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GLPW > SEC Filings for GLPW > Form 10-Q on 8-Aug-2013All Recent SEC Filings

Show all filings for GLOBAL POWER EQUIPMENT GROUP INC.

Form 10-Q for GLOBAL POWER EQUIPMENT GROUP INC.


8-Aug-2013

Quarterly Report


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

Cautionary Statement Regarding Forward-Looking Statements

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

business strategies;

operating and growth initiatives and opportunities;

competitive position;

market outlook and trends in our industry;

contract backlog and related amounts to be recognized as revenue;

expected financial condition;

future cash flows;

financing plans;

expected results of operations;

future capital and other expenditures;

availability of raw materials and inventories;

plans and objectives of management;

future exposure to currency devaluations or exchange rate fluctuations;

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

future compliance with orders and agreements with regulatory agencies;

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

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

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

In light of these risks, uncertainties and assumptions, the events described in the forward-looking statements might not occur or might occur to a different extent or at a different time than we have described. You should consider the areas of risk and uncertainty described above, as well as those discussed in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission ("SEC") on March 7, 2013, titled "Risk Factors." Except as may be required by applicable law, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise and we caution you not to rely upon them unduly.

The following discussion provides an analysis of the results of operations for each of our business segments, an overview of our liquidity and capital resources and other items related to our business. This discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto included in this Form 10-Q and our audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K, filed with the SEC on March 7, 2013.

Overview

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

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

Through our Services Division, we provide on-site specialty modification and maintenance services, outage management, facility upgrade services, specialty repair, brazed aluminum heat exchange repair and maintenance, and other industrial and safety services to nuclear, fossil-fuel, industrial gas, liquefied natural gas, petrochemical and other industrial operations in the U.S.


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For information about our segments, see Note 11 - Segment Information to our unaudited condensed consolidated financial statements included in this Form 10-Q.

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

Acquisitions

On April 30, 2013, we acquired Hetsco Holdings, Inc. and its wholly owned subsidiary Hetsco, Inc. (together "Hetsco"), a global provider of mission critical brazed aluminum heat exchanger repair, maintenance, and safety services to the industrial gas, liquefied natural gas and petrochemical industries. The addition of Hetsco increases our exposure to the macro natural gas growth trend with a focus on adjacent technologies in air and gas separation, heat exchangers and liquefied natural gas. Hetsco's repair and maintenance work further expands our scope of high-margin aftermarket services.

The aggregate acquisition price consisted of $33.3 million in cash, including estimated working capital adjustments and subject to final working capital adjustments which have not been reflected and could be significant. We funded the purchase of the Hetsco acquisition through a combination of cash on hand and draw on our $100 million Revolving Credit Facility. The financial results of Hetsco have been included in our Services Division as of the acquisition date.

In the third quarter of 2012, we acquired two businesses ("2012 Acquisitions") which expanded our products portfolio. The financial results of the 2012 Acquisitions have been included in our Products Division as of their respective acquisition dates.

Business Outlook

Products:

Year-to-date operating results for our Products Division reflect higher shipment volumes compared to the prior year period primarily due to the incremental revenues from the 2012 Acquisitions and on-time shipments offset by unfavorable market trends resulting from a limited number of new gas turbine installations. Gross margins realized during the first half of 2013 were weaker than in 2012, primarily due to lower as sold margins in our organic products businesses, unfavorable absorption from declining order rates and higher than anticipated costs on discrete projects in our organic products businesses.

Currently, orders from the oil and gas pipeline infrastructure market are robust and we anticipate this market to be a source of revenue growth in 2013 for our business. We expect our Products Division revenue in 2013 to remain generally in line with or slightly above 2012 as the increase in revenue from our 2012 Acquisitions will offset a decline in our organic business. The near-term market continues to be challenging due to the previously mentioned market trends reducing projected gross margins in 2013 and into 2014. To offset this decline in gross margins, we continue to work with customers to create cost effective solutions and more efficient product offerings. In the long-term, we expect our Products Division should benefit from the forecasted expansion of natural gas as a growing source of worldwide electricity production.

Services:

Within our Services Division, year-to-date revenue was higher as compared to the prior year period which is largely attributable to an increase in outage revenue due to both timing and scope as compared to the prior year period. Within our modification and maintenance services, our customers continue to experience lower demand for power as a result of a shift in demand from nuclear to gas power due to lower natural gas prices. As a result, U.S. utilities are expected to continue to defer elective maintenance and capital project work.

