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Showing posts with label Engineering. Show all posts
Showing posts with label Engineering. Show all posts
08 October 2013
16 July 2013
ENGlobal Corporation: Sells Engineering and In-Plant Operations to Furmanite
ENGlobal Announces Agreement to Sell Its Gulf Coast Engineering and In-Plant Operations to Furmanite
HOUSTON, July 16, 2013 (GLOBE NEWSWIRE) -- ENGlobal Corporation (Nasdaq:ENG), a leading provider of energy-related engineering and automation services, announced today that it has signed a definitive agreement under which ENGlobal's Gulf Coast engineering and in-plant operations will be sold to Furmanite America, Inc. ("FAI"), a subsidiary of Furmanite Corporation (NYSE:FRM). The total value of the transaction to ENGlobal is expected to be approximately $21.5 million, consisting primarily of cash at closing and a $3.5 million promissory note issued with a parent company guarantee.
ENGlobal's Gulf Coast engineering operations consist of its Beaumont, TX, Baton Rouge, LA, Lake Charles, LA, Deer Park, TX, and Freeport, TX offices, which primarily perform work for downstream clients across the region. The Company will retain its Engineering operations and the entirety of its Automation operations located in Houston, TX, Tulsa, OK, Mobile, AL, Denver, CO, and Chicago, IL, which primarily perform midstream and downstream related projects.
ENGlobal intends to use the net proceeds from this transaction to repay its outstanding debt. The transaction has been approved by the boards of directors for both companies, and is expected to close within 60 days, subject to lender approval and the completion of customary conditions. In addition, the companies have agreed to facilitate a smooth transition of corporate service functions and to support each company's business development efforts. Under terms of the agreement, approximately 900 employees will transfer from ENGlobal to Furmanite.
"The transaction with Furmanite, representing approximately half of our business, has stood out among all alternatives as making the most sense for our employees, clients and shareholders," said William A. Coskey, P.E., Founder, Chairman and Chief Executive Officer. "The ongoing ENGlobal operations will become strategically focused, well positioned for growth, and essentially free of bank debt. We will continue to build on the expertise of our heritage Engineering and Automation segments and also expect to target specific engineered solutions, utilizing both in-house and third party intellectual property."
Mr. Coskey continued, "We are pleased to announce that throughout our turnaround plan over the last year – and through Closing of this transaction, we will have reduced our debt and vendor obligations by approximately $50.0 million. The resulting revitalized Company with 500 employees will become the foundation from which to rebuild ENGlobal."
The Company expects that this transaction will substantially complete its review of strategic alternatives. In October 2012, ENGlobal announced its plan to explore strategic alternative options, which included raising capital, selling a portion of the Company's assets, and the possible sale or merger of ENGlobal, among other alternatives. Since that time, the Company discontinued its Electrical Services division and divested its Land/Right of Way and Midstream Inspection divisions.
HOUSTON, July 16, 2013 (GLOBE NEWSWIRE) -- ENGlobal Corporation (Nasdaq:ENG), a leading provider of energy-related engineering and automation services, announced today that it has signed a definitive agreement under which ENGlobal's Gulf Coast engineering and in-plant operations will be sold to Furmanite America, Inc. ("FAI"), a subsidiary of Furmanite Corporation (NYSE:FRM). The total value of the transaction to ENGlobal is expected to be approximately $21.5 million, consisting primarily of cash at closing and a $3.5 million promissory note issued with a parent company guarantee.
ENGlobal's Gulf Coast engineering operations consist of its Beaumont, TX, Baton Rouge, LA, Lake Charles, LA, Deer Park, TX, and Freeport, TX offices, which primarily perform work for downstream clients across the region. The Company will retain its Engineering operations and the entirety of its Automation operations located in Houston, TX, Tulsa, OK, Mobile, AL, Denver, CO, and Chicago, IL, which primarily perform midstream and downstream related projects.
ENGlobal intends to use the net proceeds from this transaction to repay its outstanding debt. The transaction has been approved by the boards of directors for both companies, and is expected to close within 60 days, subject to lender approval and the completion of customary conditions. In addition, the companies have agreed to facilitate a smooth transition of corporate service functions and to support each company's business development efforts. Under terms of the agreement, approximately 900 employees will transfer from ENGlobal to Furmanite.
"The transaction with Furmanite, representing approximately half of our business, has stood out among all alternatives as making the most sense for our employees, clients and shareholders," said William A. Coskey, P.E., Founder, Chairman and Chief Executive Officer. "The ongoing ENGlobal operations will become strategically focused, well positioned for growth, and essentially free of bank debt. We will continue to build on the expertise of our heritage Engineering and Automation segments and also expect to target specific engineered solutions, utilizing both in-house and third party intellectual property."
Mr. Coskey continued, "We are pleased to announce that throughout our turnaround plan over the last year – and through Closing of this transaction, we will have reduced our debt and vendor obligations by approximately $50.0 million. The resulting revitalized Company with 500 employees will become the foundation from which to rebuild ENGlobal."
The Company expects that this transaction will substantially complete its review of strategic alternatives. In October 2012, ENGlobal announced its plan to explore strategic alternative options, which included raising capital, selling a portion of the Company's assets, and the possible sale or merger of ENGlobal, among other alternatives. Since that time, the Company discontinued its Electrical Services division and divested its Land/Right of Way and Midstream Inspection divisions.
03 January 2013
ENGlobal Corporation: Closes the Midstream Deal
ENGlobal Completes Divestiture of Midstream Inspection Division
Houston, TX, Jan. 3, 2013 (GLOBE NEWSWIRE) -- ENGlobal Corporation (NASDAQ: ENG), a leading provider of energy-related engineering and automation services, announced today that it has closed the previously announced agreement to divest its Midstream Inspection division to Furmanite America, Inc. ("FAI") a subsidiary of Furmanite Corporation. As announced in December 2012, the total value of the transaction to ENGlobal was approximately $6.5 million, consisting of cash at closing, retained working capital, and a promissory note issued with a parent company guarantee.
