Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - GLOBAL POWER EQUIPMENT GROUP INC.Financial_Report.xls
EX-10.1 - AMENDMENT NO. 1 TO THE CREDIT AGREEMENT - GLOBAL POWER EQUIPMENT GROUP INC.d344595dex101.htm
EX-31.1 - CERTIFICATION BY THE CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 - GLOBAL POWER EQUIPMENT GROUP INC.d344595dex311.htm
EX-32.2 - CERTIFICATION BY THE CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906 - GLOBAL POWER EQUIPMENT GROUP INC.d344595dex322.htm
EX-31.2 - CERTIFICATION BY THE CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 - GLOBAL POWER EQUIPMENT GROUP INC.d344595dex312.htm
EX-32.1 - CERTIFICATION BY THE CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 906 - GLOBAL POWER EQUIPMENT GROUP INC.d344595dex321.htm
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to             

Commission File No. 001-16501

 

 

Global Power Equipment Group Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   73-1541378

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

400 E. Las Colinas Blvd., Suite 400

Irving, TX 75039

(Address of principal executive offices) (Zip code)

(214) 574-2700

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨ (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.    Yes  x    No  ¨

As of April 24, 2012, there were 17,186,842 shares of common stock of Global Power Equipment Group Inc. outstanding.

 

 

 


Table of Contents

GLOBAL POWER EQUIPMENT GROUP INC. AND SUBSIDIARIES

Form 10-Q

For the quarter ended March 31, 2012

Table of Contents

 

Part I - FINANCIAL INFORMATION

  

Item 1. Financial Statements (unaudited)

     3   

Condensed Consolidated Balance Sheets as of March  31, 2012 (unaudited) and December 31, 2011

     3   

Condensed Consolidated Statements of Operations for the Three Months Ended March  31, 2012 and 2011 (unaudited)

     4   

Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March  31, 2012 and 2011 (unaudited)

     5   

Condensed Consolidated Statement of Stockholders’ Equity for the Three Months Ended March  31, 2012 (unaudited)

     6   

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March  31, 2012 and 2011 (unaudited)

     7   

Notes to Condensed Consolidated Financial Statements (unaudited)

     8   

Item  2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     14   

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     22   

Item 4. Controls and Procedures

     22   

Part II - OTHER INFORMATION

  

Item 1. Legal Proceedings

     24   

Item 1A. Risk Factors

     24   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     24   

Item 3. Defaults Upon Senior Securities

     24   

Item 4. Mine Safety Disclosure

     24   

Item 5. Other Information

     24   

Item 6. Exhibits

     25   

SIGNATURES

     26   


Table of Contents

Part I - FINANCIAL INFORMATION

Item 1. Financial Statements.

GLOBAL POWER EQUIPMENT GROUP INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

($ in thousands, except share and per share amounts)

 

$000000.0 $000000.0
     March 31,
2012
    December 31,
2011
 
     (unaudited)        

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 95,388      $ 99,491   

Restricted cash

     3,100        3,100   

Accounts receivable, net of allowance of $1,208 and $1,135

     47,893        52,573   

Inventories

     5,504        5,354   

Costs and estimated earnings in excess of billings

     37,419        30,680   

Deferred tax assets

     3,424        3,424   

Other current assets

     5,941        5,920   
  

 

 

   

 

 

 

Total current assets

     198,669        200,542   

Property, plant and equipment, net

     10,487        9,492   

Goodwill

     74,018        74,018   

Intangible assets, net

     12,500        12,500   

Deferred tax assets

     14,721        14,448   

Other assets

     4,920        5,150   
  

 

 

   

 

 

 

Total assets

     315,315      $ 316,150   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities:

    

Accounts payable

   $ 7,743      $ 10,377   

Accrued compensation and benefits

     19,547        16,485   

Billings in excess of costs and estimated earnings

     9,018        12,859   

Accrued warranties

     4,734        4,719   

Other current liabilities

     9,069        7,153   
  

 

 

   

 

 

 

Total current liabilities

     50,111        51,593   

Other long-term liabilities

     5,926        5,903   
  

 

 

   

 

 

 

Total liabilities

     56,037        57,496   

Commitments and contingencies

    

Stockholders’ equity:

    

Common stock, $0.01 par value, 170,000,000 shares authorized and 17,517,373 and 16,771,388 shares issued, respectively, and 16,915,482 and 16,381,533 shares outstanding, respectively

     175        168   

Paid-in capital

     68,198        69,495   

Accumulated other comprehensive income

     1,599        508   

Retained earnings

     189,312        188,487   

Treasury stock, at cost (601,891 and 389,855 common shares, respectively)

     (6     (4
  

 

 

   

 

 

 

Total stockholders’ equity

     259,278        258,654   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 315,315      $ 316,150   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements (unaudited).

 

3


Table of Contents

GLOBAL POWER EQUIPMENT GROUP INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

($ in thousands, except share and per share amounts)

 

     Three months ended
March 31,
 
     2012     2011  
     (unaudited)  

Products revenue

   $ 32,104      $ 20,473   

Services revenue

     72,358        83,822   
  

 

 

   

 

 

 

Total revenue

     104,462        104,295   

Cost of products revenue

     25,860        17,066   

Cost of services revenue

     62,110        73,988   
  

 

 

   

 

 

 

Cost of revenue

     87,970        91,054   

Gross profit

     16,492        13,241   

Selling and administrative expenses

     13,712        11,989   

Reorganization expense

     —          45   
  

 

 

   

 

 

 

Operating income

     2,780        1,207   

Interest expense, net

     1,181        260   

Other (income) expense

     (5     78   
  

 

 

   

 

 

 

Income from continuing operations before income tax

     1,604        869   

Income tax expense

     712        19   
  

 

 

   

 

 

 

Income from continuing operations

     892        850   

Discontinued operations:

    

(Loss) income from discontinued operations

     (67     36   
  

 

 

   

 

 

 

Net income

   $ 825      $ 886   
  

 

 

   

 

 

 

Basic earnings per weighted average common share:

    

Income from continuing operations

   $ 0.05      $ 0.06   

Income from discontinued operations

     —          —     
  

 

 

   

 

 

 

Income per common share - basic

   $ 0.05      $ 0.06   
  

 

 

   

 

 

 

Weighted average number of shares of common stock outstanding - basic

     16,375,734        15,562,759   
  

 

 

   

 

 

 

Diluted earnings per weighted average common share:

    

Income from continuing operations

   $ 0.05      $ 0.05   

Income from discontinued operations

     —          —     
  

 

 

   

 

 

 

Income per common share - diluted

   $ 0.05      $ 0.05   
  

 

 

   

 

 

 

Weighted average number of shares of common stock outstanding - diluted

     17,072,691        16,534,643   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements (unaudited).

