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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 September 30, 2012

or

 

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission file number: 000-52380

 

 

MISCOR GROUP, LTD.

(Exact name of registrant as specified in its charter)

 

 

 

Indiana   20-0995245

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

800 Nave Road, SE

Massillon, OH 44646

(Address of principal executive offices/zip code)

Registrant’s telephone number, including area code: (330) 830-3500

 

 

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x  No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of October 29, 2012, there were 11,785,826 shares outstanding of the issuer’s Common Stock, without par value.

 

 

 


Table of Contents

MISCOR GROUP, LTD.

INDEX TO FORM 10-Q

 

  Item

Number

        Page
Number
 
  PART I - FINANCIAL INFORMATION   

1.      

  Financial Statements:   
  Condensed Consolidated Balance Sheets as of September 30, 2012 (Unaudited) and December 31, 2011      1   
  Unaudited Condensed Consolidated Statements of Income for the Three- and Nine-Months ended September 30, 2012 and October 2, 2011      2   
  Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2012 and October 2, 2011      3   
  Notes to Unaudited Condensed Consolidated Financial Statements      4   

2.      

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      12   

3.      

  Quantitative and Qualitative Disclosures about Market Risk      17   

4.      

  Controls and Procedures      17   
  PART II - OTHER INFORMATION   

6.      

  Exhibits      18   
  Signatures      19   

 

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Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

MISCOR GROUP, LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share data)

 

     September 30,
2012
    December 31,
2011
 
     (Unaudited)        
ASSETS   

CURRENT ASSETS

    

Accounts receivable, net of allowance for doubtful accounts of $62 and $136, respectively

   $ 7,122      $ 5,664   

Inventories

     5,932        6,173   

Other current assets

     675        673   
  

 

 

   

 

 

 

Total current assets

     13,729        12,510   

PROPERTY AND EQUIPMENT, net

     5,055        5,460   

OTHER ASSETS

    

Customer relationships, net

     5,861        6,150   

Technical library, net

     531        555   

Deposits and other assets

     85        109   
  

 

 

   

 

 

 

Total other assets

     6,477        6,814   
  

 

 

   

 

 

 

Total assets

   $ 25,261      $ 24,784   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY   

CURRENT LIABILITIES

    

Revolving credit line

   $ 3,801      $ 2,439   

Current portion of long-term debt

     415        431   

Current portion of long-term debt, officers and affiliates

     1,707        1,053   

Accounts payable

     3,448        4,051   

Accrued expenses and other current liabilities

     1,229        1,786   
  

 

 

   

 

 

 

Total current liabilities

     10,600        9,760   

LONG-TERM LIABILITIES

    

Long-term debt, less current portion

     1,332        1,611   

Long-term debt, officers and affiliates, less current portion

     527        2,930   
  

 

 

   

 

 

 

Total long-term liabilities

     1,859        4,541   
  

 

 

   

 

 

 

Total liabilities

     12,459        14,301   

Commitments and contingencies

    

STOCKHOLDERS’ EQUITY

    

Preferred stock, no par value; 800,000 shares authorized; no shares issued and outstanding

     —          —     

Common stock, no par value; 30,000,000 shares authorized; 11,785,826 shares issued and outstanding

     59,344        59,344   

Additional paid in capital

    

Accumulated deficit

     (46,542     (48,861
  

 

 

   

 

 

 

Total stockholders’ equity

     12,802        10,483   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 25,261      $ 24,784   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

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Table of Contents

MISCOR GROUP, LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Amounts in thousands, except share and per share data)

 

     Three months ended     Nine months ended  
     September 30, 2012      Ocotber 2, 2011     September 30, 2012      Ocotber 2, 2011  
     (Unaudited)      (Unaudited)     (Unaudited)      (Unaudited)  

REVENUES

          

Service revenue

   $ 6,512       $ 7,275      $ 21,139       $ 22,720   

Product sales

     5,310         4,036        16,423         11,746   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total revenues

     11,822         11,311        37,562         34,466   

COST OF REVENUES

          

Cost of service revenue

     5,499         5,692        18,218         18,327   

Cost of product sales

     3,145         3,147        9,828         8,667   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total cost of revenues

     8,644         8,839        28,046         26,994   
  

 

 

    

 

 

   

 

 

    

 

 

 

GROSS PROFIT

     3,178         2,472        9,516         7,472   

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

     2,238         2,042        6,629         5,913   
  

 

 

    

 

 

   

 

 

    

 

 

 

INCOME FROM OPERATIONS

     940         430        2,887         1,559   

OTHER (INCOME) EXPENSE

          

Interest expense

     189         228        556         738   

Other expense (income)

     1         (149     12         (252
  

 

 

    

 

 

   

 

 

    

 

 

 

Total other expense

     190         79        568         486   
  

 

 

    

 

 

   

 

 

    

 

 

 

NET INCOME

   $ 750       $ 351      $ 2,319       $ 1,073   
  

 

 

    

 

 

   

 

 

    

 

 

 

BASIC INCOME PER COMMON SHARE

   $ 0.06       $ 0.03      $ 0.20       $ 0.09   
  

 

 

    

 

 

   

 

 

    

 

 

 

BASIC WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING

     11,785,826         11,785,826        11,785,826         11,785,826   
  

 

 

    

 

 

   

 

 

    

 

 

 

DILUTED INCOME PER COMMON SHARE

   $ 0.06       $ 0.03      $ 0.19       $ 0.09   
  

 

 

    

 

 

   

 

 

    

 

 

 

DILUTED WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING

     12,025,964         11,785,826        12,094,244         11,785,826   
  

 

 

    

 

 

   

 

 

    

 

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

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Table of Contents

MISCOR GROUP, LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands, except share and per share data)

 

    Nine months ended  
    September 30, 2012     Ocotber 2, 2011  
    (Unaudited)     (Unaudited)  

OPERATING ACTIVITIES

   

Net income

  $ 2,319      $ 1,073   

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

   

Depreciation and amortization

    1,228        1,231   

Bad debt provision

    (58     (71

Recovery on sale of equipment

    13        —     

Changes in operating assets and liabilities:

   

Accounts receivable

    (1,400     908   

Inventories

    241        (402

Other current assets

    (2     (73

Deposits and other non-current assets

    24        —     

Accounts payable

    (603     (1,394

Accrued expenses and other current liabilities

    (557     (613
 

 

 

   

 

 

 

Net cash provided by operating activities

    1,205        659   

INVESTING ACTIVITIES

   

Acquisition of property and equipment

    (538     (191

Proceeds from disposal of property and equipment

    15        —     
 

 

 

   

 

 

 

Net cash utilized by investing activities

    (523     (191

FINANCING ACTIVITIES

   

