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UNTK > SEC Filings for UNTK > Form 10-Q on 12-Nov-2013All Recent SEC Filings

Show all filings for UNITEK GLOBAL SERVICES, INC.

Form 10-Q for UNITEK GLOBAL SERVICES, INC.


12-Nov-2013

Quarterly Report


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

This discussion should be read together with our condensed consolidated financial statements and their notes included elsewhere in this Form 10-Q. Unless the context otherwise requires, references to "we," "us," "our" and the "Company" refer to UniTek Global Services, Inc. and its subsidiaries.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS The information included in this Quarterly Report on Form 10-Q ("Quarterly Report") contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the "Securities Act," and Section 21E of the Exchange Act, the attainment of which involves various risks and uncertainties. All statements other than statements of historical fact included in this Quarterly Report are forward-looking statements. Forward-looking statements can be identified by the use of forward-looking terminology, such as "anticipate," "may," "will," "could," "expects," "believes," "intends," "estimates," "anticipates," "planned," "scheduled," "continue," or similar terms, variations of those terms or the negative of those terms. They may include comments about liquidity, potential transactions, competition within our industry, concentration of customers, loss of customers, long-term receivables, availability of capital, legal proceedings, fluctuation in interest rates, governmental regulations, and other statements contained herein that are not historical facts.
These forward-looking statements are based on assumptions that we have made in light of our experience in the industry in which we operate, as well as our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances. As you read and consider this Quarterly Report, you should understand that these statements are not guarantees of performance or results. They involve risks, uncertainties (some of which are beyond our control) and assumptions. Although we believe that these forward-looking statements are based on reasonable assumptions, you should be aware that many factors could affect our actual financial condition or results of operations and cause actual results to differ materially from those in the forward-looking statements. These factors include, among other things:
difficulty that we may have in correcting our improper accounting practices identified by the internal investigation conducted by the Audit Committee (the "Audit Committee Investigation") that necessitated our making restatement adjustments in our consolidated financial statements and have resulted in our inability to timely file required periodic reports with the SEC;

the substantial accounting, legal and other expenses resulting from the Audit Committee Investigation and the restatement of our financial reports;

the outcome of legal proceedings to which we are or may become a party;

the potential for additional litigation and governmental enforcement action resulting from the improper accounting practices;

our disclosure controls and procedures, which were ineffective as of September 28, 2013, because of the material weaknesses in our internal control over financial reporting described in the 2012 Form 10-K;

our use of the percentage-of-completion method to account for revenue is subject to assumptions and variations of actual results from our assumptions may impact our profitability;

our continued ability to service our corporate indebtedness;

our ability to comply with the financial covenants under our debt agreements including maintaining certain ratios between earnings and debt;

the uncertainty regarding the adequacy of capital resources, including liquidity, and potential limited access to additional financing;


our success of converting unbilled receivables to invoices and collecting on such invoices;

a potential increase in our insurance premiums or collateral requirements;

general economic or business conditions nationally and in our primary markets;

the consolidation of our vendors, customers and competition;

a substantial majority of the Company's revenues and accounts receivable, net of allowances, are concentrated with a few large customers. The largest three customers accounted for 42%, 20% and 12% of revenues for the nine months ended September 28, 2013 and 42%, 19% and 9% of accounts receivable, net of allowances, at September 28, 2013;

many of our largest customers have the right to either terminate their contract, or reduce the amount of work that we will perform under their contract, on relatively short notice, with or without cause;

our ability to maintain the listing of our common stock on a national securities exchange;

our ability to generate future revenues and/or earnings and our ability to manage and control costs;

the actions of competitors within our industry;

our ability to meet changing technologies;

the success of business strategies that we implement; and

the retention of key employees including skilled technicians and financial staff; and

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

This list is only an example of the risks that may affect the forward-looking statements. If any of these risks or uncertainties materialize or fail to materialize, or if the underlying assumptions are incorrect, then actual results may differ materially from those projected in the forward-looking statements. Additional factors that could cause actual results to differ materially from those reflected in the forward-looking statements include, without limitation, those discussed elsewhere in this Quarterly Report and in our 2012 Form 10-K. It is important not to place undue reliance on these forward-looking statements, which reflect our analysis, judgment, belief or expectation only as of the date of this Quarterly Report. We undertake no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date of this Quarterly Report.


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.
A substantial majority of the Company's revenues and accounts receivable, net of allowances, are concentrated with a few large customers. The largest three customers accounted for 42%, 20% and 12% of revenues for the nine months ended September 28, 2013 and 42%, 19% and 9% of accounts receivable, net of allowances, at September 28, 2013.
We have longstanding relationships with many of our customers and often provide services under master 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 performance, commitment to technology and shared services platform to continue to grow our revenues and profitability. Critical Accounting Policies and Estimates There have been no changes to the critical accounting policies and estimates disclosed in our most recently filed Form 10-K.


