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UNTK > SEC Filings for UNTK > Form 10-Q on 15-May-2014All Recent SEC Filings

Show all filings for UNITEK GLOBAL SERVICES, INC.

Form 10-Q for UNITEK GLOBAL SERVICES, INC.


15-May-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS Unless the context otherwise requires, references to "we," "us," "our" and the "Company" refer to UniTek Global Services, Inc. and its subsidiaries. The information included in this Quarterly Report on Form 10-Q (this "Quarterly Report") contains 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 Securities Exchange Act of 1934, as amended, or 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," "expect," "believe," "intend," "estimate," "anticipate," "plan," "schedule," "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, compliance with financial covenants, 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:
our continued ability to generate sufficient cash to service our long-term debt, which carries a higher interest rate than our previous debt agreements;

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

our ability to maintain sufficient liquidity to meet the capital requirements of the business and the uncertainty regarding the adequacy of our capital resources;

our reliance on three customers, who have the right to terminate our contracts or reduce our work on relatively short notice, for a substantial portion of our revenues;

our ability to replace lost business from one of our major customers;

our ability to grow our wireless systems integration business;

our ability to improve the cost structure of our broadband cable business;

our ability to execute our organic growth strategy;

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 identified by the internal investigation conducted by the Audit Committee in 2013;

our ability to establish and maintain adequate and effective internal control relating to the material weaknesses in our internal control over financial reporting, which are described further in Part II, Item 4. "Controls and Procedures";

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

our success in negotiating our insurance premiums and/or collateral requirements;

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

the consolidation of our vendors, customers and competition;

potential credit risk arising from unsecured credit extended to our customers;

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;

our reliance on subcontractors to perform certain of our services;

our ability to negotiate successful collective bargaining agreements; and

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

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 2013 Annual Report on 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 full service provider of technical services to customers in the wireless telecommunications, public safety, satellite television and broadband cable industries in the United States and Canada. Our principal lines of service, or segments, and their relative importance to our operations, based upon contribution to consolidated revenues, are:
Comprehensive installation and fulfillment services ("Fulfillment"), whereby we deploy skilled technicians to install our customers' equipment, such as television receiver units, into homes and businesses. This segment made up approximately 71% of our business in the quarter ended March 29, 2014; and

Wireless telecommunication construction, project management and systems integration ("Engineering and Construction"), whereby we assemble project teams of engineers and technicians to design and build large wireless infrastructure projects for our customers. This segment made up approximately 29% of our business in the quarter ended March 29, 2014.

Our customers are primarily satellite television, broadband cable and other telecommunications companies, their contractors, and municipalities and related agencies. Our customers utilize our services to build and maintain their infrastructure and networks and to provide residential and commercial fulfillment services, which is critical to their ability to deliver voice, video and data services to end users.
Critical Accounting Policies and Estimates.
There have been no changes in the critical accounting policies and estimates disclosed in our 2013 Annual Report on Form 10-K. Recent Accounting Pronouncements
In April 2014, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which clarifies when a disposal of a component of an entity or a group of components of an entity is to be reported in discontinued operations. We do not expect the adoption of this accounting guidance to have a material effect on our consolidated financial statements. ASU 2014-08 is effective prospectively for fiscal years, and interim period within those years, beginning after December 15, 2014. Interim Test of Impairment
As of March 29, 2014 we determined that based on results through the first quarter and the outlook for the business, the revenue growth assumptions and related profitability assumptions used previously in determining the Broadband Cable reporting unit's fair value would not be achieved. As a result, management determined that indicators of impairment existed and performed interim impairment testing of goodwill and long-lived assets, based on revised forecasts, for its Broadband Cable reporting unit.
We determined the carrying value of the Broadband Cable reporting unit exceeded its 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 (Level 3 measurements). The cash flows employed in the discounted cash flow analyses are based on our revised internal business model for the Broadband Cable reporting unit for 2014 and, for the four subsequent years beyond 2014, developed as a result of the reporting unit's actual performance through March 29, 2014 and an assessment of
(i) current and longer term operations and (ii) market conditions. The growth rates and future operating results used are an estimate of the future growth in the industry in which the reporting unit participates. The forecast represented the best information available to the Company at the time. The discount rate used of 19.2% in the discounted cash flow analysis is intended to reflect the risks inherent in the future cash flows of the reporting unit and are based on an estimated market participant's cost of capital. In addition, the market-based approach utilizes comparable company public trading values, research analyst estimates and, where available, values observed in private market transactions. For the second step of the impairment test, we allocated the fair value of the reporting unit to its respective assets and liabilities based on their relative fair value at the date of the impairment test. We then compared the implied fair value of the Broadband Cable