 

4


Table of Contents

GLOBAL POWER EQUIPMENT GROUP INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

($ in thousands)

 

     Three months ended
March 31,
 
     2012      2011  
     (unaudited)  

Net income

   $ 825       $ 886   

Foreign currency translation adjustment

     1,091         1,501   
  

 

 

    

 

 

 

Comprehensive income

   $ 1,916       $ 2,387   
  

 

 

    

 

 

 

See accompanying notes to condensed consolidated financial statements (unaudited).

 

5


Table of Contents

GLOBAL POWER EQUIPMENT GROUP INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

($ in thousands, except share amounts)

(unaudited)

 

     Common Shares
$0.01 Per Share
     Paid-in
Capital
    Accumulated
Other
Comprehensive
Income
     Retained
Earnings
     Treasury Shares     Total  
               
               
   Shares      Amount              Shares     Amount    

Balance, December 31, 2011

     16,771,388       $ 168       $ 69,495      $ 508       $ 188,487         (389,855   $ (4   $ 258,654   

Stock-based compensation

     396,651         4         (1,295     —           —           (112,171     (1     (1,292

Warrants exercised

     349,334         3         (2     —           —           (99,865     (1     —     

Net income

     —           —           —          —           825         —          —          825   

Foreign currency translation adjustment

     —           —           —          1,091         —           —          —          1,091   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance, March 31, 2012

     17,517,373       $ 175       $ 68,198      $ 1,599       $ 189,312         (601,891   $ (6   $ 259,278   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements (unaudited).

 

6


Table of Contents

GLOBAL POWER EQUIPMENT GROUP INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

($ in thousands)

 

$00000 $00000
     Three months ended
March 31,
 
     2012     2011  
     (unaudited)  

Operating activities:

    

Net income

   $ 825      $ 886   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Deferred income tax (benefit) provision

     (273     —     

Depreciation and amortization on plant, property and equipment and intangible assets

     437        964   

Amortization on deferred financing costs

     1,105        130   

Loss on disposals of equipment

     —          3   

Stock-based compensation

     1,722        1,237   

Changes in operating assets and liabilities

     (5,637     (15,048
  

 

 

   

 

 

 

Net cash used in operating activities

     (1,821     (11,828

Investing activities:

    

Proceeds from sale of equipment

     —          6   

Purchase of property, plant and equipment

     (1,087     (915
  

 

 

   

 

 

 

Net cash used in investing activities

     (1,087     (909

Financing activities:

    

Repurchase of stock-based awards for payment of statutory taxes due on stock-based compensation

     (1,039     (150

Debt issuance costs

     (902     —     
  

 

 

   

 

 

 

Net cash used in financing activities

     (1,941     (150

Effect of exchange rate changes on cash

     746        1,402   
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     (4,103     (11,485

Cash and cash equivalents, beginning of period

     99,491        55,474   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 95,388      $ 43,989   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements (unaudited).

 

7


Table of Contents

GLOBAL POWER EQUIPMENT GROUP INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1 – BUSINESS AND ORGANIZATION

Global Power Equipment Group Inc. and its wholly owned subsidiaries (unless the context requires otherwise, “Global Power”, the “Company”, “we”, “us” or “our”) is a leading provider of power generation equipment and industrial maintenance services. Through our Products Division, we design, engineer and manufacture gas turbine auxiliary equipment products for customers throughout the world. Through our Services Division, we provide on-site modification and maintenance, outage management and facility upgrade services for nuclear power plants and specialty maintenance and other industrial services to hydrocarbon power plants and other industrial operations in the United States. Our corporate headquarters are located in Irving, Texas, with facilities in Tulsa, Oklahoma; Auburn, Massachusetts; Atlanta, Georgia; Monterrey, Mexico; Shanghai, China; and Heerlen, The Netherlands.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation: These unaudited condensed consolidated financial statements have been prepared by us in accordance with accounting principles generally accepted in the United States of America (“U.S.”). The information in the condensed consolidated financial statements, in the opinion of management, includes normal recurring adjustments and reflects all adjustments that are necessary for a fair statement of such financial statements. We believe that the disclosures presented are adequate to represent materially correct interim financial statements. These condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and related notes for the year ended December 31, 2011 included in the Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 14, 2012.

Discontinued Operations Presentation: In August 2011, we completed the sale of substantially all of the operating assets of our Deltak LLC (“Deltak”) business unit. The results of Deltak operations for all periods presented have been reclassified to discontinued operations except where noted. The following notes relate to our continuing operations only unless otherwise noted (See Note 3 – Discontinued Operations and Sale of Deltak Assets).

Principles of Consolidation: The accompanying condensed consolidated financial statements include the accounts of Global Power Equipment Group Inc. and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying footnotes. Actual results could vary materially from those estimates.

Reclassifications: Certain reclassifications have been made to the prior years’ consolidated financial statements to conform with the current year presentation.

Dollar Amounts: All dollar amounts (except per share amounts) presented in the tabulations within the notes to our condensed consolidated financial statements are stated in thousands of dollars, unless otherwise noted.

NOTE 3 – DISCONTINUED OPERATIONS AND SALE OF DELTAK ASSETS

During the third quarter of 2011, we completed the sale of the operating net assets of our Deltak business unit, which was part of the Products Division. We have reported the disposition of the Deltak business unit as discontinued operations in accordance with the guidance of Accounting Standards Codification (“ASC”) 205-20 – Discontinued Operations. The following table presents selected information regarding the results of our discontinued operations:

 

$00000 $00000
     Three Months Ended March 31,  
         2012             2011      

Revenue

   $ 128      $ 7,288   

(Loss) income before income taxes

     (110     55   

Income tax (benefit) expense

     (43     19   
  

 

 

   

 

 

 

(Loss) income from discontinued operations

   $ (67   $ 36   
  

 

 

   

 

 

 

 

8


Table of Contents

NOTE 4 – EARNINGS PER SHARE

Basic earnings per common share is net income divided by the weighted average common shares outstanding during the period. Diluted earnings per common share is based on the weighted average common shares outstanding during the period, adjusted to include the incremental effect of common shares that would be issued upon the conversion of warrants and the vesting and release of restricted stock awards.

