coskey

That’s correct.

[JD Paget] – The Boston Company

What was the acquisition you did in Colorado?

William A. Coskey

That’s it, that’s what use to be called WRC in Broomfield and we’ve actually now renamed that legally to ENGlobal Land, Inc. but we refer to it as our land and regulatory group. For short for this purpose we call it our land group.

Operator

Our next question is from Tom Judson with Husic. Please proceed with your question.

Thomas Judson – Husic Capital

Could you just review again, you talked about some acquisition opportunities and I was kind of looking at a couple of different things and I may have missed your conclusions. You talked about a larger opportunity, a $150 million enterprise value and it wasn’t clear, is that off the table due to dilution issues? If you could just review the acquisition strategy again.

William A. Coskey

We looked at that situation, I really liked it, it was an excellent company but to get there with them it would have required $100 million of debt and issuing lots of stock and our board didn’t feel like that was the right thing to do for our stockholders. So, while it was a fine company that’s off the table. But, what’s on the table for us is smaller tuck in acquisitions and we do those for a lot of different reasons. We might like to geographically expand around the country, into new markets. And really two things, I guess geographical expansion around the country and then – which for us would be West Coast, Midwest, East Coast and also to add new capabilities. To find little specialties that we can cross sell to our existing clients. Those are the two reasons we do smaller acquisitions.

Thomas Judson – Husic Capital

Great. Again, what’s the timeline on potentially going into foreclosure on these guys?

William A. Coskey

I’d be happy to tell you, I’ve given them a deadline of April the 30th of this year to have the sale process underway. We’re working with the bank and the owners to get that underway. I don’t think we get to foreclosure, I think we’re going to do this orderly process.

Thomas Judson – Husic Capital

So again that means selling the plant and getting that process in place by April 30th. So upgrading the facility, that’s all been put aside and now we’re just going to try to sell the plant, is that correct?

William A. Coskey

Yeah that’s about 40 to 45% complete so we would sell the uncompleted plant to probably someone in the ethanol business who wants to complete it. We may or may not be involved in the completion of that project, I can’t say at this point. Another scenario, they might find an equity partner or financing in the interim but we’ve just pretty much drawn a line in the sand and said this is how we’re going to go with this.

Operator

Our next question is from Rich Wesolowski with Sidoti & Company. Please proceed with your question.

Richard Wesolowski – Sidoti & Company

How much revenue did the ethanol contract contribute to 2007?

William A. Coskey

Bob, you’re going to have to help me with that.

Robert W. Raiford

I’ll have to get you a number Rich, it was in excess of $10 million I think.

Richard Wesolowski – Sidoti & Company

I have in my notes $15 to $20 through the third quarter. Is that too high or does that sound like a right number?

Robert W. Raiford

It’s probably in that neighborhood and I could get you a number on that.

Richard Wesolowski – Sidoti & Company

Okay. So if you plan to grow 15% from 2007 to 2008 that really means everything ex ethanol is growing at a 20 to 22% type of rate. If that’s indeed the case why would you de-staff at all and take the pains to rehire people in a tough labor market?

William A. Coskey

Well, I think that’s just the point, I don’t think we did de-staff to a large extent. I think some of the construction people we had on the site, we did de-staff but the professional engineering folks and design folks we did not, we reassigned them to other projects as we could.

Richard Wesolowski – Sidoti & Company

Okay.

William A. Coskey

That’s the whole deal, we didn’t want to lose those folks.

Richard Wesolowski – Sidoti & Company

Okay. And that’s why the margin was off. Okay, I understand. Aside from the reporting of the segments what management changes have you made in connection with that move?

William A. Coskey

Other than our [inaudible], our systems fabrication business where we brought in a prior manager there who’s doing a great job for us. All the presidents are still in place at the business units.

Richard Wesolowski – Sidoti & Company

Okay. Just looking in the release I think it says that the reporting and management of these businesses. I was making sure there wasn’t any drastic changes to how the org chart looks.

William A. Coskey

No, the org chart looks exactly the same. It’s more just our branding and presentation to the outside world.

Operator

Our next question is from Chad Woodson with Paradigm Capital. Please proceed with your question.

[Chad Woodson – Paradigm Capital]

Could you guys comment a little bit on the process that you guys undertake to access the credit worthiness of say clients on a project by project basis?

William A. Coskey

Sure, we have a process that is in place to do both review of risk and to access the credit worthiness and it’s a joint effort between operations and business development and our financial group, our accounting group.

[Chad Woodson – Paradigm Capital]

So that involves say, if it’s a smaller private company getting inside, looking at their balance sheet and cash flows and kind of what these guys are capable of undertaking and being familiar with covenants and all that kind of stuff?

William A. Coskey

That’s correct.

Robert W. Raiford

In a lot of cases with newer clients we’ll get a short cash – and instead of a normal net 30 we may get a net 15 or net 10 until we can build up some credit worthiness of the client so we don’t get over exposed. But, most of our clients in the past have been Fortune 500 companies, that hasn’t been a problem for us.

Operator

(Operator Instructions) We have a follow up question from [JD Paget] with The Boston Company. Please proceed with your question.

[JD Paget] – The Boston Company

Just one quick one with respect to the ethanol project where it wound down in Q3 but it sounds like you just couldn’t pull the plug on it you had to do some additional work in Q4. Why do that work if they’re not paying you?

William A. Coskey

It did cost money to demobilize the project. You just don’t flip a switch and say we’re done. It costs money to get people off the site and back home and wind things down in a fashion. That’s part of the money we expect to be repaid from this client and we’ve invoiced them for that.

[JD Paget] – The Boston Company

Okay. So, it wasn’t a matter of you doing more work for them, it just takes some expense to demobilize.

William A. Coskey

Right. And, they have been invoiced for that demobilization.

William A. Coskey

JD, a lot of the costs that were incurred following the suspension of that were equipment costs that had come in, things that had been ordered and not yet delivered, or things that had been ordered that were in kind of a pre-manufacturing state that hadn’t been completed, to cancel that out. Some of it is cancellation charges, most of it’s more equipment related than labor related. I was going to say earlier, someone called and asked about the project, the project even though it may be 40% complete from an equipment standpoint, all the major tagged equipment is either on site and associated lay down guards, so the major equipment is there to complete the facility.

Operator

Our next question is from Harold Hoose, a private investor. Please proceed with your question.

Harold Hoose – Private Investor

I think it was last year that you received a contract to do a feasibility study for a new small refinery in North Dakota. I’m just wondering how this is coming and if it is a positive and they go ahead with it whether you’d expect to get a pretty good amount of work with the engineering and building it?

William A. Coskey

I’m sorry to say but that project isn’t on my radar screen unfortunately so it obviously hasn’t turned into a significant project for us. I do remember doing a study and I think we completed that study but I haven’t heard any further action on that project so I have to assume from our standpoint that there’s no further work. It’s probably not material to our business. I wish I could help you more there.

Operator

There are no further questions in queue at this time. I would like to turn the floor back over to management for closing comments.

Natalie Hairston

Thank you operator. Hello again everyone. I’ll be able to answer any follow up questions this afternoon or you can always email me directly at IR@ENGlobal.com. Thank you for being on the call today and thank you as always for your support of ENGlobal.

Operator

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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