Short-term debt borrowings, net

    1,362        (141

Borrowings of long-term debt

    —          31   

Repayments of long-term debt

    (2,044     (358
 

 

 

   

 

 

 

Net cash utilized by financing activities

    (682     (468
 

 

 

   

 

 

 

DECREASE IN CASH

    —          —     

Cash, beginning of period

    —          —     
 

 

 

   

 

 

 

Cash, end of period

  $ —        $ —     
 

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

   

Cash paid during the period for:

   

Interest

  $ 529      $ 738   
 

 

 

   

 

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

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Table of Contents

MISCOR GROUP, LTD.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except share and per share data)

NOTE A - BASIS OF PRESENTATION

The unaudited interim condensed consolidated financial statements of MISCOR Group, Ltd. (the “Company”) as of and for the three- and nine-months ended September 30, 2012 and October 2, 2011, have been prepared in accordance with generally accepted accounting principles for interim information and the rules and regulations of the Securities and Exchange Commission for interim financial information. Accordingly, they do not contain all of the information and footnotes required by generally accepted accounting principles for complete financial statements. However, in the opinion of the Company’s management, all adjustments, consisting of normal, recurring adjustments, considered necessary for a fair statement have been included. The results for the three- and nine-months ended September 30, 2012 are not necessarily indicative of the results to be expected for the year ending December 31, 2012. Refer to our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 for the most recent disclosure of the Company’s accounting policies.

In December 2011, the Company decided to no longer pursue selling HK Engine Components, LLC (“HKEC”) and reclassified HKEC from held-for-sale to held-and-used and from discontinued to continuing operations. HKEC engineers, repairs and remanufactures power assemblies for diesel powered engines, primarily used in locomotive and marine engines. Any depreciation related to HKEC for 2010 and 2011 was not recorded until December 2011. Accordingly, for the three- and nine-months ended October 2, 2011, there is no depreciation included in the results of operations for HKEC. Had HKEC been included as held-and-used, there would have been depreciation expense of $46 and $138 for the three- and nine-months ended October 2, 2011. Additionally, the presentation of operations for the period ended October 2, 2011, has been restated to include HKEC in continuing operations.

NOTE B - RECENT ACCOUNTING PRONOUNCEMENTS

The Company does not expect the adoption of recently issued accounting pronouncements to have a significant impact on the Company’s results of operations, financial position or cash flows.

NOTE C – INVENTORY

Inventory consists of the following:

 

     September 30, 2012      December 31, 2011  

Raw materials

   $ 2,307       $ 2,725   

Work-in-progress

     1,877         2,144   

Finished goods

     1,748         1,304   
  

 

 

    

 

 

 
   $ 5,932       $ 6,173   
  

 

 

    

 

 

 

NOTE D – OTHER INTANGIBLE ASSETS

Intangible assets consist of the following:

 

          September 30, 2012      December 31, 2011  
     Estimated                                        
     Useful Lives    Gross Carrying      Accumulated            Gross Carrying      Accumulated        
     (in Years)    Amount      Amortization     Net      Amount      Amortization     Net  

Technical Library

   20    $ 700       $ (169   $ 531       $ 700       $ (145   $ 555   

Customer Relationships

   15-20      7,722         (1,861     5,861         7,722         (1,572     6,150   
     

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total

      $ 8,422       $ (2,030   $ 6,392       $ 8,422       $ (1,717   $ 6,705   
     

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

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The estimated future amortization expense related to intangible assets for the periods subsequent to September 30, 2012 on a calendar year basis is as follows:

 

Year Ending December 31 —

      

2012

   $ 108   

2013

     421   

2014

     421   

2015

     421   

2016

     421   

Thereafter

     4,600   
  

 

 

 

Total

   $ 6,392   
  

 

 

 

NOTE E – SENIOR CREDIT FACILITY

As of September 30, 2012, the Company had a $5,000 secured revolving credit agreement (“credit agreement”) with Wells Fargo Bank National Association (“Wells Fargo”) with interest due monthly at the 90-day LIBOR plus 4.75% (effectively 5.11% at September 30, 2012), and a maturity date of July 31, 2013. At September 30, 2012 and December 31, 2011, approximately $3,801 and $2,439, respectively, was outstanding under the credit agreement. The borrowings under the credit agreement are limited by specified percentages of the Company’s eligible receivables as defined in the credit agreement. At September 30, 2012, approximately $864 of additional borrowings were available under the revolving credit agreement. The borrowings under the credit agreement are secured by all assets of the Company.

There are certain provisions of the credit agreement that could potentially be interpreted as a subjective acceleration clause. Specifically, Wells Fargo, in its reasonable credit judgment, can assess additional reserves to the borrowing base calculation or reduce the advance rate against accounts receivable to account for changes in the nature of the Company’s business that alter the underlying value of the collateral. The reserve requirements could result in an over-advance borrowing position that could require an accelerated repayment of the over-advance portion. The Company does not anticipate any changes in its business practices that would result in any material adjustments to the borrowing base calculation. However, management cannot be certain that additional reserves will not be assessed by Wells Fargo to the borrowing base calculation. As a result, the Company classifies borrowings under the revolving note as a short-term obligation.

As part of the financing and the related amendments, the Company paid debt issue costs which are amortized into interest expense over the remaining term of the financing. The Company paid $50 of such costs in 2011 related to amendments entered into in 2011. Debt issue costs amortized to interest expense were $8 and $24 for the three- and nine-months ended September 30, 2012. Net debt issue costs at September 30, 2012 were $24.

The Company also has a machinery and equipment loan (the “M&E Loan”) with Wells Fargo. Under the M&E Loan, the Company had outstanding borrowings of $722 at September 30, 2012 and $972 at December 31, 2011. The M&E Loan bears interest at a rate per annum equal to the 90-day LIBOR plus 4.75% through October 21, 2013 (5.11% at September 30, 2012). The Company is obligated to make equal monthly installments of $27, plus interest, commencing on December 1, 2011. Interest expense under this loan was $10 and $36 for the three- and nine-months ended September 30, 2012.

In the event that the net forced liquidation value of the machinery and equipment is appraised at less than one-hundred percent of the outstanding M&E Loan principal balance, Wells Fargo may accelerate the repayment obligations over a twelve month period in the amount of such excess. The credit agreement is due July 31, 2013, and includes the following covenants:

 

   

Maintenance of minimum net income of not less than $500 during the fiscal year ending on December 31, 2011;

 

   

Maintenance of a fixed charge coverage ratio of not less than 1.1 to 1.0 as of the end of each fiscal month for the 12 months then ending commencing with the fiscal month ending March 31, 2012;

 

   

No net loss during any fiscal year-to-date period in excess of $250; and

 

   

No capital expenditures of more than $600 during any fiscal year ending on or after December 31, 2012.

