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UNTK > SEC Filings for UNTK > Form 10-K on 12-Aug-2013All Recent SEC Filings

Show all filings for UNITEK GLOBAL SERVICES, INC.

Form 10-K for UNITEK GLOBAL SERVICES, INC.


12-Aug-2013

Annual Report


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

This discussion should be read together with our consolidated financial statements and their notes included elsewhere in this Form 10-K. Unless the context otherwise requires, references to "we," "us," "our" and the "Company" refer to UniTek Global Services, Inc. and its subsidiaries.

Restatement of Previously Issued Financial Statements

This Form 10-K includes the restatement of certain of the Company's previously issued consolidated financial statements and data. It also amends previously filed management's discussion and analysis of financial condition and results of operations and other disclosures for the periods presented in this Form 10-K. Refer to the Explanatory Note appearing at the beginning of this Annual Report on Form 10-K and the overview sub-section of the financial condition and results of operations section of this discussion and analysis for further information.

Business Overview

We are a leading full-service provider of permanently outsourced infrastructure services, offering an end-to-end suite of technical services to customers in the wireless telecommunications, public safety, satellite television and broadband cable industries in the United States and Canada. Our services include:

          Comprehensive installation and fulfillment;

          Construction and project management;

          Wireless telecommunication infrastructure services; and

          Wireless system integration for public safety and land mobile radio
applications.

Our customers utilize our services to build and maintain their infrastructure and networks and to provide residential and commercial fulfillment services. These services are critical to our customers' ability to deliver voice, video and data services to their end users. Our customers include leading media and telecommunication companies such as DIRECTV, AT&T, Clearwire Communications, Ericsson, Sprint, T-Mobile, Comcast, Charter Communications, Time Warner Cable and Rogers Communications.

The following table presents customer concentration information as a percentage of revenues:

                                 Year Ended December 31,
                               2012        2011        2010        Primary Segment
Revenues from top 10
customers                         >90 %       >90 %       >90 %
Revenues from significant
customers:
DIRECTV                            43 %        56 %        55 %      Fulfillment
                                                                    Engineering &
AT&T                               17 %         1 %         -        Construction
Comcast                            15 %        17 %        17 %      Fulfillment

We have longstanding relationships with many of our customers and often provide services under multi-year master service agreements and other service agreements. Because our business is concentrated among relatively few major customers, our business could be negatively impacted if the amount of business we obtain from these customers is reduced, or if we complete the required work on projects and cannot replace them with similar projects.

We have actively pursued a diversification and expansion strategy in our operations in the markets we serve. Our strategy has enabled us to grow and scale our business units across a diversified set of customers, geographies and end markets by executing to the highest performance standards. We intend to leverage our outstanding performance, commitment to technology and shared services platform to continue to grow our revenues and profitability.


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Critical Accounting Policies and Estimates

This discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements prepared in conformity with U.S. generally accepted accounting principles ("GAAP"), which require us to make various estimates and assumptions. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. As management estimates, by their nature, involve judgment regarding future uncertainties, actual results may differ from these estimates if conditions change or if the assumptions used in making these estimates ultimately prove to be incorrect. Such changes in estimates are reflected in our results of operations in the period in which the changes are made, and if material, their effects are disclosed.

We believe that the following accounting policies are the most critical to the preparation of our consolidated financial statements. This is because the nature of these policies requires us to make significant or complex judgments and estimates and because the impact of these policies was material to either our financial condition or our results of operations, or both. Refer to Note 4 of Item 8, "Financial Statements and Supplementary Data," for further information about our significant accounting policies.


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Revenue Recognition

We recognize revenues when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable and collectability is reasonably assured. Revenues are recognized net of any estimated allowances.

