Fall and Winter News and Events 2012

Rev. 4.6

ENGlobal Reaches Forbearance Agreement With Lender

HOUSTON, Oct. 1, 2012 (GLOBE NEWSWIRE) -- ENGlobal Corporation (Nasdaq:ENG), a leading provider of energy-related project delivery solutions, announced today that it has reached a forbearance agreement with its lender under the Company's senior secured revolving credit facility with respect to existing events of default and anticipated events of default. The forbearance agreement allows the Company time to hire a consultant and develop a turnaround plan by October 15, 2012. ENGlobal has hired a consultant and intends to work with them to develop a plan to restore the Company's compliance with the credit facility. The forbearance agreement extends through October 31, 2012.

Opinion 1/10

Again, you can really see who is in power, the lenders - PNC. Do they think ENG can restructure on their own? Nope.

Here is a Houston Business Journal article that is short and interesting. Apparently, they are unaware of the sale of Field Solutions:

http://www.bizjournals.com/houston/blog/drilling-down/2012/10/eng-gets-two-more-weeks-for-turnaround.html?ana=yfcpc

Take a look at the SEC filing and you will see quite a bit more information including the covenants broken. Moreover, there is one sentence that is quite different from the news release with an added keyword I will underline: "The Consultant is to be retained to provide a turnaround or exit plan, in form and substance satisfactory to Agent, by October 15, 2012 (or such later date as may be permitted by Agent in its sole discretion) and services as are reasonably necessary to facilitate Borrowers' ability to operate in compliance with the terms of the Credit Agreement."

You can see the filing here:

http://sec.gov/Archives/edgar/data/933738/000117184312003507/document.htm



ENGlobal Enters Agreement to Sell Its Field Solutions Segment

HOUSTON, Sept. 10, 2012 (GLOBE NEWSWIRE) -- ENGlobal Corporation, a leading provider of energy-related project delivery solutions, announced today that a subsidiary has entered into a definitive agreement to sell substantially all of the assets of its Field Solutions segment to Steele & Company, LP based in Tyler, Texas. ENGlobal's Field Solutions segment includes its Right of Way and Inspection divisions, primarily serving pipeline and electric power operating companies. The purchase price will be approximately $15 million, consisting of approximately $10 million in cash at closing to ENGlobal and a $5 million promissory note payable to ENGlobal over four years. In addition, the definitive agreement provides for a purchase price adjustment based on the net working capital of the business as of closing.

Once the transaction is finalized, Mr. David Sinclair, Executive Vice President of the Field Solutions segment, will become President of the newly formed entity, Steele Land & Inspection. LLC. Mr. Sinclair has over 30 years of Right of Way and land management experience in both domestic and international assignments for the pipeline industry.

"The sale of the Field Solutions segment is important to ENGlobal and serves as a win-win for all parties," said William A. Coskey, P.E., ENGlobal's Chairman and Chief Executive Officer. "Brandon Steele and his team possess a rich heritage and successful operating history in our industry. Both our valued Field Solutions clients as well as personnel in this group are going to be served by a strong, vibrant and honorable organization. Finally, for ENGlobal and our shareholders, this transaction is expected to be a positive step - both in terms of financial liquidity and for our strategic engineering and automation focus going forward."

"The acquisition of ENGlobal's Land and Inspection divisions is a solid strategic fit and allows us to undertake a variety of energy infrastructure projects across the United States," said Brandon Steele, Steele & Company's Chairman of the Board. "In addition, the continuity of the management team will enable us to continue operations with very little disruption. We are confident that the combined portfolio under the Steele name will be well positioned to capitalize on meaningful opportunities in the growing energy marketplace."

The transaction is subject to certain closing conditions, including approval of ENGlobal's lenders. Proceeds provided by the transaction would be used to repay borrowings under ENGlobal's credit facility.

Opinion 9/13

First, I'd like to say that Steele and Company, LP is a fine company. Field Services is lucky to have them as a new parent and Brandon Steele as a great CEO. David Sinclair's leadership and the group will do well there.