ENGlobal intends to use the net proceeds from this transaction to reduce outstanding debt. The closing of this transaction completes ENGlobal's previously announced intent to divest its Field Solutions segment, which included both its Land/Right of Way and Midstream Inspection divisions, as a means of reducing outstanding bank indebtedness.
Opinion: Kind of a repeat but glad they got it closed.
21 August 2012
ENGlobal Corporation 2Q 2012 Results and 10Q Analysis
It is hard to not become overwhelmed by the staggering $0.37/share loss ENGlobal has reported for 2Q 2012. I am sure many of you are wondering as I do; will there be a 3Q 2012? Let’s start with answering some of questions posed in the earlier post covering 2Q possibilities and then move through the 10Q information:
"What If" results:
Yes, DSO increased! Depending on how you calculate it was 78 to 82 days. At 65 days they could have pulled $11.1 to $14.5 million in cash off the Balance Sheet.
Yes, vendors and subcontractors continue to not get paid as accounts payable increased $2.6 million over 1Q.
Yes, billable hours decreased 4% from 1Q and 14% from the same period in 2011. It seems illogical that staffing levels hold and hours decline.
No, manpower utilization did not increase. We did not get a figure for 1Q of 2012 so we cannot compare Q over Q but compared to 2Q 2011 the current quarter’s utilization decreased 3%
Q over Q for 2012
E&C revenue was down from $45.6 mil to $44.8 mil and gross profit down from 9.6% to 6.4%. Issues seem to be in both growth and performance. Quality issues maybe under this iceberg!
Automation revenue was up from $13.6 mil to $14.3 mil and gross profit even at 10.2%. This seems to be the stable segment anchored by the Caspian project.
Field Services revenue was up from $16.3 mil to $17.8 mil and gross profit down from 10.8% to 7.3%. I think we questioned the margins from FS last quarter and thought they were higher than normal.
Overall revenue was up from $75.4 mil to $76.9 mil but gross profit down from 9.9% to 7.3%
What’s wrong with this “Outlook”?
“Although we are in active discussions with PNC Bank and Wells Fargo, we cannot assure you that we will be successful in obtaining the cure or waiver of the defaults under their respective facilities. If we fail to obtain the cure or waiver of the defaults under the facilities with PNC Bank and Wells Fargo, PNC Bank and Wells Fargo may exercise any and all rights and remedies available to them under their respective agreements, including demanding immediate repayment of all amounts then outstanding or initiating foreclosure or insolvency proceedings. In such event and if we are unable to obtain alternative financing, our business will be materially and adversely affected, and we may be forced to sharply curtail or cease operations.”
In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2011 , which outlines factors that could materially affect our business, financial condition or future results, and the additional risk factors below. The risks described, in our Annual Report on Form 10-K and below, are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial conditions or operating results.
If we are unable to obtain the cure or waiver of defaults under the PNC Credit Facility and Ex-Im Bank Facility, our business may be materially and adversely affected and we may be forced to sharply curtail or cease operations.
Historically, we have relied upon a revolving credit facility to provide us with adequate working capital to operate our business. On May 29, 2012, we replaced our Wells Fargo Credit Facility with a new $35 million revolving credit facility provided by PNC Bank, National Association (the “PNC Credit Facility”). The PNC Credit Facility has a maturity date of May 29, 2015. In July 2011, with the support of Wells Fargo's Global Banking Group, ENGlobal and the Export-Import Bank of the United States (“Ex-Im Bank”) entered into a separate $9.5 million letter of credit facility (the “Ex-Im Bank Facility”) to support the Company's Caspian Pipeline Consortium (CPC) project. Under the terms of this agreement, the Company may issue letters of credit to CPC for its performance under the CPC project. The PNC Facility and the Ex-Im Bank Facility require us to maintain compliance with specified financial ratios and satisfy certain financial condition tests. As of June 30, 2012, we were in default with respect to certain of these ratios and financial condition tests and other covenants. As of the date of this filing, we were in active discussions with PNC Bank and Wells Fargo regarding the cure or waiver of the defaults under the PNC Credit Facility and the Ex-Im Bank Facility.
Failure to obtain the cure or waiver of the defaults under the PNC Credit Facility and the Ex-Im Bank Facility could result in all indebtedness outstanding under the PNC Facility and the Ex-Im Bank Facility becoming immediately due and payable. If that should occur, we may not be able to pay all such amounts or borrow sufficient funds to refinance them. Even if new financing were then available, it may not be on terms that are acceptable to us. If we were unable to repay those amounts, the lenders could accelerate the maturity of the debt or proceed against any collateral granted to them to secure such defaulted debt. In such an event, our business will be materially and adversely affected and we may be forced to sharply curtail or cease operations.
As a result of the defaults under the PNC Credit Facility and the Ex-Im Bank Facility described below, additional borrowings under these facilities may be limited or restricted. As of August 15, 2012, unrestricted cash on hand totaled approximately $0.7 million and availability under the PNC Credit Facility totaled approximately $1.3 million, subject to certain restrictions on revolving advances and the requirement to maintain Average Excess Availability of not less than $3.5 million measured monthly. As of August 15, 2012, one $9.1 million letter of credit was outstanding under the Ex-Im Bank Facility and collateralized by $2.3 million in cash. As a result, the Company's ability to pay liabilities as they become due, fund business operations and meet monetary contractual obligations, currently depends primarily on cash flow from operations and the timely collection of outstanding invoices.
Cash and the availability of cash could be materially restricted if:
• Outstanding invoices billed are not collected or are not collected in a timely manner,
• Circumstances prevent the timely internal processing of invoices,
• We lose one or more of our major customers,
• We are unable to win new projects that we can perform on a profitable basis, or
• We are unable to obtain the cure or waiver of existing defaults under the PNC Credit Facility or the Ex-Im Bank Facility.
