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UNTK > SEC Filings for UNTK > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for UNITEK GLOBAL SERVICES, INC.

Form 10-Q for UNITEK GLOBAL SERVICES, INC.


8-Nov-2012

Quarterly Report


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

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

The information included in this quarterly report of UniTek Global Services, Inc. ("UniTek," the "Company," "we," "our," or "us") contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the attainment of which involves various risks and uncertainties. All statements other than statements of historical fact included in this quarterly report are forward-looking statements. Forward-looking statements may be identified by the use of forward-looking terminology, such as "may," "will," "expects," "believes," "estimates," "anticipates," "planned," "scheduled," "continue" or similar terms, variations of those terms or the negative of those terms.

These forward-looking statements are based on assumptions that we have made in light of our experience in the industry in which we operate, as well as our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances. As you read and consider this quarterly report, you should understand that these statements are not guarantees of performance or results. They involve risks, uncertainties (some of which are beyond our control) and assumptions. Although we believe that these forward-looking statements are based on reasonable assumptions, you should be aware that many factors could affect our actual financial condition or results of operations and cause actual results to differ materially from those in the forward-looking statements. These factors include, among other things:

         our financial condition and strategic direction;

         our future capital requirements and our ability to satisfy our capital
needs;

         the potential generation of future revenues and/or earnings and our
ability to manage and control costs;

         changes in our ability to adequately staff our service offerings;

         opportunities for us from new and emerging technologies in our
industries;

         changes in our ability to obtain additional financing and the
potential for restrictive covenants within our credit agreements;

         our growth strategy and our ability to consummate acquisitions and
integrate them into our existing operations;

         trends in the satellite television, broadband cable and
telecommunications industries;

         key drivers of change in our business, as identified in this quarterly
report;

         our competitive position and the competitive landscape;

         shortages in fuel supply or increases in fuel prices that could

increase operating expense; and

other statements that contain words like "may," "will," "expects," "believes," "estimates," "anticipates," "planned," "scheduled," "continue" and similar expressions that are also used to identify forward-looking statements.

It is important to note that all of our forward-looking statements are subject to a number of risks, assumptions and uncertainties, such as risks:

related to a concentration in revenues from a small number of customers and competition;

         associated with the consolidation of our customers;

         associated with competition in the satellite television, broadband
cable and telecommunications industries;

         related to the current transition within our executive leadership
team;

         that we will not be able to generate positive cash flow; and

         that we may not be able to obtain additional financing.

This list is only an example of the risks that may affect the forward-looking statements. If any of these risks or uncertainties materialize or fail to materialize, or if the underlying assumptions are incorrect, then actual results may differ materially from those projected in the forward-looking statements.

Additional factors that could cause actual results to differ materially from those reflected in the forward-looking statements include, without limitation, those discussed elsewhere in this quarterly report. It is important not to place undue reliance on these forward-looking statements, which reflect our analysis, judgment, belief or expectation only as of the date of this quarterly report. We undertake no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date of this quarterly report.

Critical Accounting Policies and Estimates

There have been no changes to the critical accounting policies and estimates disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011.


Table of Contents

Summary of Financial Condition and Results of Operations

Overview

The following sections present consolidated selected financial information. The balance sheet data as of September 29, 2012 and December 31, 2011 and the results of operations data for the three and nine months ended September 29, 2012 and October 1, 2011 have been derived from our unaudited condensed consolidated financial statements that, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary to state fairly the data for such period. We operate in two reportable segments:
(1) Fulfillment and (2) Engineering and Construction.

Recent Developments

During the three months ended September 29, 2012, we committed to a plan to sell the net assets of our wireline business unit ("wireline group"), which we expect will be completed during the fourth quarter of 2012. As a result of our plan to sell the wireline group, its results of operations have been excluded from the reported results of our Engineering and Construction segment. As of September 29, 2012, the assets of the wireline group have been reclassified as assets held for sale, and the liabilities of the wireline group have been reclassified as liabilities held for sale.

The results of operations of the wireline group have been included in discontinued operations in our statements of comprehensive income or loss for the three and nine months ended September 29, 2012 and October 1, 2011. Discontinued operations for the three and nine months ended September 29, 2012 include pre-tax impairment charges of $35.2 million related to the impairment of property and equipment and goodwill in our wireline reporting unit. Additionally, discontinued operations for the three and nine months ended September 29, 2012 include an income tax benefit of $7.1 million and $5.5 million, respectively, which represents the difference between the Company's total income tax expense originally computed and the amount attributable to continuing operations, and also reflects changes in deferred tax assets and liabilities that were triggered by the impairment charges of the wireline reporting unit.