Fulfillment

We recognize revenues from installation and fulfillment services as the services are rendered. Fulfillment services are performed pursuant to work orders under master service or similar types of service agreements that specify units of service to be performed for a contractually stated fixed price per unit. Revenues from fulfillment services are reported net of equipment costs payable to our customers because we act as an agent with respect to the equipment. Generally, the recognition of revenues in our Fulfillment segment does not require us to make significant estimates or assumptions.

Revenues from this segment were $305.3 million, $286.7 million and $270.0 million for the years ended December 31, 2012, 2011 and 2010, respectively.

Engineering and Construction

We recognize revenues from infrastructure construction, equipment installation and project management contracts under the percentage-of-completion method based on the percentage of costs incurred to-date compared to estimated total costs at completion. Engineering and construction services are performed pursuant to work orders under agreements or master agreements that specify units of service to be performed for a contractually stated price per unit that we are entitled to receive upon satisfactory completion of each unit. Contracts generally become billable upon satisfaction of contractually-specified performance milestones per individual contract terms or, in most cases, for work completed to-date in the event of project termination. We combine contracts when they are, in effect, parts of a single project with an overall profit margin. We review and revise our determination of total contract revenues and our estimates of total cost quarterly as work progresses. Any adjustments to earnings arising from such revisions are made cumulatively through the date of revision and included in results of operations in the period of revision. Costs used to determine percentage-of-completion include direct costs such as materials, labor and subcontractor costs and indirect costs specifically allocable or identifiable to each contract, such as indirect labor, supplies, tools and repairs. Contract losses are recognized currently if it becomes known that a contract will be performed at an overall loss. We recognize revenues from standalone site acquisition and zoning service contracts based upon output measures using contract milestones as the basis.

Unbilled contract revenues represent revenues recognized on infrastructure construction and equipment installation contracts that are not yet billed or billable pursuant to contract terms. Billings in excess of costs and estimated earnings principally represent the value of services to customers that have been billed as of the balance sheet date but for which the requisite services have not yet been rendered.

Certain contracts include multiple deliverables, typically involving the design, construction and implementation of public safety radio networks with a separate maintenance component for a specific period of time following implementation. The maintenance component of these contracts is typically for a period of one to ten years. We account for the maintenance component of these contracts as a separate unit of accounting with the revenue being recognized on a pro-rata basis over the term of the maintenance period. The revenue for the remaining portion of the contract is recognized on the percentage-of-completion method. The value assigned to each unit of accounting is determined primarily based upon its separate selling price. The liability associated with these maintenance contracts is reflected within other current liabilities and other liabilities.

Costs relating to customer claims and change orders are expensed in the period incurred unless approved by the customer or persuasive evidence exists that the costs will be recovered, in which case they are included in our estimates of total contract revenues and costs. We determine the likelihood that costs relating to claims and change orders will be recovered based upon past practices or specific discussions, correspondence or negotiation with the customer.

At any time we have numerous contracts in progress which can be at various stages of completion. Accounting for revenues and profits on long-term projects requires estimates of progress towards completion to determine the extent of profit recognition. These estimates may be revised as additional information becomes available. We review all our significant contracts on a quarterly basis and revise our estimates as appropriate. The most significant estimates we must make in order to recognize revenues are determining (i) the total estimated cost of each project at completion, including whether and when any contracts will be performed at an overall loss, and therefore recognizing that loss immediately;
(ii) the relative values of each unit of accounting under multiple-element arrangements; (iii) the likelihood that costs related to claims and change orders will be recoverable; and (iv) for certain contracts, the estimation of total contract revenue. Such estimates, by their nature, involve judgment regarding future uncertainties and could result in significant changes in estimate in the future. Further, as discussed in the Explanatory Note appearing at the beginning of this Annual Report on Form 10-K and elsewhere in this discussion and analysis, certain of our estimates related to revenue recognition were corrected as part of our restatement.

Revenues from this segment were $132.3 million, $64.7 million and $75.5 million for the years ended December 31, 2012, 2011 and 2010, respectively.


