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GSE > SEC Filings for GSE > Form 10-Q on 10-May-2013All Recent SEC Filings

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Form 10-Q for GSE HOLDING, INC.


10-May-2013

Quarterly Report


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

You should read this discussion and analysis together with our unaudited condensed consolidated financial statements and the related notes included in Item 1 of this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for the fiscal year ended December 31, 2012 filed with the Securities and Exchange Commission (the "SEC") on March 28, 2013. This discussion and analysis contain forward-looking statements that are based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management. Actual results could differ materially from those discussed in or implied by forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Quarterly Report on Form 10-Q, particularly in "Forward-Looking Statements."

Unless we state otherwise or the context otherwise requires, the terms "we," "us," "our," "GSE," "GSE Holding," "our business" and "our company" refer to GSE Holding, Inc. and its consolidated subsidiaries as a combined entity.

Overview

We are the leading global provider of sales of highly engineered geosynthetic containment solutions for environmental protection and confinement applications. Our products are used in a wide range of infrastructure end markets such as mining, waste management, liquid containment (including water infrastructure, agriculture and aquaculture), coal ash containment and shale oil and gas. We are one of the few providers with the full suite of products required to deliver customized solutions for complex projects on a global basis, including geomembranes, drainage products, geosynthetic clay liners ("GCLs"), nonwoven geotextiles and specialty products. We have a global infrastructure that includes seven manufacturing facilities located in the United States, Germany, Chile, Egypt and Thailand, 18 regional sales offices located in 12 countries and engineers and technical salespeople located on four continents. We generate the majority of our sales outside of North America, including high-growth emerging markets in Asia, Latin America, Africa and the Middle East. Our comprehensive product offering and global infrastructure, along with our extensive relationships with customers and end-users, provide us with access to high-growth markets worldwide and the flexibility to serve customers regardless of geographic location.

Segment Data

We have organized our operations into five principal reporting segments: North America, Europe Africa, Asia Pacific, Latin America and Middle East. We generate a greater proportion of our gross profit, as compared to our sales, in our North America segment, which consists of the United States, Canada and Mexico, because our product mix in this segment is focused on higher-margin products. We expect the percentage of total gross profit derived from outside North America to increase in future periods as we continue to focus on selling these higher-value products in our other segments. We also expect the percentage of sales derived from outside North America to increase in future periods as we continue to expand globally.

The following table presents our net sales by segment for the period presented, as well as gross profit and gross profit as a percentage of sales from each segment:

                                     North        Europe        Asia        Latin       Middle
                                    America       Africa      Pacific      America       East
                                                (in thousands, except percentages)
Three months ended March 31, 2013
Net sales                           $ 41,374     $ 22,353     $ 16,587     $ 11,704     $ 3,116
Gross profit                           8,947          157        2,199        1,511         443
Gross margin                            21.6 %        0.7 %       13.3 %       12.9 %      14.2 %



                                     North        Europe        Asia        Latin       Middle
                                    America       Africa      Pacific      America       East
                                                (in thousands, except percentages)
Three months ended March 31, 2012
Net sales                           $ 36,226     $ 25,851     $ 18,570     $ 12,476     $ 1,793
Gross profit                           9,230          960        3,142          759         119
Gross margin                            25.5 %        3.7 %       17.9 %        6.1 %       6.6 %


The following table presents our net sales from each segment, as a percentage of total net sales:

                  Three Months Ended
                       March 31,
                   2013          2012
North America         43.5 %       38.2 %
Europe Africa         23.5         27.2
Asia Pacific          17.4         19.6
Latin America         12.3         13.1
Middle East            3.3          1.9
Total                100.0 %      100.0 %

North America

North America net sales increased $5.2 million, or 14.4%, during the first three months of 2013 to $41.4 million from $36.2 million in the first three months of 2012. North America net sales increased approximately $5.2 million due increases in volume shipped. North America net sales increased approximately $0.5 million due to increased selling prices which was offset by changes product mix.

North America gross profit decreased $0.3 million, or 3.3%, during the first three months of 2013 to $8.9 million from $9.2 million in the first three months of 2012. North America gross profit decreased $0.9 million due to changes in product mix and increased manufacturing costs which were partially offset by the increases in volume shipped.