Discontinued operations for the three and nine months ended September 29, 2012 and October 1, 2011 also include the results of certain cable fulfillment and wireless service locations that were shut down and discontinued due to lack of continuing revenues.

On September 14, 2012, we completed the acquisition of Skylink LTD ("Skylink"). The operating results of Skylink are included in our consolidated results as a component of the Fulfillment segment beginning September 14, 2012.

During 2012 and 2011, the Company acquired substantially all of the assets and assumed certain liabilities of the following cable fulfillment companies (the "Cable Acquisitions"):

          Cableview Communications, Inc., which we acquired on March 2, 2012;

          Streamline Communications, Inc., which we acquired on January 3,
2012;

          Oasis Communications, LLC DA d/b/a Wyretech, which we acquired on

October 6, 2011; and

DA Technologies, Inc., which we acquired on February 28, 2011.

The operating results of the Cable Acquisitions are included in our consolidated results as a component of the Fulfillment segment beginning on their respective dates of acquisition.

Effective April 3, 2011, we completed the acquisition of Pinnacle pursuant to an asset purchase agreement, dated as of March 30, 2011, as amended on March 28, 2012. The operating results of Pinnacle are included in our consolidated results as a component of the Engineering and Construction segment beginning April 3, 2011.


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Non-GAAP Financial Measurements

Adjusted earnings before interest, taxes, depreciation and amortization ("Adjusted EBITDA") is a key indicator used by our management to evaluate operating performance of our continuing operations and to make decisions regarding compensation and other operational matters. While this Adjusted EBITDA is not intended to replace any presentation included in our consolidated financial statements under generally accepted accounting principles, or GAAP, and should not be considered an alternative to operating performance, we believe this measure is useful to investors in assessing our performance with other companies in our industry. This calculation may differ in method of calculation from similarly titled measures used by other companies. We compensate for these limitations by relying primarily on our GAAP results and using Adjusted EBITDA only as supplemental information. Adjusted EBITDA is our EBITDA adjusting for discontinued operations, transaction costs, certain restructuring costs and other non-cash charges.

Net income or loss after certain non-cash adjustments is a key indicator used by our management to evaluate operating performance of our continuing operations. While net income or loss after certain non-cash adjustments is not intended to replace any presentation included in our consolidated financial statements under GAAP, and should not be considered an alternative to operating performance, we believe this measure is useful to investors in assessing our performance in comparison with other companies in our industry. Specifically, (i) non-cash portion of discontinued operations may vary due to infrequent or unusual non-cash items such as impairment charges and losses on disposal of assets,
(ii) non-cash compensation expense may vary due to factors influencing the estimated fair value of performance-based rewards, estimated forfeiture rates and amounts granted, (iii) non-cash interest expense varies depending on the timing of amendments to our debt and changes to our debt structure and
(iv) amortization of intangible assets is impacted by the Company's acquisition strategy and timing of acquisitions.


Table of Contents

Financial Condition



The following table presents a summary of our financial condition.



                                                        September 29,
                                                            2012           December 31,
(in thousands)                                           (unaudited)           2011
Current assets                                         $       155,597    $      105,980
Total assets                                                   373,119           348,880
Current liabilities                                            114,747           104,975
Long-term debt and capital lease obligations, net of
current portion                                                172,479           127,500
Stockholders' equity                                            83,762           109,230

Current Assets

Current assets increased $49.6 million, or 46.8%, to $155.6 million at September 29, 2012 compared to $106.0 million at December 31, 2011. The increase in current assets was primarily due to incremental working capital requirements of our wireless business due to revenue growth from a significant wireless project in the northeastern region of the United States. In addition, current assets increased as a result of business acquisitions in our Fulfillment segment.

Total Assets

Total assets increased $24.2 million, or 6.9%, to $373.1 million at September 29, 2012 compared to $348.9 million at December 31, 2011. The increase in total assets was primarily due to the increase in current assets and business acquisitions, partially offset by impairment charges of $35.2 million related to the impairments of property and equipment and goodwill in our wireline reporting unit.

Current Liabilities

Current liabilities increased $9.8 million, or 9.3%, to $114.7 million at September 29, 2012 compared to $105.0 million at December 31, 2011. The increase in current liabilities was primarily due to incremental working capital requirements of our wireless business due to revenue growth, partially offset by the payment of $17.6 million of contingent consideration related to the acquisition of Pinnacle.

Long-term Debt and Capital Lease Obligations, Net of Current Portion

Long-term debt and capital lease obligations, net of current portion, increased $45.0 million, or 35.3%, to $172.5 million at September 29, 2012 compared to $127.5 million at December 31, 2011. The increase was primarily due to $19.5 million of net proceeds from our Revolving Loan and $32.9 million of net proceeds from our Term Loan, which were used primarily to fund business acquisitions and the incremental working capital requirements of our wireless business due to revenue growth. In addition, we repaid $7.7 of capital lease obligations during the nine months ended September 29, 2012.

