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AETI > SEC Filings for AETI > Form 10-K on 28-Mar-2013All Recent SEC Filings

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Form 10-K for AMERICAN ELECTRIC TECHNOLOGIES INC


28-Mar-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the consolidated financial statements and accompanying notes appearing elsewhere in this Form 10-K. This discussion contains forward-looking statements, based on current expectations related to future events and AETI's future financial performance that involves risks and uncertainties. AETI's actual results may differ materially from those anticipated in these forward-looking statements as a result of many important factors, including those set forth in the section entitled "Risk Factors" in this Form 10-K.

Overview

Our corporate structure currently consists of American Electric Technologies, Inc., which owns 100% of both M&I and AAT. We report financial data for three operating segments: the TP&S segment and the E&I segment which together encompass the operations of M&I including its South Coast Electric Systems, LLC subsidiary and the AAT segment which encompasses the operations of AAT including its wholly-owned Omega Metals division. In addition, M&I holds a 40%, 41%, and 49% interest in China, Singapore, and Brazil foreign joint ventures' operations, respectively. Prior to December 31, 2011, the Company owned 49% of the Singapore's joint venture with our joint venture partner, Oakwell Engineering, Ltd., owning the remaining 51%. At December 31st 2011, we exchanged 8% of our MIEFE ownership for satisfaction of amounts owed to MIEFE's general manager, under a deferred compensation arrangement for approximately $190,000. These ventures are stand-alone operating companies and enhance our ability to provide products to these markets. Results from these ventures are reported using the equity method of accounting.


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We are a leading provider of power delivery solutions to the global energy industry. Our customers are in the following industries:

Oil & gas

Upstream which includes land and offshore drilling, and offshore production, all primarily related to exploration and production (E&P)

Midstream which includes oil & gas pipelines along with fractionation plants

Downstream which includes refining and petrochemical, as well as Liquefied Natural Gas (LNG) plants

Power generation and distribution

Distributed power generation such as remote power stations, co-generation,

Renewable power generation including solar power, geothermal, biomass,

Power distribution including substations

Marine and Industrial

Marine Vessel including Platform Supply Vessels (PSV), Offshore supply vessels (OSV), tankers and other various work boats, tankers

Industrial including non oil & gas industrial markets such as steel, heavy commercial, and other non oil & gas segments

A key component of our company's strategy is our international focus. We have two primary models for conducting our international business. First, we sell directly and through foreign sales agents and distributors that we have appointed. Many of those international partners also provide local service and support for our products in those overseas markets. Second, where local market conditions dictate, we have expanded internationally by forming joint venture operations with local companies in key markets such as China, Brazil and Singapore, where there are local content requirements or we need to do local manufacturing.

Our business strategy is to grow through organic growth in our key energy markets, to expand our solution set to our current market segments, to continue our international expansion, and to accelerate those efforts with acquisitions. While at the same time increasing earnings and cash flow per share to enhance overall stockholder value.

The Company is uniquely positioned to be the "turn-key" supplier for power delivery projects for our customers, where we are able to offer custom-designed power distribution and power conversion systems, power services, and electrical and instrumentation construction, all from one company.

Non-GAAP Financial Measures

A non-GAAP financial measure is generally defined as one that purports to measure historical or future financial performance, financial position or cash flows, but excludes or includes amounts that would not be so adjusted in the most comparable GAAP measure. In this report, we define and use the non-GAAP financial measure EBITDA as set forth below.

EBITDA

Definition of EBITDA

We define EBITDA as follows:

Net income (loss) before:

provision (benefit) for income taxes;

non-operating (income) expense items;

depreciation and amortization; and

dividends on mandatorily redeemable preferred stock.

Management's Use of EBITDA

We use EBITDA to assess our overall financial and operating performance. We believe this non-GAAP measure, as we have defined it, is helpful in identifying trends in our day-to-day performance because the items excluded have little or no significance on our day-to-day operations. This measure provides an assessment of controllable expenses and affords management the ability to make decisions which are expected to facilitate meeting current financial goals as well as achieving optimal financial performance. It provides an indicator for management to determine if adjustments to current spending decisions are needed.