Tax Expense:
ASC Topic 825, “Income Taxes” requires all available evidence, both positive and negative, be considered to determine whether, based on the weight of that evidence, a valuation allowance is needed. During the current quarter, based upon the Company's recent performance, management determined the realization of deferred tax assets is uncertain as the Company is unable to consider tax planning strategies or projections of future taxable income in its evaluation of the realizability of its deferred tax assets as of June 30, 2012. Under these circumstances, deferred tax assets may only be realized through future reversals of taxable temporary differences and carryback of net operating losses to available carryback periods. We have performed such an analysis and a valuation allowance of approximately $6.2 million has been provided against deferred tax assets as of June 30, 2012.
This basically means they do not think ENG will make enough money to take advantage of the tax benefits from past losses for the periods such credits remain. It seems the losses have exceeded ENG’s future profit expectations.
I think it will be difficult to keep PNC out of their office until resolutions to address defaults are achieved. Will this be the next in a long list of distractions for ENG management?
Goodwill
With the Company’s somewhat bleak outlook and going concern issues did they not consider this as a triggering event for impairment testing?
Conclusion
A two-year slide has seemingly hit the bottom of the hill. It appears the Titanic has hit the iceberg, backed up and hit it again while management was concerned over what to select for dessert. Where has the Chairman and the Board been as we sat in the stands and watched ENG go sailing by?
Maybe the analysts that follow ENG will ask some questions to get full disclosure and transparency for the shareholders. ENG lists the following analysts providing coverage:
Enerecap Partners – Craig Bell
Keybanc – Matt Tucker & Ahird Afzal
Lazard Capital – Will Gabrielski
8/21 0753 EDT KeyBanc Downgrades ENGlobal Corporation (ENG) to Hold; Q2 Miss, Visibility Weak (see Blog Update)
Listen in to the Conference Call tomorrow. Good luck to everyone.
"What If" results:
Yes, DSO increased! Depending on how you calculate it was 78 to 82 days. At 65 days they could have pulled $11.1 to $14.5 million in cash off the Balance Sheet.
Yes, vendors and subcontractors continue to not get paid as accounts payable increased $2.6 million over 1Q.
Yes, billable hours decreased 4% from 1Q and 14% from the same period in 2011. It seems illogical that staffing levels hold and hours decline.
No, manpower utilization did not increase. We did not get a figure for 1Q of 2012 so we cannot compare Q over Q but compared to 2Q 2011 the current quarter’s utilization decreased 3%
Q over Q for 2012
E&C revenue was down from $45.6 mil to $44.8 mil and gross profit down from 9.6% to 6.4%. Issues seem to be in both growth and performance. Quality issues maybe under this iceberg!
Automation revenue was up from $13.6 mil to $14.3 mil and gross profit even at 10.2%. This seems to be the stable segment anchored by the Caspian project.
Field Services revenue was up from $16.3 mil to $17.8 mil and gross profit down from 10.8% to 7.3%. I think we questioned the margins from FS last quarter and thought they were higher than normal.
Overall revenue was up from $75.4 mil to $76.9 mil but gross profit down from 9.9% to 7.3%
What’s wrong with this “Outlook”?
“Although we are in active discussions with PNC Bank and Wells Fargo, we cannot assure you that we will be successful in obtaining the cure or waiver of the defaults under their respective facilities. If we fail to obtain the cure or waiver of the defaults under the facilities with PNC Bank and Wells Fargo, PNC Bank and Wells Fargo may exercise any and all rights and remedies available to them under their respective agreements, including demanding immediate repayment of all amounts then outstanding or initiating foreclosure or insolvency proceedings. In such event and if we are unable to obtain alternative financing, our business will be materially and adversely affected, and we may be forced to sharply curtail or cease operations.”
In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2011 , which outlines factors that could materially affect our business, financial condition or future results, and the additional risk factors below. The risks described, in our Annual Report on Form 10-K and below, are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial conditions or operating results.
If we are unable to obtain the cure or waiver of defaults under the PNC Credit Facility and Ex-Im Bank Facility, our business may be materially and adversely affected and we may be forced to sharply curtail or cease operations.
Historically, we have relied upon a revolving credit facility to provide us with adequate working capital to operate our business. On May 29, 2012, we replaced our Wells Fargo Credit Facility with a new $35 million revolving credit facility provided by PNC Bank, National Association (the “PNC Credit Facility”). The PNC Credit Facility has a maturity date of May 29, 2015. In July 2011, with the support of Wells Fargo's Global Banking Group, ENGlobal and the Export-Import Bank of the United States (“Ex-Im Bank”) entered into a separate $9.5 million letter of credit facility (the “Ex-Im Bank Facility”) to support the Company's Caspian Pipeline Consortium (CPC) project. Under the terms of this agreement, the Company may issue letters of credit to CPC for its performance under the CPC project. The PNC Facility and the Ex-Im Bank Facility require us to maintain compliance with specified financial ratios and satisfy certain financial condition tests. As of June 30, 2012, we were in default with respect to certain of these ratios and financial condition tests and other covenants. As of the date of this filing, we were in active discussions with PNC Bank and Wells Fargo regarding the cure or waiver of the defaults under the PNC Credit Facility and the Ex-Im Bank Facility.
Failure to obtain the cure or waiver of the defaults under the PNC Credit Facility and the Ex-Im Bank Facility could result in all indebtedness outstanding under the PNC Facility and the Ex-Im Bank Facility becoming immediately due and payable. If that should occur, we may not be able to pay all such amounts or borrow sufficient funds to refinance them. Even if new financing were then available, it may not be on terms that are acceptable to us. If we were unable to repay those amounts, the lenders could accelerate the maturity of the debt or proceed against any collateral granted to them to secure such defaulted debt. In such an event, our business will be materially and adversely affected and we may be forced to sharply curtail or cease operations.