Europe Africa

Europe Africa net sales decreased $3.5 million, or 13.5%, during the first three months of 2013 to $22.4 million from $25.9 million in the first three months of 2012. Net sales decreased $3.2 million due to reduced volume shipped and $0.8 million due to changes in product mix. These decreases were partially offset by an increase in selling prices. The weakening European economy had a negative affect on net sales in 2013.

Europe Africa gross profit decreased $0.8 million to $0.2 million in the first three months of 2013 compared to $1.0 million in the first three months of 2012 primarily due to changes in product mix.

Asia Pacific

Asia Pacific net sales decreased $2.0 million, or 10.8%, during the first three months of 2013 to $16.6 million from $18.6 million in the first three months of 2012. Net sales decreased $3.2 million due to reduced volume shipped, which was partially offset by an increase in selling prices and product mix.

Asia Pacific gross profit decreased $0.9 million, or 29.0%, during the first three months of 2013 to $2.2 million from $3.1 million in the first three months of 2012. Gross profit decreased due to the decrease in volume shipped and increased manufacturing costs.

Latin America

Latin America net sales decreased $0.8 million, or 6.4%, during the first three months of 2013 to $11.7 million from $12.5 million in the first three months of 2012 primarily due to decreases in volume shipped.

Latin America gross profit increased $0.7 million, or 87.5%, during the first three months of 2013 to $1.5 million from $0.8 million in the first three months of 2012. Gross profit increased $0.9 million due to changes in product mix, which was partially offset by increased manufacturing costs.

Middle East

Middle East net sales increased $1.3 million, or 72.2% to $3.1 million during the first three months of 2013 from $1.8 million in the first three months of 2012 primarily due to an increase in volume shipped.

Middle East gross profit increased $0.3 million to $0.4 million in the first three months of 2013 from $0.1 million in the first three months of 2012, primarily due to the increase in sales volume.


Key Drivers

The following are the key drivers of our business:

Timing of Projects. Our financial results are influenced by the timing of projects that are developed and constructed by the end-users of our products in our primary end markets, including mining, waste management and liquid containment.

Mining projects and associated capital expenditures are driven by global commodity supply and demand factors. Our products are used primarily in metal mining, including copper, silver, uranium and gold. Metal mining projects are typically characterized by long lead times and large capital investment by the owners of the projects. In addition, these projects are often located in remote geographies with limited infrastructure, such as power and roads, creating complex logistics management requirements and long supplier lead times.

In our waste management end market, landfill construction and expansion projects are driven by waste volume generation and the need for additional municipal solid waste disposal resources. In developed markets, landfill construction and expansion projects are influenced by economic factors, particularly retail sales and consumer spending, housing starts and commercial and infrastructure construction. In emerging markets, waste management projects are also driven primarily by increased per capita GDP, which is positively correlated with waste generation, as well as by increasing environmental awareness and regulation, as discussed further below.

Finally, projects in our liquid containment end markets, including water management infrastructure, agriculture and aquaculture and industrial wastewater treatment applications, are driven by investment in civil and industrial infrastructure globally. This global spending is influenced by increased urbanization, increased wealth and protein-rich diets in developing economies necessitating higher levels of food production, population growth and other secular and economic factors, in both developed and emerging markets.

Environmental Regulations. Our business is influenced by international levels of environmental regulation and mandated geosynthetics specifications, which vary across jurisdictions and by end market. For example, China has addressed the need for increased environmentally sound, solid waste disposal resources in its twelfth five-year plan, the most recent in a series of economic development initiatives, which mandates the investment of 180 billion Yuan, or approximately $28 billion, in the urban waste disposal sector between 2011 and 2015. Environmental regulations often require the use of geosynthetic products to contain materials and protect groundwater in various types of projects. In emerging markets, waste management and water infrastructure projects are driven by an ongoing increase in environmental awareness and regulation that has developed through the continued urbanization and increased affluence of these economies.

Although environmental regulations may not be as stringent or may not be enforced in emerging markets, we believe these regulations will continue to develop and to be enforced more diligently. In developed markets, existing regulations, which often specify our products, tend to be highly specific and stringently enforced. As a result, regulatory changes in developed markets tend to impact new end markets, such as coal ash containment in the United States.

