Appointments and Moves

Rev. 1.5

Willbros Oil & Gas Segment names Michael Lee named Senior V.P. of Commercial Services

June 14, 2012. Willbros Group, Inc. (NYSE: WG) today announced that Michael Lee has been named Senior Vice President of Commercial Services in its Oil & Gas Segment. In this role, Mr. Lee will be responsible for the integration of services and development of strategic initiatives across the Professional Services Division. Mr. Lee will also be responsible for business development to support identifying and pursuing cross-selling opportunities for all of the Company's professional services.

Burrows Global

Olan Weeks P.E. - 45 Years Automation Experience, joined Burrows Global earlier this year. He will be President of the rapidly growing Automation Division. Mr. Weeks has been managing a major BASF project he started while working for ENGlobal Corporation. When he moved over to Burrows Global he kept his commitments to BASF to finish the job and on schedule even while working for a different company. This is the character type exemplary of success. You can tell a person is particular about doing things precise and correct from the start when they own their own bulldozer. With the BASF project completed as promised BG now has a fully operational Automation Division.

More from Burrows Global News:

Meredith Barnes, formerly Corporate Controller, has been named Chief Financial Officer, Secretary, and Treasurer. Ms. Barnes will now oversee the day-to-day accounting and treasury functions. She joined Burrow earlier this year and has more than 20 years of expertise in accounting for engineering and construction firms.

Leroy Faulk has been retained as the Vice President and General Manager of the Beaumont Division. Mr. Faulk brings over 36 years experience in various roles including President, V.P. of Operations, Manager of Projects, Engineering and Operations for local engineering and construction firms.

Additionally, Burrow has engaged Doug Eckols as the Vice President of Quality at the parent company level. Previously, Mr. Eckols has served variously as Executive V.P. - Human Resources, Engineering and Business Development and owner/founder in former companies in which Mike Burrow served as the Chief Executive.

Ron Chapman, P.E. has joined as the Civil/Structural Engineering Manager for the Beaumont Division. Previously, Mr. Chapman served as the structural engineering department head for another Beaumont firm and has over 34 years of experience in industry. He has also worked as part of the management team in former Burrow managed organizations.

Don Johnson has joined Burrow Global as Corporate Director of Health, Safety and Environmental. He will be providing support to engineering, construction, and automation business units. His experience includes but is not limited to employee safety training, writing and implementing safety procedures, firm knowledge of state and federal safety regulations, Workers Comp Risk Management, and implementation of VPP certification. He brings 39 years experience to the company with eighteen years as a Safety Professional.

Jerry Hammers has joined Burrow Global in the Beaumont Office. He is is charge of Cost Controls and Scheduling for Engineering and Automation.

Mike O'Keefe P.E. joined Burrow Global as VP of Automation Group at the Beaumont Office. He is Automation Group's Lead Project and Technical Manager. He also is a Chemical Engineer.

Lastly, Donald Moyers, former Vice President of Demar Industrial Construction, a Burrow company, will assume the role of Vice President of the Plant Division for Burrow Global Construction. Mr. Moyers previously played an instrumental role in allowing Burrow to become a self-performing contractor in construction services. He brings more than 46 years of experience in refining & midstream sectors and will now consolidate the Demar Industrial Construction Division into Burrow Global Construction.

"Our plan to grow into an industry leader is rapidly coming to fruition," said Chairman and Chief Executive Office, Michael Burrow. "These new appointments will build upon the strong foundation of top industry talent and leadership that has propelled Burrow to its current status as one of the fastest growing EPC firms in the country."

Express Energy Services, LLC (EES)

HOUSTON, Aug. 1, 2012 /PRNewswire/ -- Express Energy Services, LLC (EES) today announces that John R. Beall has joined as Chief Financial Officer, effective July 5, 2012. Mr. Beall replaces Jim Davis, who is retiring from EES.