We had project scope on all of the U.S. new and re-start nuclear plant projects during the first half of 2013. We anticipate this support to increase during the second half of 2013.

In connection with the Fukushima, Japan incident in March 2011, the Nuclear Regulatory Commission has issued preliminary guidance related to certain modifications on the U.S. nuclear fleet, but the timing and scope of such modifications remain uncertain as U.S. utilities evaluate how these preliminary guidelines will apply to their nuclear sites. We do anticipate some projects to begin to materialize by the second half of 2013 from this guidance.

Our margins realized in the first half of 2013 have declined from 2012 due to the higher margins realized on two capital projects in the prior year period.

In the second quarter of 2013, we also expanded our service offerings to the industrial gas market with the acquisition of Hetsco.


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Executing our Growth Strategy and other costs:

As we continue to execute our growth strategy, we are working to realign our businesses to focus on creating a scalable, efficient organization aligned along our customer markets to better meet their expectations. We are focused on investing in sectors with growth opportunities and control costs in sectors with lower growth opportunities. We expect to complete the realignment of operations by the end of the year.

Backlog:

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

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

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

                    June 30,      March 31,       December 31,       September 30,      June 30,
                      2013           2013             2012               2012             2012
 Products Backlog   $ 145,307     $  130,198     $      113,193     $       152,385     $ 136,058
 Services Backlog     263,557        257,066            280,561             301,916       266,451

 Total              $ 408,864     $  387,264     $      393,754     $       454,301     $ 402,509

Our Products Division backlog as of June 30, 2013 increased by $15.1 million from March 31, 2013 and increased by $9.2 million from June 30, 2012. The increase in backlog since March 31, 2013 was primarily attributable to orders for power generation projects primarily in the U.S. and Asia as well as oil and gas pipeline infrastructure projects in the U.S. Also contributing to the backlog levels are timing of shipments which are expected to increase in the second half of 2013. Proposals for power generation projects remain steady despite the limited number of new gas turbine installations. While we remain optimistic about the prospects for new natural gas-fired generation projects in the U.S., over 63% of our current backlog is for non-U.S. projects. Bookings destined for U.S., Asian and South American projects increased during the first half of 2013. The ratio of orders booked to orders shipped was 1.4-to-1 during both the three and six months ended June 30, 2013.

Our Services Division backlog as of June 30, 2013 increased by $6.5 million from March 31, 2013 and decreased by $2.9 million from June 30, 2012. Excluding the Hetsco acquisition, Services Division backlog increased $4.0 million from March 31, 2013. The increase from March 31, 2013 was largely attributable to scope expansion on a multi-year re-start nuclear project. Of the $263.6 million in Services Division backlog as of June 30, 2013, we expect an estimated $157.9 million to convert to revenue beyond 2013. The amount of backlog expected to convert beyond 2013 increased from the three months ended March 31, 2013 primarily due to new projects awarded and project delays. Excluding the effect of the Hetsco acquisition, the ratio of project awards to services rendered was 1.1-to-1 during the three months ended June 30, 2013 and 0.9-to-1 during the six months ended June 30, 2013.


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Results of Operations

Effective as of January 1, 2013, our Board of Directors determined to change from a traditional month-end calendar close cycle to a 4-4-5 calendar close methodology during interim periods. Our fiscal year will continue to end on December 31. Under this methodology, each interim period is comprised of 13 weeks, which includes two 4-week months and one 5-week month, and begins on Monday and ends on Sunday. The 4-4-5 close methodology will change the accounting periods to month-end dates that would be different than the traditional last day of the standard month end. This change in methodology aligns our financial calendar to our payroll cycle simplifying our close process. The effects of this practice are modest and only exist within a reporting year. The reporting periods and applicable reports for the year 2013 are expected to be as follows:

Fiscal Period                              Reporting Period                    Report to be Filed
First quarter of fiscal 2013    January 1, 2013 to March 31, 2013         Quarterly Report on Form 10-Q
Second quarter of fiscal 2013   April 1, 2013 to June 30, 2013            Quarterly Report on Form 10-Q
Third quarter of fiscal 2013    July 1, 2013 to September 29, 2013        Quarterly Report on Form 10-Q
Fourth quarter of fiscal 2013   September 30, 2013 to December 31, 2013   Annual Report on Form 10-K