reporting unit's goodwill of $3.1 million to its carrying amount. Since the carrying amount of the goodwill exceeded its implied fair value, we recognized a preliminary non-cash impairment charge of $10.1 million for the quarter ended March 29, 2014. The amount of the goodwill impairment loss is an estimate as we are still verifying certain of the fair market value assumptions used to determine the implied fair value of the Broadband Cable reporting unit's goodwill.
Should actual future results differ from those projections used in the impairment testing, or should our assumptions prove to be incorrect, the fair value of a reporting unit could decline further, which could result in additional impairment. Following the goodwill impairment charge, the Fulfillment segments' goodwill was $88.4 million at March 29, 2014 consisting of $85.3 million and $3.1 million for the DirectSat and Broadband Cable reporting units, respectively.
Non-GAAP Financial Measurements
As appropriate, we supplement our results of operations determined in accordance with U.S. generally accepted accounting principles ("GAAP") with certain non-GAAP financial measurements that we believe are useful to investors in assessing our performance. These non-GAAP financial measurements referenced in this discussion and analysis are earnings before interest, taxes, depreciation and amortization, adjusted for certain items described below ("Adjusted EBITDA") and net loss excluding certain items. These measurements should not be considered in isolation or as a substitute for reported net 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 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 of our financial statements during 2013 and the costs associated with the investigation by our Audit Committee commencing in 2013.
Our management uses net loss excluding certain items as an indicator to evaluate the operating performance of the Company excluding the impact of various recent events. While net loss excluding certain items is not intended to replace any presentation included in the consolidated financial statements under GAAP, and should not be considered an alternative to operating performance, we believe this measure is useful to investors in assessing our performance by not giving effect to various recent events that have impacted our business. Specifically, these items are (i) loss from discontinued operations, (ii) restatement, investigation, restructuring and related costs and (iii) income related to contingent consideration.
Results of Operations.
In this section, we present a summary and detailed comparison of our results of operations for the three months ended March 29, 2014 compared to the three months ended March 30, 2013. We have derived this data from our unaudited consolidated financial statements and other financial information included elsewhere in this Quarterly Report. Where applicable, we provide commentary related to each of our two segments: (i) Fulfillment and (ii) Engineering and Construction.
Summary
Revenue and gross profit decreased 22.2% and 28.6%, respectively, in the three months ended March 29, 2014 compared to the three months ended March 30, 2013, to $88.6 million and $13.3 million, respectively. Of the revenue decrease of $25.2 million, the Fulfillment and Engineering and Construction segments had reductions of $11.2 million and $14.0 million, respectively.
While gross margin percentages for the Fulfillment segment remained relatively constant in the three months ended March 29, 2014 compared to the three months ended March 30, 2013, the Engineering and Construction segment's gross margin percentage declined substantially. Both segments realized lower gross profits in the three months ended March 29, 2014 compared to the three months ended March 30, 2013 as a result of lower revenues and lower gross margins. Operating loss in the three months ended March 29, 2014 increased by $9.6 million to $11.9 million, as compared to $2.4 million for the three months ended March 30, 2013. The Company's operating loss in the three months ended March 29, 2014 was positively impacted by declines in selling, general and administrative expenses, restructuring, restatement and investigation related costs and depreciation and amortization expense compared to the three months ended March 30, 2013. Offsetting these items was a $5.3 million


decline in gross profit in the three months ended March 29, 2014 compared to the three months ended March 30, 2013 and an impairment charge of $10.1 million in the quarter ended March 29, 2014.
Loss from continuing operations increased to $19.6 million for the three months ended March 29, 2014 as compared to $7.0 million for the three months ended March 30, 2013 as a result of the (i) aforementioned increase in our operating loss, (ii) an increase in interest expense resulting from higher interest rates on our revolving and term loan facilities entered into in July 2013, and (iii) the amortization of related debt discount and deferred financing fees. The results of discontinued operations have been presented separately from continuing operations as a component of net loss. During 2012, we sold our wireline telecommunications business unit, and certain costs related thereto are included in results of operations for the three months ended March 30, 2013 . Net loss increased $12.0 million to $19.6 million for the three months ended March 29, 2014 as compared to $7.7 million for the three months ended March 30, 2013 as a result of the increase in our loss from continuing operations of $12.6 million for the three months ended March 29, 2014 and the decline in the loss from discontinued operations of $0.6 million from the prior year period. As you read and consider this management's discussion and analysis, you should be aware that our historical results may not be indicative of future performance as a result of the opportunities, challenges, risks, trends and uncertainties discussed in this Quarterly Report and in the section entitled "Overview" in our Annual Report on Form 10-K for the year ended December 31, 2013.