Mr. Beall most recently was CFO for ENGlobal Corporation and has over 26 years in senior financial and treasury management roles with both private and public energy services companies. He graduated from Baylor University with a BBA in Marketing and Southern Methodist University with an MBA in Finance.  He has developed in-depth corporate financial and strategic skills serving as a respected financial leader for growing domestic and international companies.

Darron Anderson, Chief Executive Officer of Express, said, "We are delighted that John is joining Express. His extensive knowledge and experience make him an ideal fit to help guide the company to new levels of growth. With a track record of working for both private and public energy services firms, he complements our Executive Leadership team well and I am looking forward to working with him."

Siemens

James Dorsey is Marketing Manager at Siemens Industry (SI). Mr. Dorsey established the strategic automation business plan for Siemens systems integration services. He expanded and has grown market share within the Automation, Analyzer, and Remote Instrument Enclosure (RIE), Control & Power systems markets. He supports existing industries serviced by Siemens and expanded into new markets and regions.

James Dorsey assumed leadership for business plans development, marketing, strategy business development & sales, technical presentations, and product direction. He has served on Customer Advisory Council (CAC) for systems integration (SI).

BP

Jonathan Ballard has joined BP USA as a SCADA Systems Analyst.

CDI

Mike Patton is a Senior Vice President at CDI Corporation.

Richard Industrial Group (RIG)

Shelley Leedy, chemical engineer, is President of Richard Automation and Instrumentation (RAI).

Denny Robertson, P. E., Chemical Engineer, is a Project Manager currently overseeing RDS projects for a renewable fuels producer in Geismar, La.  He recently completed an assignment as Lead Process Engineer on a renewable fuels project in Norco, La.  He also serves as Process Engineering Manager (Interim) and Technology Specialist for RDS.

Jim Gilliam, mechanical engineer, is a Project Manager currently overseeing Richard Design Services (RDS) projects for a major refiner in the Golden Triangle Area.

Elmo Johnson is a project manager currently overseeing RDS projects for a major refiner in the Golden Triangle Area.

Jeff LeBlanc, Chemical Engineer, is performing RDS process engineering work for refiners in the Golden Triangle Area.

Rodger Peterson, Chemical Engineer, is a Project Manager currently overseeing RDS projects for a major refiner in the Minneapolis-St. Paul area.

Matt Vogel, Chemical Engineer, is a project manager currently overseeing RDS projects for a major refiner in the Golden Triangle Area.
 

Early Summer 2012 Stock News And Events

Rev. 11.1

ENG Announces New Government Contract

Houston, July 5, 2012 (GLOBE NEWSWIRE) -- ENGlobal today announced that it is one of three firms that has been awarded a multiple award contract for the procurement of automated fuel handling equipment (AFHE) support services to the U.S. Military. If all options are exercised by the United States Navy, the cumulative value of these fixed-price contracts for the three firms is an estimated $215 million and, in that case, work could continue until June 2017.

ENGlobal is one of three firms awarded an indefinite-delivery/indefinite-quantity (ID/IQ), cost-plus-fixed-fee contract for technical and maintenance services for automated tank gauging and automated fuel service stations. The scope of the project includes development, design, engineering, fabrication, integration, installation, quality assurance, logistics, maintenance, life-cycle management and technical support for AFHE systems. Work will be performed at Department of Defense fuel facilities worldwide, and is expected to be completed by the second quarter 2013.

Space and Naval Warfare (SPAWAR) Systems Center Atlantic, in Charleston, South Carolina provides contracting activity administration services on behalf of multiple Department of Defense military departments. The U.S. Department of Defense announced this Navy contract award on June 14, 2012:

http://www.defense.gov/contracts/contract.aspx?contractid=4812

"ENGlobal has a proven track record of delivering exceptional service to SPAWAR since 2007," said Edward L. Pagano, ENGlobal's President and Chief Executive Officer. "This cumulative award for the three firms represents an increase of approximately $89 million over the 2007 award level of $126 million and, as validated by our performance, we will make every effort to increase ENGlobal's portion of the base contract funding."