Our summary financial results during the three and six months ended June 30, 2013 and 2012 were as follows ($ in thousands):

                                                 Three Months Ended                                          Six Months Ended
                                                      June 30,                     Variance                      June 30,                     Variance
                                                 2013           2012           $              %            2013           2012            $             %
Products revenue                               $  35,930      $ 33,582      $  2,348            7.0 %    $  74,824      $  65,686      $  9,138          13.9 %
Services revenue                                  80,035        61,096        18,939           31.0 %      157,851        133,454        24,397          18.3 %

Total revenue                                    115,965        94,678        21,287           22.5 %      232,675        199,140        33,535          16.8 %
Cost of products revenue                          27,368        25,586         1,782            7.0 %       60,305         51,446         8,859          17.2 %
Cost of services revenue                          69,794        52,100        17,694           34.0 %      137,601        114,210        23,391          20.5 %

Cost of revenue                                   97,162        77,686        19,476           25.1 %      197,906        165,656        32,250          19.5 %
Gross profit                                      18,803        16,992         1,811           10.7 %       34,769         33,484         1,285           3.8 %
Gross profit percentage                             16.2 %        17.9 %                                      14.9 %         16.8 %
Selling and marketing expenses                     2,462         1,486           976           65.7 %        4,685          2,990         1,695          56.7 %
General and administrative expenses               12,812        13,271          (459 )         -3.5 %       27,366         25,237         2,129           8.4 %
Depreciation and amortization expense (1)          1,559           267         1,292          483.9 %        2,632            509         2,123         417.1 %

Total operating expenses                          16,833        15,024         1,809           12.0 %       34,683         28,736         5,947          20.7 %
Operating income                                   1,970         1,968             2            0.1 %           86          4,748        (4,662 )       -98.2 %
Interest expense, net                                190            90           100          111.1 %          276          1,271          (995 )       -78.3 %
Other expense (income), net                          154            (2 )         156        -7800.0 %            4             (7 )          11        -157.1 %

Income (loss) from continuing operations
before income tax                                  1,626         1,880          (254 )        -13.5 %         (194 )        3,484        (3,678 )      -105.6 %
Income tax expense                                   884           917           (33 )         -3.6 %          265          1,629        (1,364 )       -83.7 %

Income (loss) from continuing operations             742           963          (221 )        -22.9 %         (459 )        1,855        (2,314 )      -124.7 %
Discontinued operations:
Loss from discontinued operations                     (1 )         (60 )          59          -98.3 %          (41 )         (127 )          86         -67.7 %

Net income (loss)                                    741      $    903      $   (162 )        -17.9 %    $    (500 )    $   1,728      $ (2,228 )      -128.9 %

(1) Excludes depreciation and amortization expense for the three months ended June 30, 2013 and 2012 of $291 and $201 included in cost of revenue, respectively. Excludes depreciation and amortization expense for the six months ended June 30, 2013 and 2012 of $649 and $396 included in cost of revenue, respectively.

Revenue



($ in thousands)       Three Months Ended June 30,              Variance              Six Months Ended June 30,             Variance
                        2013                 2012             $           %             2013               2012           $           %
Products revenue   $        35,930       $      33,582     $  2,348        7.0 %    $      74,824       $   65,686     $  9,138       13.9 %
Services revenue            80,035              61,096       18,939       31.0 %          157,851          133,454       24,397       18.3 %

Total              $       115,965       $      94,678     $ 21,287       22.5 %    $     232,675       $  199,140     $ 33,535       16.8 %


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Products Revenue.