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EBITDA provides us with a measure of financial performance, independent of items that are beyond the control of management in the short-term, such as dividends required on preferred stock, depreciation and amortization, taxation and interest expense associated with our capital structure. This metric measures our financial performance based on operational factors that management can impact in the short-term, namely the cost structure or expenses of the organization. EBITDA is one of the metrics used by senior management and the board of directors to review the financial performance of the business on a regular basis. EBITDA is also used by research analysts and investors to evaluate the performance of and value companies in our industry.

Limitations of EBITDA

EBITDA has limitations as an analytical tool. It should not be viewed in isolation or as a substitute for GAAP measures of earnings. Material limitations in making the adjustments to our earnings to calculate EBITDA, and using this non-GAAP financial measure as compared to GAAP net income (loss), include:

the cash portion of dividends and interest expense and income tax (benefit) provision generally represent charges (gains), which may significantly affect our financial results; and

depreciation and amortization, though not directly affecting our current cash position, represent the wear and tear and/or reduction in value of our fixed assets and may be indicative of future needs for capital expenditures.

An investor or potential investor may find this item important in evaluating our performance, results of operations and financial position. We use non-GAAP financial measures to supplement our GAAP results in order to provide a more complete understanding of the factors and trends affecting our business.

EBITDA is not an alternative to net income, income from operations or cash flows provided by or used in operations as calculated and presented in accordance with GAAP. You should not rely on EBITDA as a substitute for any such GAAP financial measure. We strongly urge you to review the reconciliation of EBITDA to GAAP net income (loss) attributable to common stockholders, along with our condensed consolidated financial statements included herein.

We also strongly urge you to not rely on any single financial measure to evaluate our business. In addition, because EBITDA is not a measure of financial performance under GAAP and is susceptible to varying calculations, the EBITDA measure, as presented in this report, may differ from and may not be comparable to similarly titled measures used by other companies.

The table below shows the reconciliation of Net income (loss) attributable to common stockholders to EBITDA for the years ended December 31, 2012 and 2011 (dollars in thousands):

                                                              Years ending December 31,
                                                              2012                2011
Net Income (loss) attributable to common Stockholders     $      2,084        $      (5,888 )
Add: Dividends on redeemable preferred stocks                      225                   -
Depreciation and Amortization                                      877                  772
Interest expense and other, net                                    148                  216
Provision (benefit) for income taxes                               707                5,442

EBITDA                                                    $      4,041        $         542

Foreign Joint Ventures:

Summary financial information of BOMAY, MIEFE and AAG in U.S. dollars was as
follows at December 31, 2012 and 2011 (in thousands):



                                      BOMAY                    MIEFE                    AAG
                                2012         2011        2012        2011*       2012        2011
                                                         (in thousands)
   Assets:
   Total current assets       $ 91,926     $ 60,817     $ 3,894     $ 4,459     $ 2,241     $ 1,604
   Total non-current assets      5,116        5,163         116         105         776          49

   Total assets               $ 97,042     $ 65,980     $ 4,010     $ 4,564     $ 3,017     $ 1,653


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                                        BOMAY                    MIEFE                    AAG
                                  2012         2011        2012        2011*       2012        2011
                                                           (in thousands)
 Liabilities and equity:
 Total liabilities              $ 73,293     $ 46,499     $ 1,422     $ 2,162     $ 1,511     $ 1,151
 Total joint ventures equity      23,749       19,481       2,588       2,402       1,505         502

 Total liabilities and equity   $ 97,042     $ 65,980     $ 4,010     $ 4,564     $ 3,016     $ 1,653

 Gross sales                    $ 84,639     $ 53,574     $ 6,996     $ 5,783     $ 7,625     $ 4,339
 Net income (loss)                 6,422        4,142          39          20       1,104         532

* On December 31, 2011, the Company exchanged an 8% ownership in MIEFE to satisfy certain obligations to the general manager of MIEFE pursuant to a deferred compensation arrangement totaling approximately $190,000. The exchange decreased the Company's ownership interest in MIEFE from 49% to 41%.