Mr. Pagano continued. "Our Government Services division, based in Tulsa, Oklahoma, specializes in the turn-key installation and maintenance of automation and instrumentation systems for the U.S. defense industry worldwide. This award demonstrates that our technical capability for AFHE engineering support extends globally to keep Department of Defense fuel systems fully mission capable."

Opinion

“If all options are exercised by the United States Navy, the cumulative value of these fixed-price contracts for the three firms is an estimated $215 million and, in that case, work could continue until June 2017.” I understand the release has to be written this way but the key words are, “If all options are exercised…” and, “…work could continue until June 2017.” It is also unknown what percentage of the work ENGlobal will actually get.

“Work… is expected to be completed by the second quarter 2013” Huh? What work or phase of work is to be completed by 2Q 2013 when the potential for the contract is stated earlier to continue through 2017? Typo? Something is wrong in the details here.

Moreover, some other important information would be supportive of the apparent prime job profit feeling you get from this “Everything is OK” news release. So...I am not ready to pull up a log and join in on "Kumbaya" yet. Is this new contract replacing an older one phasing out or is this truly additional work? Are new people being hired for additional work and thus increasing billable hours? Where is the material increase? Without calculating, if this new work simply replaces backlog at the same normal governmental costs and profit parameters there is no increase in profit, only the security of sustaining income at or near the same level against the balance of the company’s other losses. Any such contribution will not come close to make up for the losses in other parts of the company. Is this good news? Yes. Will it improve ENG’s financial health? No, not without material change.


Stock News

On 27 June ENG stock hit a 5-year low. Bloomberg News featured ENGlobal and nine other stocks in a daily article titled, NASDAQ Stocks Posting Largest Volume Increases:

"ENGlobal Corp. : Approximately 569,900 shares changed hands, a 1,052.7 percent increase over its 65-day average volume. The shares fell $.06 or 4.1 percent to $1.41."

I had seen an 80K ($1.50) trade at 1001 that tallied in the volume correctly. A few hours later I noticed the volume tally had been reduced by the 80K trade. Knowing something was up traders watched more closely and saw the larger trade posting at 1524. That block traded at $1.39. It is end of quarter and witching - institutional window dressing probably has much to do with the trades.


ENGlobal Announces New Ship Channel Office and Expansions in Texas & Oklahoma

Company Signs Leases Totaling 27,887 square feet
Houston, TX, June 18, 2012 (GLOBE NEWSWIRE) -- ENGlobal (NASDAQ: ENG), a leading provider of energy-related project delivery solutions, today announced that it has finalized three leases totaling approximately 27,887 square feet for new offices in the Houston Ship Channel region and expansion of its Engineering and Construction operations in West Houston and Tulsa.

The new Ship Channel lease is located in Deer Park, Texas.  The office will support ENGlobal's Engineering and Construction segment and is ENGlobal's first location in the Houston Ship Channel.  The office will provide support to a $15 billion petrochemical market, the largest in the country.  Build-out of the office location is expected to be completed in the third quarter of 2012.

The expansions in West Houston and Tulsa total approximately 18,039 square feet of additional space.  The new Houston location is in the Westchase Business District and represents an expansion of an existing office.  ENGlobal's Tulsa office will expand the current operation within the CityPlex Towers.  Occupancy of the offices is expected to be completed in the second quarter of 2012.

"We are excited about these key infrastructure expansions as they will allow our Engineering & Construction segments to better serve existing and future clients of ENGlobal," said Edward L. Pagano, ENGlobal's President and Chief Executive Officer. "The new Ship Channel office is a direct response to client requests to bring our engineering resources closer to the end user and illustrates our growing commitment to clients in and around this prolific petrochemical region. Combined with the growth in Texas and Oklahoma, we are well positioned for anticipated demand growth for our Engineering & Construction services."