Basic and diluted earnings per common share are calculated as follows:

 

     Three Months Ended March 31,  
     2012     2011  

Net Income (basic and diluted):

    

Income from continuing operations

   $ 892      $ 850   

(Loss) income from discontinued operations

     (67     36   
  

 

 

   

 

 

 

Net income available to common shareholders

   $ 825      $ 886   
  

 

 

   

 

 

 

Basic Earnings Per Common Share:

    

Weighted Average Common Shares Outstanding

     16,375,734        15,562,759   
  

 

 

   

 

 

 

Basic earnings per common share from continuing operations

   $ 0.05      $ 0.06   

Basic earnings per common share from discontinued operations

     —          —     
  

 

 

   

 

 

 

Basic earnings per common share

   $ 0.05      $ 0.06   
  

 

 

   

 

 

 

Diluted Earnings Per Common Share:

    

Weighted Average Common Shares Outstanding

     16,375,734        15,562,759   

Effect of Dilutive Securities:

    

Unvested portion of restricted stock awards

     201,883        372,140   

Warrants to purchase common stock

     495,074        599,744   
  

 

 

   

 

 

 

Weighted Average Common Shares Outstanding Assuming Dilution

     17,072,691        16,534,643   
  

 

 

   

 

 

 

Diluted earnings per common share from continuing operations

   $ 0.05      $ 0.05   

Diluted earnings per common share from discontinued operations

     —          —     
  

 

 

   

 

 

 

Diluted earnings per common share

   $ 0.05      $ 0.05   
  

 

 

   

 

 

 

During the three months ended March 31, 2012 and 2011, 214,644 and no outstanding stock equivalents, respectively, were anti-dilutive and excluded from the computations of diluted earnings per common share. Excluded from the calculation of both basic and diluted earnings per common share are the unvested performance-based restricted stock awards for which performance targets had not been set by the Board of Directors of 156,192 and 184,254 as of March 31, 2012 and March 31, 2011, respectively.

NOTE 5 – INCOME TAXES

The overall effective income tax rate during the three months ended March 31, 2012 and 2011 was as follows:

 

     Three Months Ended March 31,  
     2012     2011  

Effective income tax rate

     44.4     2.2

The effective income tax rate differs from the statutory federal income tax rate of 35% primarily because of state and foreign income taxes and permanent differences, changes in the valuation allowance realized in 2011 and utilization of net operating loss carryforwards.

As of both March 31, 2012 and December 31, 2011, we provided for a liability of $5.8 million for unrecognized tax benefits related to various federal, foreign and state income tax matters, which is included in long-term deferred tax assets and other long-term liabilities. If recognized, the entire amount of the liability would affect the effective tax rate.

NOTE 6 – DEBT

New Credit Facility: On February 21, 2012, we entered into a new $100 million Credit Facility (“New Credit Facility”) with Wells Fargo Bank, National Association, as Administrative Agent, U.S. Bank National Association, as Syndication Agent and

 

9


Table of Contents

the various lending institutions party thereto. The New Credit Facility is a multicurrency revolving credit facility with a letter of credit sublimit of $75 million and an expansion feature not to exceed $50 million. Proceeds of borrowings under the New Credit Facility may be used for working capital, acquisitions and general corporate purposes. As of March 31, 2012, there were no outstanding borrowings.

The interest rate on letters of credit issued under the revolving letter of credit was 1.25% per annum as of March 31, 2012. We also pay an unused line fee of 0.20%. Should we need to borrow against the revolver facility, at any time during the agreement, we would incur an interest rate of LIBOR plus 1.25% per annum. As of March 31, 2012, our outstanding letters of credit under the New Credit Facility totaled approximately $16.5 million for our domestic entities. We also had outstanding letters of credit issued by another financial institution for our non-U.S. entities of $11.5 million, which reduced our available capacity sublimit for letters of credit under the New Credit Facility.

The New Credit Facility contains certain restrictive covenants customary for facilities of this type (subject to negotiated exceptions and baskets), including restrictions on indebtedness, liens, acquisitions and investments, restricted payments and dispositions. There are also financial covenants that require us to maintain a maximum consolidated total leverage ratio and a minimum interest coverage ratio. The New Credit Facility also provides for customary events of default, with corresponding grace periods, including failure to pay principal when due, failure to pay interest within three business days after becoming due, failure to pay other obligations within five days after becoming due, failure to comply with covenants, breaches of representations and warranties, default under certain other indebtedness, certain insolvency or receivership events affecting us and our subsidiaries, the occurrence of certain material judgments, or a change in control of the Company. The New Credit Facility has a maturity date of February 21, 2017.

As of March 31, 2012, we were in compliance with all debt covenants. As of March 31, 2012, we had unamortized deferred financing fees on our New Credit Facility of $0.9 million.

Previous Credit Facility: Upon entering into our New Credit Facility, we extinguished our previous $150 million Credit Facility (“Previous Credit Facility”). Our Previous Credit Facility consisted of a $60 million revolving letter of credit facility, including a $25 million cash advance sub-facility, and a $90 million term loan facility. On November 18, 2010, we repaid the outstanding balance of the term loan facility and all related interest in full. The Previous Credit Facility would have terminated on January 22, 2014 and any amounts outstanding at that time would have been due and payable in full, if it had not been extinguished on February 21, 2012 when we entered into our New Credit Facility.

On February 21, 2012, the amortization of debt financing costs pertaining to the Previous Credit Facility was accelerated increasing the amount of interest expense recognized during the first quarter of 2012 by $1.1 million.

NOTE 7 – COMMITMENTS AND CONTINGENCIES

Litigation: We are involved from time to time in legal actions that arise in the ordinary course of our business. We do not believe that the resolution of any currently pending actions, either individually or in the aggregate, is reasonably likely to have a material adverse effect on our financial position or results of operations. However, the outcomes of any legal actions cannot be predicted, and therefore, there can be no assurance that this will be the case.

Asbestos Cases: A former operating unit of Global Power has been named as a defendant in a limited number of asbestos personal injury lawsuits. Neither we nor our predecessors ever mined, manufactured, produced or distributed asbestos fiber, the material that allegedly caused the injury underlying these actions. The bankruptcy court’s discharge order issued upon emergence from bankruptcy extinguished the claims made by all plaintiffs who had filed asbestos claims against us before that time. We also believe the bankruptcy court’s discharge order should serve as a bar against any later claim filed against us, including any of our subsidiaries, based on alleged injury from asbestos at any time before emergence from bankruptcy. In any event in all of the asbestos cases finalized post-bankruptcy, we have been successful in having such cases dismissed without liability. We intend to vigorously defend all currently active actions, just as we defended the other actions that have since been dismissed, all without liability, and we do not anticipate that any of these actions will have a material adverse effect on our financial position, results of operations or liquidity. However, the outcomes of any legal action cannot be predicted and, therefore, there can be no assurance that this will be the case.

