ENGlobal Corporation: What Is InThe Future?

On 30 August we heard that ENGlobal completed its sale of Gulf Coast Engineering and In-Plant Services for about $20 million. The figure announced 16 July was $21.5 million and a $3.5 million promissory note. Offhand it looks like the deal netted ~$5 million less than first announced – the wrong money direction, but closed nevertheless.

ENGlobal’s words earlier were that they were selling “approximately half our business”. So with half the income and revenue the stock stays approximately the same? Does anyone else think the market forces are unusual?

One of the most revealing statements in the July release was, “…through Closing of this transaction, we will have reduced our debt and vendor obligations by approximately $50.0 million." Were any of you aware that debt had reached this magnitude? I don’t believe we ever got that transparency beforehand and then in July, revealing this accumulated debt fact highlighted later, as a ‘plus’ accomplishment?! Think what you want, however, the pattern of disclosure suggests you find out issues later than sooner.

A point I will give Bill Coskey, he is a survivor. This statement from the July release I find resonanting, "The ongoing ENGlobal operations will become strategically focused, well positioned for growth, and essentially free of bank debt.” The key word there was “Essentially”. For those of you that think that ENG will ever be debt free – Nope. Debt was less reduced by the money differences mentioned in the first paragraph plus an additional $10 million Credit Facility was announced in the 30 August release. Debt was reported to be $12.5 million at August 7, 2013.

The new Credit Facility is only a one-year term used for…”working capital purposes, as needed, and will allow the Company additional time to analyze its long-term capital needs.” Please notice the underlined portion which means ‘we’re not done figuring it out yet’. I do not mean to relate this idea as entirely negative; the potential for a positive situation emerging is equally possible.

Measuring the Company

2Q 2013 was a poor showing. Compared to 2Q 2012:
•    $0.06 loss per share, an improvement from a loss per share of $0.37
•    Revenue of $50.6 million, a decrease of 14.5%
•    Gross profit margin as a percentage of revenue of 10.9%, an increase from 8.8%
•    Overall SG&A decreased from $7.9 million to $6.4 million

An improved loss! A loss is a loss, your loss amount may decrease but extended losses lead to bankruptcy. Revenue decreased and now half the company is sold, so watch the revenue number closely in the future. The margins improving are a good sign. SG&A should really decrease more; however, this is the period ending 30 June. Observe the next nine months financials to establish a trend. If you see no significant positive trend then I would be concerned.

From the 2Q release: Mr. Coskey continued. "In effect, this transaction [asset sale] serves as a directional change for ENGlobal. We will have a fresh start and our management team will now have the freedom to pursue strategic opportunities that we believe will ultimately grow the Company. Through the balance of this year, we will firm up the new goals for our Company's future – and look forward to communicating our short- and long-term plans during that time." Well folks how many times have we heard something like this from recent CEO’s? Question: What took away ENGlobal’s management team’s “freedom to pursue strategic opportunities that we believe will ultimately grow the Company” in the first place?

To be honest I do not think I could come up with a better statement under present conditions or would expect much different from the company’s position of being ‘painted in the corner’. I just wouldn’t let myself get into that predicament in the first place. Isn’t being proactive is what management is all about? One thing is for sure when you consider the end of the quote – change is not over and you will have to wait to hear the future plans. Good luck to everyone.