I have been watching the stock making new lows after ENGlobal’s Field Services segment has been sold. It does not look like the market has viewed the sale as beneficial and possibly a negative indicator. Let’s examine the sale and look at some facts. Second, let's review the final statement in the news portion of the 8K:

“The transaction is subject to certain closing conditions, including approval of ENGlobal's lenders. Proceeds provided by the transaction would be used to repay borrowings under ENGlobal's credit facility.”

Well you can really see who is in power, the lenders - PNC. Additionally, you can see where the cash is going, into the Credit Facility. This simply allows ENG to borrow more, at a percentage, to operate. We will revisit this later.

It appears this just a way to monetize AR off the Balance Sheet. The sale price is approximate 2.5 times average monthly revenue for FS which could also equal AR and Unbilled at 70-75 days sales outstanding. PNC may be forcing ENG to handle the liquidation too. As far as the FS employees being "served by strong, vibrant, and honorable organization", this will at least be a switch for those FS employees!

ENG loses 22% of their revenue and as a percent of revenue the most profitable segment in their portfolio. The sale is probably the only option within the company that could bring anything in a sale and with the $5 million note ENG discounted its AR by 30%. If the CEO got 60% of all AR he could pay off his debt but not sure he could fund operations going forward. All this appears to be is quick short-term option to pay down debt.

The cash value, if it were used for such represents about 18 days of payroll. The cash will help in one way only, it will be used to pay off debt, increasing the base formula of the CF to borrow more money while an additional percentage of borrowing debt is added. Revisiting this topic again from above, will it help? Sure short-term. But in the long-term it does not help if you don’t make money. You can't pay any debt back if you continue to lose money. Moreover, hemorrhaging valuable employees on a continual basis will only hasten the inevitable.

Comments are welcome.

• 9/10 New 5-year intraday low on ENG stock, $0.64.
• 9/11 New 5-year intraday low on ENG stock, $0.61. New 5-year closing low on ENG stock, $0.64, volume 68K shares.
• 9/13 New 5-year closing low on ENG stock, $0.62, volume 177K shares.
• 9/18 New 5-year intraday low on ENG stock, $0.60.
• 9/19 New 5-year closing low on ENG stock, $0.59.
• 9/20 New 5-year intraday low on ENG stock, and new 5-year closing low on ENG stock, $0.51, volume 174K shares.
• 9/21 New 5-year intraday low on ENG stock, $0.50.
• 10/3 ENG files Delisting Notice 8K from the NASDAQ with the SEC. 180 days timeout. :(
• 10/9 New 5-year intraday low on ENG stock, and new 5-year closing low on ENG stock, $0.45, volume 81K shares.
• 10/10 New 5-year intraday low on ENG stock, $0.32. New 5-year closing low on ENG stock, $0.33, volume 369K shares. It looks as though somebody is expecting a bad event.
• The heads of Engineering, HR and Business Development have left ENGlobal.
• 3Q Earnings are delayed - NT 10Q filed 11/13 (see post).

Late Summer 2012 Stock News And Events

Rev 6.6

I Love The Smell Of Burned Pizza In The Morning - It Smells Like....Inevitability.

• Edd Pagano has resigned and Mr. Coskey picked up the loose reins. Well folks, that took some time to happen. See new post - ENGlobal CEO Resigns.
• The stock markets so far seem unimpressed. The price is virtually unaffected near the multi-year lows at ~ $1.45. The volume is up huge with big blocks trading.  Looks like no increase in confidence so far.
• 8/2 New 5-year low on ENG stock, $1.34 on 71K shares.
• 8/7 New 5-year intraday low on ENG stock, $1.26.Closed at $1.28 on 157K shares.
• 8/9  New 5-year intraday low on ENG stock, $1.16. Closed at $1.18 on 55K shares.
• 8/10  New 5-year intraday low on ENG stock, $1.0302. Closed at $1.12 on 114K shares. Market Cap is below liquidation value.
• 8/13 New 5-year intraday low and close on ENG stock, $1.01 on 192K shares.
• 8/13 1630 No announcements currently. I would think that if there were some hopeful news it would be before 2Q earnings. It maybe possible 2Q will be delayed but now we wait and see if it will be tomorrow as announced and what other possible news may accompany it.
• 8/13 NT 10Q Filed by ENGlobal - Earnings Delay.  PART III--NARRATIVE
  
  State below in reasonable detail why forms 10-K, 20-F, 11-K, 10-Q, 10-D, N-SAR, or the transition report or portion thereof, could not be filed within the prescribed time period.
  