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Impairment Testing of Goodwill and Other Long-Lived Assets

We review our goodwill and indefinite-lived intangible assets for impairment at least annually or more often if an event occurs or circumstances change which indicates that their carrying amount may not exceed their fair value. We perform our annual impairment review as of the first day of the fourth quarter of each fiscal year based upon information and estimates available at that time. To perform our impairment testing, we first assess qualitative factors to determine whether it is more likely than not that the fair values of its reporting units are less than their carrying values as a basis for determining whether or not to perform the quantitative two-step goodwill impairment test. We then estimate the fair value of each reporting unit not meeting the qualitative criteria and compare its fair value to its carrying value. If the carrying value of a reporting unit exceeds its fair value, we determine the implied fair value of goodwill assigned to that reporting unit by deducting the estimated the fair value of its net assets, other than goodwill, from its overall fair value. If the fair value of goodwill is less than its carrying value, we recognize an impairment loss for the difference.

Goodwill and any additions to goodwill related to acquired businesses are assigned to individual reporting units. We have currently established our reporting units at the operating segment level.

We review other long-lived assets, consisting primarily of property and equipment and intangible assets with finite lives, for recoverability whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. In analyzing recoverability, we use projections of future undiscounted cash flows from the assets. These projections are based on our view of growth rates for the related business, anticipated future economic conditions and estimates of residual values. If the future undiscounted cash flows of such assets are less than their carrying value, we recognize an impairment loss for the amount by which their carrying value exceeds their fair value.

The profitability of individual reporting units or other assets may suffer periodically from downturns in customer demand and other factors resulting from the cyclical nature of our business, the high level of competition existing within our industry, the concentration of our revenues within a limited number of customers, and the level of overall economic activity. During times of economic slowdown, our customers may reduce their capital expenditures and defer or cancel pending projects. Individual reporting units may be relatively more impacted by these factors than our company as a whole. As a result, demand for the services of one or more of our reporting units could decline resulting in an impairment of goodwill or intangible assets.

The carrying value of our goodwill was $121.9 million and $163.8 million at December 31, 2012 and 2011, respectively. The carrying value of our other long-lived assets was $75.3 million and $78.5 million at December 31, 2012 and 2011, respectively.

Interim Tests of Impairment

During the third quarter of 2012, we committed to a plan to sell the net assets of our wireline telecommunications business unit (the "Wireline Group"). As a result of committing to this plan, we performed interim tests of impairment of the property and equipment and the goodwill of the Wireline Group.

We estimated the future cash flows of the property and equipment of the Wireline Group and determined that their carrying value exceeded both the sum of their undiscounted cash flows and their fair value, resulting in an impairment charge of $2.2 million. The estimated future cash flows used in the undiscounted cash flow test and the fair value measurement were based on anticipated growth rates for the Wireline Group, future economic conditions and residual values (Level 3 measurements).

We estimated the fair value of the Wireline Group, which also represents a reporting unit under GAAP, and determined that the implied fair value of the goodwill was zero, resulting in an impairment charge of $33.0 million. The fair value of the goodwill was implied by calculating the fair value of the reporting unit and subtracting from that the fair values of the assets attributable to the reporting unit other than goodwill. The fair value of the reporting unit was determined by considering both a market approach, including private bid information obtained by us (Level 2 measurements) and the future discounted cash flows attributable to the reporting unit, which was determined using our internal operating forecasts, weighted-average cost of capital, and certain other assumptions (Level 3 measurements). The fair values of the other assets and liabilities attributable to the reporting unit, other than property and equipment, were calculated using historical cost, which was materially representative of their fair values due to the relatively short-term nature of the assets and liabilities (Level 2 measurements) and was used only for purposes of calculating the implied fair value of goodwill.