NOTE 8 – STOCKHOLDERS’ EQUITY

Warrants: On January 22, 2008, we issued warrants to purchase 1,807,236 shares of common stock with an exercise price of $7.9254. The warrants vested immediately upon issuance and expire on January 22, 2013. During the three months ended March 31, 2012, warrants were exercised to purchase 349,334 shares of common stock. The stock was issued in a cashless transaction whereby we withheld 99,865 shares of common stock, treasury shares, as payment of the exercised purchase warrants.

 

10


Table of Contents

Foreign Currency Translation: Foreign assets and liabilities are translated using the exchange rate in effect at the balance sheet date, and results of operations are translated using an average rate during the period. Translation adjustments are accumulated and reported as a component of accumulated other comprehensive income. The amount of accumulated comprehensive income related to foreign currency translation was $1.1 million during the three months ended March 31, 2012.

Stock-Based Compensation: We granted 246,254 shares of restricted stock awards to employees and directors during the three months ended March 31, 2012 at a weighted-average fair value price per share of $24.88. These restricted stock awards will vest ratably over four years. During the three months ended March 31, 2012, we vested 377,331 shares of stock-based compensation to employees and includes a $2.0 million non-cash accrual related to the payment of statutory taxes due on the awards that was unpaid as of March 31, 2012.

NOTE 9 – SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental cash flow disclosures are as follows:

 

$00000 $00000
     Three Months Ended March 31,  
         2012             2011      

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

    

Cash paid for the period for:

    

Interest

   $ 144      $ 210   

Income taxes

     378        565   

Net effect of changes in operating activities:

    

Decrease (increase) in accounts receivable

     4,680        (1,093

Increase in inventories

     (150     (301

Increase in costs and estimated earnings in excess of billings

     (6,739     (14,468

Increase in other current assets

     (21     (3,865

Decrease (increase) in other assets

     27        (4

Increase (decrease) in accounts payable

     (2,634     1,006   

Increase in accrued and other liabilities

     3,041        1,784   

Increase (decrease) in billings in excess of costs and estimated earnings

     (3,841     1,893   
  

 

 

   

 

 

 

Changes in operating assets and liabilities

   $ (5,637   $ (15,048
  

 

 

   

 

 

 

NOTE 10 – MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK

We have certain customers that represent more than 10 percent of consolidated accounts receivable. The balance for these customers as a percentage of the consolidated accounts receivable is as follows:

 

Customer

   As of
March 31,
2012
    As of
December 31,
2011
 

Siemens Energy, Inc.

     20     26

Southern Nuclear Operating Company

     17     15

Tennessee Valley Authority

     12     *   

General Electric Company

     11     *   

 

* Less than 10%

 

11


Table of Contents

We have certain customers that represent more than 10 percent of consolidated revenue. The revenue for these customers as a percentage of the consolidated revenue is as follows:

 

     Three Months Ended March 31,  

Customer

   2012     2011  

Southern Nuclear Operating Company

     30     30

Tennessee Valley Authority

     16     *   

Siemens Energy, Inc.

     12     *   

General Electric Company

     11     *   

Entergy Services Inc.

     *        13

FPL Group

     *        14

All others

     31     43
  

 

 

   

 

 

 

Total

     100     100
  

 

 

   

 

 

 

 

* Less than 10% of revenue included in All others above

Customers for the Products Division include original equipment manufacturers, engineering, procurement and construction contractors and operators of power generation facilities. Products Division customers include Siemens Energy, Inc. and General Electric Company. Customers for the Services Division are varied, but include some major utility companies within the U.S. Services Division customers include Southern Nuclear Operating Company, Tennessee Valley Authority, Entergy Services Inc. and FPL Group. Our major customers vary over time due to the relative size and duration of our projects and customer outages.

NOTE 11 – SEGMENT INFORMATION

We follow ASC 280 – Segment Reporting, to present segment information. We considered the way our management team makes operating decisions and assesses performance and considered which components of our enterprise have discrete financial information available. As management makes decisions using a products and services group focus, our analysis resulted in two reportable segments, the Products Division and the Services Division.

The following tables present information about segment income:

 

Products Divis Products Divis Products Divis

Three Months Ended March 31, 2012

   Products Division     Services Division      Total  

Revenue

   $ 32,104      $ 72,358       $ 104,462   

Depreciation and amortization

     310        127         437   

Operating income

     (366     3,146         2,780   

Three Months Ended March 31, 2011

   Products Division     Services Division      Total  

Revenue

   $ 20,473      $ 83,822       $ 104,295   

Depreciation and amortization

     313        547         860   

Operating income

     (2,569     3,776         1,207   

The following table presents information, which reconciles segment information to consolidated total assets:

 

$00000.00 $00000.00
      As of
March 31,
2012
     As of
December 31,
2011
 

Assets:

     

Products

   $ 123,971       $ 116,557   

Services

     81,606         78,652   

Non allocated corporate assets

     109,738         120,941   
  

 

 

    

 

 

 

Total consolidated assets

   $ 315,315       $ 316,150   
  

 

 

    

 

 

 

Corporate assets consist primarily of cash and deferred tax assets.

 

12


Table of Contents

The following presents the Products Division revenue by geographical region based on our operating locations. Products are often shipped to other geographical areas but revenue is listed in the region in which the revenue is recognized:

 

     Three Months Ended March 31,  
     2012      2011  
     Revenue
Recognized In
     Product
Shipped To
     Revenue
Recognized In
     Product
Shipped To
 

United States

   $ 15,366       $ 6,578       $ 12,536       $ 8,150   

Canada

     —           12         —           13   

Europe

     13,329         2,395         4,470         970   

Mexico

     3,151         2,661         3,163         3,040   

Asia

     258         2,759         304         175   

Middle East

     —           12,891         —           5,883   

South America

     —           4,660         —           1,985   

Other

     —           148         —           257   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 32,104       $ 32,104       $ 20,473       $ 20,473   
  

 

 

    

 

 

    

 

 

    

 

 

 

Our Services Division revenue, virtually all of which was derived in the U.S., were $72.4 million and $83.8 million during the three months ended March 31, 2012 and 2011, respectively.

