Tumultuous Tulsa

Rev 1.1

Tulsa is the home of the Golden Hurricanes but that is not where the turbulence is. I was intrigued by several postings and circulating opinions that some event occurred up in ENGlobal’s Tulsa Government Office. I looked into those claims and now have some facts.

Tulsa, OK - ENGlobal Government Services

Several former members of the ENGlobal Government Group said that a massive resignation and walkout has occurred in the Tulsa, Oklahoma office by the Senior Program and Project Management Team, System Integration Department Head/Project Manager, several Systems Analysts and the Sr. Electrical Engineer. No details are revealed. The only fact known is that management fired one key manager which resulted in the resignation of multiple other key managers.

Any other details are really unnecessary anyway. Let’s examine just that basic information. The fact that one member was fired and many others left fairly quickly indicates several important psychological facts:

• There was sharp disagreement with management.

• The disagreement was deep enough to fore go fears of unemployment. There may have been a longer history of discord between management and the team indicating misunderstanding and poor relations. It is well known this team made high profit for many past years to present – you may draw your own conclusions.

• There is a strong emotional and support bond within this group – they stand together. This usually means they performed as a group well, which is typical for long-term government contracting. There is usually a great deal of respect between the government and long-lived groups.

The firing triggered a cascade of resignations that could impact performance on past and recently awarded contracts. Will ENGlobal eventually lose the contracts without the team? No one can be absolutely sure but with that much central talent gone it should severely impact performance. I will discuss my experiences. Having performed some government contracting in the past I know that if a contractor has not paid vendors and/or cannot perform work or convince the government of unfettered performance the contract will be cancelled for "non-performance" or "convenience". This happens rather procedurally and relatively fast once the government gets any red flags. If the government hears of this walkout it will be on alert and they will look for any performance issues. All government actions are based on performance on the contract.

If performance issues are noted the first step is for the government to issue “Cure” letters. If the issues from those letters are not remedied then the next step is reached. That step is “Show/Cause” notifications. If these are not actively engaged and solved then “Notice of Termination” results. This process is very procedural, paced and the government provides adequate time for reflexive action. Note: The opinion of the contractor that is having problems will always differ on the latter point. If you act slowly or ignore the government the termination comes justifiably quicker. The government pays on time and quickly (~ 10 days) – you should not waste their time or fair procedure with excuses or silence. 

When a government contractor loses team members it cannot simply replace any single team member with another Program or Project Manager, Analyst, Engineer, etc. Why? This is due to the fact that the government will not accept or approve of just any person filling those roles. The government has a serious responsibility to U.S. taxpayers to spend money wisely with tight controls. Contracting team members that they will approve of are very professional and have pedigreed resumes by working up to those positions under previous government contracts and have a history of accepted performance.

So what will ENG corporate do now?

One, they can refill those positions with government approved personnel and continue to service the contract. If ENG is able to refill the positions and continue to service the contract, it is doubtful that they would continue to receive the same quantity of work that the previous experienced team was able to win.  ENG still has to bid this work against other contract awardees and these other firms are likely to be a beneficiary of this situation.  If this occurs revenue from this group will start to decline.

ENG might try and pick up new work in other Government sectors, however their current financial situation will make this difficult.  It is doubtful other Government agencies will want to risk new contract awards to a company struggling financially.

If they cannot do the above then, two, they can sell the contract, before they lose it, to a group properly registered to do government work. Remember, there are other awardees on that same contract also.

Three, they can lose the contract with little value. The actual contract value to ENG is $8,333.00 with the huge balance not presently awarded. Yes, even though millions were touted those contract blocks have not been awarded yet! ENG may try to attract the group back with more money but the factors that led them to quit would remain.

Good luck to everyone.

Fall and Winter News and Events 2012

Rev. 4.6

ENGlobal Reaches Forbearance Agreement With Lender

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

Opinion 1/10

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

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

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

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

You can see the filing here:

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



ENGlobal Enters Agreement to Sell Its Field Solutions Segment

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

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

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

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

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

Opinion 9/13

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

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

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

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

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

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

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

Comments are welcome.

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

2Q 2012 10Q More Analysis

In looking at the 10Q closer there are more interesting notes and comments to make. Let’s look at it by section:

Note 3 - Discontinued Operations

"The Company has been unable to sell the Electrical Services group business as planned and has decided to sell substantially all of the assets of this business. The Company expects to complete the disposal of its discontinued operations concurrent with the completion of the last remaining lump sum project, which is expected to occur in the third quarter of 2012. During the second quarter, the Company accrued approximately $0.5 million of additional costs expected to be incurred to complete the remaining lump sum project. The Company will have no continuing involvement with these operations after the sale or disposal."

The trend in losses since the election of “discontinued operations”:
    06/30/2011 – loss of $0.430 mil
    09/30/2011 – loss of $1.036 mil
    12/31/2011 – loss of $0.933 mil
    03/31/2012 – loss of $0.113 mil;
That’s $2.512 mil in the prior 4 quarters and now another $2.073 mil in 2Q of 2012!  Sounds like it was not discontinued... Where was project controls and internal audit on assessment of ETC on this project?  Where is the credibility that such project will now be completed in 3Q?  What additional losses will we see?