Stockholders' Equity

Stockholders' equity decreased $25.5 million, or 23.3%, to $83.8 million at September 29, 2012 compared to $109.2 million at December 31, 2011. The decrease in stockholders' equity was primarily due to net loss of $36.5 million for the nine months ended September 29, 2012, partially offset by additional paid-in capital of $7.1 million from issuing common shares for the acquisition of Pinnacle and $4.0 million of stock-based compensation.


Table of Contents

Results of Operations - Three Months Ended September 29, 2012 Compared to Three
Months Ended October 1, 2011



The following table presents a summary of our results of operations.



                                                               Three Months Ended
                                                         September 29,      October 1,
                                                             2012              2011
(in thousands, except per share data)                     (unaudited)       (unaudited)
Revenues                                                $       132,124    $     101,863
Cost of revenues                                                104,517           78,632
Gross profit                                                     27,607           23,231
Selling, general and administrative expenses                     10,590           11,649
Restructuring charges                                             1,594                -
Depreciation and amortization                                     6,710            5,624
Operating income                                                  8,713            5,958

Interest expense                                                  3,883            3,313
Other income, net                                                   (77 )            (57 )
Income from continuing operations before income
taxes                                                             4,907            2,702
Income tax expense                                                  293              354
Income from continuing operations                                 4,614            2,348
(Loss) income from discontinued operations, net of
income taxes                                                    (30,669 )             73
Net (loss) income                                       $       (26,055 )  $       2,421

Net (loss) income per share - basic and diluted
Continuing operations                                   $          0.25    $        0.14
Discontinued operations                                 $         (1.64 )  $        0.01

Weighted average shares of common stock outstanding
- basic and diluted                                              18,732           16,350

Adjusted EBITDA                                         $        18,126    $      12,524

Revenues



The following table presents information regarding our revenues by segment for
the three months ended September 29, 2012 and October 1, 2011.



                                       Three Months Ended (unaudited)
                              September 29, 2012             October 1, 2011
(Amounts in thousands)     Amount      % of Revenues     Amount      % of Revenues     Change
Fulfillment               $  84,579            64.0%    $  81,708            80.2%    $  2,871
Engineering and
Construction                 47,545            36.0%       20,155            19.8%      27,390
Total                     $ 132,124           100.0%    $ 101,863           100.0%    $ 30,261

We had revenue of $132.1 million for the three months ended September 29, 2012, compared to $101.9 million for the three months ended October 1, 2011. This represents an increase of approximately $30.3 million, or 29.7%.

Revenue for the Fulfillment segment increased by $2.9 million, or 3.5%, from $81.7 million for the three months ended October 1, 2011 to $84.6 million for the three months ended September 29, 2012. The increase in revenues from our Fulfillment segment was primarily attributable to growth in our cable operations, growth in satellite internet installations and the acquisition of Skylink, partially offset by lower volumes in our legacy satellite installation markets.

Revenue for the Engineering and Construction segment was $47.5 million for the three months ended September 29, 2012 and $20.2 million for the three months ended October 1, 2011. This 135.9% increase in revenues in our Engineering and Construction segment was primarily attributable to revenue growth from a significant wireless project in the northeastern region of the United States and various other wireless project ramp-ups.


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Gross Profit



The following table sets forth information regarding our gross profit by segment
for the three months ended September 29, 2012 and October 1, 2011.



                                       Three Months Ended (unaudited)
                              September 29, 2012             October 1, 2011
(Amounts in thousands)     Amount      % of Revenues     Amount      % of Revenues     Change
Fulfillment               $  19,197            22.7%    $  20,480            25.1%    $ (1,283 )
Engineering and
Construction                  8,410            17.7%        2,751            13.6%       5,659
Total                     $  27,607            20.9%    $  23,231            22.8%    $  4,376

Our gross profit for the three months ended September 29, 2012 was $27.6 million compared to $23.2 million for the three months ended October 1, 2011, representing an increase of $4.4 million or 18.8%. Our gross profit as a percentage of revenue was approximately 20.9% for the three months ended September 29, 2012, as compared to 22.8% for the three months ended October 1, 2011.

For the Fulfillment segment, gross margin decreased from 25.1% for the three months ended October 1, 2011 to 22.7% for the three months ended September 29, 2012. The decrease in gross margin was attributable to mix of revenue changes between our broadband cable operations and our satellite operations, which is consistent with previous quarters in 2012.