Opinion

It is always better to go where the work is. Increasing visibility is good and I agree with this move. One would think an announcement of specific related profits, new projects or increased backlog would have preceded an announcement of office expansions. However, going after the mentioned $15 billion petrochemical market seems like a good reason. The next step is execution. Now what about sales there and who is doing that? It would be good to hear some expanded dialog on that mentioned growth in TX and OK.


ENGlobal Announces Annual Meeting Results

Houston, TX, June 14 2012 (Globe Newswire) The formal business of the meeting included the election of the following directors to a one-year term:  William A. Coskey, P.E., Edward L. Pagano, David W. Gent, P.E., Randall B. Hale, and David C. Roussel. In addition, ENGlobal's stockholders approved an amendment to the ENGlobal 2009 Equity Incentive Plan to increase the number of shares of common stock reserved for issuance there under from 480,000 shares to 980,000 shares and ratified the appointment of Hein & Associates LLP as the independent auditors of ENGlobal for fiscal year 2012.

Approximately 93.6% of ENGlobal's total common stock outstanding was represented at the meeting, either in person or by proxy. Of those shares, approximately 98.4% were cast in favor of the election of the Company's directors, 80.8% were cast in favor of the approval of an amendment to the ENGlobal 2009 Equity Incentive Plan, and approximately 98.0% were cast in favor of the ratification of the appointment of Hein & Associates LLP. Upon conclusion of the formal business of the meeting, ENGlobal's President and CEO, Mr. Pagano, updated the stockholders on ENGlobal's current business outlook and strategies.

8K Analysis and Comments

The 8K filings reveal the BOD awarded themselves additional restricted stock for another banner year of their services. The CEO received 50,335 shares of restricted stock (a 120% increase over last year) for his contribution over the last 12 months. Each of the BOD received 33,557 shares, or a 38% increase over last year's award. If one was to go back and review all the statements of changes in beneficial ownership over the past 5 years they will see that most of the stock awards have been to the benefit of the BOD.

As to the CEO's oversight of accounting, if he spent more time growing beans rather than helping count them the company might be better off. That oversight seems to be Mr. Pagano’s comfort zone as indicated in recent news and maybe they could just get a new CEO and encourage his retreat back to that zone.

A CEO can best help a CFO by oversight of Operations to assure client projects are done on time, under budget with high quality and safety. That seems to be where ENG is failing the most even though there have been errors in reporting. The company's failure to produce profits puts a lot of pressure on how to report them! Two CFO resignations in one year should be a red flag for any investor.

By the way, Mark Hess left his former company on March 22, 2010 to pursue other opportunities "effective immediately". His boss, the CFO, left 2 months later. Not sure what Mark did from April of 2010 to July of 2011 when he came with ENG. When you take the macro view of all the senior and middle management moves and departures, it is a challenge to describe what is seen, it's like a box of hamsters.

The CEO comment about the support of the current accounting staff may have been to give recognition (deserved of not) to help keep them on board. It would be very difficult if a similar transition took place and other top-level accounting staffers were to walk as happened last year. I would think ENG may have a difficult time recruiting someone with required experience to come in and take over this mess, and if they do they may not be able to afford them.

Where does this all leave us? A poor performance from the CEO for a second year: Receives more stock with a raise in shares. A BOD just watching it all happen: Receives more stock with a raise in shares. It is like a ship hitting an iceberg - backing up and hitting it again. Then you give the deck crew raises.


ENGlobal CFO Resigns

The CFO has resigned effective immediately. So we’re back for the latest round of musical chairs in Mr. Pagano’s management team. Predictable? Yes. As you may recall in the previous report covering the DSO Calculation Discrepancy the very last sentence was, “When is management going to be held accountable?” When you read that I am sure all of you knew it meant upstream from the CFO.