Note 4 – Stock Compensation Plans

I find this section generally painful to read considering company results:

"In April 2012, the Compensation Committee of the Board of Directors approved an increase of 500,000 shares, which was subsequently approved by our shareholders. As of August 17, 2012, 470,773 shares of restricted stock have been granted under the Equity Plan, of which 133,115 remain subject to outstanding awards."

Where did the 470,773 shares go?  Who produced results to get such grants other than the board?  As you recall the CEO and the board received just over 151,000 shares for their efforts and direction.

Note 5 – Contracts

“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 June 30, 2012, compared to $0.3 million as of December 31, 2011.” - THEY ARE STILL DOING WORK WITHOUT CHANGE ORDERS!

“We expect a majority of the deferred revenue amount to be realized by year end 2012.” If they expect this revenue to be realized why are they deferring?

Credit Facility

You need to read the sections concerning the Credit Facility in the 10Q. The facility was covered previously within a dedicated post. I had several people read that lengthy and onerous money contract and contribute their thoughts to that post to get that monster right. It is tough and restrictive contract as noted then. The information within the current 10Q is a good, well-written abstract synopsis of that Credit Facility - too bad ENG fell into such financial condition that this was the result. The abstract is shorter than the approximately 114 pages of the actual CF, however it is still lengthy so I will provide you a link, see section labeled "PNC Credit Facility". As a side note see the section above it labeled "Current Classification of Borrowings under the PNC Credit Facility". I find it humorous that a three-year term agreement is classified as "Current".

http://sec.gov/Archives/edgar/data/933738/000093373812000012/eng-10qx063012q.htm

Note 8 – Federal and State Income Taxes

Remember the big percentage of this quarter’s loss?

"During the 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."

Translation: Basically we do not think we will make enough money to take advantage of the deferred tax asset… if that’s true why wouldn’t this be a triggering event for goodwill impairment?

MD&A Overview

“After a period of declining revenues due to poor domestic economic conditions, we were encouraged by our project proposal activity during the fourth quarter of 2011 and into the first quarter of 2012, which resulted in an increase in backlog and revenue." Where are the awards?  We have not seen any press releases sharing any recent successes.

"In the first quarter of 2012, we were notified by Wells Fargo Bank that they were no longer willing to support the Company with its credit facility. In response, we began looking for a replacement credit facility to meet our working capital needs, while curtailing unnecessary expenditures. The majority of our vendors and customers have been amenable to working with us through this transition."

Really, so vendors have agreed to work without pay and customers have agreed to pay early?  We can see where AP has increased since December 31, 2011 from $8.4 mil to $8.9 mil at the end of March 30, 2012 and $11.5 mil at the end of June 30, 2012 but what we cannot see customer help with early payments?

"As a result of the uncertainty created by the credit facility transition, we spent valuable time reassuring our stakeholders. Unfortunately, the internal focus - while necessary - was also counterproductive to our business development momentum. As a result, our sales throughout the second quarter have been weaker than expected." REALLY? Profits would be the most assuring thing for the stakeholders.  How about spending time making that happen?

Management's Discussion and Analysis

"During the recent period of industry-wide decline in demand for the types of services we provide, we reduced our rates significantly, as was required to obtain and retain business. Although the level of demand has increased, pricing in certain geographical markets is still extremely competitive and we have not yet been able to increase our margins to prior levels." - What?  Tell that to Richard Industrial Group and Burrow Global. Competitors are growing!

Revenue:
"The Field Solutions segment experienced decreased revenue in the Land division due to decreased project activity with major midstream energy companies while the Inspection Division experienced decreased revenue due to completion of the Ruby Pipeline Project." Where does the flight of senior management fit into the chicken and the egg theory within Field Solutions?

Selling, General, and Administrative:
“The $1.1 million increase in SG&A expense for the three months ended June 30, 2012 , as compared to the same period for 2011 , primarily resulted from increased salary and related expenses of approximately $0.8 million incurred primarily as a result of initiatives undertaken in anticipation of increased activity for the remainder of the year.” Who was reading these tealeaves?  Maybe it is just rose-colored glasses or the smoke from burning pizza!

"As a percentage of revenue, SG&A expense increased to 10.2% for the three months ended June 30, 2012, from 9.2% for the comparable prior year period. During June, we began reducing overhead and staff levels in response to reduced activity levels. These staff reductions resulted in severance costs of approximately $0.2 million during the quarter.”  Surely there will be other severance costs for the CEO, the VP of HSE, the SVP of Field Solutions and others both voluntary and due to staff reductions that will come in Q3.  Have those costs been taken or accrued? What about the bonuses being paid to keep staff in tact?

Liquidity and Capital Resources

This section speaks for itself:

"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.

If any such event occurs and continues without remedy, we would be required to consider alternative financing options." L

"The primary changes in working capital accounts during the six months ended June 30, 2012 were increased Costs in Excess of Billings and Decreased Billings in Excess of Costs on uncompleted contracts of $8.4 million on fixed price projects where billing milestones have not been met [Could this be due to performance issues related to the loss of staff?] and increased Accounts Receivable of $1.0 million."