Interest expense under the Wells Fargo credit agreement, including the M&E Loan and excluding amortization of debt issue costs, was $50 and $146 for the three- and nine-months ended September 30, 2012, and $40 and $176 for the three-and nine-months ended October 2, 2011, respectively.

 

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Table of Contents

As of September 30, 2012 and December 31, 2011, the Company was not in violation of any covenants with Wells Fargo.

NOTE F - RELATED PARTY TRANSACTIONS

Long-term debt, officers

The Company has three outstanding promissory notes, which are subordinate to Wells Fargo (each as “subordinated note”). The holders of the three subordinated notes are: BDeWees, Inc., XGen III, Ltd. (collectively, BDeWees, Inc. and XGen III, Ltd. being referred to as the “3D Creditors”) and John A. Martell (“Mr. Martell”), the Company’s Chairman of the Board and former President and Chief Executive Officer (BDeWees, Inc., XGen III, Ltd. and Mr. Martell are each a “subordinated debt holder”). The Company used the proceeds of the M&E Loan to make cash distributions to the subordinated debt holders by paying $317 in principal on each of three outstanding subordinated promissory notes on November 30, 2011.

The subordinated promissory notes with the 3D Creditors have an aggregate principal balance of $1,566 and mature on August 1, 2013. Interest on the notes through June 30, 2012 is equal to the index rate plus six percentage points, but no less than 10.5% per annum. Beginning on July 1, 2012, the interest rate on each note increases to the index rate plus nine percentage points, but no less than 19% per annum. Regularly scheduled monthly payments in the amount of $10 per note, plus all unpaid accrued interest, began being paid on January 1, 2012. Beginning on January 1, 2013, the monthly payments are set to increase to $15 per month, with a balloon payment of the full outstanding principal and accrued interest due on the notes’ maturity date of August 1, 2013. On April 23, 2012, the Company made the last of three special scheduled payments, which were required as follows:

 

  November 30, 2011 - $317 (paid from the proceeds of the M&E Loan);

 

  December 29, 2011 - $300 (paid from operating cash flow); and

 

  No later than June 30, 2012 - $250 (paid from operating cash flow).

The agreement with the 3D Creditors cap the Company’s borrowing power with Wells Fargo to a maximum aggregate amount of $6,000, limit the Company’s ability to accelerate payment to Mr. Martell without prior consent, and contain customary representations and warranties. Further, as required by Wells Fargo, the 3D Creditors notes are subordinate to our indebtedness with Wells Fargo. Specifically, the 3D Creditors each agree that Wells Fargo may prohibit the Company from making the monthly payments on each note, as stated above, if the Company is in default of the obligations to Wells Fargo. The Company must obtain Wells Fargo’s approval prior to making any additional repayments, in excess of those outlined above, on either note.

As stated above, the Company also has a subordinated promissory note with Mr. Martell (the “Martell subordinated note”). The aggregate principal balance of the subordinated promissory note with Mr. Martell is $668, and arose out of the sale of Martell Electric, LLC (“Martell Electric”) and Ideal Consolidated, Inc. (“Ideal”) to Mr. Martell on February 3, 2010 and the subsequent negotiation of a working capital adjustment to the purchase price in such sale. The Martell subordinated note matures on October 31, 2013. Interest on the note is calculated through February 28, 2013 as the greater of 7.5% or 2% plus prime, increasing to the greater of 9.5% or 2% plus prime beginning on March 1, 2013 until maturity. Regular monthly installment payments of principal, in the amount of $7.5, began being paid on January 1, 2012, which amount increases to $12.5 monthly beginning on January 1, 2013 until payoff or maturity. On April 23, 2012, the Company made the last of three special scheduled payments, which were required as follows:

 

  November 30, 2011 - $317 (paid from the proceeds of the M&E Loan);

 

  December 29, 2011 - $120 (paid from operating cash flow); and

 

  No later than June 30, 2012 - $250 (paid from operating cash flow).

In the event of default, Mr. Martell may increase the interest rate and accelerate the outstanding indebtedness. Additionally, as required by Wells Fargo, the Martell subordinated note is subordinate to our indebtedness with Wells Fargo. Specifically, Mr. Martell agrees that Wells Fargo may prohibit the Company from making the monthly payments on his note, as stated above, if the Company is in default of its obligations to Wells Fargo. Additionally, on November 30, 2011, Mr. Martell executed an Agreement for Subordination of Security Interest and Payment of Debt in favor of the 3D Creditors, in which Mr. Martell agreed to subordinate his security interest in the Company’s assets in favor of the security interest held by the 3D Creditors. The agreement also prohibits making any additional repayments, in excess of the scheduled monthly payments and special scheduled payments outlined above, on the Martell subordinated note prior to maturity.

 

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Table of Contents

Interest on these three notes was $91 and $264 for the three- and nine-months ended September 30, 2012 and $120 and $360 for the three- and nine-months ended October 2, 2011.

Leases

The Company leases its Hammond, Indiana; and Boardman, Ohio facilities from Mr. Martell. Total rent expense under these agreements was approximately $42 and $122 for the three and nine month periods ended September 30, 2012 and October 2, 2011, respectively. The leases for the Hammond, Indiana and the Boardman, Ohio facilities, expire in May 2015 and August 2015, respectively.

The Company leased a facility in South Bend from Mr. Martell. This lease expired in July 2012. As a result of closure and relocation of the corporate office to Massillon in June 2010, the Company no longer uses this office space. As of September 30, 2012 and December 31, 2011, $0 and $51, respectively, was included in accrued expenses and other current liabilities on the Company’s Condensed Consolidated Balance Sheets for the expired lease.

The Company leases its Hagerstown, Maryland facility from a partnership of which an officer of the Company’s subsidiary, HK Engine Components, LLC, is a partner. Rent expense under this agreement was $40 and $120 for the three- and nine-months ended September 30, 2012 and October 2, 2011, respectively.

The Company leases a facility in Massillon, Ohio from a partnership, one partner of which is a former officer of Magnetech Industrial Services, Inc., under an agreement expiring in November 2017. Rent expense under the lease was $141 and $424 for the three- and nine-month periods ended September 30, 2012 and $135 and $405 for the three- and nine-month periods ended October 2, 2011.

 

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NOTE G - DEBT

Long-term debt

Long-term debt consists of the following:

 

     September 30,      December 31,  
     2012      2010  

Subordinated note payable to former member of 3D Service, Ltd. (BDeWees, Inc.), payable in monthly installments of $10 beginning January 1, 2012 (increasing to $ 15 on January 1, 2013), maturing August 1, 2013, with additional $250 principal payable no later than June 30, 2012, with interest at the index rate plus six percentage points, but not less then 10.5% per annum, through June 30, 2012, with interest at the index rate plus nine percentage points, but no less than 19%, beginning July 1, 2012, until maturity,secured by a subordinated interest in certain machinery and equipment of Magnetech Industrial Services , Inc.