As a result of the defaults under the PNC Credit Facility and the Ex-Im Bank Facility described below, additional borrowings under these facilities may be limited or restricted. As of August 15, 2012, unrestricted cash on hand totaled approximately $0.7 million and availability under the PNC Credit Facility totaled approximately $1.3 million, subject to certain restrictions on revolving advances and the requirement to maintain Average Excess Availability of not less than $3.5 million measured monthly. As of August 15, 2012, one $9.1 million letter of credit was outstanding under the Ex-Im Bank Facility and collateralized by $2.3 million in cash. As a result, the Company's ability to pay liabilities as they become due, fund business operations and meet monetary contractual obligations, currently depends primarily on cash flow from operations and the timely collection of outstanding invoices.
Cash and the availability of cash could be materially restricted if:
• Outstanding invoices billed are not collected or are not collected in a timely manner,
• Circumstances prevent the timely internal processing of invoices,
• We lose one or more of our major customers,
• We are unable to win new projects that we can perform on a profitable basis, or
• We are unable to obtain the cure or waiver of existing defaults under the PNC Credit Facility or the Ex-Im Bank Facility.
Tax Expense:
ASC Topic 825, “Income Taxes” requires all available evidence, both positive and negative, be considered to determine whether, based on the weight of that evidence, a valuation allowance is needed. During the current quarter, based upon the Company's recent performance, management determined the realization of deferred tax assets is uncertain as the Company is unable to consider tax planning strategies or projections of future taxable income in its evaluation of the realizability of its deferred tax assets as of June 30, 2012. Under these circumstances, deferred tax assets may only be realized through future reversals of taxable temporary differences and carryback of net operating losses to available carryback periods. We have performed such an analysis and a valuation allowance of approximately $6.2 million has been provided against deferred tax assets as of June 30, 2012.
This basically means they do not think ENG will make enough money to take advantage of the tax benefits from past losses for the periods such credits remain. It seems the losses have exceeded ENG’s future profit expectations.
I think it will be difficult to keep PNC out of their office until resolutions to address defaults are achieved. Will this be the next in a long list of distractions for ENG management?
Goodwill
With the Company’s somewhat bleak outlook and going concern issues did they not consider this as a triggering event for impairment testing?
Conclusion
A two-year slide has seemingly hit the bottom of the hill. It appears the Titanic has hit the iceberg, backed up and hit it again while management was concerned over what to select for dessert. Where has the Chairman and the Board been as we sat in the stands and watched ENG go sailing by?
Maybe the analysts that follow ENG will ask some questions to get full disclosure and transparency for the shareholders. ENG lists the following analysts providing coverage:
Enerecap Partners – Craig Bell
Keybanc – Matt Tucker & Ahird Afzal
Lazard Capital – Will Gabrielski
8/21 0753 EDT KeyBanc Downgrades ENGlobal Corporation (ENG) to Hold; Q2 Miss, Visibility Weak (see Blog Update)
Listen in to the Conference Call tomorrow. Good luck to everyone.
25 July 2012
Burrow Global Automation Group – Quality You Can Trust
by Olan Weeks, P.E.
The Burrow Global Automation Group is comprised of the finest experienced professionals we can find. Our competent team has successfully performed automation projects from as small as one input-output to several “World Class” projects exceeding 30,000 input/outputs. We treat all projects, no matter what size, with the same expertise. We consistently achieve satisfied clients by not only performing the project to the parameters of the client in regards to cost, schedule and quality; but also by automating the systems to be as easy and friendly to operate and maintain as possible. Successful automation systems not only satisfy the needs of process control engineers but also the desires and needs of the personnel who must sit continually day-in and day-out operating these controls. Our experiences have shown it is much easier to live with and operate a friendly system when working long hours than dreading a system which tends to make operations personnel fatigued, agitated or operationally uncomfortable. Our ergonomic designs not only increase control and efficiency they promote the safety and the well being of your employees.
Burrow Global Automation (BGA) personnel take pride in working to meet the needs of the operations personnel as well as satisfying the process automation engineering requirements. BGA personnel have performed thousands of automation projects both domestically and internationally helping corporations and governments meet the global demands. Our list of automation clientele is large and in essentially all cases they will give the BGA TEAM very positive references. Most of the key BGA personnel have spent their entire professional experience within the industry and have transitioned from pneumatics to electronics, and then onward to the DCS/SIS systems of today. BGA personnel are ready to respond to any size projects and will work to meet or exceed the expectations of its customers.
One of the key attributes of BGA by design is inventiveness – we employ visionaries. Our personnel tend to think out-of-the-box and have developed automation methodologies in the DCS/SIS arena, which has saved our customers money. One current customer is now saving millions of dollars in hot cutover cost by using a Burrow Global developed technique that is both innovative and unique. Most projects have been cutover while the process units are still operating. In fact, our TEAM has successfully performed over one million hot cutovers without a shutdown. If you have a challenge – we are ready to solve it.
As the President of the Burrow Global Automation Group I am proud to state that in my 45 years in the automation business, I believe the BGA group is the finest automation group in the world. All of the BGA personnel would like to take this opportunity to express our appreciation for the many opportunities that have been given us in the past and we will appreciate any new business opportunities in the future.
May mankind’s Greatest Spiritual Engineer of the past, present and future, Jesus Christ be your guide.
Burrow Global Automation is expanding with great new clients. Are you motivated and desire to perform challenging work to highest quality standards? Do you want to join our professional automation team? Please send your resume to: L.Watkins@burrowglobal.com
Editor's note: Olan Weeks P.E. started his disciplined career in the US Navy, earned an Electrical Engineering Degree from Lamar University and has worked in the automation arena ever since. Mr. Weeks began his engineering career working for Petrocon in Beaumont, which evolved into ENGlobal Corporation. There he performed various jobs from Senior Project Management to CEO of Systems (Automation). He was one of the co-inventors of the patented “Integrated Rack System ™” owned by that corporation (the article is still posted on this website, 9/28/08). He is now President of Burrow Global Automation group.
22 July 2012
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.
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
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.
13 June 2012
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.
06 June 2012
ENGlobal Corporation - New Credit Facility 8K Analysis
After reading through the new Credit Facility (CF) twice I
think you will agree when you read it that is both complicated and long.