Summary of Financial Condition and Results of Operations Overview
The following section presents our discussion and analysis of our financial condition and results of operations for the three and nine months ended September 28, 2013 compared to the same periods ended September 29, 2012. We have derived this data from our condensed consolidated financial statements and other financial information included elsewhere in this report.
We report our results in two segments based on the services that we provide and the industries that we serve:
Our Fulfillment segment provides comprehensive installation and fulfillment services to customers in the satellite television and broadband cable industries. Revenues in this segment are primarily recurring in nature and based on predetermined rates for each type of service performed. Our two most significant customers for this segment for the three and nine months ended September 28, 2013 were DIRECTV and Comcast.

Our Engineering and Construction segment provides infrastructure services, systems integration for public safety and land mobile radio applications, construction and project management services to customers in the wireless telecommunications and public safety industries. Revenues in this segment are primarily contract-based and are recognized primarily using the percentage-of-completion method using estimated costs incurred to-date or milestones achieved to measure progress towards completion. Our two most significant projects for this segment for the three and nine months ended September 28, 2013 were awarded by AT&T, where we construct and upgrade wireless towers in a significant region of the northeastern United States, and by Five Star Electric and Eaton Electric, where we are designing and constructing an integrated public safety communications system at the World Trade Center.

Historical Results
We have experienced organic growth by winning new projects from our wireless customers and capturing additional market share from our broadband cable fulfillment competitors. Since September 14, 2012, the results of our Fulfillment segment also include the acquisition of Skylink, LTD. ("Skylink"), a provider of satellite fulfillment services in Indiana, Ohio and West Virginia. Our results of operations also reflect actions we have taken to align our operations with what we perceive as our customers' most significant areas of growth. These areas of growth include (i) growing consumer demand for wireless bandwidth and technological improvements; (ii) the continuing need for best-in-class fulfillment services by our satellite television customers; and
(iii) vendor consolidation by broadband cable service providers. In order to concentrate our presence in these areas of growth, we sold our wireline telecommunications business unit (the "Wireline Group") during the fourth quarter of 2012. We have also closed certain broadband cable fulfillment and wireless service locations that reside outside of the geographic regions where we expect the greatest amount of growth. The results of operations related to these operations are presented as income or loss from discontinued operations in our discussion and analysis of results of operations. On April 12, 2013, the Company announced that as a result of an internal investigation conducted by the Audit Committee of the Company's Board of Directors, with the assistance of outside independent counsel and a forensic accounting firm (the "Audit Committee Investigation"), it was determined that several employees of the Company's Pinnacle Wireless division engaged in fraudulent activities that resulted in improper revenue recognition. As a result of the Audit Committee Investigation, the Company concluded that certain previously issued financial statements could no longer be relied upon due to the improper revenue recognition at the Pinnacle Wireless division and certain other errors related to the valuation of contingent consideration, the application of a revenue recognition policy and classification of debt and cash overdrafts. The Company undertook a process to restate those financial statements (the "Restatement"), which it completed with the filing of its 2012 Form 10-K in August 2013. The Audit Committee Investigation and the Restatement required the Company to incur substantial costs for professional services and consultants. Such costs are presented as restatement, investigation and related costs in our discussion and analysis of results of operations. In July 2013, the Company refinanced its long-term debt, which resulted in significant refinancing costs and an increase in the cost of our debt. Refinancing costs of $9.2 million for the three and nine months ended September 28, 2013 were included in our results of operations as loss on extinguishment of debt, and refinancing costs of $19.6 million (including warrants with a value of $13.1 million) have been deferred, to be incurred as a component of interest expense over the remaining life of the debt. Furthermore, the interest rate of the term loan facility increased by 600 basis points, of which 400 basis points are applied directly to the principal balance of the term loan, and the interest rate of the revolving credit facility increased by 675 basis points.


Trends and Uncertainties
This discussion and analysis may not be indicative of our future financial condition or results of operations as a result of the following trends and uncertainties, which could materially impact our results of operations and financial condition in future periods:
Our ability to bid on new engineering and construction projects was limited as a result of our restatement and the delayed issuance of our 2012 financial statements, which may have diminished our pipeline of new projects that will contribute to future earnings;

Our relationships with our customers and vendors may have been harmed as a result of our restatement, the delayed issuance of our 2012 financial statements and our inability to pay our vendors timely. This in turn could harm our ability to maintain business with existing customers, to attract new customers and to maintain the insurance, bonding and other requirements required by our customers. For example, we were notified in the second quarter of 2013 by AT&T that they would reduce the amount of wireless construction work that we forecasted we would perform for them, the impact of which is expected to be approximately $21 million less than such forecast for 2013;