The composition of our Products Division revenue varies from period to period
based on our product mix, the strength of various geographic markets we serve
and our ability to address those markets. The geographic dispersion of where
products were shipped during the three and six months ended June 30, 2013 and
2012 was as follows ($ in thousands):



                                          Three Months Ended June 30,               Variance                 Six Months Ended June 30,               Variance
                                           2013                 2012             $             %             2013                2012             $             %
United States (1)                     $       14,560       $        8,760     $  5,800         66.2 %    $      35,049       $      15,607     $ 19,442        124.6 %
Canada                                            79                1,391       (1,312 )      -94.3 %              230               1,403       (1,173 )      -83.6 %
Europe                                         2,280                1,506          774         51.4 %            3,238               3,858         (620 )      -16.1 %
Mexico                                            37                  501         (464 )      -92.6 %              316               3,128       (2,812 )      -89.9 %
Asia                                           1,315                  798          517         64.8 %            5,444               3,533        1,911         54.1 %
Middle East                                   14,615               18,755       (4,140 )      -22.1 %           23,680              31,640       (7,960 )      -25.2 %
South America                                  1,325                1,075          250         23.3 %            4,993               5,553         (560 )      -10.1 %
Other                                          1,719                  796          923        116.0 %            1,874                 964          910         94.4 %

Total                                 $       35,930       $       33,582     $  2,348          7.0 %    $      74,824       $      65,686     $  9,138         13.9 %

(1) For certain U.S. parts deliveries that are picked up by our customers, we do not have visibility to the final destinations; and therefore, those shipments are considered to be U.S. shipments.

The increase in Products Division revenue during the three and six months ended June 30, 2013 of $2.3 million and $9.1 million, respectively, compared to the corresponding periods in 2012, was primarily due to $9.6 million and $19.7 million of incremental revenue associated with the 2012 Acquisitions. This increase was partially offset by a reduction in shipments from the organic business due to unfavorable market trends resulting from a limited number of new gas turbine installations. The incremental revenue from the 2012 Acquisitions was comprised of energy infrastructure projects and aftermarket parts in the U.S.

Services Revenue.

The composition of our Services Division revenue varies from period to period based on contract mix (fixed price versus cost plus and capital versus maintenance) and the number and scope of outages under our evergreen maintenance contracts. The increase in Services Division revenue of $18.9 million and $24.4 million during the three and six months ended June 30, 2013, respectively, compared to the same periods in 2012, primarily resulted from an increase in the scope of 2013 outage work and one additional outage for the year to date period. Additionally, there was incremental revenue of $3.2 million associated with the Hetsco acquisition during the second quarter of 2013.

Gross Profit / Margin %



($ in thousands)                                 Three Months Ended June 30,               Variance              Six Months Ended June 30,              Variance
                                                 2013                  2012              $          %             2013                2012             $          %
Gross Profit-Products                        $       8,562         $       7,996      $   566        7.1 %    $     14,519        $     14,240      $   279       2.0 %
Gross Margin %                                        23.8 %                23.8 %                                    19.4 %              21.7 %
Gross Profit-Services                        $      10,241         $       8,996      $ 1,245       13.8 %    $     20,250        $     19,244      $ 1,006       5.2 %
Gross Margin %                                        12.8 %                14.7 %                                    12.8 %              14.4 %

Total Gross Profit                           $      18,803         $      16,992      $ 1,811       10.7 %    $     34,769        $     33,484      $ 1,285       3.8 %

Gross Margin %                                        16.2 %                17.9 %                                    14.9 %              16.8 %

Products.

The increase in Products Division gross profit during the three months ended June 30, 2013 of $0.6 million compared to the corresponding period in 2012, was primarily due to higher revenue as the realized gross margin percentage was unchanged during the period.

The increase in Products Division gross profit during the six months ended June 30, 2013 of $0.3 million compared to the corresponding periods in 2012, was primarily due to higher shipment volumes which impacted gross profit dollars by approximately $2.3 million. The effect of the increase in gross profit dollars was partially offset by lower as sold margins in our organic business, unfavorable absorption from declining job flow and higher than anticipated costs on discrete projects incurred during the first quarter of 2013 in our organic products business.


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Services.

The increase in Services Division gross profit during the three and six months ended June 30, 2013 of $1.2 million and $1.0 million, respectively, compared to the corresponding periods in 2012, was primarily due to $1.0 million of incremental gross profit related to the acquisition of Hetsco in the second quarter of 2013. Additionally, our organic Services Division revenue increase contributed $2.3 million and $3.0 million of additional gross profit during the three and six months ended June 30, 2013, respectively. These increases were partially offset by the decrease in our organic Services Division gross margin percentage, which impacted gross profit dollars by approximately $2.0 million and $3.0 million during the three and six months ended June 30, 2013, . . .

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