 

13


Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Cautionary Statement Regarding Forward-Looking Statements

This Form 10-Q contains or incorporates by reference various forward-looking statements that express a belief, expectation or intention or are otherwise not statements of historical fact. Forward-looking statements generally use forward-looking words, such as “may,” “will,” “could,” “project,” “believe,” “anticipate,” “expect,” “estimate,” “continue,” “potential,” “plan,” “forecast” and other words that convey the uncertainty of future events or outcomes. Forward-looking statements include information concerning possible or assumed future results of our operations, including the following:

 

   

business strategies;

 

   

operating and growth initiatives and opportunities;

 

   

competitive position;

 

   

market outlook and trends in our industry;

 

   

contract backlog and related amounts to be recognized as revenue;

 

   

expected financial condition;

 

   

future cash flows;

 

   

financing plans;

 

   

expected results of operations;

 

   

future capital and other expenditures;

 

   

availability of raw materials and inventories;

 

   

plans and objectives of management;

 

   

future exposure to currency devaluations or exchange rate fluctuations;

 

   

future income tax payments and utilization of net operating losses and foreign tax credit carryforwards;

 

   

future compliance with orders and agreements with regulatory agencies;

 

   

the effectiveness of our disclosure controls and procedures;

 

   

expected outcomes of legal or regulatory proceedings and their expected effects on our results of operations; and

 

   

any other statements regarding future growth, future cash needs, future operations, business plans and future financial results.

These forward-looking statements represent our intentions, plans, expectations, assumptions and beliefs about future events and are subject to risks, uncertainties and other factors, including unpredictable or unanticipated factors that we have not discussed in this Form 10-Q. Many of those factors are outside of our control and could cause actual results to differ materially from the results expressed or implied by the forward-looking statements.

In light of these risks, uncertainties and assumptions, the events described in the forward-looking statements might not occur or might occur to a different extent or at a different time than we have described. You should consider the areas of risk and uncertainty described above, as well as those discussed in our Annual Report on Form 10-K, filed on March 14, 2012, titled “Risk Factors.” Except as may be required by applicable law, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise and we caution you not to rely upon them unduly.

The following discussion provides an analysis of the results of operations for each of our business segments, an overview of our liquidity and capital resources and other items related to our business. This discussion and analysis should be read in conjunction with our condensed consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission (“SEC”) on March 14, 2012.

 

14


Table of Contents

Overview

We are a comprehensive provider of power generation equipment and modification and maintenance services for customers in the domestic and international energy, power infrastructure and service industries. We operate through two business segments, which we refer to as our Products Division and our Services Division.

 

   

Through our Products Division, we design, engineer and manufacture a comprehensive range of gas turbine auxiliary equipment primarily used to enhance the efficiency and facilitate the operation of gas turbine power plants as well as for other industrial, energy and power-related applications.

 

   

Through our Services Division, we provide on-site specialty modification and maintenance, outage management and facility upgrade services for nuclear power plants and specialty maintenance and other industrial services to fossil-fuel and hydroelectric power plants and other industrial operations in the United States (“U.S.”).

For information about our segments, see Note 11 to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.

In both our segments, our operations are based on discrete projects subject to contract awards of varying scopes and values. Business volume fluctuates due to many factors, including the mix of work and project schedules, which are dependent on the level and timing of customer releases of new projects. Significant fluctuations may occur from period to period in revenue, gross profit and operating results and are discussed below.

New Credit Facility

On February 21, 2012, we extinguished our previous $150 million Credit Facility (“Previous Credit Facility”) and entered into a new $100 million Credit Facility (“New Credit Facility”). The New Credit Facility allows for borrowings up to $100 million, with an accordion feature for up to $50 million of additional borrowing capacity. The facility has a letter of credit sublimit of $75 million and provides access to multi-currency funds. The New Credit Facility has a maturity date of February 21, 2017.

Sale of Deltak Assets

On August 31, 2011, we sold substantially all of the operating assets of our Deltak LLC (“Deltak”) business unit, which was part of our Products Division, for $31.0 million in cash, less a $4.9 million working capital adjustment. Given that Deltak’s products were primarily for industrial and process applications, the divestiture allows us to focus on our core power generation end markets. We have reclassified the historical results of operations of our Deltak business unit to discontinued operations for all periods presented. Unless noted otherwise, the discussion and analysis that follows relates to our continuing operations only.

Business Outlook

Products:

Year-to-date operating results for our Products Division reflect higher shipment volumes compared to the prior year period primarily due to favorable market trends. Gross margins realized during the first quarter of 2012 were stronger than in 2011, primarily due to higher “as sold” margins booked as the original equipment manufacturer (“OEM”) cycle gradually emerges from the recent trough. Other than Europe, we continue to see an increase in the number of requests for quotes and other indicators that the market for our products continues to gain momentum, including increased proposal activity in the United States for growth of natural-gas power generation as it is a less expensive and lower emission alternative to coal-fired power generation. Our Products Division should benefit from the forecasted expansion of natural gas as a growing source of worldwide electricity production.

Services:

Within our Services Division, year-to-date revenue is lower, primarily due to the completion of a large capital project in 2011. Our margins realized in the first quarter of 2012 have improved from 2011 due to operational execution and efficient project management. Our customers for modification and maintenance services have not seen a significant recovery from the economic recession. In response to lower demand and a mild 2011 winter, some of our customers have reduced the scope of or deferred maintenance projects. We believe that competition is increasing as full scope engineering and procurement firms and other niche companies are seeking to expand into modification and maintenance services in part to offset lower capital project work. We have realized modest revenue to date and continue to pursue new contracts from the four new build nuclear project sites in the U.S. While we expect additional guidance to be issued later in 2012 from the U.S. Nuclear Regulatory Commission related to safety modifications on the domestic nuclear fleet, we do not anticipate any earnings in 2012 from contract opportunities that may result from this guidance.

 

15


Table of Contents

Backlog:

Our backlog consists of firm orders or blanket authorizations from our customers. Backlog may vary significantly from reporting period to reporting period due to the timing of customer commitments. The time between receipt of an order and actual completion, or delivery, of our products varies from a few weeks, in the case of inventoried precision parts, to a year or more, in the case of custom designed gas turbine auxiliary equipment and other major plant components. We add a booking to our backlog for Products Division orders when we receive a purchase order or other written contractual commitment from a customer. The maintenance services we provide through our Services Division are typically carried out under long-term contracts spanning several years. Upon signing a multi-year maintenance contract with a customer for services, we add to our backlog only the first twelve months of work that we expect to perform under the contract. Additional work that is not identified under the original contract is added to our backlog when we reach an agreement with the customer as to the scope and pricing of that additional work. Capital project awards are typically defined in terms of scope and pricing at the time of contractual commitment from the customer. Upon receipt of a customer commitment, capital project bookings are added to our backlog at full contract value regardless of the time frame anticipated to complete the project.

Backlog is not a measure defined by generally accepted accounting principles in the U.S., and our methodology for determining backlog may vary from the methodology used by other companies in determining their backlog amounts. Backlog may not be indicative of future operating results and projects in our backlog may be cancelled, modified or otherwise altered by our customers.