  The Registrant’s management deemed additional time is necessary to ensure full, complete and accurate disclosure and to complete the financial statements required for inclusion within the Quarterly Report on Form 10-Q for the period ended June 30, 2012. We believe that the subject quarterly report will be available for filing on or before August 20, 2012.
• 8/14 New 5-year intraday low on ENG stock, $0.92. Closed at $0.97 on 123K shares.
• 8/15 New 5-year intraday low on ENG stock, $0.80. Closed at $0.87 on 92K shares
• 8/16 The stock rose today on heavy volume to $0.98. As stated above in the NT 10Q the report filing may occur on or before August 20, 2012.
• Friday should be an interesting day for the stock. Watch for the SEC filing from now until Monday: http://sec.gov/cgi-bin/browse-edgar?company=&match=&CIK=eng&filenum=&State=&Country=&SIC=&owner=exclude&Find=Find+Companies&action=getcompany
• Friday 8/17 The PR came out and made proper reference to the last set report date of 8/14 with the delayed date set on 8/20 "After Market Close". The Conference Call will be held the next day 8/21 at 1100 EDT. Should be interesting. Maybe some more PR issued then also.
• 8/21 New 5-year intraday low on ENG stock, $0.68. Closed at $0.79 on 1.2M shares.
• 8/22 New 5-year low close of .77 on 419K shares.
• 8/27 New 5-year low close of .73 on 104K shares.
• 8/31 New 5-year low close of .70 on 56K shares.
• 9/7 New 5-year intraday low on ENG stock, $0.65. New 5-year close at $0.69 on 246K shares. 

• 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.  See "Appointments And Moves" for more information.

8/21 0753 EDT KeyBanc Downgrades ENGlobal Corporation (ENG) to Hold; Q2 Miss, Visibility Weak KeyBanc downgraded ENGlobal Corporation (NASDAQ: ENG) from Buy to Hold.

Analyst, Matt Tucker, said, "We are downgrading ENGlobal following its weaker-than-expected 2Q12 results, which have dampened our near to medium-term earnings outlook and have put the firm in violation of covenants under its new credit facility, generating some concerns around ENG's near-term liquidity. This follows several quarters of disappointing performance from ENG and adds to a series of events that have contributed to the uncertainty around the firm's direction, including recent credit issues that we believe impacted competitiveness in 1H12 (at least temporarily), the abrupt June 13 departure of its CFO (still without full-time replacement), and the unexpected August 1 departure of two-year CEO Edd Pagano, who was replaced by co-founder, Chairman and former CEO Bill Coskey."

 "...the unexpected August 1 departure of two-year CEO Edd Pagano" Don't read much, huh Matt?

KeyBanc lowers FY13 EPS estimate from $0.38 to $0.00.

Are you kidding me? What do you think they believe what conditions should constitute a Sell rating?

Opinion 8/10

Having thought about the situation ENGlobal is in for some time I think the most likely outcome and smart transition for ENGlobal is a merger/buyout of some type. Why? It is the best outcome for everyone. If the BOD lets this company go bankrupt what risk does that pose for them given the total loss for investors (the stock would be cancelled) and catastrophic blow to thousands of employees? This would be the poster child for reckless management for sure and lawyers to the SEC would agree.

To avoid all this, a merger/buyout is the best option. Most certainly they have been approached and received offers. Who would buy? A good question, however, ENG is not without value, there are assets, AR, contracts, backlog and loyal employees. I think large companies may find something imbedded within ENG that would interest them and there are a lot of large companies. Smaller local companies like Burrow Global or RDS are the major local players. BG would be eliminated purely on their competent, quick gentleman’s success story and prehistory. That leaves also successful and larger RDS along with a multitude of even larger players and with possible capitol investor groups.