Actually, at over 106 pages long it is at least 600% longer with more onerous
terms and conditions than seen in the past. The WF agreement from 12/29/2009
was only 15 pages long! Why so long? PNC is trying to protect them from getting stuck
with a big problem. ENGlobal on the other hand, is under the gun, needs help
quickly to survive and is willing to agree to such costs, reporting requirements
and lender controls.
It is so complicated it is hard to find a place to start.
Since documents like this are generally boring and full of tedious detail I
will highlight some points and issues. I may amend this post over time as
discoveries are made. For now, let's start with reporting requirements, see Exhibit 9.2:
Notice the required monthly reporting of AR, AP, unbilled,
CIEB, backlog and Caspian cash flow. Additionally, notice that ENG is required
to make weekly reporting providing copies of client invoices, delivery
information and inventory reports. Is this mistrust or verification, take your
pick? Everything seems delayed or “last moment” at ENG from Quarterly Reports,
News Releases & the CF. If they
cannot make their financial reporting deadlines (decentralized accounting) on a
monthly basis I would think they would find it difficult to gather information
together on a weekly basis. It is a staffing and organization issue.
The agreement also gives the bank the right to verify all
receivables. Imagine how ENG clients will react to calls from the bank to
verify an account balance or check on payments. Clients rarely respond to
year-end auditor confirmations how do you think they will view ENG’s financial
health now, and in turn, wanting to do longer business with them?
Asset based credit facilities are always on a formula basis
and you are limited by the amount of eligible receivables be it AR, unbilled,
CEIB or government billings. There are
also disqualifiers for over 90-Day invoices, accounts with 25% over 90 days are
eliminated in total, etc. Notice that PNC will only allow domestic and Canadian
accounts, while international accounts require Letters Of Credit or guarantees
from the clients. Based on those
conditions ENG would not have been able to take on the Caspian project as they
did in the past. I wonder if the CEO figures this new requirement into his
international strategy!
Since mentioning the Caspian project, there is a default
condition if they lose or have a material change in that project AND that it
must be cash positive and remain cash positive by the end of 2012 (see 10.20).
I hope they asked the Project Manager about the possibility of that happening.
If you missed the conference call, I mentioned in the 1Q 2012 Analysis the CEO
made references to reducing the negative cash flow by one half this fall. He
never gave any figures so “one half” is meaningless of an acknowledged bad
condition. I expect this will be a problem soon because in that same CC the CEO
pushed the profitable period into 2013. Isn’t it amazing how quickly
information can change?
Now let's look at the pre-payment penalties. ENG would have to pay 3% of the commitment
if prepaid in the first year (that's $1,050,000), 2% in the second year
($750,000) and 1% in the third year ($350,000). They also paid $175k
origination fee to PNC, plus all their legal fees! Did you notice who signed the agreement? It was not the CFO as was past
practice. Is the CFO going somewhere?
If ENG was struggling to meet their cash commitments with
Wells Fargo I suspect they will experience similar pressures with PNC. I did
not see where they get much relief (extra money) or at least enough to make a
difference with this new CF. They must also maintain $3.5 mil in excess availability,
which comes off their overall availability level, which again limits their
borrowing.
With a new CF in place I think vendors are standing in line
to be paid. ENGlobal will again have to comply with a bank
"lockbox"! That change will
have to be announced to all the clients, as they will have to change the
"remit to" addresses in their AP systems. That will be another red flag to ENG's financial issues. Clients will perceive this to be similar to
a factoring of ENG's invoices.
The fixed charge ratio of 1.10 to 1.00 is lower than the
1.75 to 1.00 within the former Wells Fargo facility but in 3Q 2011 ENG only
produced a ratio of .90 to 1.00. This, by the way, was one of the repeated
broken covenants that contributed to the end the old CF and Wells Fargo
relationship. With the new CF and PNC as a lender making money is still a
requirement!
Lets look at PNC’s role. Are they the sole lending bank now
and the future? The agreement is constructed as though they were going to
syndicate the loan, as PNC is referred to as an agent in a few places
referencing percentage of commitments and repayments. While in one of the
schedules it shows PNC as furnishing 100% of the funding. Opinion: It looks as
though PNC has built in some options if the weekly required reported numbers
start deteriorating. If this happens, have they got a sweet opportunity for
you?
Conclusion
I anticipated the CF was going to be heavy and laden with
numerous levels of protection for PNC. What would you expect for a company with
3+ years of losses. I think that since ENG declined into such a tenuous
condition the CF was written in a way that PNC actually manages the company
where management has been deficient. Think about this for a moment with all the
controls and required reporting. Mergers, acquisitions and stock issuance all
have to be approved by PNC. Although PNC is managing the company on such basis
through these reports and controls to protect itself there may be some forced
benefit upon ENGlobal’s management that helps investors. You see situations very similar to this in
Chapter 13 companies.
I believe ENG will be forced to make internal changes and
cut overhead. This new CF is far more structured and limiting, and quite the
opposite than the greater flexibility advertised by the CEO. The decentralized
accounting system does not work for reasons designed and has cost ENG time,
control and money. Watch for changes. I hope they will happen soon and in time.
Good luck to everyone.
Comments are welcome.
18 May 2012
ENGlobal Corporation: Q1 2012 10Q Analysis
The 10Q was filed on the 16th, and not later on the 15th as advertised. Normally these quarterly filings can be tedious and a challenge to search through but there are some important details that indicate a deteriorating situation at ENGlobal. Some of those details further support the previous idea that the numbers were embellished. I understand that other issues are occurring on a daily basis so I will try to cover the important ‘indicator’ items and illuminate those that are critical.
Before I dive into the 10Q I wanted to ask those of you that are investors to look at the ballot which is asking you for another half million shares with more undoubtedly ending up with your BOD. If you doubt this assumption do a little research over the last 10 years and see where the majority of ENG options and restricted stock have gone. I won’t opine on this but simply ask you if they deserve stock payment?