Seasonality. Due to the significant amount of our projects in the northern hemisphere (North America and Europe), our operating results are impacted by seasonal weather patterns in these markets. Our sales in the first and fourth quarters of the calendar year have historically been lower than sales in the second and third quarters. This is primarily due to lower activity levels in our primary end markets during the winter months in the northern hemisphere. The impact of this seasonality is partially mitigated by our mining and liquid containment end markets, which are located predominantly in the southern hemisphere. As our mining end market becomes a greater source of our sales, we expect seasonality to be further mitigated.

Resin Cost Volatility. Resin-based material, derived from crude petroleum and natural gas, accounted for 80.4% of our cost of products for the three months ended March 31, 2013. Our ability to both manage the cost of our resin purchases as well as pass fluctuations in the cost of resin through to our customers is critical to our profitability. Fluctuations in the price of crude oil impact the cost of resin. In addition, planned and unplanned outages in facilities that produce polyethylene and its feedstock materials have historically impacted the cost of resin. In 2010, we implemented successful performance initiatives that focused on reducing the risk of volatility in resin costs on our profitability. We have developed policies, procedures, tools and organizational training procedures to enable better resin cost management and facilitate the efficient pass through of increases in our resin costs to our customers. These initiatives included diversifying our resin sources, hiring a polyethylene expert to lead procurement, implementing pricing tools that account for projected resin pricing, institutionalizing a bid approval process, creating a plant sourcing decision model, and running a large project tracking process. While the significant majority of our products are sold under orders that include 30-day re-pricing provisions at our option, and while we have taken advantage of this option in the past, the policies, processes, tools and organizational training procedures described above allow us to limit the need to re-price projects already under contract. This, in turn, helps us better manage our relationships with our customers. We believe that managing the risks associated with volatility in resin costs is now among our critical and core competencies.


Results of Operations

Three Months Ended March 31, 2013 Compared to Three Months Ended March 31, 2012

                                                        Three Months Ended
                                                             March 31,
                                                                                      Period over
                                                        2013          2012           Period Change
                                                          (in thousands)
Net sales                                             $  95,134     $  94,916     $    218           0 %
Cost of products                                         81,877        80,528        1,349           2
Gross profit                                             13,257        14,388       (1,131 )        (8 )
Selling, general and administrative expenses             14,039        10,925        3,114          29
Non-recurring initial public offering related costs           -         9,655       (9,655 )      (100 )
Amortization of intangibles                                 359           300           59          20
Operating loss                                           (1,141 )      (6,492 )      5,351          82
Other expenses (income):
Interest expense, net of interest income                  3,763         5,747       (1,984 )       (35 )
Other expense (income), net                                 339          (443 )       (782 )      (177 )
Loss from continuing operations before income taxes      (5,243 )     (11,796 )      6,553         (56 )
Income tax (benefit) provision                           (2,796 )         649       (2,705 )       417
Loss from continuing operations                       $  (2,447 )   $ (12,445 )   $  9,258          74 %

Net sales

Consolidated net sales increased $0.2 million, or 0.2%, to $95.1 million for the three months ended March 31, 2013 from $94.9 million for the three months ended March 31, 2012. Consolidated net sales increased $0.9 million due to higher selling prices and $0.7 million due to changes in product mix. Consolidated net sales decreased $1.0 million due to decreased volume.

Cost of Products

Cost of products increased $1.3 million, or 1.7%, to $81.9 million for the three months ended March 31, 2013 from $80.5 million for the three months ended March 31, 2012. The increase in raw material costs contributed approximately 69.2%, or $0.9 million to the increase, which was passed on to our customers as reflected in the increase in sales prices. Manufacturing costs and changes in foreign currency led to approximately $0.4 million of the increase.

Gross Profit

Consolidated gross profit for the three months ended March 31, 2013 decreased $1.1 million, or 7.9%, to $13.3 million compared to $14.4 million for the three months ended March 31, 2012 due to the factors noted above.. Gross profit as a percentage of sales was 13.9% for the three months ended March 31, 2013 compared with 15.2% for the three months ended March 31, 2012.