The Company's investment in and advances to its foreign joint ventures' operations were as follows as of December 31, 2012 and 2011:

                                                        2012                                               2011
                                     BOMAY*        MIEFE       AAG        TOTAL         BOMAY*       MIEFE        AAG        TOTAL
                                                   (in thousands)                                     (in thousands)
Investment in joint ventures:
Balance, beginning of year          $  2,033      $    14     $ 284      $  2,331      $  2,033      $   17      $ 158      $  2,208
Ownership exchange                        -            -         -             -             -           (3 )       -             (3 )
Additional amounts invested and
advanced                                  -            -        (50 )         (50 )          -           -         126           126

Balance, end of year                   2,033           14       234         2,281         2,033          14        284         2,331

Undistributed earnings:
Balance, beginning of year             4,839          739       158         5,736         4,221         990        (93 )       5,118
Equity in earnings (loss)              2,569           16       503         3,088         1,656          10        251         1,917
Ownership exchange                        -            -         -             -             -         (143 )       -           (143 )
Dividend distributions                (1,008 )         -         -         (1,008 )      (1,038 )      (118 )       -         (1,156 )

Balance, end of year                   6,400          755       661         7,816         4,839         739        158         5,736

Foreign currency translation
Balance, beginning of year             1,040          233       (32 )       1,241           767         282         -          1,049
Ownership exchange                        -            -         -             -             -          (45 )       -            (45 )
Change during the year                    58           61       (49 )          70           273          (4 )      (32 )         237

Balance, end of year                   1,098          294       (81 )       1,311         1,040         233        (32 )       1,241

Investments, end of year            $  9,531      $ 1,063     $ 814      $ 11,408      $  7,912      $  986      $ 410      $  9,308

* Accumulated statutory reserves in equity method investments of $1.6 million and $1.3 million at December 31, 2012 and 2011, respectively, are included in AETI's consolidated retained earnings. In accordance with the People's Republic of China, ("PRC"), regulations on enterprises with foreign operations, an enterprise established in the PRC with foreign operations is required to provide for certain statutory reserves, namely (i) General Reserve Fund, (ii) Enterprise Expansion Fund and (iii) Staff Welfare and Bonus Fund, which are appropriated from net profit as reported in the enterprise's PRC statutory accounts. A non-wholly-owned foreign invested enterprise is permitted to provide for the above allocation at the discretion of its board of directors. The aforementioned reserves can only be used for specific purposes and are not distributable as cash dividends.

The Company accounts for its investments in foreign joint ventures' operations using the equity method of accounting. Under the equity method, the Company's share of the joint ventures' operations' earnings or loss is recognized in the consolidated statements of operations as equity income (loss) from foreign joint ventures' operations. Joint venture income increases the carrying value of the joint ventures and joint venture losses reduce the carrying value. Dividends received from the joint ventures reduce the carrying value.


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Results of Operations

The table below summarizes our consolidated net sales and profitability for the years ended December 31, 2012, 2011 and 2010 (dollars in thousands):

                                                       2012            2011            2010
Net sales                                            $ 54,065        $ 51,940        $ 38,964

Gross profit                                            8,123           7,155           3,656
Gross profit %                                             15 %            14 %            10 %
Research and development expenses                        (103 )          (577 )          (882 )
Selling and marketing expenses                         (2,455 )        (2,508 )        (2,275 )
General and administrative expenses                    (5,146 )        (5,780 )        (4,833 )

Income (loss) from domestic operations                    419          (1,710 )        (4,334 )

Equity income from foreign joint ventures'
operations                                              3,088           1,917           2,304
Foreign joint ventures' operations related
expenses                                                 (343 )          (437 )          (436 )

Net equity income from foreign joint ventures'
operations                                              2,745           1,480           1,868

Income (loss) from domestic operations and net
equity income from foreign joint ventures'
operations                                              3,164            (230 )        (2,466 )

Other expense, net                                       (148 )          (216 )          (318 )

Net income (loss) before income taxes                   3,016            (446 )        (2,784 )
(Provision for) benefit from income taxes                (707 )        (5,442 )         1,090
Net income (loss) before preferred dividends            2,309          (5,888 )        (1,694 )
Preferred Stock Dividend                                 (225 )            -               -

                                                     $  2,084        $ (5,888 )      $ (1,694 )

Year ended December 31, 2012 compared to year ended December 31, 2011

Consolidated net sales increased $2.1 million or 4%, to $54.1 million for the year ended December 31, 2012 as compared to 2011. The Company's net sales growth from the comparative prior year period was driven primarily by increased demand for its Technical Products which was partially offset by declines in Electrical Instrumentation and Construction. These declines in the E&I segment relate primarily to the Company's decision in 2012 to exit the water/wastewater construction business to focus its E&I efforts on more strategic segments including oil & gas, power generation and distribution, and marine and non oil & gas industrial.