Now let’s get into the latest 10Q and look at statements and numbers. When you look at the Consolidated Balance Sheets (Unaudited) on page 4 of the 10Q notice these line items (the figures shown are in thousands):
Item 1)
Costs and estimated earnings in excess of billings (CIEB) on uncompleted contracts:
3/31/2012 12/31/2011
$12,573 $6,790
An increase of $5.783 million since 12/31/2011…
This line indicates the Company has incurred approximately $5.8 million in additional project costs on fixed price contracts for which it has not billed to their client. So why does this matter? An increase in CIEB has a negative impact on CASH and could impact the Company’s ability to make payroll, pay vendors and suppliers and meet statutory obligations. Why does this happen? Options as to what is causing this increase include delays in getting client billings out the door due to inefficient processes and/or administrative approvals, bad contractual terms on billing milestones or project failures to meet milestone deliverables. All of options are the results of decisions made by or controlled by ENG management. Regardless of the reason, the current trend is going in the wrong direction. CIEB as of December 31, 2010 was only $3.146 million. Do you like this fast-paced trend?
Item 2)
Notes Payable
3/31/2012 12/31/2011
$336 $0
An increase of $336k since 12/31/2011…
ENGlobal must have to sign notes with vendors and materials suppliers to get equipment and materials for client projects.
Item 3)
Billings in excess of costs and estimated earnings (BIEC) on uncompleted contracts:
3/31/2012 12/31/2011
$2,236 $4,421
This line indicates the Company has lost approximately $2.2 million in pre-billings for project costs on fixed price contracts billed to their client. So why does this matter? A decrease in BIEC also has a negative impact on CASH and again could impact the Company’s ability to make payroll, pay vendors and suppliers and meet statutory obligations. Why does this happen? Options as to what is causing this increase include delays in getting client billings out the door due to inefficient processes and/or administrative approvals, bad contractual terms on billing milestones or project failures to meet milestone deliverables. All of these options are the results of decisions made by or controlled by ENG management. Regardless of the reason, the current trend is going in the wrong direction. BIEC as of December 31, 2010 was $0.947 million.
Item 4)
Other Current Liabilities (totals)
3/31/2012 12/31/2011
$2,331 $3,072
Remember this section covering Reserve from previous 10K comments? This was the table that included the $2.1 million of “known”, but not detailed, liabilities. It appears they paid the accrued interest of $86k and cleared the $655k in customer prepayments for a net change of $741k. Just an FYI, customer prepayments are where clients are billed and then prepay for services yet performed at the end of one reporting period and then services are performed and earned in a later reporting period. Hopefully the reduction of the $655k in these liabilities was taken against the later produced AR billings for those delayed services and not as a credit against the costs on those projects. Could that be the reason for the GP improvement in FS? Time will tell if this is the case because when the later AR billings do not get cleared by the client (because he has already paid in a prior period) they will have to be written off or charged back to the projects and result in much lower GP in the current reporting period.
Item 4)
Other Current Liabilities (totals)
3/31/2012 12/31/2011
$2,331 $3,072
Remember this section covering Reserve from previous 10K comments? This was the table that included the $2.1 million of “known”, but not detailed, liabilities. It appears they paid the accrued interest of $86k and cleared the $655k in customer prepayments for a net change of $741k. Just an FYI, customer prepayments are where clients are billed and then prepay for services yet performed at the end of one reporting period and then services are performed and earned in a later reporting period. Hopefully the reduction of the $655k in these liabilities was taken against the later produced AR billings for those delayed services and not as a credit against the costs on those projects. Could that be the reason for the GP improvement in FS? Time will tell if this is the case because when the later AR billings do not get cleared by the client (because he has already paid in a prior period) they will have to be written off or charged back to the projects and result in much lower GP in the current reporting period.
As you remember in the last two posts I alerted readers to how operating contingencies and reserve can be used to embellish earnings. Since the practice is not regulated you will see no required disclosure statements. However, it does show up as a sudden and abnormal increase in GP and margins. That did seem to happen and let's dive into this from where we left off in the last post. I would recommend new readers to review the last two postings to prepare for this new information.
Page 20: “Our gross profit and gross profit margin increased primarily due to reduced variable costs and improved efficiencies in our Automation Segment, resulting in higher profit margins.” [On the CC the CEO stated this was the problem segment!] “However, we are still affected by intense competition and pricing pressures. In addition, our E&C and Field Solutions segments experienced increases in gross profit and gross profit margins due to higher revenues and increased efficiencies.”
I think the problem is variable conclusions and variable accounting as you may conclude as you read on. Let us look at one of those mentioned divisions that experienced increases and compare it to the previous year – Field Solutions (FS).
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The four quarters and YTD of 2011 are represented along with 1Q 2012 for comparison. The percentages given are percent of revenue for the applicable time period. Notice most prominently is that FS made more profit, $732,000, in Q1 2012 than in all of 2011, which came in at only $160,000! At 2011 GP percentages they should have made ~ $500,000 less. Look at the GP and Operating income for all four quarters of 2011, then the YTD and compare to Q1 2012. Why the sudden and extraordinary jump in profit and margins to 4.5%? The Q1 2012 Field Solutions GP margins of 10.8 % even beat Engineering & Construction same period margins of 9.6%! My guess is that FS had more operating contingency money available than E&C. Does this meet your smell test?
Moreover, if you don’t know, the FS division is a cost-plus, low-margin segment. Let’s put all this into another perspective and look at the statement on pages 17 & 18 of the 10Q: “During the recent period of industry-wide decline in demand for the types of services ENGlobal provides, we reduced our rates significantly, as was required to obtain and retain business. Although the level of demand has increased (although FS revenues were down from Q1 2011), pricing in certain geographical markets is still extremely competitive and we have not yet been able to increase our margins to prior levels.”
By now you are feeling the contradictions. How can you make a statement like that and show massive increases in GP and Margins? This comment further supports the question of how the GP increased in the Field Services segment. There may be a valid reason but without more meaningful disclosure we are left to speculate.