The following table shows our backlog, by division, as of the end of each of the last five quarters ($ in thousands):

 

     March 31,
2012
     December 31,
2011
     September 30,
2011
     June 30,
2011
     March 31,
2011
 

Products Backlog

   $ 135,355       $ 130,614       $ 126,198       $ 120,571       $ 147,251   

Services Backlog

     199,412         213,433         213,647         195,904         206,050   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 334,767       $ 344,047       $ 339,845       $ 316,475       $ 353,301   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Our Products Division backlog as of March 31, 2012 increased by $4.7 million from December 31, 2011 and declined by $11.9 million from March 31, 2011. The increase in backlog since December 31, 2011 reflected continuing improvement of market conditions. While we remain optimistic about the prospects for new natural gas-fired generation projects in the U.S., over 70% of our current backlog is for international projects. The Middle East remains active and bookings destined for South American projects increased during the first quarter of 2012. The ratio of orders booked to orders shipped was 1.2-to-1 during the three months ended March 31, 2012.

Our Services Division backlog as of March 31, 2012 declined by $14.0 million from December 31, 2011 and $6.6 million from March 31, 2011. The decline from December 31, 2011 was largely attributable to lower capital and operating budgets from our utility client base due to the recent mild winter temperatures coupled with the timing and scope of our customers’ planned outages in 2012 as compared to 2011. The ratio of project awards to services rendered was 0.8-to-1 during the three months ended March 31, 2012.

 

16


Table of Contents

Results of Operations

Our summary financial results during the three months ended March 31, 2012 and 2011 were as follows ($ in thousands):

 

     Three Months Ended March 31,  
     2012     2011  

Products revenue

   $ 32,104      $ 20,473   

Services revenue

     72,358        83,822   
  

 

 

   

 

 

 

Total revenue

     104,462        104,295   

Cost of products revenue

     25,860        17,066   

Cost of services revenue

     62,110        73,988   
  

 

 

   

 

 

 

Cost of revenue

     87,970        91,054   

Gross profit

     16,492        13,241   

Selling and administrative expenses

     13,712        11,989   

Reorganization expense

     —          45   
  

 

 

   

 

 

 

Operating income

     2,780        1,207   

Interest expense, net

     1,181        260   

Other (income) expense

     (5     78   
  

 

 

   

 

 

 

Income from continuing operations before income tax

     1,604        869   

Income tax expense

     712        19   
  

 

 

   

 

 

 

Income from continuing operations

     892        850   

Discontinued operations:

    

(Loss) income from discontinued operations

     (67     36   
  

 

 

   

 

 

 

Net income

   $ 825      $ 886   
  

 

 

   

 

 

 

 

17


Table of Contents

Revenue

 

($ in thousands)    Three Months Ended March 31,      Variance  
     2012      2011      $     %  

Products revenue

   $ 32,104       $ 20,473       $ 11,631        56.8

Services revenue

     72,358         83,822         (11,464     -13.7
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 104,462       $ 104,295       $ 167        0.2
  

 

 

    

 

 

    

 

 

   

 

 

 

Products Revenue.

The composition of our Products Division revenue varies from period to period based on our product mix, the strength of various geographic markets we serve and our ability to address those markets. The geographic dispersion of where products were shipped during the three months ended March 31, 2012 and 2011 was as follows ($ in thousands):

 

     Three Months Ended March 31,      Variance  
     2012      2011      $     %  

United States

   $ 6,578       $ 8,150       $ (1,572     -19.3

Canada

     12         13         (1     -7.7

Europe

     2,395         970         1,425        146.9

Mexico

     2,661         3,040         (379     -12.5

Asia

     2,759         175         2,584        1476.6

Middle East

     12,891         5,883         7,008        119.1

South America

     4,660         1,985         2,675        134.8

Other

     148         257         (109     -42.4
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 32,104       $ 20,473       $ 11,631        56.8
  

 

 

    

 

 

    

 

 

   

 

 

 

The $11.6 million increase in Products Division revenue during the three months ended March 31, 2012, compared to the same period in 2011, was due to the improvement in market conditions and overall increase in project activity as compared to the three months ended March 31, 2011. Approximately $12 million and $20 million for the three months ended March 31, 2012 and 2011, respectively, of projects scheduled to ship during the first quarter were delayed until subsequent quarters. Revenue growth continues to remain strongest in the Middle East with shipments to South America and Asia showing positive improvements.

Services Revenue.

The composition of our Services Division revenue varies from period to period based on contract mix (lump-sum versus fixed price and capital versus maintenance) and the number and scope of outages under our evergreen maintenance contracts.

The decrease in Services Division revenue during the three months ended March 31, 2012, compared to the same period in 2011, resulted from an approximate $12.6 million reduction in revenue from a large capital project that was completed in 2011. Declining plant outage work in 2012 was more than offset by construction support work at one of the new build nuclear reactor sites.

Gross Profit / Margin %

 

($ in thousands)    Three Months Ended March 31,     Variance  
     2012     2011     $      %  

Gross Profit - Products

   $ 6,244      $ 3,407      $ 2,837         83.3

Gross Margin %

     19.4     16.6     

Gross Profit - Services

   $ 10,248      $ 9,834      $ 414         4.2

Gross Margin %

     14.2     11.7     
  

 

 

   

 

 

   

 

 

    

 

 

 

Total Gross Profit

   $ 16,492      $ 13,241      $ 3,251         24.6
  

 

 

   

 

 

   

 

 

    

 

 

 

Gross Margin %

     15.8     12.7     
  

 

 

   

 

 

      

 

18


Table of Contents

Products.

The increase in Products Division gross profit during the first quarter 2012 compared to the corresponding period in 2011 was primarily due to the 60% increase in revenues during the period. The increase in gross margin percentage for the three months ended March 31, 2012 compared to the same period in 2011 added to the overall increase in gross profit. The lower gross margin earned in 2011 resulted primarily from lower “as sold” margins on projects booked in a more competitive OEM market during 2010 due to global economic conditions.

Services.

The gross profit for the Services Division increased by $0.4 million during the three months ended March 31, 2012, compared to the corresponding period in 2011. The increase for the three months ended March 31, 2012 over the same period in the prior year was primarily due to increased margins resulting from favorable changes in contract mix that were offset by declining revenues.

Selling and Administrative Expenses

 

($ in thousands)    Three Months Ended March 31,      Variance  
     2012      2011      $      %  

Selling and administrative expenses

   $ 13,712       $ 11,989       $ 1,723         14.4

Selling and administrative expenses include the costs associated with conducting our business, including general management, compensation and benefits of employees that are not direct costs of active projects, officers and directors, legal and professional fees and other general expenses.