We have incurred $7.6 million of costs to date to complete the Audit Committee Investigation and the restatement of our financial statements, the majority of which were incurred during the second and third quarters of 2013. Additional costs for related legal matters are likely to arise in the future, such as our obligation to indemnify our current and former officers in connection with any regulatory or litigation matters or any additional legal actions we may choose to pursue. We are not able to estimate what the costs related to these matters might be, but such costs could be significant;

The Company had a collective action under the Fair Labor Standards Act filed against it in February 2008. In October 2012, a judgment was entered for the plantiffs. The Company intends to appeal the judgment promptly as soon as it becomes final and appealable. The Company believes that the potential loss exposure for this action is between $0.0 million and $3.8 million and that it has accrued adequate reserves for any resulting loss;

We need to improve our management of working capital within our wireless construction business, which if not managed well, could require us to borrow additional amounts. This in turn may reduce our profitability, cause us to become ineligible for new borrowings, and/or cause us to default on our debt; and

We were notified by our insurance carriers that they required us to deposit funds with them to cover all or a portion of our self-insured claims.

Non-GAAP Financial Measurements
As appropriate, we supplement our results of operations determined in accordance with GAAP with certain non-GAAP financial measurements that we believe are useful to investors in assessing our performance. The non-GAAP financial measurement referenced in this discussion and analysis is earnings before interest, taxes, depreciation and amortization, adjusted for certain items described below ("Adjusted EBITDA"). This measurement should not be considered in isolation or as a substitute for reported net income or loss but rather as an additional way of viewing aspects of our operations that, when viewed with our GAAP results and the provided reconciliations to the corresponding GAAP financial measures, provide a more complete understanding of our business. We strongly encourage investors and shareholders to review our financial statements and publicly filed reports in their entirety and not rely on any single financial measure.
Adjusted EBITDA is a key indicator used by our management to evaluate operating performance of our continuing operations and to make decisions regarding compensation and other operational matters as well as by our investors and lenders in evaluating our performance. While this Adjusted EBITDA is not intended to replace any presentation included in our consolidated financial statements under generally accepted accounting principles, or GAAP, and should not be considered an alternative to operating performance, we believe this measure is useful to investors in assessing our performance with other companies in our industry. This calculation may differ in method of calculation from similarly titled measures used by other companies or from required calculations pursuant to our loan agreements. We compensate for these limitations by relying primarily on our GAAP results and using Adjusted EBITDA only as supplemental information. Adjusted EBITDA is our EBITDA adjusted for discontinued operations, stock-based compensation and other unusual or non-recurring costs, including the costs associated with the Restatement, the Audit Committee Investigation and related costs.


Results of Operations - Comparison of Three and Nine Months ended September 28, 2013 and September 29, 2012
The following table summarizes our results of operations:

                                             Three Months Ended                     Nine Months Ended
                                      September 28,      September 29,      September 28,      September 29,
(in thousands)                             2013               2012               2013               2012

Revenues                             $      130,037     $      130,482     $      365,062     $      316,667
Cost of revenues                            104,227            102,824            298,594            257,657
Gross profit                                 25,810             27,658             66,468             59,010
Selling, general and administrative
expenses                                     10,290             11,099             35,199             33,490
(Income) expense related to
contingent consideration                          -                  -               (114 )           10,077
Restructuring charges                           670              1,594              1,149              6,400
Restatement, investigation and
related costs                                 2,524                  -              7,590                  -
Impairment charges                            1,090                  -              1,090                  -
Depreciation and amortization                 4,807              6,701             16,067             19,790
Operating income (loss)                       6,429              8,264              5,487            (10,747 )
Interest expense                              8,051              3,883             21,592             10,496
Loss on extinguishment of debt                9,247                  -              9,247                  -
Other expense (income), net                     239                (76 )              232             (1,146 )
(Loss) income from continuing
operations before income taxes              (11,108 )            4,457            (25,584 )          (20,097 )
Income tax expense                              273                293                449                315
(Loss) income from continuing
operations                                  (11,381 )            4,164            (26,033 )          (20,412 )
Income (loss) from discontinued
operations                                       67            (30,773 )             (652 )          (34,672 )
Net loss                             $      (11,314 )   $      (26,609 )   $      (26,685 )   $      (55,084 )