The CFO "resignation" was easy to predict for several reasons. To begin, let’s cover the “Who”? Reason one, as noted in the Credit Facility Analysis (6 June 2012): “Did you notice who signed the [CF] agreement?  It was not the CFO as was past practice.  Is the CFO going somewhere?” With the foreshadowing we knew the CFO position was at risk then. The next question was when? Reason two, how about right before the Annual Meeting (in one day) so Mr. Pagano can tout that the problems of accounting, transparency and ethics have been solved with the departure of the latest scapegoat. I do not think ENGlobal suffered as much from Mr. Beall's inexperience but more from Mr. Pagano's misdirection of accounting. Now the obvious why? Reason three, as noted in the 1Q 2012 10Q Analysis, 18 May 2012, Mr. Pagano puts his survival ahead of ENGlobal’s survival for the reasons given within that post. He will find others to blame and continue to practice poor management with the perception that others are buying it. I am surprised that it isn’t “Bush’s Fault”.

Until a new CFO is found Mr. Pagano states, "I am confident that our existing financial team will continue to support ENGlobal in its renewed growth efforts." When anyone sees that growth effort please let me know. Moreover, let us be reminded what Mr. Pagano's growth target is from the 1Q 2012 news release and 16 May 2012 post: Mr. Pagano says, “I am personally committed to returning ENGlobal to a position of leadership among small, well-respected engineering firms with a focus on innovation, superior client services and profitable growth." I have never heard anyone refer to ENG desiring to be a SMALL company. What happened to the billion-dollar revenue target from previous management? If he wants to "return" to a position among small, well-respected firms, where is ENGlobal presently?

Responsibility Lies at the Top

The board of directors has ultimate responsibility for the company performance and management fiascoes. With that said let’s focus on the CEO and illuminate the second reason in the preceding paragraph. Notice from the release: “…the CFO duties will be assumed by the Company's Controller, Mark A. Hess, CPA, with oversight from Edward L. Pagano, President and Chief Executive Officer.  Prior to joining ENGlobal as Chief Executive Officer, Mr. Pagano served as Chief Financial Officer for a number of public and private engineering and construction companies.” Mr. Pagano served as CFO for a number of companies. This is supposed to give comfort? Did not Mr. Pagano have "oversight" on accounting before? If he is so good as a Financial Officer why was he with a “number of public and private engineering and construction companies” to begin with? When I was hiring executives and saw long pedigreed resumes I always wondered why they job hopped or had to job hop so much.

Next, let’s cover some recent history. Why do you think the former CFO, Bob Raiford, quit? Soon followed by the former Controller, Meredith Barnes and subsequently followed six top accountants? And then lately the AP accountant in Beaumont walked off the job? These people did not leave because they felt secure in their job practicing accounting as it was successfully done before Mr. Pagano arrived. In practice we have seen what Mr. Pagano’s management and accounting “skills” have amounted to - over two years of negative profit. The CEO is where the authority rests - So does the responsibility.


ENGlobal Receives Safety Award

On June 7th ENGlobal announced it received a National Safety Excellence Merit Award from the Associated Builders and Contractors (ABC). "ABC is proud to honor ENGlobal with a National Safety Excellence Award for demonstrating an extraordinary commitment to safety and outstanding safety performance," said Michael D. Bellaman, ABC President and Chief Executive Officer. ENGlobal has truly shown a dedication to becoming one of the leaders for the industry by striving to create the safest work environment possible for its employees."

I do think this is great that ENGlobal’s tradition of safety in the workplace continues. It started with IDS/ENG CEO Mr. Coskey who did establish a fantastic safety team and record. That tradition continued with ENG CEO Mr. Burrow. The record was near perfect even as Mr. Pagano took over as CEO. I understand that he added more safety people to the team. I wondered if adding more people and overhead was wise since there was no improvement to be made on a near perfect record with a dwindling workforce? Not knowing that answer is less important that the record continues and people are not injured.

"We are pleased to accept this award from the Associated Builders and Contractors," said ENGlobal's President and Chief Executive Officer, Edward L. Pagano. "Safety is an ENGlobal Core Value that empowers our employees to intervene when they observe an unsafe situation or behavior. We believe this award recognizes the hard work and safety excellence of our employees as well as our commitment to ENGlobal's ZERO IMPACT philosophy."