Now let's deal with the Why? The CEO sees his survival as paramount even to the company’s survival. I would like to note that even Bill Coskey had the presence of mind to step back when the company trend wasn’t good. Unfortunately, it eroded further since then. But the company does have to survive for the CEO's job to continue. For that to happen, the company needs a Credit Facility to operate.
On page 11 of the 10K you see this clue: “Due to the net loss for the first quarter ended March 31, 2012, the Company failed to comply with the positive net income covenant added in the Amendment Extension and Wells Fargo has agreed not to exercise its rights with respect to this failure to comply until after May 31, 2012.”
First, we see that ENGlobal broke another covenant. They were required to make a profit in Q1. There is one motive for trying to embellish earnings by using operational contingency money buried within the segments and/or reserve money – to prevent Wells Fargo from exercising its rights (which they have agreed to delay until after 31 May). The other and primary motive is so the CEO can save his job. I say that logically because all these company conditions are known to the CEO and compare that to Bill Coskey choosing to step aside.
Second, why would the CEO agree to a covenant of positive net income approx 6 weeks ago when they should have known at the time they were not going to make a profit? If they thought then they were going to make a profit what changed in those 6 weeks? One thought is that it may be related to the increase in DEFERRED REVENUE (see the last paragraph in Note 10 – Contracts). It was stated… “The Company recognizes service revenue as soon as the services are performed. For clients that we consider higher risk, due to past payment history or history of not providing written work authorizations, we defer revenue recognition until we receive either a written authorization or a payment. The current amount of revenue deferred for these reasons is approximately $1.7 million as of March 31, 2012, compared to $0.3 million as of December 31, 2011. We expect a majority of the deferred revenue amount to be realized by year end 2012”. In Q1 deferred revenue increased $1.4 million! Could that be a Change Order yet to be approved which was not accounted for until the end of the quarter? Must not have been because on the CC the CEO, when asked if there were any material losses or problem projects during the period, he could not recall. I would think he would recall a $1.4 million revenue reversal! Maybe it's related to one of the fixed price projects announced last September, which were scheduled to be completed in Q2 of 2012.
We now should move on to stark matters.
Credit Facility
This subject is paramount for ENGlobal’s survival. In a moment you will read a statement that will resound deeply with you if you have not seen it already.
Page 22:
“Due to the net loss for the first quarter ended March 31, 2012, the Company failed to comply with the positive net income covenant in the Amendment Extension and Wells Fargo has agreed not to exercise its rights with respect to this failure to comply until after May 31, 2012.”
Item 1A under Risk Factors, p. 24:
“…If we are unable to enter into the proposed credit facility, we will not have sufficient capital to repay the Wells Fargo Credit Facility at May 31, 2012 and as a result, we would be unable to fund our working capital needs and would need to secure additional capital or financing to fund our working capital requirements and to repay the outstanding debt under the Wells Fargo Credit Facility. We cannot assure you that we will be successful in entering into a new credit facility (including the proposed credit facility), obtaining a further extension from Well Fargo beyond the current maturity date of May 31, 2012 or in connection with raising additional capital, that any amount, if raised, will be sufficient to meet our cash requirements. If the Wells Fargo Credit Facility is not repaid in full by May 31, 2012 or if the current maturity date is not otherwise extended, Wells Fargo may exercise its rights and remedies under the credit facility, including initiating foreclosure or insolvency proceedings; in such event our business will be materially and adversely affected, and we may be forced to sharply curtail or cease operations.”
How about that for a statement? I am sure independent legal council recommended it.
But there is more to this. Please put this in context with what management said only a few weeks ago in the 10K on page 42 in the Overview section under Liquidity and Capital Resources: “We believe that we have sufficient available cash required for operations for the next 12 months”
Conclusion
Management should be changed ASAP. I hear of more personnel leaving ENGlobal daily and this further erodes capacity and capability. Bills are not being paid on time (Notes Payable) and this hurts a hard earned reputation. Will ENGlobal get more ‘Feature Projects’ like the Caspian Sea Project or Government Group’s (EAS) $200 million SPAWAR contract? I doubt it if this trend and direction continues. You have a voice, both individual and collective as investors and employees. I posted many times that in the past Senior Management and BOD was available to listen. I even remember mention of an employee hotline and investors have their avenues through Investor Relations. It is your company too. Good luck to everyone.
16 May 2012
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 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
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:
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.
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.
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.
Good luck to everyone.
Comments are welcomed.
08 May 2012
ENGlobal Corporation: More 10K Analysis and 1Q Preview
ENG’s 1Q report date has been set for 15 May with a
conference call afterward. In the meantime we are all wondering about a
replacement credit facility (CF). According to the SEC filing DEF 14A a short
resume’ indicates the current CFO, John Beall, has held several positions in
the bank and finance sector. He should be able to secure a CF from one of his
old companies such as PNC. A new CF will have to be larger than the previous
one to pay off the debt and allow ammunition for continuing operations. It would
have to be at least one pay cycle larger that the original one, therefore, it
should be in the neighborhood of $33-35 million. I would expect this to be
addressed soon because as pointed out in the 17 April post ENG is cutting it
close on cash. I have heard plenty of comments and seen written issues of
non-payment or delayed payments, etc. However, instead of dealing with those I
chose to rely on that previous calculation that ENG was cutting it close and
low on cash.
From the 10 K: “In
particular, we are focused on international expansion as we believe that the
many significant projects will be located outside of the United States”.
ENGlobal has placed emphasis on international projects. Will the new CF cover
international projects (with the given money exchange issues); or, cover
lump-sum projects for that matter? [As a post script a news release was issued the day after this posting that ENG secured a credit facility for $35 million. No other details, including those that would answer the questions above, about the agreement were given.]
The backlog may have decreased lately. I have heard from two
different companies that former ENG employees are applying for work after being
laid off of a big DCS (Automation) job at midstream in the project. This
project is being performed in a series of contracts. This work was in
California for ConocoPhillips and I think valued originally at ~$120 Million. I
believe they were halfway through the total project. In the 17 April post the organic
(Domestic US) backlog was calculated to be only $221 million. Now it looks like
backlog could be reduced to ~$161 million ($221 million - $60 million). Since
ENG only reports backlog annually at year-end you will not see an updated
backlog reported 1Q.