   $ 783       $ 1,373   

Subordinated note payable to former member of 3D Service, Ltd. (Xgen III, Ltd.), payable in monthly installments of $10 beginning January 1, 2012 (increasing to $ 15 on January 1, 2013), maturing August 1, 2013, with additional $250 principal payable no later than June 30, 2012, with interest at the index rate plus six percentage points, but not less then 10.5% per annum, through June 30, 2012, with interest at the index rate plus nine percentage points, but no less than 19%, beginning July 1, 2012, until maturity,secured by a subordinated interest in certain machinery and equipment of Magnetech Industrial Services , Inc.

     783         1,373   

Note payable to bank in monthly installments of $ 27 beginning November 30, 2011, plus interest currently at Daily Three Month LIBOR (0.36% at September 30, 2012 plus 4.75%,secured by inventory and substantially all machinery and equipment, maturing July 31, 2012 (see Note E Senior Credit Facility)

     722         972   

Subordinated note payable to Mr. Martell, payable in monthly installments of $ 7.5 beginning January 1,2012 (increasing to $12.5 on January 1, 2013, maturing October 31, 2013, with $250 of principal payable no later than June 30, 2012, plus interest at the greater of 7.5% or 2% plus the prime rate (3.25% at July 1, 2012) increasing to 9.5% or 2% plus prime beginning on March 1, 2013, until maturity, secured by a subordinated interest in substantially all assets owned by the Company

     668         1,236   

Note payable to bank in monthly installments of $ 3 through November 16, 2014, plus interest at 8% secured by a security interest in certain equipment

     71         94   

Capital lease obligations

     954         977   
  

 

 

    

 

 

 
     3,981         6,025   

Less: current portion

     2,122         1,484   
  

 

 

    

 

 

 
   $ 1,859       $ 4,541   
  

 

 

    

 

 

 

Aggregate maturities of long-term debt for the periods subsequent to September 30, 2012, on a calendar year basis are as follows:

 

Years Ending December 31,

   Amount  

2012

   $ 274   

2013

     3,687   

2014

     20   
  

 

 

 
   $ 3,981   
  

 

 

 

 

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Following is a summary of interest expense for the three- and nine-months ended September 30, 2012 and October 2, 2011:

 

     Three Months Ended      Nine Months Ended  
     September 30, 2012      October 2, 2011      September 30, 2012      October 2, 2011  

Interest expense on principal

   $ 181       $ 228       $ 532       $ 738   

Amortization of debt issue costs

     8         —           24         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 189       $ 228       $ 556       $ 738   
  

 

 

    

 

 

    

 

 

    

 

 

 

NOTE H – INCOME PER SHARE

The following table details the computation of basic and diluted earnings per common share from continuing operations for the periods presented:

 

    Three months ended     Nine months ended  
    September 30,     October 2,     September 30,     October 2,  
    2012     2011     2012     2011  

Net income

  $ 750      $ 351      $ 2,319      $ 1,073   

Weighted-average common shares outstanding (basic)

    11,785,826        11,785,826        11,785,826        11,785,826   

Effect of dilutive securities from equity awards

    240,138        —          308,418        —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average common shares outstanding (diluted)

    12,025,964        11,785,826        12,094,244        11,785,826   

Basic earnings per common share

  $ 0.06      $ 0.03      $ 0.20      $ 0.09   
 

 

 

   

 

 

   

 

 

   

 

 

 

Dilutive earnings per common share

  $ 0.06      $ 0.03      $ 0.19      $ 0.09   
 

 

 

   

 

 

   

 

 

   

 

 

 

The weighted-average common shares outstanding (diluted) computation is not impacted during any period where the exercise price of a stock option is greater than the average market price. There were 8,079 and 308,197 warrants to purchase shares of common stock for the three- and nine-months ended September 30, 2012 and October 2, 2011, respectively. There were 81,000 options to purchase shares of common stock to employees under the 2005 Stock Option Plan, for the three and nine months ended September 30, 2012. As of September 30, 2012, 81,000 of the total 82,000 options to purchase shares under the 2005 Stock Option plan are dilutive. There were 52,600 options to purchase shares of common stock to employees under the 2005 Stock Option Plan, for the three- and nine-months ended October 2, 2011. For the three- and nine-months ended October 2, 2011, the options and warrants were not included in computing diluted income per share because they would have been anti-dilutive.

NOTE I - CONCENTRATIONS OF CREDIT RISK

The Company grants credit, generally without collateral, to its customers, which are primarily in the steel, metal working, scrap and rail industries. Consequently, the Company is subject to potential credit risk related to changes in economic conditions within those industries. However, management believes that its billing and collection policies are adequate to minimize the potential credit risk. At September 30, 2012 and December 31, 2011, approximately 35% and 27%, respectively, of gross receivables were due from entities in the rail industry, and approximately 26% and 21%, respectively, of gross accounts receivable were due from entities in the steel, metal working and scrap industries. Three customers, doing business with the Company’s Industrial Services and Rail Services segments, accounted for approximately 37% and 23% of gross receivables at September 30, 2012 and October 2, 2011, respectively. As of September 30, 2012, these three customers accounted for 20%, 16% and 5% of the total consolidated revenue, respectively. The loss of any of these customers would have a material adverse effect on the Company.

NOTE J - COMMITMENTS AND CONTINGENCIES

Collective bargaining agreements

At September 30, 2012 and December 31, 2011, approximately 14% of the Company’s employees were covered by collective bargaining agreements.

Warranty reserves

The Company warrants workmanship after the sale of its products and services, generally for a period of one year. An accrual for warranty costs is recorded based upon the historical level of warranty claims and management’s estimates of future costs.

 

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Product warranty activity for the three- and nine-months ended September 30, 2012 and October 2, 2011 is as follows:

 

     Three Months Ended     Nine Months Ended  
     September 30, 2012     October 2, 2011     September 30, 2012     October 2, 2011  

Balance at beginning of period

   $ 116      $ 220      $ 84      $ 217   

Warranty claims paid

     (9     (45     (35     (56

Warranty expense (recovery)

     22        25        80        39   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 129      $ 200      $ 129      $ 200   
  

 

 

   

 

 

   

 

 

   

 

 

 

Employment Agreement

On June 18, 2010, the Company entered into an employment agreement with its President and CEO, Michael P. Moore. The agreement was for an initial one-year term, subject to earlier termination as provided in the agreement. At each year-end, the agreement will automatically renew for successive one-year periods unless either party, at least three months before the end of the initial term or any renewal term, requests termination or renegotiation of the agreement. The employment agreement provides for certain benefits to the executive if employment is terminated by the Company without cause, by the executive with good reason, or due to death or disability. The benefits include continuation of the executive’s base salary for six months, any earned but unpaid profit-sharing or incentive bonus, stock option and company-paid health insurance for six months.