Revenues
Revenues decreased $0.4 million, or 0.3%, to $130.0 million from $130.5 million for the three months ended September 28, 2013 and September 29, 2012, respectively. For the Fulfillment segment, revenues increased $3.9 million, or 4.7%, to $88.6 million from $84.6 million for the three months ended September 28, 2013 and September 29, 2012, respectively. The increase in Fulfillment revenues was primarily attributable to the impact of the Skylink acquisition ($6.9 million), partially offset by lower volume from our cable fulfillment customers. For the Engineering and Construction segment, revenues decreased $4.4 million, or 9.6%, to $41.5 million from $45.9 million for the three months ended September 28, 2013 and September 29, 2012, respectively. The decrease in Engineering and Construction revenues was primarily attributable to a reduction of AT&T work ($7.9 million) offset by an increase in other construction and systems integration projects.
Revenues increased $48.4 million, or 15.3%, to $365.1 million from $316.7 million for the nine months ended September 28, 2013 and September 29, 2012, respectively. For the Fulfillment segment, revenues increased $16.3 million, or 7.2%, to $240.9 million from $224.6 million for the nine months ended September 28, 2013 and September 29, 2012, respectively. The increase in Fulfillment revenues was primarily attributable to the impact of the Skylink acquisition ($21.2 million) and growth from satellite internet customers ($2.8 million), partially offset by lower volume from our cable fulfillment customers ($8.0 million). For the Engineering and Construction segment, revenues increased $32.1 million, or 34.9%, to $124.2 million from $92.1 million for the nine months ended September 28, 2013 and September 29, 2012, respectively. The increase in Engineering and Construction revenues was primarily attributable to revenue growth from our AT&T projects in the northeastern United States ($27.0 million). We were notified in the second quarter of 2013 by AT&T that they would reduce the amount of wireless construction work that we would perform for them, the impact of which is expected to reduce our forecasted revenues by $21 million for 2013.


Gross Profit
Gross profit decreased $1.8 million, or 6.7%, to $25.8 million from $27.7 million for the three months ended September 28, 2013 and September 29, 2012, respectively. Gross margin decreased to 19.8% compared to 21.2% for the three months ended September 28, 2013 and September 29, 2012, respectively. For the Fulfillment segment, gross margin decreased to 21.0% compared to 22.7% for the three months ended September 28, 2013 and September 29, 2012, respectively. The decrease was primarily attributable to cable start-up costs in the southeast. For the Engineering and Construction segment, gross margin decreased to 17.4% compared to 18.4% for the three months ended ended September 28, 2013 and September 29, 2012, respectively. The decrease was primarily attributable to the reduction in AT&T volume, as previously discussed.
Gross profit increased $7.5 million, or 12.6%, to $66.5 million from $59.0 million for the nine months ended September 28, 2013 and September 29, 2012, respectively. Gross margin decreased to 18.2% compared to 18.6% for the nine months ended September 28, 2013 and September 29, 2012, respectively. For the Fulfillment segment, gross margin remained essentially consistent at 20.0% compared to 20.6% for the nine months ended September 28, 2013 and September 29, 2012, respectively. For the Engineering and Construction segment, gross margin increased to 14.8% compared to 13.8% for the nine months ended ended September 28, 2013 and September 29, 2012, respectively. The increase was primarily attributable to revenue growth from our AT&T projects in the northeastern United States, which growth is not expected to continue. Selling, General and Administrative Expenses Selling, general and administrative expenses decreased $0.8 million, or 7.3%, to $10.3 million from $11.1 million for the three months ended September 28, 2013 and September 29, 2012, respectively. The decrease was primarily attributable to lower stock-based compensation of $0.5 million.
Selling, general and administrative expenses increased $1.7 million, or 5.1%, to $35.2 million from $33.5 million for the nine months ended September 28, 2013 and September 29, 2012, respectively. Increases of $4.7 million were attributable to a higher provision for doubtful accounts, due to the increased mix of receivables from our Engineering and Construction segment, as well as higher insurance and personnel expenses, partially offset by $2.4 million lower stock-based compensation. Stock-based compensation expense for the nine months ended September 29, 2012 included $2.3 million for the acceleration of RSU vesting related to the separations of the former Chief Executive Officer, the former Executive Chairman of the Board and the former Chief Administrative officer, in accordance with the terms of their employment agreements, and the acceleration of RSUs awarded to members of the Board of Directors. Income or Expense related to Contingent Consideration We recognized no expense related to contingent consideration during the three months ended September 28, 2013 or September 29, 2012 and negligible income related to contingent consideration during the nine months ended September 28, 2013. Expense related to contingent consideration was $10.1 million for the nine months ended September 29, 2012. The expense was related to the remeasurement of contingent consideration to fair value at each period end, which was related to the acquisition of Pinnacle Wireless, Inc. ("Pinnacle"). Using information then available, the estimated fair value of the Pinnacle earn-out increased based on
(i) the revised EBITDA forecast for the twelve months ended March 30, 2013; and
(ii) the provisions of the asset purchase agreement for Pinnacle regarding the calculation of the earn-out for that period, resulting in the recognition of expense.
Restructuring Charges . . .

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