I hope that “ZERO IMPACT philosophy” isn’t the same one applied to earnings?



Comments are welcome.

ENGlobal Corporation - DSO Calculation Discrepancy

Rev. 1.2

*Beep* Houston We Have A Problem

This posting will cover a narrow scope issue attempting to verify the Company’s reported DSO calculations. All calculations use information included in the 2011 10K (4Q 2011) and 1Q 2012 10Q. There will also be a discussion of DSO theory and how companies can modify their own formula to achieve best practice. I addressed Days Selling Outstanding in earlier posts.

As you know DSO is an important tool in measuring liquidity and has become a quick metric whereby investors and readers of financial data judge a company’s cash flow.  Normally a DSO trend downward indicates a positive cash flow and vise versa a trend upward indicates a negative cash impact for the period being reported. Why is it an important parameter? The lower the DSO the less you have to borrow from the Credit Facility and pay the associated costs. If you look at most definitions for calculating DSO the formula will be:

“Accounts Receivable / Average daily sales = DSO”

Discussion and Best Practice Using Your DSO

Only including “Billed Revenue” in the Accounts Receivable (“AR”) numerator would seemingly only measure the effectiveness of a company’s collections process. If you were to also include “Unbilled Revenue” in the numerator and the DSO came out significantly higher then you may need to look at your “order-to-cash” process which would include generating invoices quicker after billable work perform is performed.  A company’s “Unbilled Revenue” includes cost plus billings and/or lump sum or fixed price billings. Unbilled lump sum/fixed price revenue is shown on the Balance Sheet as “cost-in-excess of billings” (“CIEB”). Timing can be an issue for “Unbilled Revenue” for Companies where cost plus charges billing cycles vary month-to-month due to a need to coordinate with something like bi-weekly pay periods. Getting those invoices processed prior to month end and thus included in AR may not be achievable due to timing.  Being late in billings for one day could mean current work would not get included in AR.  This further supports including these unbilled revenue in our numerator. Same logic could support including CIEB as this is earned revenue on fixed-price or lump-sum projects yet to be billed due to timing related to performance or contract terms, each of which should be in control of the company by meeting specific project deliverables or by negotiating more advantageous billing milestones.

What about “allowance for doubtful account” reserves, should they be added back? One could argue that bad debts are also controllable and should be included in the numerator and taking AR as a net figure. Lowering AR in this manner may distort DSO levels. Bad debts, or allowance levels, should also be in control of management be it though good credit practices, timely collections and/or performance issues which may lead to client refusals to pay. Adding back the allowance may help keep management accountable for these reserves.

And then there are “billings-in-excess of costs” which are shown as a liability on the Balance Sheet. That figure includes billings to customers which are not included in revenue because by contract a portion of the revenue included on the billing side has yet to be earned but that same contract allows for pre-billings to help match labor, material and equipment cash flow impacts. For cash flow, BIEC is a positive feature and can be controlled by management though contract negotiations and timely billing cycles.  To encourage such management practice and behavior why not give credit against the other items in the numerator for these excess charges? 

Confusing you say! Yes, and that’s the point. There is not one standard DOS formula that fits all and may not be a measurement of what each company is attempting to better manage. What should be standard though is that the same DOS formula is used period over period and that the DSO formula needs to be broadly understood and meaningful. Each company should design their own DSO method, which hopefully will fit their industry and give investors a quick benchmark to gauge the company’s success in managing liquidity and cash flow. 

Test your skills and try to calculate ENGlobal’s DSO levels comparing the financial results as of December 31, 2011 to their results as of March 31, 2012.  Just a hint, you will have to go back to the Form 10K for 2011 to get total revenue for the 4th quarter of last year.