The real problem I think happening within ENGlobal is cash and loss of personnel. Not paying vendors is problematic and costs trust and time. Not paying employees – well, they walk and this erodes ability to make money. Employees are the real long-term value in a company. Another scenario threat would have desperate people doing desperate things and not operating ethically with the highest integrity, without exception.  Managing in the face of crisis requires courage from the leadership.  Does ENG management, and the BOD, have it? Time for them to demonstrate such virtues may have gone by or at best is running out quickly.

I think there is a real race going on now to hold things together by the clock ticking with PNC using their power in some fashion, keeping employees paid, and getting a deal done with a company or capitol group to transition the company.  When may this be announced? This could occur Friday 8/10 after the close until Tuesday; before the 2Q announcement. That surely would render bad news moot by degree or level of transition. If this does not happen expect more stock volatility and anxiety from uncertainty - people do not do well with uncertainty, especially when they have a great deal at stake.

The prospect of ENGlobal continuing otherwise is not likely unless downsizing to core profitable services occurs. Additionally, a change in management style to one that is "hands-on" and active in a recession would be necessary. It is a “survival of the fittest” business environment.

ENGlobal SEC Filing 8/7/2012

Item 5.02. Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.

On August 3, 2012, Michael G. Bryant advised the Registrant of his resignation as Executive Vice President – Field Solutions for personal reasons effective immediately.  Mr. Bryant has served as Executive Vice President of Field Solutions since November 2011.  David Sinclair will replace Mr. Bryant.

David Sinclair, 54, has served as the Registrant’s Senior Vice President of its Field Solutions segment in November 2011.  From 2001 to November 2011, he served as the Vice President of Land in the Field Solutions segment for the Registrant and a predecessor company.  Mr. Sinclair brings over 30 years of experience in both domestic and international assignments for the pipeline industry. Prior to joining the Registrant, he spent 16 years at Enron as the Director of Right of Way and as an independent land consultant.  He is presently a Trustee and former President of the Right of Way International Education Foundation, an IRWA course facilitator, Past Chairman of the IRWA Pipeline Committee, Past President of IRWA Chapter 8, and a Past Chairman of the Southern Gas Association’s (SGA) Right of Way Roundtable. Mr. Sinclair holds a Bachelor of Business Administration from Texas Tech University.

Opinion

"Another one bites the dust"  Great as a song - bad as status quo for any company. This was revealed earlier on this website in an earlier comment on ENGlobal CEO Resigns.

David Sinclair who will take over the duties brings good experience to the job. Do not make the mistake of thinking that his working for Enron is a detriment, it isn't, it was good professional experience added to his career. I have had lunch with David in the past and have spoken with him several times at ENGlobal. I mentioned him within the past Annual Meeting posts that I made on the message boards. He is rock solid and a good man for the job.

2Q 2012 Predictions And "What Ifs"

I have been getting a lot of questions for an opinion on ENGlobal’s forthcoming 2Q financial results. This is a good opportunity to examine the Profit or No Profit scenarios and the “What If” permutations.

What if ENGlobal makes a Profit?

That could mean more “Pagano” for everyone, extra cheese and free delivery...enjoy.

How many of you think ENGlobal will make a profit? I don’t!  Please leave comments and reasons to why you think they will make a profit.  That’s it for this section.

What if ENGlobal makes No Profit?

I want to say outright I hope ENG makes some clean profit.  However, I do not think ENG will make a profit based on their past results, especially 1Q.  As illustrated in previous postings, reported financial results, conference call comments and SEC filings the numbers looked to be potentially embellished in 1Q for reasons I will leave up to readers.  Despite numbers that do not meet the smell test the 1Q results were still a loss. With just basic logic I think continuing operations (the true operational value without affect of questionable numbers) will be a severe loss.  Without further help from these questionable numbers or errors 2Q may be a real horror show.  If you have followed ENG you know traditionally 2Q has been one of the strongest financial reporting periods for the company.

