ENGlobal Corporation: 1Q 2012 and Conference Call Analysis

Rev. 2.1

Earnings were late on release time, coming out at 0950. Trading appeared to be halted on ENG stock and opened a few minutes after the news release was posted. Since I know Ms. Hairston is professional about the job she performs so very well my senses are that lately she is dealing with confusion, delays and inaccurate information within the chain sequence she depends on to get the news out on time. Since these issues did not occur in the past and people usually get better at their jobs with time the logical reason is usually a changing environment around them and bosses. Therefore, since Ms. Hairston is the best at what she does I am positive these difficulties are further indicative of the comparatively chaotic environment presently at ENGlobal.

Earnings or rather “non-earnings” came in at -0.01 cent loss rounded from a fraction. This was a delta of 2 cents lower than analyst’s expectations and even on the lower end of what I predicted. Revenue came in below expectations also at $75.4 million. I suspect revenues were materially impacted by the fact the company could not pay vendors to ship materials and equipment to project and manufacturing sites.  This probably impacted Automation’s manufacturing division the most.  The “problem” with Automation may in fact have been created by the CEO/CFO failure to secure an extension on the WF credit facility.

Remember what I alerted readers to in the last post concerning a surprise and significant jump in profit margins? I was preparing readers to be aware of the bottom line being boosted by using operating contingency money and/or leftover reserve money (from last year) to embellish it. That appears to have happened with a jump in Gross Profit from operations of $7.5 million, an increase of 41.7%. Moreover, Consolidated Gross Profit as a percentage of revenue was 9.9%, an increase from 7.7%. For example: Did you notice Field Solutions Gross Profit for Q1 was 10.8%!  That’s more than the core business E&C produced in Q1 at 9.6% AND it represents an increase of 3% over the year-to-date performance of 7.8% for Field Solution during all of 2011. Do you believe these increases are normal?

I also mentioned previously that explanations of these monies are not regulated or required and in the CC we heard nothing mentioned. In fact, despite gross profit and margins being listed as bullet points on the news release no revealing discussion ensued? A guess is that discussion would lead to questions. My personal opinion is that you did not get a margin jump from 7.7% to 9.9% suddenly from good management practices because you traditionally see continual and incremental changes over time. You will have to ask yourself if this issue meets the smell test?

What happens if you use operating contingencies to boost the bottom line and margins? You get a short-term gain – at the cost of not being able to handle long-term problems in your projects. If you have problems in the future then you are SOL. What happens if you use cash reserve to the same end? You simply lose the reserve and are unable use it when and where you need it in the future. This money is profit withheld from the bottom line from earlier periods and is true profit earned. Potentially it can embellish the results of a different quarter and is not reflective of true operations in that later quarter used. If they did use cash reserve and/or operating contingencies to embellish the bottom line; what would have been the loss if it were not brought up to –0.01 cent? I will leave these thoughts with you.

Credit Facility

Remember folks; the CF is not a done deal. Look very closely at the wording on the previous news release – “ENGlobal Announces Update on Financing Initiative” – “Update” & “Initiative” are far from a done deal. This is why Mr. Pagano states in the news release, “We are presently focused on completing a solid, new banking relationship as one of the final steps of our process to reposition ENGlobal." I added the underlining. Notice also the top three listed issues in the recent Safe Harbor Statement:

“(1) Our ability to comply with the terms of our existing Wells Fargo credit facility; (2) our ability to enter into our proposed $35 million senior secured credit facility by May 31, 2012; (3) if we are unable to enter into our proposed $35 million senior secured credit facility by May 31, 2012, our ability to extend the maturity date of our existing Wells Fargo credit facility and, depending on the status of the proposed credit facility, to secure additional capital or financing to fund our working capital requirements and to repay outstanding debt;…”

The Wells Fargo credit facility increased from $16.4 million at 12/31/2011 to $17.5 million at 3/31/2012 to $20.5 million as of 5/11/2012.  Do you see the trend? Do you think a new facility will change that trend? Even with an improved DSO their cash position seems to continue to deteriorate.

The real questions you have to ask yourself are:  If you get a new CF, what is next? What has really changed or will change in the management practices that got us to this point in the last two years? This is really classic BOD evaluation material (in two degrees).

Conference Call

I listened to the conference call and heard a few interesting points made. I think Mr. Pagano did generally well on the call considering the company’s position, especially in a market I acknowledge is not good but not insurmountable either. To the later point, Burrows Global, LLC is a great example of what the potential is on the success side in the same marketplace. Mr. Pagano’s outlook on the business future was mediocre at best – sadly, I think he was very realistic. He did list a lot of “hopefuls” and of course with more beautiful language.

From the CC we heard that ENGlobal employee count increased from 1,900 to 2,000 quarter over quarter? Somehow I doubt this with all the more people I hear leaving. Discussion about backlog was nebulous. There was no mention of Automation losing the big ConocoPhillips job but Mr. Pagano did say Automation segment needed more backlog.

He also said the Caspian Sea Project profits would be delayed to future quarters (nothing specific); and that the negative cash flow from that project was soon to be cut in half… cut in half from what figure or to what new figure?

The CFO reported that the DSO Q over Q reduced from 63 days to 61 days. He also stated that they [accounting] plan to get DSO down to the mid 50s by middle summer. Hey, that would be back down to where Mr. Raiford and Ms. Barnes had it before! Great, it’s been a year but they are finally getting it. Stay tuned.

Extra Cheese

Saving the best for last Mr. Pagano states in the news release:

"While the first quarter of 2012 improved on 2011, we remain committed to returning to profitability in the coming quarters," Well hasn’t this statement been recycled a few times – I have lost count.

And this, "Our first quarter results were in line with our 2012 budget, however, the months of March and April were impacted by our internal focus on credit issues, creating a challenging operating environment." Therein lies the problem – “Our first quarter results were in line with our 2012 budget…” They budgeted for a loss!

In my final quote 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?

If he is trying to return ENGlobal to a 'well-respected position among small firms' where does this place ENGlobal now? This is indicative of a CEO that has lost direction.

Milestones and Conclusions

These are my impressions of the 1Q 2012 report and CC. I may revise or add details to this report as I come across new or illuminated information. Thanks to those offering comments and asking questions that help form these reports. I wish to also to note that this website went over 35,900 hits recently (there is a counter at the page bottom) and I appreciate all the readers whether you agree or not. Readership comes from the following countries: United States, Canada, Australia, New Zealand, Russia, Saudi Arabia, United Arab Emirates, Oman, Iraq, Pakistan, Sweden, Finland, Latvia, Poland, Germany, Argentina, Uruguay, Brazil, Colombia, Ecuador, Chile, Panama, Costa Rica,Trinidad and Tobago, Dominican Republic, Japan, South Korea, Netherlands, Hong Kong, Singapore, Thailand, Vietnam, Indonesia. China, England, Ireland, Spain, France, Belgium, Italy, Switzerland, Ukraine, Romania, Bulgaria, Hungary, Slovenia, Serbia, Georgia, Moldova, Malaysia, Philippines, Israel, Tanzania, India, Sri Lanka, Algeria, Gabon and South Africa. Thank you.

I posed some real and serious questions within and in earlier reports. You will have to make your own minds up as to what is happening and what needs to be changed. You will have to judge whether you accept the numbers - GAAP, Non-GAAP or potentially boosted. You will need to do this while balancing risk and profit as an investor and/or evaluating your future as employees. Let your management and BOD hear from you just like the employees in Beaumont did at Mr. Pagano’s “town hall” meeting last week. Yes, ladies and gentlemen, I heard about that – big thumbs up!

Good luck to everyone.

Comments are welcomed.