Selling, General and Administrative Expenses

SG&A expense, excluding non-recurring initial public offering costs, for the three months ended March 31, 2013 was $14.0 million compared to $10.9 million for the three months ended March 31, 2012, an increase of $3.1 million. SG&A expense for the three months ended March 31, 2013 increased approximately $1.6 million in costs associated with increased personnel, increased professional fees of $0.7 million as well as other miscellaneous costs.

Excluding the expenses related to the IPO, SG&A as a percentage of sales for the three months ended March 31, 2013 was 14.8% compared to 11.5% for the three months ended March 31, 2012.

Other Expenses (Income)

Interest expense was $3.8 million for the three months ended March 31, 2013 compared to $5.7 million for the three months ended March 31, 2012. The $1.9 million decrease in interest expense in the three months ended March 31, 2013 was primarily due to lower interest rates 2013. The weighted average debt balance outstanding was $179.5 million and $181.2 million for the three months ended March 31, 2013 and 2012, respectively; weighted average effective interest rates were 7.3% and 8.8% for the three months ended March 31, 2013 and 2012, respectively.


Income Tax Expense

Income tax expense from continuing operations for the three months ended March 31, 2013 and 2012 was ($2.8) million and $0.6 million, respectively.Our provision for income taxes is recorded at the estimated annual effective tax rates for each tax jurisdiction based on fiscal year to date results. Our effective tax rates were 53.3% and (6%) for the three months ended March 31, 2013 and 2012, respectively. The difference in the effective tax rate compared with the U.S. federal statutory rate in 2013 is due to the mix of the international jurisdictional rates and U.S. permanent differences relating to foreign taxes for which no benefit is being recorded. In the quarter ended March 31, 2012, the difference in the effective rate is due to international rate differences and the fact the U.S. was recording a full valuation allowance.

Adjusted EBITDA

Adjusted EBITDA from continuing operations was $3.4 million during the three months ended March 31, 2013, a decrease of $3.6 million, or 51.4%, from $7.0 million during 2012. The decrease in Adjusted EBITDA was primarily due to an increase in our SG&A expense of $3.1 million and a decrease in our gross profit of $1.1 million.

Adjusted EBITDA represents net income or loss from continuing operations before interest expense, income tax expense, depreciation and amortization of property, plant and equipment and intangibles, foreign currency transaction gains/losses, restructuring expenses, certain professional fees, stock-based compensation expense, management fees paid to CHS, and public offering related costs. Disclosure in this Quarterly Report on Form 10-Q of Adjusted EBITDA, which is a "non-GAAP financial measure," as defined under the rules of the SEC, is intended as a supplemental measure of our performance that is not required by, or presented in accordance with, GAAP. Adjusted EBITDA should not be considered as an alternative to net income (loss), income (loss) from continuing operations, earnings per share or any other performance measures derived in accordance with GAAP. Our presentation of Adjusted EBITDA should not be construed to imply that our future results will be unaffected by unusual or non-recurring items.

We believe this measure is meaningful to our investors to enhance their understanding of our financial performance. Although Adjusted EBITDA is not necessarily a measure of our ability to fund our cash needs, we understand that it is frequently used by securities analysts, investors and other interested parties as a measure of financial performance and to compare our performance with the performance of other companies that report Adjusted EBITDA. Our calculation of Adjusted EBITDA may not be comparable to similarly titled measures reported by other companies. The following table reconciles net loss from continuing operations to Adjusted EBITDA for the periods presented in this table and elsewhere in this Quarterly Report on Form 10-Q.

The following table reconciles net loss from continuing operations, the most comparable GAAP financial measure, to Adjusted EBITDA for the periods presented:

                                                         Three Months Ended
                                                              March 31,
                                                         2013          2012
                                                           (in thousands)
Net loss                                               $  (2,447 )   $ (12,766 )
Loss from discontinued operations, net of income tax           -           321
Interest expense, net                                      3,763         5,747
Income tax (benefit) provision                            (2,796 )         649
Depreciation and amortization expense                      3,724         3,545
Foreign exchange loss (gain)                                 371          (572 )
Restructuring expense                                          -            60
Professional fees                                            596            37
Stock-based compensation expense                             155             -
Public offering related costs                                  -         9,655
Management fees                                                -           215
Other                                                          9           133
Adjusted EBITDA                                        $   3,375     $   7,024


Liquidity and Capital Resources

We rely on borrowings under our Senior Secured Credit Facilities (as defined below) and other financing arrangements as our primary source of liquidity. Our cash flow from operations serves as an additional source of liquidity to the extent available. Our primary liquidity needs are to finance working capital, capital expenditures and debt service. The most significant components of our working capital are cash and cash equivalents, accounts receivable, inventories, accounts payable and other current liabilities.