For the Engineering and Construction segment, gross margin increased from 13.6% for the three months ended October 1, 2011 to 17.7% for the three months ended September 29, 2012. The increase in gross margin was attributable to volume leverage and improvements in wireless project mix in 2012.

Selling, General and Administrative Expenses

Selling, general and administrative expense ("SG&A") for the three months ended September 29, 2012 was $10.6 million as compared to $11.6 million for the three months ended October 1, 2011, representing an overall decrease of $1.0 million. The primary drivers of the decrease in SG&A were decreases in salary and personnel costs, driven in part by lower corporate personnel costs, and lower legal and professional costs.


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Adjusted EBITDA and Net Income after Certain Non-cash Adjustments



The following table presents the reconciliation of net (loss) income to net
income after certain non-cash adjustments and Adjusted EBITDA:



                                                   Three Months Ended (unaudited)
(Amounts in thousands)                       September 29, 2012        October 1, 2011

Net (loss) income                           $            (26,055 )    $            2,421
Impairment charges from discontinued
operations                                                35,180                       -
Non-cash stock-based compensation                          1,003                     788
Non-cash interest expense                                    479                     340
Non-cash amortization                                      2,703                   2,414
Net income after certain non-cash
adjustments                                 $             13,310      $            5,963

Other discontinued operations, net of
tax                                                       (4,511 )                   (73 )
Income tax expense                                           293                     354
Restructuring charges                                      1,594                       -
Change in fair value                                           -                       -
Cash interest expense                                      3,404                   2,973
Other income                                                 (77 )                   (57 )
Depreciation                                               4,007                   3,210
Transaction costs                                            106                     154
Adjusted EBITDA                             $             18,126      $           12,524

Adjusted EBITDA increased by 44.7% to $18.1 million for the three months ended September 29, 2012 from $12.5 million for the three months ended October 1, 2011. The year-over-year increase in Adjusted EBITDA was primarily related to higher gross profit and lower SG&A, partially offset by mix of work and infrastructure investments for wireless growth.


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Restructuring Charges

We recognized $1.6 million of restructuring charges during the three months ended September 29, 2012 related to the change in management structure, including the elimination of our Chief Administrative Officer position. We recognized no restructuring charges during the three months ended October 1, 2011.

Depreciation and Amortization

Depreciation of fixed assets totaled approximately $4.0 million for the three months ended September 29, 2012 compared to $3.2 million for the three months ended October 1, 2011. The increase in depreciation was primarily attributable to the addition of vehicles in the fourth quarter of 2011 related to our cable business growth.

Amortization of intangible assets totaled approximately $2.7 million for the three months ended September 29, 2012 compared to $2.4 million for the three months ended October 1, 2011. Our intangible asset base increased in 2012 as a result of new acquisitions, resulting in an increase in amortization expense.

Interest Expense

We recognized $3.9 million and $3.3 million of interest expense during the three months ended September 29, 2012 and October 1, 2011, respectively. Interest expense increased due to the incremental draws on our Term Loan in May and September 2012 and additional borrowings on our Revolving Loan to support higher working capital amounts resulting from our revenue growth.

Income Taxes

For the three months ended September 29, 2012, we recognized income tax expense of $0.3 million, which consisted primarily of a deferred tax expense of $0.3 million related to tax deductible goodwill. During the three months ended October 1, 2011, we recognized income tax expense of $0.4 million which consisted primarily of a current tax expense of $0.2 million related to state income taxes and unrecognized tax benefits, a deferred tax benefit of $0.1 million related to our Canadian operations and a deferred tax expense of $0.3 million related to tax deductible goodwill.

Income or Loss from Discontinued Operations

We incurred a loss from discontinued operations of $30.7 million for the three months ended September 29, 2012 compared to income from discontinued operations of $0.1 million for the three months ended October 1, 2011. Discontinued operations for the three months ended September 29, 2012 include pre-tax impairment charges of $35.2 million related to the impairments of property and equipment and goodwill in our wireline reporting unit. Additionally, discontinued operations for the three months ended September 29, 2012 include an income tax benefit of $7.1 million which represents the difference between the Company's total income tax expense originally computed and the amount attributable to continuing operations, and also reflects changes in deferred tax assets and liabilities that were triggered by the impairment charges of the wireline reporting unit.

Net Income or Loss

We had net loss of $26.1 million for the three months ended September 29, 2012, compared to net income of $2.4 million for the three months ended October 1, 2011. The unfavorable change in net income was primarily due to the unfavorable change in discontinued operations of $30.8 million offset by higher operating income of $2.8 million.


Table of Contents

Results of Operations - Nine Months Ended September 29, 2012 Compared to Nine
Months Ended October 1, 2011



The following table presents a summary of our results of operations.



                                                               Nine Months Ended
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