	DSO	1Q 2012	4Q 2011
1	Revenues	75,440	76,097
2	avg days sales	838	846
3	DSO Calculated	78	69
	DSO Reported	61	70
	Balance Sheet	1Q 2012	4Q 2011
4	Trade AR, net	53,139	54,020
4	Add-back Allowance	1,713	1,792
4	Cost in excess	12,573	6,790
4	Note receivable	-	-
4	Billings in excess	(2,236)	(4,421)
5	Totals	65,189	58,181
	Trade AR, net	53,139	54,020
	Allowance for doubtful acct	1,713	1,792
	Cost in excess	12,573	6,790
	Note receivable	514	514
	Cost in excess	2,236	4,421

Notes to line items: 1. From forms 1Q 2012 and 10K 201; 2. Revenues divided by 90 days; 3. Item 5 divided by Item 2 avg days sales; 4. From forms 1Q 2012.

Conclusions

Let’s put these numbers into perspective. Read this statement taken from 2012 Form 10Q for period ended March 31, 2012, page 17:

“The Company manages its billing and client collection processes to reduce days sales outstanding (DSO) to the extent practicable. We believe that our allowance for bad debt is adequate to cover any potential non-payment by our customers. The Company's DSO decreased to 61 days at March 31, 2012, from 63 days at March 31, 2011, and 70 days at December 31, 2011. Both decreases in the number of days of sales outstanding were primarily attributable to efforts to collect accounts receivable from clients whose payment practices are slower or whose payment terms are longer compared to the Company’s average payment terms. ENGlobal continues to manage its billing and client collection processes toward reducing days of sales outstanding to the extent practicable.”

I think by now you can see the discrepancies. First, and not the big issue is the DSO for 4Q 2011 actually looks 1 day better than reported. This is not such a big deal but a positive difference nevertheless.

I believe you understand that DSO management makes incremental changes over time with good accounting management. What really catches the eye is why DSO was proudly reported coming down from 70 days to 61 days! Looking at the numbers included in recent SEC filings and making same application formula calculations shows this 61 days DSO is a grossly false number, or the Company has some secret DSO formula applied inconsistently over the two periods. Moreover, DSO has seemingly actually deteriorated, increasing by 8 days to a 78-day level as opposed to going down by 9 days!

I’d like to know what happened, wouldn’t you? Why was 61 days DSO reported when it is actually closer to 78 days? If you just used net AR straight from the March 31, 2012 Balance Sheet as your numerator you get 63 days DSO ($53,139 mil / $838k). Where are the auditing backup procedures to catch “mistakes” like this? There are many things all companies need, publicly traded or not; a fundamental element is the need to be trusted. Two following imperative traits a publicly traded company needs are clean consistent numbers and transparency. We have been seeing more and more numbers that do not pass the smell test as illustrated in recent posts. When is management going to be held accountable? 

Good luck to everyone.

Comments are welcome.

ENGlobal Corporation - New Credit Facility 8K Analysis

After reading through the new Credit Facility (CF) twice I think you will agree when you read it that is both complicated and long. Actually, at over 106 pages long it is at least 600% longer with more onerous terms and conditions than seen in the past. The WF agreement from 12/29/2009 was only 15 pages long! Why so long? PNC is trying to protect them from getting stuck with a big problem. ENGlobal on the other hand, is under the gun, needs help quickly to survive and is willing to agree to such costs, reporting requirements and lender controls.

It is so complicated it is hard to find a place to start. Since documents like this are generally boring and full of tedious detail I will highlight some points and issues. I may amend this post over time as discoveries are made. For now, let's start with reporting requirements, see Exhibit 9.2:

Notice the required monthly reporting of AR, AP, unbilled, CIEB, backlog and Caspian cash flow. Additionally, notice that ENG is required to make weekly reporting providing copies of client invoices, delivery information and inventory reports. Is this mistrust or verification, take your pick? Everything seems delayed or “last moment” at ENG from Quarterly Reports, News Releases  & the CF. If they cannot make their financial reporting deadlines (decentralized accounting) on a monthly basis I would think they would find it difficult to gather information together on a weekly basis. It is a staffing and organization issue.