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As a result of the restatement of the results of operations of Pinnacle, during the first quarter of 2012, we performed an interim impairment test of goodwill of the wireless reporting unit. We determined the fair value of the wireless reporting unit using a combination of the market-based approach and income approach relying on a discounted cash flow analysis. Determining fair value requires the exercise of significant judgment, including judgment about appropriate discount rates, perpetual growth rates, the amount and timing of expected future cash flows, as well as relevant comparable company earnings multiples for the market-based approach. The discounted cash flow methodology based on known or knowable information at the time of interim testing, includes seven-year projections of revenues, operating costs and cash flows considering historical and anticipated future results, general market conditions, and the impact of planned business and operational strategies. The terminal value has been estimated through the use of the Gordon Growth Model. This model estimates a terminal value through the capitalization of a stabilized amount that is assumed to grow annually at a constant growth rate (4%). These projections were based on our internal business model for 2012, and for the subsequent years beyond 2012, the growth rates we used are an estimate of the future growth in the industry in which we participate. The discount rates used in the discounted cash flow was estimated to be 18.1% per annum, and are intended to reflect the risks inherent in the future cash flows of the reporting unit and are based on an estimated cost of capital, which we determined based on our estimated cost of capital relative to our capital structure. A 100 basis point change in the discount rate would have had a material impact on the results of the impairment analysis. As a result of our interim testing, no impairment of goodwill was indicated.

Annual Tests of Impairment

We performed our most recent annual goodwill impairment test as of September 30, 2012, the first day of our fourth fiscal quarter. When we performed our annual goodwill impairment test, we determined that the carrying value of the wireless reporting unit exceeded the fair value. We determined fair value using a combination of the market-based approach and the income approach relying on a discounted cash flow analysis. Determining fair value requires the exercise of significant judgment, including judgment about appropriate discount rates, perpetual growth rates, the amount and timing of expected future cash flows, as well as relevant comparable company earnings multiples for the market-based approach. The discounted cash flow methodology includes five-year projections of revenues, operating costs and cash flows considering historical and anticipated future results, general market conditions, and the impact of planned business and operational strategies. The terminal value has been estimated through the use of the Gordon Growth Model. This model estimates a terminal value through the capitalization of a stabilized amount that is assumed to grow annually at a constant growth rate (3%). These projections are based on our internal business model for 2013, and for the four subsequent years beyond 2013, the growth rates we used are an estimate of the future growth in the industry in which we participate, considering our liquidity position and the refinancing of our debt which occurred in July 2013 (see Note 22 of Item 8, "Financial Statements and Supplementary Data"). The discount rates used in the discounted cash flow was estimated to be 18.6% per annum, and are intended to reflect the risks inherent in the future cash flows of the reporting unit and are based on an estimated cost of capital, which we determined based on our estimated cost of capital relative to our capital structure. A 100 basis point change in the discount rate would not have had a material impact on the results of the impairment analysis.

Our analysis indicated that the reporting unit fair value was below its carrying value as of September 30, 2012, and accordingly, we performed the second step in the analysis. The second step required that we allocate the fair value of our reporting unit to all assets and liabilities as if the reporting unit had been acquired in a business combination at the date of the impairment test. We then compared the implied fair value of the wireless reporting unit's goodwill to its carrying amount ($25.5 million). Since the carrying amount of our goodwill exceeded its implied fair value, we recognized an impairment loss in an amount equal to that excess. In the fourth quarter of 2012, the carrying value of goodwill for the wireless reporting unit exceeded its implied fair value and we recorded a noncash, pre-tax impairment charge of $14.9 million.

Allowance for Doubtful Accounts

We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We record a specific reserve for known or suspected doubtful accounts receivable. For all other accounts, we record a general reserve based on the length of time receivables are past due and historical write-off experience. We evaluate the adequacy of the reserve using several factors including length of time a receivable is past due, historical experience with the customer, changes in the customer's credit worthiness, the customer's payment history, the length of the customer's relationship with us, the customer's financial condition, availability of mechanics' and other liens, existence of payment bonds and other sources of payment, current industry trends and current economic trends. Account balances are charged off against the allowance when they are deemed uncollectible. The provision for doubtful accounts is recorded as a reduction to revenues or in selling, general and administrative expenses depending upon whether the related revenues have been billed to the customer.