NOTE K - FAIR VALUE OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used to estimate the fair value of each class of financial instrument:

Cash and cash equivalents, accounts receivable, accounts payable and accrued expenses

The carrying amounts of these items are a reasonable estimate of their fair values because of the current maturities of these instruments.

Debt

As of September 30, 2012 and December 31, 2011, rates currently available to us for long term borrowings with similar terms and remaining maturities are used to estimate the fair value of existing borrowings at the present value of expected cash flows. As of September 30, 2012 and December 31, 2011, the fair value of debt differed from the carrying amount due to interest terms on the notes with the 3D Creditors and Mr. Martell. At September 30, 2012 and December 31, 2011 the aggregate fair value of debt, with an aggregate carrying value of $6,828 and $7,487, respectively, is estimated at $6,693 and $7,356, respectively. The calculation of the aggregate fair value of debt is based on the estimated future cash flows discounted at terms by which the Company projects it could borrow such funds from unrelated parties.

NOTE L – MANAGEMENT PLAN

In 2012, the Company’s management plan is to continue to improve operating margins and to continue its cost reduction efforts through operating efficiencies and strategic sourcing. The Company will continue to identify and act upon areas where revenues can be increased. The Company will continue to review its sales process, to further enhance and improve the sales process throughout the Company. This includes the implementation of a customer relations management system. Additionally, the Company completed the integration of HKEC into the same enterprise reporting package used by the remainder of the Company.

NOTE M – SEGMENT INFORMATION

The Company reports segment information in accordance with Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise (“SFAS No. 131”). The Company operates in two segments: Industrial Services and Rail Services.

The Industrial Services segment provides maintenance and repair services to several industries including electric motor repair and rebuilding; maintenance and repair of electro-mechanical components for the wind power industry; and the repairing, manufacturing, and remanufacturing of industrial lifting magnets for the steel and scrap industries. To supplement our service offerings, the Company also provides on-site maintenance services and custom and standardized industrial maintenance training programs.

 

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The Rail Services segment manufactures and rebuilds power assemblies, engine parts, and other components related to large diesel engines, and providing locomotive maintenance, remanufacturing, and repair services for the rail industry.

The Company evaluates the performance of its business segments based on net income or loss. Corporate administrative and support services for the Company are allocated to the business segments, except for corporate depreciation and interest expense.

Summarized financial information for the Company’s reportable segments as of and for the three- and nine-months ended September 30, 2012 and October 2, 2011 is shown in the following tables:

 

2012    Industrial Services     Rail Services      Corporate     Intersegment
Eliminations
     Three months
ended September
30, 2012
 

External revenue:

            

Service revenue

   $ 6,512      $ —         $ —        $ —         $ 6,512   

Product sales

     1,039        4,271         —          —           5,310   

Deprecation included in the cost of revenues

     225        45         —          —           270   

Gross profit

     1,660        1,518         —          —           3,178   

Other depreciation & amortization

     115        —           30        —           145   

Interest expense

     34        1         154        —           189   

Net income (loss)

     (38     989         (201     —           750   

Capital expenditures

     208        59         —          —           267   

Total assets at September 30, 2012

     19,512        4,847         902        —           25,261   
2011    Industrial Services     Rail Services      Corporate     Intersegment
Eliminations
     Three months
ended October 2,
2011
 

External revenue:

            

Service revenue

   $ 7,275      $ —         $ —        $ —         $ 7,275   

Product sales

     1,222        2,814         —          —           4,036   

Deprecation included in the cost of revenues

     261        —           —          —           261   

Gross profit

     1,878        594         —          —           2,472   

Other depreciation & amortization

     144        —           30        —           174   

Interest expense

     156        3         69        —           228   

Net income

     57        243         51        —           351   

Capital expenditures

     35        —           49        —           84   

Total assets at December 31, 2011

     20,396        3,643         745        —           24,784   
2012    Industrial Services     Rail Services      Corporate     Intersegment
Eliminations
     Nine months ended
September 30,
2012
 

External revenue:

            

Service revenue

   $ 21,139      $ —         $ —        $ —         $ 21,139   

Product sales

     3,586        12,837         —          —           16,423   

Deprecation included in the cost of revenues

     670        133         —          —           803   

Gross profit

     5,370        4,146         —          —           9,516   

Other depreciation & amortization

     343        —           82        —           425   

Interest expense

     104        5         447        —           556   

Net income (loss)

     246        2,644         (571     —           2,319   

Capital expenditures

     345        143         50        —           538   

Total assets at September 30, 2012

     19,512        4,847         902           25,261   
2011    Industrial Services     Rail Services      Corporate     Intersegment
Eliminations
     Nine months ended
October 2, 2011
 

External revenue:

            

Service revenue

   $ 22,720      $ —         $ —        $ —         $ 22,720   

Product sales

     3,313        8,433         —          —           11,746   

Deprecation included in the cost of revenues

     782        —           —          —           782   

Gross profit

     5,425        2,047         —          —           7,472   

Other depreciation & amortization

     359        —           90           449   

Interest expense

     464        7         267        —           738   

Net income (loss)

     155        986         (68        1,073   

Capital expenditures

     92        6         94        —           192   

Total assets at December 31, 2011

     20,396        3,643         745        —           24,784   

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Introduction

This section reviews the financial condition and results of operations of MISCOR Group, Ltd. and subsidiaries for the quarterly and year to date periods ended September 30, 2012, and September 30, 2011. When you read this discussion, you should also refer to the consolidated financial statements and related notes in this report. The page locations of specific sections and notes that we refer to are presented in the table of contents.

References to our “2011 Annual Report on Form 10-K” refer to our Annual Report on Form 10-K for the year ended December 31, 2011, which has been filed with the Securities and Exchange Commission (the “SEC”) and is available on its website (www.sec.gov) or on our website (www.miscor.com) by clicking on the heading “Investor Relations.”

Terminology

Throughout this discussion, references to the “Company,” “we,” “our,” “us” and similar terms refer to the consolidated entity consisting of MISCOR and its subsidiaries.