Conclusion

There is not much cash left and once again ENGlobal is in a workout group, this time with PNC. This is virtually the same predicament as in May, same company - different lender. Can it be worked out? Sure, however, I think it will be with more restrictions. Additionally, cash will need to be raised. How? An equity partner and/or sale of assets as noted in previous commentary is most likely.

I get a lot of questions about liquidation and bankruptcy. I do not wish to amplify the subjects above their natural possibilities so please keep that in mind. In the case of bankruptcy the stock is always cancelled - zero value to shareholders.

In addressing liquidation start looking at Tangible Net Worth:
   
Current assets - $78 mil
Current liabilities - $60 mil
That is a net of $18 mil for shareholders
   
Why, we have $48.7 in stockholder equity?  The balance of approx. $30.8 million is made up of:

$3.3 mil in PP&E, which would not offer much cash
$25.0 mil in goodwill & other intangibles
$899K in a note held by the courts on a legal claim
$1.6 mil in “Other Assets” whatever that includes

$18 - $21mil for shareholders equates to $0.67 to $0.78 per share in liquidation scenario.

The best path is for ENGlobal to manage better, probably downsize to viable capability and rebuild as conditions and management capability permits. Good luck to everyone.

Comments are welcome.
   

Neil Armstrong - Salute

        Godspeed Neil Armstrong

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.

NT 10-Q Filed by ENGlobal

2Q Earnings Delay - see Late Summer 2012 Stock News And Events (scroll down)

ENGlobal CEO Resigns

Rev. 1.8

First things first, understand where the news release attempts to take you from a psychological point of view. The actual headline reads: ENGlobal Appoints New Chief Executive Officer. The word “New” is designed to bring hope and change. I am not trying to create any associated illustration – it is just that in simple form.

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 didn’t it? Wasn’t it just over a month ago Mr. Pagano was reelected along with the rest of the Directors overwhelmingly to the BOD? Didn’t he get an increased share of stock options (50,335 shares – 120% increase YoY) for his banner service? What does this tell how about how the BOD is managing your company’s business? To me this firing looks purely reactionary. I would prefer a BOD that is proactive. These behaviors further display the BOD is responsible just as much as Mr. Pagano is for his poor management and should be held accountable.

From the news release: "Mr. Pagano will be available in a consulting capacity through the remainder of 2012 to ensure a smooth and seamless leadership transition." As a consultant? This is probably another another way of saying Mr. Pagano is still "being paid". Let's put it this way - If you had the unfortunate experience of enduring a divorce would you go back to your ex-spouse for marriage counseling tips?

Reaction to What?

I believe the possibility of what happened was covered within the possibilities of the 2Q 2012 Predictions And "What Ifs" post. We know more about what permutation line we are traveling down. We now have “New” management or “New-Old” management. Whatever it is you are supposed to feel good about it, and it is certainly better than the misguided leadership before. So why did this happen?

There are a number of possibilities. This cannot be a good sign for 2Q results. As stated before in the 2Q 2012 Predictions post and for reasons given there I think 2Q is going to be awful. Given that probability what choice is left at this point, over 3 years, with the accumulation of losses. Mr. Pagano is not a scapegoat in terms of his actions. He deserves to be fired. He is, however, a scapegoat in terms of BOD responsibilities and them not performing their fiduciary responsibilities earlier, preventing this condition. Like I said, this is reactive.

The 2Q numbers have been in and the BOD knows them. If any bad results were being pushed forward to 3Q they should be taken in now. With Pagano’s departure they should take ALL the losses and give Mr. Coskey a chance in Q3.  Still, it may be too little too late for a recovery. Let's hope not.

PNC may have lost faith in Mr. Pagano and informed the board with their own ultimatum given their powers from the controlling Credit Facility. PNC may have threatened to pull the plug, period. A government investigation could be taking place that has not manifested publicly. A reverse merger, corporation sale or asset buyout could be in the works. Any of these scenarios certainly would lessen the impact of a debilitating quarter and would render it moot by degree of the actual event level. You have to believe if these last three possibilities were to happen the plans would not include Mr. Pagano.

Mr. Coskey certainly can do a better job than Mr. Pagano, however, I think his taking over is for a company in transition. More big news is coming as stated before and it will happen soon. Two CFOs gone, one CEO gone with a multitude of Senior and Middle Management departed. Mr. Coskey has a talent for growing a company, and is one of the best entrepreneurs I have ever seen. Sure there were mistakes but that is a normal condition for true entrepreneurship. He likes to delegate with a “hands off” leadership style. That works better during good economic times, and not so well when close management is needed for recession periods. I mentioned this in past posts that when Hulda Coskey was involved they made a great team and everything ran better. Ms. Coskey did about everything in the earlier companies that Mr. Coskey didn’t do. Now that he has taken the CEO position she would be effective as COO, however, neither IDS or ENG ever went the COO route. She could perform CFO duties well, with her meticulous number control and attention to detail. The conference call should be interesting – no permanent CFO announced and another CEO trying to hold a company together. Good luck to everyone.

Comments are welcome.