Rev 1.3 (see Spring 2012 Updates)
It has been a while since my last posting. You may notice I have changed the name of this blog to basic Engineering, that I may comment toward other engineering companies.
It has been a while since my last posting. You may notice I have changed the name of this blog to basic Engineering, that I may comment toward other engineering companies.
I have been watching ENGlobal to see what was going to develop with the new CEO, Edd Pagano. It has been about two years now and I am sad to say Mr. Pagano has been a disappointment by most any measure. First, lets cover some old business. ENGlobal made a big mistake when they pushed out Mike Burrow years ago. Yes, the announcement said he would retire, but did he? No. He waited a year or so, presumably to clear a non compete agreement and started Burrow Global LLC. My point is made that he obviously didn’t retire. Not only did he start an engineering firm in the recession but grew it to over 730 personnel and made money during a period in which ENGlobal produced continued losses. ENGlobal cut a person who could best guide ENG during this protracted recession, they put him in a position to be a primary competitor and the potential for ENG to lose contracts. The proof is in the results for both companies.
What has Mr. Pagano done? I watched and read all the announcements. I think I lost count of the upper management shuffle, especially the Business Development position. For a while the CEO was shuffling the same deck of cards moving management, adding no new people, and came up with no real results. Then he added more management, again with no results other than increasing overhead. In his two years he managed to black ink one quarter with a fraction of a penny that was lucky enough to round up to a 1-cent profit. All the rest of the quarters were like the previous quarters prior to his hiring – losses. Most of these quarterly losses were exaggerated by adding additional losses to the unimproved continued operations due to “Special or One-Time Charges”. This begs the investor with a memory to ask. “How many Special Charges can you have before they are NOT Special anymore?”
The Exodus
I have watched so many quality people leave ENGlobal that I have doubts of its viability in a recession. I am not talking tens; I am talking many dozens of primary experienced middle and upper management people that have left. They generally seem to be going to four competing companies that I am told have plenty of other resumes in their inboxes.
ENGlobal lost the head of Engineering. I’m not even going to address the earlier hire and resend fiasco that made the CEO look plain stupid. They lost the head of the Construction Division (and restructured so it wasn’t noticeable). They lost head of Field Solutions (Land) Division. Watch for a drop in this segment. And, they lost the head of the Automation Division – more on that later.
They also lost their excellent CFO, Bob Raiford. He did not retire - he flat resigned. Subsequent to his departure ENGlobal started Non-GAAP reporting of financial results. I also learned ENGlobal’s competent long-time Controller, Meredith Barnes, quit and took six of the top accountants with her to a new company. A total of eight top people left accounting, Non-GAAP reporting started and there was a sudden decrease in SG&A (?). Management has stated this method of reporting better reflects their financial position. I’m not buying any of it. When accountants roll it is a bad sign. When numbers start to change with no positive results I don’t believe that either.
The South Louisiana Ethanol Project
This failed project manifested in 2006. Mike Burrow was the CEO but the project was let out under a cost center that was not under Mr. Burrow’s control or supervision. The Chairman and the CEO had divided the company into cost centers under separate supervisions. Mr. Burrow took the blame anyway but still lead the company profitably under his “Back To Basics Plan”. This plan worked brilliantly, even after Mr. Burrow’s departure. But any plan has limitations especially without the designer present to steer and tweak it. And so as third quarter 2008 neared and while the markets were crashing ENGlobal announced a surprise miss in a special release. The stock tanked. I say surprise because the second quarter 2008 was ENG’s top record of 24 cents profit. Then CEO Mr. Coskey stated in the conference call that the third quarter would meet or exceed the second quarter. I have this recording. You can hear for yourself in archived recordings and in transcripts. That statement, folks, was guidance no matter what the company says that they do not give guidance. It may have been that once, but they gave guidance and got caught not minding the ship.
The Ethanol Project went through the courts. ENGlobal stated they may receive millions in the end - I remember a figure of 9 million. This was not so. The final outcome was released not long ago and I will provide a link at the end of this section. The final document was fairly complex and convoluted. I was requested to write an abstract interpretation of the final document for another company. This is what I found and represents my opinion: One, ENG started the work in Louisiana without being licensed there – this caused major problems. Two, apparently from the way the document was worded ENG’s case angered the court as proceeded. ENG management should have been supervising their lawyers. That management action should never potentially compromise any case. Three, the final recovery was only $242,746.44. This may not even cover the "in-house" multi-year attorney's costs. Since the judge left it open for other claimants to proceed against ENG on this recovery, they may get nothing or even lose money. Watch the year-end report. ENGlobal lost over 6 million on this project.
Automation Division
Olan Weeks, originally ran this division and it was day-to-day managed by James Dorsey. Both of these talented managers have left ENGlobal. As I reflect on the past glory of this division I can see both these men have the key characteristics of being visionaries and ritual daily diligence. Automation was not only profitable but had the potential to make huge money when run properly. Conversely, it could be a huge loss if run poorly and not managed consistently. Later Shelly Leedy came from Honeywell to run this division and did so very well under Mike Burrow’s supervision. After that and under two other CEO’s she was moved around and given other duties while expected to still run the division from afar. We just saw the immediate resignation of Shelly Leedy. Someone on the ENGlobal message Board posted a letter from Edd Pagano announcing her immediate resignation. I assume this was an intra-company letter that filtered out via email from an employee that does not care of its release or posting. Ms. Leedy's "resignation" coincides as the fourth quarter and year-end results were being tabulated with, by my guess, more Non-GAAP and GAAP methods. I can tell you from experience her immediate departure was probably due to a surprise loss from a contract or discovered loss from discontinued operations in the division revealed by the 4Q/Year-End calculations. As I mentioned before, this division has the potential for huge losses as well as gains. Watch for a loss, probably a big one, from this division. As a post script, the conference called revealed a 4.3 million dollar loss from the Electrical Division.
4Q/Year-End and the Board of Directors
For the third time this earnings date has been moved or postponed. Considering what I have noted earlier and ENGlobal's earnings history, this is not good news. Moreover, considering ENG's statement citing their credit facility I think the news is worse. The credit facility is a big indicator of ENGlobal's future and the bank's confidence in management. For some time I have been mystified why the Board Of Directors have let Edd Pagano fly this company into the ground. Clearly he has used this opportunity as OJT (On the Job Training). It has been painful to watch this decline of ENGlobal and erosion of experience personnel. I believe the Board Of Directors have abandoned their fiduciary responsibility to shareholders by continuing with this CEO.
The only explanation I can think of why this condition would be allowed to continue would be due to a plan, unbeknownst to shareholders, to sell the company. There have been rumors and discussions for years about this but it is the only situation to me that makes feasible sense given the obvious deterioration. Otherwise, we have a very slow Board Of Directors and I would expect soon to see the departure of Mr. Pagano. That would have a positive effect on the company and the stock. It is time for someone else that is pragmatic and sensible to run this company. For sure there are negotiations with the bank or new banks concerning the credit facility as they stated in the postponement announcement. They may be looking for an equity partner as well, pure speculation. As for earnings I unfortunately expect ENGlobal to announce one of it’s biggest yearly losses ever. The debilitation is a shame and I have long admired this company from the first day I invested in IDS. However, I have always told you the truth about what I saw potentially. It just isn’t very good now. Can it be saved? This is debatable for sure, I have a vision how to do it but if the Board Of Directors continues to operate this way the future looks dim or bankrupt. Good luck to everyone.
Comments are invited via the link below. There is an email link for sharing this open distribution information or you may email the link with your own account or domain.
No comments:
Post a Comment