Consolidated gross profit increased $1.0 million to $8.1 million and increased as a percentage of net sales from 14% to 15%. This increase was mainly attributable to the TP&S segment's increased net sales and direct margin compared to the previous period in 2011. This performance reflects the improved business environment and benefits of the cost reduction efforts implemented in late 2010. The Company's gross profit reported each quarter in 2012 was $1.8 million in the first quarter, $2.2 million in the second quarter, $1.6 million in the third quarter and $2.5 million in the fourth quarter.

Segment Comparisons

The TP&S segment's net sales increased $10.0 million from $28.9 million for the year ended December 31, 2011, to $39.0 million for the year ended December 31, 2012, a 35% improvement. Gross profit for the segment for the year ended December 31, 2012 was $6.6 million, an increase of $2.1 million over the prior year gross profit of $4.6 million. The increase in Technical Products and Services results was driven in large part by increased mid and downstream oil and gas demand for our products and services during 2012 which more than offset a slowdown in the domestic land and offshore rig markets.

The E&I segment's reported net sales of $9.2 million for the year ended December 31, 2012, a decrease of $6.3 million, or 41%, compared to the year ended December 21, 2011. The results reflect our decision to exit the water/wastewater business and focus our Electrical and Instrumentation construction efforts on markets that are more closely aligned with our overall strategy. Gross profit for the E&I segment during the year ended December 31, 2012 was $0.5 million, compared to $1.2 million in the corresponding prior year period. Gross profit as a percentage of net sales decreased to 6% from 8% in the comparable prior period, due to the winding down of existing contractual arrangements and the consolidation of our Beaumont and Houston construction resources.

The AAT segment reported net sales of $5.9 million for the year ended December 31, 2012, down $1.6 million, from the comparable prior year period, a 22% decrease. Gross profit decreased by $0.4 million in 2012, from $1.3 million in the prior year. Gross profit as a percentage of net sales decreased to 16% in 2012 from 18% in the comparable prior period. The decline in the AAT segments revenue and profitability primarily relates to the loss of a key contract. This segment continues to be challenged by competitive pricing due to weakness in the industrial sector and the loss of a key account. While we continue to work to improve the results, we do not anticipate AAT to return to 2011 revenue levels during 2013.


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Research and development costs for the year ended December 31, 2012 were down to $0.1 million from $0.6 million in the previous period, all of which related to the continued development of the Company's ISIS products. We anticipate increased research and development expenditures in 2013 as we develop new products to meet the needs of our customers.

Selling and marketing expenses for the year ended December 31, 2012 were $2.5 million, or 5% of net sales and essentially unchanged when compared to 2011.

General and administrative expenses were down for the year ended December 31, 2012 over the same period in 2011 by $0.6 million from $5.8 million in 2011 to $5.2 million in 2012 primarily due to a legal expense of $0.4 million in 2011 related to the E&I segment's arbitration dispute, from which the Company received a favorable determination from the binding arbitrator. In addition, the Company recorded an additional audit expense accrual of $252,000 in 2011.

Net equity income from foreign joint ventures increased for the year ended December 31, 2012 by $1.3 million to $2.8 million when compared to the period ended December 31, 2011. The increased equity income resulted primarily from BOMAY, which increased from $1.7 million in 2011 to $2.6 million in 2012 as a result of increased activity in China.

Consolidated other expense, net was $148,000 for the year ended December 31, 2012, a decrease of $68,000 from the comparable prior year, primarily due to a reduction of long-term debt. Long-term debt decreased from $5.1 million at the end of 2011 to $0.5 million at December 31, 2012 as a result of a $5 million preferred stock issuance.