If our estimates of the collectability of accounts receivable change, we may be required to adjust the allowance for doubtful accounts, which could increase or decrease our profitability.

Accounts receivable, net, was $102.5 million and $84.6 million at December 31, 2012 and 2011, respectively, and our allowance for doubtful accounts was $6.3 million and $3.6 million at December 31, 2012 and 2011, respectively.


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Accrued Insurance

We maintain high-deductible insurance policies for workers' compensation, general liability, automobile, medical and dental claims. Because most claims against us do not exceed our deductibles, we are effectively self-insured for substantially all claims. We establish insurance reserves for estimates of the loss that we will ultimately incur on reported claims and claims that have been incurred but not yet reported. Our insurance reserves incorporate historical loss experience and judgments about the present and expected levels of cost per claim. Trends in actual experience are a significant factor in the determination of such reserves. We update our estimates and the appropriateness of our reserves quarterly based upon known facts, historical trends and our judgments regarding future claims.

Insurance claims may take several years to completely settle. Consequently, actuarial estimates are required to project the ultimate cost that will be incurred to fully resolve the claims. A number of factors can affect the actual cost of a claim, including the length of time the claim remains open, trends in health care costs and the results of related litigation. Furthermore, claims may emerge in future years for events that occurred in a prior year at a rate that differs from previous actuarial projections. We believe that the amounts we have accrued for such claims are adequate, but actual experience in claim frequency or severity, or both, could materially differ from our estimates and impact our results of operations.

Accrued insurance was $16.2 million and $13.7 million at December 31, 2012 and 2011, respectively.

Income Taxes

The provision or benefit for income taxes consists of taxes currently due plus deferred taxes related primarily to differences between the basis of assets and liabilities for financial and income tax reporting. Deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be deductible or taxable when the assets and liabilities are recovered or settled. Deferred tax assets are also recognized for operating losses that are available to offset future taxable income. Deferred tax assets and liabilities are reflected at income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision or benefit for income taxes.

We establish tax valuation allowances to reduce deferred tax assets, such as tax loss carryforwards, to net realizable value. We consider future pretax income and ongoing prudent and feasible tax planning strategies in assessing the net realizable value of deferred tax assets and the need for such a valuation allowance. In the event that we determine that we may not be able to realize all or part of the net deferred tax asset in the future, a valuation allowance for the deferred tax asset is charged against the provision or benefit for income taxes in the period such determination is made. The establishment of the valuation allowance does not preclude us from utilizing its deferred tax assets in the future; however, we have experienced an ownership change as defined under
Section 382 of the Internal Revenue Code, and therefore the use of the net operating loss carry forwards is subject to limitation.

We provide an intra-period tax allocation of the provision or benefit for income taxes to continuing operations and discontinued operations.

As of December 31, 2012, we have net operating loss carryforwards of approximately $86.6 million for federal income tax purposes, prior to consideration of valuation allowances, which begin to expire in 2014. Based on our history of operating losses and our forecasts for future periods, we have determined that it is more likely than not that the federal and state net operating loss carryforwards and other temporary differences will not be realized. Accordingly, we established valuation allowances against the related deferred tax assets of $79.7 million as of December 31, 2012. If we ultimately are able to utilize these deferred tax assets to offset taxable income in future periods, we could recognize a significant income tax benefit that could improve our results of operations by a material amount.

Business Combinations

We account for business combinations by estimating the fair value of consideration paid for acquired businesses, including contingent consideration, and allocating that amount to the fair values of assets acquired and liabilities assumed, with the remainder assigned to goodwill. Our determinations of fair values are based on estimates and assumptions utilizing customary valuation procedures and techniques, which require us, among other things, to estimate future cash flows and discount rates. The accounting for business combinations . . .

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