The agreement also gives the bank the right to verify all receivables. Imagine how ENG clients will react to calls from the bank to verify an account balance or check on payments. Clients rarely respond to year-end auditor confirmations how do you think they will view ENG’s financial health now, and in turn, wanting to do longer business with them?

Asset based credit facilities are always on a formula basis and you are limited by the amount of eligible receivables be it AR, unbilled, CEIB or government billings.  There are also disqualifiers for over 90-Day invoices, accounts with 25% over 90 days are eliminated in total, etc. Notice that PNC will only allow domestic and Canadian accounts, while international accounts require Letters Of Credit or guarantees from the clients.  Based on those conditions ENG would not have been able to take on the Caspian project as they did in the past. I wonder if the CEO figures this new requirement into his international strategy!

Since mentioning the Caspian project, there is a default condition if they lose or have a material change in that project AND that it must be cash positive and remain cash positive by the end of 2012 (see 10.20). I hope they asked the Project Manager about the possibility of that happening. If you missed the conference call, I mentioned in the 1Q 2012 Analysis the CEO made references to reducing the negative cash flow by one half this fall. He never gave any figures so “one half” is meaningless of an acknowledged bad condition. I expect this will be a problem soon because in that same CC the CEO pushed the profitable period into 2013. Isn’t it amazing how quickly information can change?

Now let's look at the pre-payment penalties.  ENG would have to pay 3% of the commitment if prepaid in the first year (that's $1,050,000), 2% in the second year ($750,000) and 1% in the third year ($350,000). They also paid $175k origination fee to PNC, plus all their legal fees!  Did you notice who signed the agreement?  It was not the CFO as was past practice.  Is the CFO going somewhere?

If ENG was struggling to meet their cash commitments with Wells Fargo I suspect they will experience similar pressures with PNC. I did not see where they get much relief (extra money) or at least enough to make a difference with this new CF. They must also maintain $3.5 mil in excess availability, which comes off their overall availability level, which again limits their borrowing.

With a new CF in place I think vendors are standing in line to be paid. ENGlobal will again have to comply with a bank "lockbox"! That change will have to be announced to all the clients, as they will have to change the "remit to" addresses in their AP systems.  That will be another red flag to ENG's financial issues.  Clients will perceive this to be similar to a factoring of ENG's invoices.

The fixed charge ratio of 1.10 to 1.00 is lower than the 1.75 to 1.00 within the former Wells Fargo facility but in 3Q 2011 ENG only produced a ratio of .90 to 1.00. This, by the way, was one of the repeated broken covenants that contributed to the end the old CF and Wells Fargo relationship. With the new CF and PNC as a lender making money is still a requirement!

Lets look at PNC’s role. Are they the sole lending bank now and the future? The agreement is constructed as though they were going to syndicate the loan, as PNC is referred to as an agent in a few places referencing percentage of commitments and repayments. While in one of the schedules it shows PNC as furnishing 100% of the funding. Opinion: It looks as though PNC has built in some options if the weekly required reported numbers start deteriorating. If this happens, have they got a sweet opportunity for you?

Conclusion

I anticipated the CF was going to be heavy and laden with numerous levels of protection for PNC. What would you expect for a company with 3+ years of losses. I think that since ENG declined into such a tenuous condition the CF was written in a way that PNC actually manages the company where management has been deficient. Think about this for a moment with all the controls and required reporting. Mergers, acquisitions and stock issuance all have to be approved by PNC. Although PNC is managing the company on such basis through these reports and controls to protect itself there may be some forced benefit upon ENGlobal’s management that helps investors. You see situations very similar to this in Chapter 13 companies.

I believe ENG will be forced to make internal changes and cut overhead. This new CF is far more structured and limiting, and quite the opposite than the greater flexibility advertised by the CEO. The decentralized accounting system does not work for reasons designed and has cost ENG time, control and money. Watch for changes. I hope they will happen soon and in time. Good luck to everyone.

Comments are welcome.