At this stage in the game, 3+ years of losses, how do you think investors, employees and public opinion will think of the CEO and BOD?  The factors of fiduciary responsibility, competence, denial and ego have reached epic proportions and are in question.

I see several scenarios that could result from another “no profit” quarter…

First, if ENG is having difficulty paying bills while running out of money, the bank, PNC, will know this with the continuous reporting requirements ENG has to make to them.  The continuous reporting was done so PNC could simply monitor and control their investment (see the Credit Facility post) to hopefully prevent losses and increased investment risk. Remember the terms of the CF make current operations a near Chapter 13, Receivership, condition.  If PNC pulls the plug, I think ENG will partially or wholly cease to function while assets are sold to satisfy the CF. There was a clear equal statement of this featured in a previous post and SEC filing. At this point vendors, creditors and clients are dealing with the bank.  Chapter 11 may follow.

Second, ENG goes direct to Chapter 11.  No one at ENG takes responsibility and blames others for the “sudden” collapse. After a few weeks the determination will be that this blog caused it.

And a third possibility is that the BOD sees bad results or bank action coming and negotiates to sell part of or all of ENG to raise cash and prevent total loss.  At this time the BOD and upper management have to know the results for April and May, and with only 14 working days remaining until the 2Q report is filed and they should have an idea what it looks like for the last 90 days.  Even if they are successful in negotiating a sale there won’t be much saved this late in the decision game.  A White Knight scenario would seemingly be preposterous given the personality of the company unless it was preplanned.

I would say realistically you might see class action lawsuits or government investigations take place based on the strange numbers and calculations reported in past news releases, conference calls and SEC filings.  The stock may soon be below acceptable NASDAQ levels and when the time limit is reached (30 days) ENG will be notified, a SEC filing made and ENG will file for an extension to remain on the NASDAQ under probation status.  If they rise above $1 within the time requirement, they stay, if not – it will be to the small penny stock boards or back to the AMEX.

Other "What Ifs"…

What if DSO increases to 85 days?  First, that could depend on how it is calculated for 2Q.  It could also mean the struggle with the “order to cash process” of not getting bills out to clients and not collecting them in a timely manner continues.  Maybe operations should take over that function!

What if vendors and subcontractors are not getting paid?  Not paying vendors and sub-contractors could mean projects, shipments and work schedules may suffer, and that new government contract may be in jeopardy as well as that large international project.  These types of issues could have an impact on getting work completed, thus reducing revenues.

What if billable man-hours decline?  How can billable man-hours not decline when it appears the loss of management and staff to competitors continues?  Maybe bonuses could be paid to management to keep them around! Wouldn’t that be ironic! Have you heard or read about that recently, companies (our government/banks) not making money, not paying debts, and yet paying out bonuses?

What if manpower utilization increases? That could mean corporate and operational overhead staffing levels have been scaled back to coincide with a decline in manpower or it could mean billable man-hours have actually increased.  Either scenario would be good news. A combination of the two would be GREAT news.

What if the BOD suddenly awakened to the fact ENG may be in trouble and stepped-up with an action plan calling for one or all of the following:
·    New management;
·    A renewed emphasis on a “core” business;
·    The divestiture of “non-core” business operations for cash to allow for acquisitions or expansion supporting its “core” business;
·    A reduction, reorganization and centralization of overhead services to fit a new model;
·    Recognition that “customers” and “cash” are king;
·    Another reverse merger;
·    An equity partner;
·    A follow-on stock offering of 10,000,000 shares at $3.50 a share to reduce debt and provide working capital (yes this would dilute earnings, but WHAT earnings?); or
·     A 7-cent per share dividend beginning January 1st?

Conclusion

What if you were in charge for a day, what solutions or changes would you make?
It won’t be long until the earnings news will be out. Given the critical nature of what we have seen the sensible logic dictates the existing operational condition and same management practices cannot continue much longer. The credit facility and Bank simply will not let it or tolerate it, respectively. Some big event will happen and it will happen soon. There are a lot of great people working for ENGlobal, I wish you the best. Good luck to everyone.

Comments are welcome.