Selling and administrative expenses increased by $1.7 million for the three months ended March 31, 2012 as compared to the corresponding period in 2011, resulting from an increase in non-cash stock compensation expense of $0.5 million due to the 2012 grant of restricted stock awards and the setting of the 2012 performance condition portion of prior years’ restricted stock award grants to employees. Also impacting the comparative increase were higher costs for personnel, system upgrades within our Products Division, and costs associated with organic growth initiatives.

Interest Expense

 

($ in thousands)    Three Months Ended March 31,      Variance  
     2012      2011      $      %  

Interest expense, net

   $ 1,181       $ 260       $ 921         354.2

Interest expense consists of interest on outstanding letters of credit, interest on our unused commitment and amortization of debt issuance costs offset by interest income earned on cash balances.

Interest expense increased $0.9 million during the three months ended March 31, 2012, compared to the corresponding period in 2011. The increase was attributable to extinguishing our Previous Credit Facility, resulting in a $1.1 million charge to write-off the remaining portion of unamortized debt issuance costs during the three months ended March 31, 2012.

Other (Income) Expense

 

($ in thousands)    Three Months Ended March 31,      Variance  
     2012     2011      $     %  

Other (income) expense

   $ (5   $ 78       $ (83     -106.4

Other (income) expense during both 2012 and 2011 were de minimis amounts.

Income Tax Expense

 

($ in thousands)    Three Months Ended March 31,      Variance  
     2012      2011      $      %  

Income tax expense

   $ 712       $ 19       $ 693         3647.4

Income tax expense for interim periods is based on estimates of the effective tax rate during the entire fiscal year. The effective income tax rate is based upon the estimated income during the year, the estimated composition of the income in different jurisdictions and discrete adjustments, if any, in the applicable quarterly periods for settlements of tax audits or assessments and the resolution or identification of tax position uncertainties.

 

19


Table of Contents

During the three months ended March 31, 2012, our income tax provision was $0.7 million, or 44.4% of pretax income, compared to $0.02 million, or 2.2% of pretax income, in the same period for 2011. The increase in our effective tax rate was primarily due to 2011 valuation allowance releases that removed the majority of valuation allowances related to U.S. federal and state net operating loss carryforwards. The effective tax rate in 2012 differs from the statutory rate due to U.S. state income taxes, non-deductible expenses, and changes in uncertain tax benefit positions.

(Loss) Income from Discontinued Operations

 

($ in thousands)    Three Months Ended March 31,      Variance  
     2012     2011      $     %  

(Loss) income from discontinued operations, net of tax

   $ (67   $ 36       $ (103     -286.1

(Loss) income from discontinued operations during the three months ended March 31, 2012 and 2011 were fully comprised of the Deltak business unit, divested on August 31, 2011. The loss from operations in 2012 consisted primarily of winddown of in process contracts and litigation expenses.

Liquidity and Capital Resources

Overview

As of March 31, 2012, we had $95.4 million of unrestricted cash on our balance sheet, including $18.3 million on deposit outside the U.S. Cash generated by operations and borrowings available under our New Credit Facility represent our primary sources of short-term liquidity. We believe our cash flow from operations and our available borrowings will be adequate to meet our liquidity needs for the next twelve months. Our primary uses of cash are working capital, general corporate purposes, capital expenditures and interest payments on our unused borrowing capacity. Additionally, we may use cash on hand to support growth initiatives either organically or through acquisitions.

The primary elements of our working capital accounts are accounts receivable, costs and estimated earnings in excess of billings, other assets, accounts payable, billings in excess of costs and estimated earnings and other accrued liabilities. We continually monitor our accounts receivable and manage our operating cash flows by managing the working capital accounts in total, rather than by the individual elements. This comprehensive view of working capital, taking into account each of the six primary elements listed, is both common and useful in our project-based industry, as it facilitates reviews of cash flow information at the total working capital level.

Our ability to generate sufficient cash depends on numerous factors beyond our control. We cannot be assured that our business will generate sufficient cash flow from operations or that future borrowings in addition to our New Credit Facility will be available to us in an amount sufficient to enable us to fund our liquidity needs. There can be no assurance that additional financing above our New Credit Facility will continue to be available in the future or that it will be available under terms acceptable to us. Failure to obtain sufficient capital could materially hinder our future expansion strategies.

 

20


Table of Contents

Changes in cash and cash equivalents during the three months ended March 31, 2012 and 2011 were as follows ($ in thousands):

 

     Three Months Ended March 31,  
     2012     2011  

Statement of cash flow data:

    

Cash flows used in:

    

Operating activities

   $ (1,821   $ (11,828

Investing activities

     (1,087     (909

Financing activities

     (1,941     (150

Effect of exchange rate changes on cash

     746        1,402   
  

 

 

   

 

 

 

Change in cash and cash equivalents

   $ (4,103   $ (11,485
  

 

 

   

 

 

 

2012 as compared to 2011

Operating Activities

During the three months ended March 31, 2012, cash used in operations was $1.8 million. The primary uses of cash were incremental net working capital requirements of approximately $5.6 million. This was partially offset by net income of $0.8 million and $3.0 million in non-cash items including depreciation, amortization, deferred financing costs, stock-based compensation and deferred income taxes.

During the three months ended March 31, 2011, cash used in our operating activities was $11.8 million primarily due to timing of shipments increasing working capital requirements for contracts in progress.

Investing Activities

Cash flows used in investing activities of $1.1 million for the three months ended March 31, 2012 was largely unchanged from the $0.9 million used in investing activities in the corresponding period in 2011.

Financing Activities

Cash flows used in financing activities of $1.9 million during the three months ended March 31, 2012 increased by $1.8 million as compared to the three months ended March 31, 2011. The increase in 2012 was primarily attributable to timing of the repurchase of annual stock-based compensation awards for payment of statutory taxes and cash expenditures of $0.9 million for costs associated with the issuance of our New Credit Facility.

Discontinued Operations

Cash flows provided by operating activities during the three months ended March 31, 2012 included operating cash flows from discontinued operations of $0.4 million. During the three months ended March 31, 2011, cash flows used in operating activities was $2.3 million.

Financing

Credit Facilities. On February 21, 2012, we extinguished our Previous Credit Facility and entered into a New Credit Facility. The New Credit Facility allows for borrowings up to $100 million, with an accordion feature for up to $50 million of additional borrowing capacity. The facility has a letter of credit sublimit of $75 million and provides access to multi-currency funds. The New Credit Facility has a maturity date of February 21, 2017. As of March 31, 2012, we had no debt outstanding.

