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.