The (provision for) benefit from income taxes for the year ended December 31, 2011 was a non-cash expense of $5.4 million which reflects the valuation allowance related to the Company's net deferred tax assets related to its U.S. operations. The deferred tax asset was primarily related to the net operating loss carry forwards of $9.8 million generated by AAT prior to the Company's merger in 2007. Subsequently, the Company generated additional net operating losses and foreign tax credit carry forwards. It was determined in the fourth quarter of 2011 that due to the Internal Revenue's Section 382 limitations on our ability to utilize the net operating losses and due to three years of cumulative losses, a full valuation allowance was warranted and as such, an expense was recorded. See Note 7 to the Consolidated Financial Statements included in this report for further details. The 2012 tax accrual represents U.S. taxes on the equity income less dividends received.

Year ended December 31, 2011 compared to year ended December 31, 2010

Consolidated net sales increased $13.0 million or 33%, to $51.9 million for the year ended December 31, 2011 over the comparable period in 2010. The Company's reporting segments showed strong net sales growth from the comparative period primarily due to increased demand for its technical products related to the U. S. land drilling market.

Consolidated gross profit increased $3.5 million to $7.2 million and increased as a percentage of net sales from 9% to 14%. This increase was mainly attributable to the TP&S segment's increased net sales and direct margin compared to the previous period in 2010, as well as a reduction of the Company's indirect costs of sales expenses of approximately $1.4 million for the year ended December 31, 2011. This performance reflects the improving conditions in the land drilling markets and benefits of the cost reduction efforts implemented in late 2010. The Company's gross profit reported each quarter in 2011 was $1.2 million in the first quarter, $1.5 million in the second quarter, $2.2 million in the third quarter and $2.3 million in the fourth quarter which reflected a continued improvement with each quarter. In the four quarter 2011, the Company wrote down its AAT inventory by $276,000 as a charge to cost of sales which reflected a change in the labor and overhead absorption rates in inventory.

Segment Comparisons

The TP&S segment's net sales increased $8.3 million from $20.6 million for the year ended December 31, 2010, to $28.9 million for the year ended December 31, 2011, a 41% improvement which reflects the increase in the land drilling market. Gross profit for the segment for the year ended December 31, 2011 was $4.6 million, an increase of $3.4 million over the prior year gross profit of $1.2 million. In 2010, the Company implemented cost saving initiatives which reduced indirect expense by $1.1 million in 2011 over 2010.

The E&I segment reported net sales of $15.5 million for the year ended December 31, 2011, an increase of $4.0 million, or 35%, over the year ended December 31, 2010 which primarily reflected an improvement in the water/wastewater projects developed in municipalities. Gross profit for the E&I segment during the year ended December 31, 2011 was $1.2 million, compared to $834,000 in the corresponding prior year period. Although gross profit as a percentage of net sales increased to 8% from 7% in the comparable prior period, the water/wastewater market continues to be competitive with fixed-priced projects. Indirect costs during 2011 declined by $314,000 which benefited the gross profit.


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The AAT segment reported net sales of $7.5 million for the year ended December 31, 2011, up $655,000 from the comparable prior year period, a 10% increase. Gross profit decreased by $334,000 in 2011, from $1.7 million in the prior year period. Gross profit as a percentage of net sales decreased to 18% in 2011from 24% in the comparable prior period. In the fourth quarter 2011, the Company wrote down its AAT inventory by $276,000 as a charge to cost of sales which reflected a change in the labor and overhead absorption rates in inventory. This segment continues to be challenged by competitive pricing due to weakness in the industrial sector.

Research and development costs for the year ended December 31, 2011 were down to $557,000 from $882,000 in the previous period, all of which related to the continued development of the Company's ISIS products.

Selling and marketing expenses for the year ended December 31, 2011 were $2.5 million, or 5% of net sales compared to the prior year period ended December 31, 2010 of $2.3 million, or 6% of net sales. The dollar increase is primarily attributable to increased commissions related to the $13.0 million increase in net sales and an increase in marketing trade shows of approximately $130,000.

General and administrative expenses were up for the year ended December 31, 2011 over the same period in 2010 by $947,000 due to an increase in Company's variable compensation expense of $364,000 and legal expenses of $368,000 related to the E&I segment's arbitration dispute, from which the Company received a favorable determination from the binding arbitrator. In addition, the Company recorded an additional audit expense accrual of $252,000 in 2011.

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