The New Credit Facility, while structured to support strategic growth initiatives and provide flexibility regarding return on capital alternatives, includes affirmative and negative covenants, including customary limitations on securing additional debt and liens and restrictions on transactions and payments as well as financial covenants relating to our consolidated leverage ratio and consolidated interest coverage ratio. If we fail to comply with the restrictions in the New Credit Facility, we will be in default and the participating banks may restrict our ability to borrow additional funds under the New Credit Facility, may require that we immediately repay all outstanding loans with interest and may require the cash collateralization of outstanding letter of credit obligations. We have given a first priority lien on substantially all of our assets as security for the New Credit Facility. As of March 31, 2012, we were in compliance with all covenants under the New Credit Facility.

 

21


Table of Contents

We may review from time to time possible expansion and acquisition opportunities relating to our business. The timing, size or success of any acquisition effort and the associated potential capital commitments are unpredictable. We may seek to fund all or part of any such efforts with proceeds from debt and/or equity issuances. Debt or equity financing may not, however, be available to us at that time due to a variety of events, including, among others, credit rating agency downgrades of our debt, industry conditions, general economic conditions, market conditions and market perceptions of us and our industry.

Off-Balance Sheet Transactions

Our liquidity is currently not dependent on the use of off-balance sheet transactions but, in line with industry practice, we are often required to provide performance and surety bonds to customers and may be required to provide letters of credit. If performance assurances are extended to customers, generally our maximum potential exposure is limited in the contract with our customers. We frequently obtain similar performance assurances from third party vendors and subcontractors for work performed in the ordinary course of contract execution. However, the total costs of a project could exceed our original cost estimates, and we could experience reduced gross profit or possibly a loss for a given project. In some cases, if we fail to meet certain performance standards, we may be subject to contractual liquidated damages.

As of March 31, 2012, we had a contingent liability for issued and outstanding letters of credit, generally issued to secure performance on customer contracts. The balance of letters of credit totaled approximately $16.5 million for the domestic entities and $11.5 million for non-U.S. entities as of March 31, 2012. Currently, there are no amounts drawn upon these letters of credit. In addition, as of March 31, 2012, we had outstanding surety bonds on projects of approximately $23.7 million. Our subsidiaries provide financial guarantees for certain contractual obligations in the ordinary course of business. As of March 31, 2012, we had $5.2 million of subsidiary company financial guarantees outstanding.

Critical Accounting Policies

Our condensed consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. Preparation of these statements requires management to make judgments and estimates. Item 7 of Part II of our Annual Report on Form 10-K filed with the SEC on March 14, 2012, addressed the accounting policies and related estimates that we believed were the most critical to understanding our consolidated financial statements, financial condition and results of operations and those that require management judgment and assumptions, or involve uncertainties. We did not have a significant change to the application of our critical accounting policies and estimates during the first three months of 2012.

Contractual Obligations

There have been no material changes to the table of contractual obligations presented in our Annual Report on Form 10-K, filed with the SEC on March 14, 2012.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We may be exposed to market risk through changes in interest rates and foreign currency exchange fluctuations. We have established policies to monitor and control these market risks.

Foreign Exchange Rate Risk. We operate in a number of international areas and are involved in transactions denominated in currencies other than the U.S. dollar, which exposes us to foreign currency exchange rate risk. We have from time-to-time used derivative instruments to hedge our foreign currency transactions. We did not enter into any such instruments as of or during the three months ended March 31, 2012. We do not hold or issue foreign currency forward contracts, option contracts or other derivative financial instruments for speculative purposes.

Interest Rate Risk. Our primary market risk exposure is volatility of interest rates, primarily in the U.S. We manage interest rates through the use of a combination of fixed and floating rate debt and interest rate swap agreements. We are subject to interest rate changes on our LIBOR-based variable interest under our New Credit Facility. As of March 31, 2012, we had no outstanding borrowings on our New Credit Facility and have not borrowed funds since the November 2010 payoff of the term loan on our Previous Credit Facility.

Interest Rate Sensitivity. Based on the absence of any borrowings as of March 31, 2012, a 50 basis point fluctuation in short-term interest rates would have a de minimis impact on our expected pre-tax income on an annual basis.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and

 

22


Table of Contents

reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based on the definition of “disclosure controls and procedures” in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2012. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report to provide reasonable assurance that the information required to be disclosed in our periodic reports is recorded, processed, summarized and reported as and when required.

Changes in Internal Controls over Financial Reporting

Effective April 1, 2012, we completed the implementation of a new enterprise resource planning (“ERP”) system for our Products Division, except for our European operations which we expect to complete later in the second quarter of 2012. The implementation of the ERP system represents a redesign in our internal controls within our accounting and financial reporting system for the Products Division. There were no changes in our internal control over financial reporting that occurred during the three months ended March 31, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

23


Table of Contents

Part II - OTHER INFORMATION

Item 1. Legal Proceedings.

The information included in Note 7 to the Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q is incorporated by reference into this Item.

Item 1A. Risk Factors.

There were no material changes to our risk factors from those reported in our Annual Report on Form 10-K as filed with the SEC on March  14, 2012.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Issuer Purchases of Equity Securities

The following table presents information regarding our repurchases of shares of our common stock on a monthly basis during the first quarter of 2012.

 

Period

   Total Number of
Shares
Purchased(1)
     Average Price
Paid Per Share
     Total Number of Shares
Purchased as Part of a
Publicly Announced
Plan (2)
     Maximum Number of
Shares That May Yet
Be Purchased Under
the Plan (2)
 

January 1, 2012 through January 31, 2012

     —         $ —           N/A         N/A   

February 1, 2012 through February 29, 2012

     1,630       $ 25.93         N/A         N/A   

March 1, 2012 through March 31, 2012

     3,248       $ 24.83         N/A         N/A   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     4,878       $ 25.20         N/A         N/A   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Represents the surrender of shares of common stock to satisfy statutory minimum tax withholding obligations in connection with the vesting of restricted stock awards issued to employees under our stockholders-approved long-term incentive plan.
(2) We did not have at any time during the quarter, and currently do not have, a share repurchase program in place.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosure.

Not applicable.

Item 5. Other Information.

None.

 

24


Table of Contents

Item 6. Exhibits.

 

Exhibit

  

Description

10.1    Amendment No. 1 to the Credit Agreement, dated as of April 25, 2012, entered into by and among Global Power Equipment Group Inc., certain of its subsidiaries, Wells Fargo Bank, National Association, U.S. Bank National Association, and the other lenders from time to time party thereto.
31.1    Certification by the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2    Certification by the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1    Certification by the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2    Certification by the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema Document
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB    XBRL Taxonomy Extension Labels Linkbase Document
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document

 

25


Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

      GLOBAL POWER EQUIPMENT GROUP INC.
Date: May 1, 2012     By:  

/s/ William G. Evans

      William G. Evans,
     

Vice President and Chief Accounting Officer

As a duly authorized officer of the Registrant and as principal accounting officer.

 

26