We also want to provide some background so that you better understand the discussion that follows:

 

   

In December 2009 we announced an overall restructuring plan to reorient our growth strategy and to intensify our focus on industrial and utility services. This plan has been completed. The plan resulted in the divestiture of: (i) AMP Rail Services Canada ULC (“AMP Canada”), in December 2009; and (ii) the divestiture of our CES subsidiaries, Martell Electric and Ideal, in February 2010, and American Motive Power, Inc (“AMP”), in March 2010. In December of 2011, we announced our intention to no longer have HKEC, the subsidiary comprising our Rail Services segment, listed as held for sale. While we see HKEC as outside of our business strategy focusing on industrial and utility services, we do see significant value in HKEC and believe we would not obtain the appropriate value for this business if it were to be sold in today’s economic environment.

Following completion of the restructuring plan, and through September 30, 2012, we have operated primarily in two business segments:

 

   

Industrial Services – Providing maintenance and repair services to several industries including electric motor repair and rebuilding; maintenance and repair of electro-mechanical components for the wind power industry; and the repairing, manufacturing, and remanufacturing of industrial lifting magnets for the steel and scrap industries. To supplement our service offerings, the Company also provides on-site maintenance services and custom and standardized industrial maintenance training programs.

 

   

Rail Services – Manufacturing and rebuilding power assemblies, engine parts, and other components related to large diesel engines, and providing locomotive maintenance, remanufacturing, and repair services for the rail industry.

Recent Developments

Not applicable

Significant Accounting Policies

The significant accounting polices used in preparation of the Company’s consolidated financial statements are disclosed in Note B of the Notes to the Consolidated Financial Statements within the Form 10-K. No additional significant accounting policies have been adopted during Fiscal 2012.

Recent Accounting Pronouncements

The Company does not expect the adoption of recently issued accounting pronouncements to have a significant impact on the Company’s results of operations, financial position or cash flows.

 

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Discussion of Forward-Looking Statements

From time to time, we have made or will make forward-looking statements. These statements can be identified by the fact that they do not relate strictly to historical or current facts. Forward-looking statements usually can be identified by the use of words such as “goal,” “objective,” “plan,” “expect,” “anticipate,” “intend,” “project,” “believe,” “may,” “could,” “believe,” “estimate,” or other words of similar meaning. Forward-looking statements provide our current expectations or forecasts of future events, circumstances, results, or aspirations. Our disclosures in this report contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We may also make forward-looking statements in our other documents filed or furnished with the SEC.

A “safe harbor” for forward-looking statements is provided by the Private Securities Litigation Reform Act of 1995 (Reform Act of 1995). The Reform Act of 1995 was adopted to encourage such forward-looking statements without the threat of litigation, provided those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause the actual results to differ materially from those projected in the statement.

Management based the forward-looking statements in this report largely on its current expectations and perspectives about future events and financial trends that management believes may affect our financial condition, results of operations, business strategies, short-term and long-term business objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, that may cause actual results to differ materially from those indicated in the forward-looking statements, due to, among other things, factors identified in this report, and those identified in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

Results of Operations

Three Months Ended September 30, 2012 Compared to Three Months Ended October 2, 2011

Revenues. Total revenues increased by $511, or 4.5%, to $11,822 for the three months ended September 30, 2012 from $11,311 for the three months ended October 2, 2011. This increase is comprised of a $763 or 10.5%, decrease in service revenues and a $1,274, or 31.6%, increase in product sales. The Industrial Services segment revenues decreased by $946, or 11.1%, while revenues for the Rail Services segment increased $1,457, or 51.8%. The decrease in the service revenues represents the timing of the completion of various field service projects. The increase in product sales is primarily related to demand for engine components produced by our HKEC unit.

Gross Profit. Total gross profit for the three months ended September 30, 2012 was $3,178, or 26.9% of total revenues, compared to $2,472, or 21.9% of total revenues for the three months ended October 2, 2011. This represents an increase of $706, or 28.6%. This increase is comprised of a decline of $570, or 36.0%, in service gross profit and an increase of $1,276, or 143.5%, in product gross profit. The Industrial Services segment gross profit decreased by $239, or 12.6%, while gross profit for the Rail Services segment increased $945, or 164.6%. The decline in gross profits associated with service revenues is due to a number of quoted jobs not achieving optimal efficiencies, as well as the whole dollar impact of reduced sales. Many customers have reduced demand for our services due to the economic uncertainty presented by the impending elections in the United States of America. Product sales gross profit increased due to price increases, volume increases and our ability to eliminate costs and improve operational efficiencies. For the three months ended October 2, 2011, HKEC was held-for-sale and accordingly no depreciation was recorded (depreciation for HKEC in 2011 was subsequently recorded during the fourth quarter when HKEC was reclassified from held-for-sale to held-and-used). Had depreciation been recorded for the three months ended October 2, 2011, both product and rail services gross profit would have declined by $46 as a result of the associated depreciation expense.

Selling, General and Administrative Expenses. Selling, general and administrative expenses attributed to operations increased to $2,238 for the three months ended September 30, 2012, compared to $2,042 for the three months ended October 2, 2011. This represents an increase of $196, or 9.6%, for the quarter. Selling expenses were 6.4% of total revenues for the three months ended September 30, 2012 and 5.7% of total revenues for the three months ended October 2, 2011. This increase is attributed to an increase in the number of salesmen employed on the Industrial Services segment of the business. Selling expenses for the Industrial Services segment were 7.9% of the Industrial Services segment revenue for the three months ended September 30, 2012, compared to 6.0% of Industrial Services segment revenues for the three months ended October 2, 2011. Selling expenses for the Rail Services segment were 3.5% of Rail Services segment revenues for the three months ended September 30, 2012 and 4.8% of the Rail Services segment

 

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revenues for the three months ended October 2, 2011. General and administrative expenses increased 1.4% to $1,419 for the three months ended September 30, 2012 from $1,399 for the three months ended October 2, 2011. The increase in in general and administrative expenses is attributed to increased consulting fees. General and administrative expenses were 12.0% and 12.4% of total revenues for the three months ended September 30, 2012 and October 2, 2011, respectively. General and administrative expenses for the Industrial Services segment were 14.2% of Industrial Service segment revenues for the three months ended September 30, 2012 and 14.0% of the Industrial Services segment revenues for the three months ended October 2, 2011. General and administrative expenses for the Rail Services segment were 8.9% of the Rail Services segment revenues for the three months ended September 30, 2012, and 7.4% for the three months ended October 2, 2011.

Income from Operations. Income from operations improved $510, or 119%, from $430 for the three months ended October 2, 2011 to $940 for the three months ended September 30, 2012. This improvement is directly attributable to increased gross profit for the three months ended September 30, 2012. The Industrial Services segment generated a loss from operations of $5 for the three months ended September 30, 2012. This is a decline of $204 from income from operations of $199 for the three months ended October 2, 2011. The Rail Services segment generated income from operations of $989 for the three months ended September 30, 2012 or an improvement of $760 from income from operations of $229 for the three months ended October 2, 2011.