Additional staffing losses include senior managers in
Denver, Houston (both in Engineering) and Manufacturing of the Automation
Group. I can remember when ENGlobal was proud of their “Hiring from the Top
Down” technique by hiring senior managers that bring their staff with them.
Unfortunately it works in reverse just as well. Moreover, you lose business
because the client relationships follow the people who created them.
More 10K Analysis
I had difficulty-understanding sections of this year’s
10K. Earlier ones seemed easier to understand when the former CFO was
responsible for the numbers product output. It looks to me like unbillable
corporate (“other”) support overhead has been pushed out to operations and
impacting the three segments. It appears SG&A went down from 2010 to 2011
by showing a decrease of $8.712 million. This initially looks good but there is
something that is hiding the real number. Let’s compare continuing operations
and take out a legacy issue that the CEO had no control over. The South
Louisiana Ethanol (SLE) project failure added ~$10 million overhead via a bad
debt reserve to SG&A in 2010. Remove this charge and 2010 SG&A drops to
$29.9 million and compare that to $31.2 million SG&A in 2011. Well folk’s,
looks like SG&A actually INCREASED $1.3 million in additional overhead for
2011 and the comparable net loss from continuing operations doubled from $2.2
million in 2010 to $4.2 million in 2011. That is a bad trend for continuing
operations. Decentralizing support staff adding additional staff (and costs…)
for human resources, safety, and accounting; pushing SG&A out to
operations; increasing SG&A; increasing DSO (17 April post) are all at the
heart of why profit is not made from present revenues.
From the 10K: “The decrease in all other SG&A
expense for the twelve months ended December 31, 2011 as compared to the
comparable 2010 period, was primarily the result of decreases of $1.1 million
in salaries and employee related expenses, offset by an increase of $0.1
million in professional services expenses.”
The net of these two variances indicate an overall decrease of $1.0
million while the consolidated details for 2011 vs. 2010 indicate an overall
decrease of $78k! What happened to the
other $922k?
Cash flow notables include a tax refund of $6.7 million
in October 2011. Just think what the credit facility debt would be if they had
not received this refund – ENG would have totaled ~$23.6 million in debt!
From the 10K: “In 2011, investing activities were
primarily used for capital additions.” Only $664k was detailed to Property and
Equipment Acquired, while $2.275 million is shown as restricted cash. What
constitutes restricted cash? No explanation is found for over $2.2 million.
Could it be collateral required for the letter of credit on the international
project? Restricted cash hit the Balance Sheet in 3Q and the Statement of Cash
Flows in 4Q?
Note 8 in the 10K details
certain balance sheet accounts. I find this interesting especially since their
auditors make specific statements in their opinion letter that…“We have also audited the schedule listed in
the accompanying Item 8” and “Also, in our opinion, the schedule presents
fairly, in all material respects, the information set forth, therein in
relation to the financial statements taken as a whole.”
The components of Other Current Liabilities as of December 31, 2011 and 2010 are as follows:
2011
|
2010
|
||||||||||||||
(in thousands)
|
|||||||||||||||
Accrual for
known contingencies
|
$
|
2,061
|
$
|
831
|
|||||||||||
Customer
prepayments
|
655
|
309
|
|||||||||||||
Accrued interest
|
86
|
73
|
|||||||||||||
Other
|
270
|
81
|
|||||||||||||
Other current
liabilities
|
$
|
3,072
|
$
|
1,294
|
|||||||||||
The accrual for known contingencies seems rather high since
it was taken primarily for litigation and legal expenses for two lawsuits
discussed earlier in the section. Relating to the Phillips case and they
state…“the claim is still pending but
it is not expected to have a material adverse effect on our results of
operations or financial position” so could we reasonably expect little or no
reserve related to this case? As for
the SLE lawsuit, they still show $0.9 million ($845,500) in a long-term notes
receivable so they may have reserved that amount within the $2.061 million. The
final judgment was issued 15 February 2011 and in the court settlement ENG got
only $242 thousand (and this was known as of writing and prior to the release
of the 10K). The $845K looks lost – so where is the balance of over $1.2
million going to land? They breakout customer prepayments of $655k and accrued
interest of $86k and yet $2.331 million is just lumped together as either
“known” or “other”. If these
liabilities are “known” why not share the details?
Earnings
1Q earnings could be a real wildcard for 2012. One could
reasonably expect that the delay in final reporting of 2011 financial results
gave ample time for all legacy issues to be vetted and properly accounted for
as 2012 January and February monthly financial results should have already been
completed by April 12th. Year-end accruals,
work-in-process estimates, the allowance for bad debt, and material liability
accounts covered by burden rates should have easily been reconciled, tested,
and reviewed.
If 1Q is a loss, that could reflect the continuing downward
operational trend and the actual increase in SG&A revealed earlier in this
posting.
If 1Q is a surprise positive, be wary of how that gain got
to the bottom line. Before you are thrilled by a gain understand if a profit
was truly made. Dissection will be necessary and keep in mind the past use of
Non-GAAP methods. Be aware that reserves left from last year can be placed on
the bottom line this year with no explanation required or necessary.
Additionally, contingencies from fixed-sum projects may also be called in from
operations and used to embellish the bottom line with no explanations or
accounting. Watch the margins, if there is a sudden increase you can bet there was contingency or reserve pumping to increase the bottom line. I would love to see analysts' questions address these topics.
I
think a reasonable estimate for 1Q will be $80-$82 million in revenues with EPS
between ($0.01) to $(0.03).
If the 10K were easier to read and understand as it was in
past years and better disclosures were being utilized I would be less cautious
about 1Q forward. But for now we have a company on the edge. Recovery would be
fantastic – but what put ENGlobal in risk of viability deserves serious review.
Comments are welcomed.
Good
luck to everyone.
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