Although we can make no assurances, we believe that our cash on hand, together with the availability of borrowings under our Senior Secured Credit Facilities and other financing arrangements and cash generated from operations, will be sufficient to meet working capital requirements, anticipated capital expenditures and scheduled interest payments on our indebtedness for at least the next twelve months.

Cash and Cash Equivalents

As of March 31, 2013, we had $26.8 million in cash and cash equivalents. We maintain cash and cash equivalents at various financial institutions located in the United States, Germany, Thailand, Egypt and Chile. As of March 31, 2013, $1.2 million, or 4%, was held in domestic accounts with various institutions and approximately $25.6 million, or 96%, was held in accounts outside of the United States with various financial institutions.

In general, when an entity in a foreign jurisdiction repatriates cash to the United States, the amount of such cash is treated as a dividend taxable at current U.S. tax rates. We have not historically repatriated the earnings of any of our foreign subsidiaries, and we currently believe our foreign earnings are permanently reinvested. If we were to repatriate earnings from our foreign subsidiaries in the future, we would be subject to U.S. income taxes upon the distribution of cash to us from our non-U.S. subsidiaries. However, our tax attributes may be available to reduce the amount of the additional tax liability. The U.S. tax effects of potential dividends and related foreign tax credits associated with earnings indefinitely reinvested have not been realized pursuant to ASC-740-10, "Income Taxes". Upon distribution we will be subject to U.S. income taxes.

Description of Long-Term Indebtedness

First Lien Credit Facility

We have a $170.0 million first lien senior secured credit facility with General Electric Capital Corporation, Jefferies Finance LLC and the other financial institutions party thereto (as amended from time to time, the "First Lien Credit Facility"), consisting of $135.0 million of term loan commitments (as amended from time to time, the "First Lien Term Loan") and $35.0 million of revolving loan commitments (as amended from time to time, the "Revolving Credit Facility"). On April 18, 2012, the First Lien Credit Facility was amended to increase the First Lien term Loan commitments from $135.0 million to $157.0 million, resulting in an aggregate capacity of $192.0 million. We used the additional borrowing capacity under the First Lien Term Loan to repay in full all outstanding indebtedness under, and to terminate, the Second Lien Term Loan (as defined below) and to pay related fees and expenses. On September 19, 2012, we entered into a fourth amendment to the First Lien Credit Facility, which increased the Capital Expenditure Limitation covenant as discussed below in "Restrictive Covenants." On January 25, 2013, we entered into a fifth amendment to the First Lien Credit Agreement to provide more efficient capacity to move funds between foreign entities and clarify or correct certain other technical provisions in the agreement.

The First Lien Credit Facility matures in May 2016. Borrowings under the First Lien Credit Facility incur interest expense that is variable in relation to the London Interbank Offer Rates ("LIBOR") (and/or Prime) rate. In addition to paying interest on outstanding borrowings under the First Lien Credit Facility, we pay a 0.75% per annum commitment fee to the lenders in respect of the unutilized commitments, and letter of credit fees equal to the LIBOR margin on the undrawn amount of all outstanding letters of credit. As of March 31, 2013, there was $179.1 million outstanding under the First Lien Credit Facility consisting of $154.6 million in term loans and $24.5 million in revolving loans, and the weighted average interest rate on such loans was 7.17%. We had $8.0 million of capacity under the Revolving Credit Facility after taking into account outstanding loan advances and letters of credit.

Guarantees; Security. The obligations under the First Lien Credit Facility are guaranteed on a senior secured basis by the Company and each of its existing and future wholly-owned domestic subsidiaries, other than GSE International, Inc. and any other excluded subsidiaries. The obligations are secured by a first . . .

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