Interest Expense and Other Expense (Income). Interest expense was reduced for the three months ended September 30, 2012 to $189, or by 17%, from $228 for the three months ended October 2, 2011. This reduction is the result of the Company’s reduced level of debt and the fact that the Company renegotiated its credit facility with Wells Fargo during 2011, which effectively reduced the interest rate paid to Wells Fargo by approximately 39%, and reduced interest expense related to certain of the Company’s subordinated debt, as a result of the Company renegotiation with its subordinated debt holders. Other expense increased $150 to $1 of expense for the three months ended September 30, 2012 from $149 of income for the three months ended October 2, 2011. The income achieved in other expense for the third quarter of 2011 was due to the successful recovery on a lawsuit against a prior property and casualty insurance broker.

Provision for Income Taxes. Through 2010, we experienced tax net operating losses in each year since we commenced operations. We are uncertain as to whether we will be able to utilize these tax losses before they expire. Accordingly, we have provided a valuation allowance for the income tax benefits associated with these net future tax benefits which primarily relates to cumulative net operating losses, until such time that profitability is reasonably assured and it becomes more likely than not that we will be able to utilize such tax benefits. No provision for income taxes was recorded during the periods ended September 30, 2012, and October 2, 2011, due to the utilization of cumulative net operating losses.

Net Income. Net income was $750 for the three months ended September 30, 2012, as compared to $351 for the three months ended October 2, 2011. This represents an increase of $399 or 113.7%. As indicated above, the improvement is due to improved gross margins and reduced interest expense.

Nine Months Ended September 30, 2012 Compared to Nine Months Ended October 2, 2011

Revenues. Total revenues increased by $3,096, or 9.0%, to $37,562 for the nine months ended September 30, 2012, as compared to $34,466 for the nine months ended October 2, 2011. This increase is comprised of a $1,581 or 7.0%, decrease in service revenues and a $4,677, or 39.8%, increase in product sales. The Industrial Services segment revenues decreased by $1,309, or 5.0%, while revenues for the Rail Services segment increased by $4,405, or 52.2%. The decrease in the service revenues represents the timing of the completion of various field service projects. The increase in product sales is primarily related to demand for engine components produced by our HKEC unit.

Gross Profit. Total gross profit for the nine months ended September 30, 2012 was $9,516, or 25.3% of total revenues, as compared to $7,472, or 21.7% of total revenues, for the nine months ended October 2, 2011. This represents an increase of $2,044, or 27.4%. The increase is comprised of a decline of $1,472, or 33.5%, in service gross profit and an increase of $3,516, or 114.2%, in product gross profit. The Industrial Services segment gross profit decreased by $56, or 1.0%, while gross profit for the Rail Services segment increased by $2,100, or 102.6%. The decline in gross profits associated with service revenues is due to a number of quoted jobs not achieving optimal efficiencies and lower sales volume. Product sales gross profit increased due to price increases and our ability to eliminate costs and improve operational efficiencies. For the nine months ended October 2, 2011, HKEC was held-for-sale and accordingly no depreciation was recorded (depreciation for HKEC in 2011 was subsequently recorded during the fourth quarter when HKEC was reclassified from held-for-sale to held-and-used). Had depreciation been recorded for the nine months ended October 2, 2011, both product and Rail Services segment gross profit would have declined by $138 as a result of the associated depreciation expense.

 

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Selling, General and Administrative Expenses. Selling, general and administrative expenses attributed to operations increased to $6,629 for the nine months ended September 30, 2012 from $5,913 for the nine months ended October 2, 2011. This represents an increase of $716, or 12.1%. Selling expenses were 5.9% of total revenues for the nine months ended September 30, 2012 and 5.3% of total revenues for the nine months ended October 2, 2011. This increase is attributed to an increase in the number of salesmen employed on the Industrial Services segment of the business Selling expenses for the Industrial Services segment were 6.9% of the Industrial Services segment revenue for the nine months ended September 30, 2012 and 5.4% of the Industrial Services segment revenues for the nine months ended October 2, 2011. Selling expenses for the Rail Services segment were 3.4% of Rail Services segment revenues for the nine months ended September 30, 2012, as compared to 4.5% of the Rail Services segment revenues for the nine months ended October 2, 2011. General and administrative expenses decreased 3.1% to $3,296 for the nine months ended September 30, 2012 from $3,400 for the nine months ended October 2, 2011. General and administrative expenses were 11.7% and 12.0% of total revenues for nine months ended September 30, 2012 and October 2, 2011, respectively. General and administrative expenses for the Industrial Services segment were 13.4% of the Industrial Service segment revenues for the nine months ended September 30, 2012 and 13.1% of the Industrial Services segment revenues for the nine months ended October 2, 2011. General and administrative expenses for the Rail Services segment were 8.2% of the Rail Services segment revenues for the nine months ended September 30, 2012, as compared to 8.0% of the Rail Service segment revenues for the nine months ended October 2, 2011.

Income from Operations. Income from operations improved $1,328, or 85%, from $1,559 for the nine months ended October 2, 2011 to $2,887 for the nine months ended September 30, 2012. This improvement is directly attributable to increased sales volume and overall gross profit improvement for the nine months ended September 30, 2012. The Industrial Services segment generated income from operations of $351 for the nine months ended September 30, 2012. This is a decline of $269, or 43%, from income from operations of $620 for the nine months ended October 2, 2011. The Rail Services segment generated income from operations of $2,658 for the nine months ended September 30, 2012 or an improvement of $1,667 from income from operations of $992 for the nine months ended October 2, 2011.

Interest Expense and Other Expense (Income). Interest expense decreased by $182, or 25%, for the nine months ended September 30, 2012 to $556 from $738 for the nine months ended October 2, 2011. This reduction is the result of the Company having reduced its level of debt and renegotiated its credit facility with Wells Fargo, during 2011, effectively reducing the interest rate of the credit facility by approximately 39%, and reduced interest expense related to certain of the Company’s subordinated debt, as a result of its renegotiation with the Company’s subordinated debt holders in November 2011. Other loss increased $264 to $12 for the nine months ended September 30, 2012 from $252 of income for the nine months ended October 2, 2011, as the nine months ended October 2, 2011 included the expiration of an exclusivity agreement, which expired, with a potential buyer for HKEC business unit, the subsidiary comprising our Rail Services segment.

Provision for Income Taxes. Through 2010 we have experienced tax net operating losses in each year since we commenced operations. We are uncertain as to whether we will be able to utilize these tax losses before they expire. Accordingly, we have provided a valuation allowance for the income tax benefits associated with these net future tax benefits which primarily relates to cumulative net operating losses, until such time as our profitability is reasonably assured and it becomes more likely than not that we will be able to utilize such tax benefits. No provision for income taxes was recorded during the periods ended September 30, 2012, and October 2, 2011, due to the utilization of cumulative net operating losses.

Net Income. Net income was $2,319 for the nine months ended September 30, 2012 compared to $1,073 for the nine months ended October 2, 2011. This is an increase of $1,246, or 116.1%. As indicated above, the improvement is due to improved gross margins, and reduced interest expense.

Earnings Before Interest Expense, Income Taxes, Depreciation and Amortization (“EBITDA”)

For the three months ended September 30, 2012, EBITDA increased by $356, or 35%, from $1,010 for the three months ended October 2, 2011 to $1,366. The primary increase in EBITDA is a result of increased profitability during the three months ended September 30, 2012, as compared to the three months ended October 2, 2011.

 

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For the nine months ended September 30, 2012, EBITDA increased by $1,185, or 40%, from $2,974 for the nine months ended October 2, 2011 to $4,159. The primary increase in EBITDA is a result of increased profitability during the nine months ended September 30, 2012, as compared to the nine months ended October 2, 2011.

 

     Three months ended  
     September 30, 2012      October 2, 2011  
            Restated  

EBITDA - Consolidated

     

Net income (loss)

   $ 750       $ 351   

Add back:

     

Interest Expense

     189         228   

Depreciation and amortization

     415         435   

Income taxes

     12         (4
  

 

 

    

 

 

 

EBITDA (1)

   $ 1,366       $ 1,010   
  

 

 

    

 

 

 
     Nine months ended  
     September 30, 2012      October 2, 2011  
            Restated  

EBITDA - Consolidated

     

Net income (loss)

   $ 2,319       $ 1,073   

Add back:

     

Interest Expense

     556         738   

Depreciation and amortization

     1,228         1,231   

Income taxes

     56         (68
  

 

 

    

 

 

 

EBITDA (1)

   $ 4,159       $ 2,974   
  

 

 

    

 

 

 

 

(1) EBITDA represents earnings before interest expense, income taxes, depreciation and amortization. Our management believes EBITDA is useful in evaluating our operating performance compared to that of other companies in our industry because the calculation of EBITDA generally eliminates the effects of financing and income taxes and the accounting effects of capital spending and acquisitions. We believe EBITDA is useful to investors to assist them in getting a more accurate picture of our results from operations.

However, EBITDA is not a recognized measurement under GAAP and when analyzing our operating performance, readers should use EBITDA in addition to, and not as an alternative for, net income as determined in accordance with GAAP. Because not all companies use identical calculations, our presentation of EBITDA may not be comparable to similarly titled measures of other companies. Furthermore, EBITDA is not intended to be a measure of free cash flow for our management’s discretionary use, as it does not consider certain cash requirements such as tax and debt service payments. The amounts shown for EBITDA also differ from the amounts calculated under similarly titled definitions in our debt instruments, which are further adjusted to reflect certain other cash and non-cash charges and are used to determine compliance with financial covenants and our ability to engage in certain activities, such as incurring additional debt and making certain restricted payments.

Liquidity and Capital Resources

At September 30, 2012, the Company had $3,129 of working capital, an improvement of $379 as compared to December 31, 2011. The increase is primarily due to increased accounts receivable, offset by an increase in the revolver at September 30, 2012. The increase in accounts receivable is due to the timing of invoicing of customers and the corresponding payment being made by the customers.

Net cash provided by operating activities was $1,205 for the nine months ended September 30, 2012, as compared to $659 for the nine months ended October 2, 2011. This increase is primarily due to the Company generating increased income.

For the nine months ended September 30, 2012, net cash flows utilized by investing activities increased by $332 to $523, as compared to $191 for the nine months ended October 2, 2011. This is the result of the purchase of various property and equipment.

Net cash utilized by financing activities increased by $214 to $682, as of September 30, 2012, as compared to $468 as of October 2, 2011. This increase is directly attributed to the Company’s ability to repay long-term debt owed to our subordinated debt holders.

During the remainder of 2012, the Company will continue to focus its efforts to maintain the generation of positive operating cash flows and to reduce the levels of subordinated debt. We continue our efforts to enhance our future cash flows. These improvements include efforts to collect accounts receivable at a faster rate, decrease inventory levels, improve operating margins, review alternative financing sources, and negotiate extended terms with our vendors.

 

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The Company has subordinated promissory notes outstanding to BDeWees, Inc., XGenIII, Ltd., and Mr. Martell, in the principal amounts of $783, $783 and $668, respectively (together the “Subordinated Indebtedness”) (See Note F, Related Party Transactions, of our Financial Statements). Subordination agreements have been executed which subordinate the obligations of the Company under the Subordinated Indebtedness to the Wells Fargo credit facility.

As of September 30, 2012, we did not have any material commitments for capital expenditures.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Applicable.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Effectiveness of Disclosure Controls and Procedures

Our disclosure controls and procedures (as defined in Rules13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) are designed to ensure that information we are required to disclose in our reports filed under the Exchange Act, such as this Quarterly Report on Form 10-Q, is recorded, processed, summarized and reported within the time periods specified in the rules of the Securities and Exchange Commission. Our disclosure controls and procedures also are designed to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Accounting Officer, as appropriate to allow timely decisions regarding required disclosures.

Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Accounting Officer, evaluated the effectiveness of our disclosure controls and procedures in effect as of September 30, 2012. Based on this evaluation, our Chief Executive Officer and Chief Accounting Officer concluded that, as of September 30, 2012, our disclosure controls and procedures were effective to provide reasonable assurance that material information relating to the Company and its consolidated subsidiaries required to be included in our Exchange Act reports, including this Quarterly Report on Form 10-Q, is recorded, processed, summarized, and reported as required, and is made known to management, including the Chief Executive Officer and Chief Accounting Officer, on a timely basis.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2012, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II - OTHER INFORMATION

ITEM 6. EXHIBITS

The following documents are included or incorporated by reference in this Quarterly Report on Form 10-Q:

 

Exhibit No.

  

Description

31.1    Certification by Chief Executive Officer required by Rule 13a-14(a) or 15d-14(a) of the Exchange Act
31.2    Certification by Chief Accounting Officer required by Rule 13a-14(a) or 15d-14(a) of the Exchange Act
32    Section 1350 Certifications
101    The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter September 30, 2012,, formatted in XBRL: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Cash Flows and (iv) the Notes to Unaudited Condensed Consolidated Financial Statements.

 

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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.

 

  MISCOR GROUP, LTD.
November 8, 2012   By:  

/s/ Marc Valentin, CPA, CGMA

    Marc Valentin, CPA, CGMA
    Chief Accounting Officer
    (Signing on behalf of the registrant as Principal Financial
    and Accounting Officer)

 

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