Discussion
The following table presents our results of operations:
                                                                     Three Months Ended

  (in thousands)                                              March 29, 2014     March 30, 2013

  Revenues                                                   $       88,600     $      113,838
  Cost of revenues                                                   75,329             95,251
  Gross profit                                                       13,271             18,587
  Selling, general and administrative expenses                       10,219             13,138
  Income related to contingent consideration                              -               (114 )
  Restructuring, restatement and investigation related costs            871              1,877
  Impairment charge                                                  10,100                  -
  Depreciation and amortization                                       4,022              6,047
  Operating loss                                                    (11,941 )           (2,361 )
  Interest expense                                                    8,356              4,634
  Other income, net                                                    (612 )              (12 )
  Loss from continuing operations before income taxes               (19,685 )           (6,983 )
  Income tax (benefit) expense                                          (60 )               60
  Loss from continuing operations                                   (19,625 )           (7,043 )
  Loss from discontinued operations                                       -               (621 )
  Net loss                                                   $      (19,625 )   $       (7,664 )


Revenues
The following table presents revenue information by segment:
                                            Three Months Ended
                                 March 29, 2014            March 30, 2013           Increase (Decrease)
                                             % of                      % of
(amounts in thousands)         Amount      Revenues      Amount      Revenues       Amount           %

Fulfillment                  $  63,236        71.4 %   $  74,430        65.4 %   $   (11,194 )     (15.0 )%
Engineering and Construction    25,364        28.6 %      39,408        34.6 %       (14,044 )     (35.6 )%
Total                        $  88,600                 $ 113,838                 $   (25,238 )     (22.2 )%

Revenues decreased $25.2 million, or 22.2%, to $88.6 million from $113.8 million for the three months ended March 29, 2014 and March 30, 2013, respectively. For the Fulfillment segment, revenues decreased $11.2 million, or 15.0%, to $63.2 million from $74.4 million for the three months ended March 29, 2014 and March 30, 2013, respectively. The decrease in Fulfillment segment revenues was primarily attributable to (i) revenue declines from both the cable and satellite installations attributable mainly to weather disruptions in the markets we serve resulting in lower installs to homes, and (ii) our exiting certain low or negative margin cable markets in 2013 and 2014. For the Engineering and Construction segment, revenues decreased $14.0 million, or 35.6%, to $25.4 million from $39.4 million for the three months ended March 29, 2014 and March 30, 2013, respectively. The decrease in Engineering and Construction revenues was primarily attributable to reduced work for AT&T as our northeastern turf agreement concludes in August 2014.
Gross Profit
The following table presents gross profit information by segment:

                                            Three Months Ended
                                 March 29, 2014            March 30, 2013           Increase (Decrease)
                                             % of                      % of
(amounts in thousands)         Amount      Revenues      Amount      Revenues       Amount           %

Fulfillment                  $  11,332        17.9 %      13,295        17.9 %   $    (1,963 )     (14.8 )%
Engineering and Construction     1,939         7.6 %       5,292        13.4 %        (3,353 )     (63.4 )%
Total                        $  13,271        15.0 %   $  18,587        16.3 %   $    (5,316 )     (28.6 )%

Gross profit decreased $5.3 million, or 28.6%, to $13.3 million from $18.6 million for the three months ended March 29, 2014 and March 30, 2013, respectively, as a result of lower revenues and gross margin percentages in the three months ended March 29, 2014 compared to the three months ended March 30, 2013. Gross margin percentages decreased to 15.0% compared to 16.3% for the three months ended March 29, 2014 and March 30, 2013, respectively. For the Fulfillment segment, gross margins remained constant year over year. For the Engineering and Construction segment, gross margin percentages decreased 5.8% for the three months ended March 29, 2014 compared to the prior year period. The decrease is attributable to the decline in our work for AT&T. Selling, General and Administrative Expenses Selling, general and administrative expenses decreased $2.9 million, or 22.2%, to $10.2 million from $13.1 million for the three months ended March 29, 2014 and March 30, 2013, respectively. Reductions in insurance expense, bonus, salary and stock compensation expense and a decline in the provision for bad debt in the three months ended March 29, 2014, compared to the prior year period, accounted substantially for the reduction in selling, general and administrative expenses. Selling, general and administrative expenses as a percentage of revenue remained constant at 11.5% in the three months ended March 29, 2014 compared to the three months ended March 30, 2013. Restructuring, Restatement and Investigation Related Costs For the three months ended March 29, 2014, restatement, investigation and related costs related to the the 2013 Audit Committee Investigation were $0.5 million, mainly professional fees. For the three months ended March 30, 2013 such costs were $1.4 million. Additional costs for related matters may arise in the future, such as the Company's obligation to indemnify current and former officers in connection with potential regulatory or legal proceedings. Management is not able to estimate what the costs related to these matters might be, but such costs could be significant.


Restructuring charges were $0.3 million and $0.5 million for the three months ended March 29, 2014 and March 30, 2013, respectively. The charges for the three months ended March 29, 2014 were related to the separation of a former member of management and the closing of certain operating locations. The charges for the three months ended March 30, 2013 were related to the separation of a former member of senior management.
Impairment Charge
During three months ended March 29, 2014, we recognized an impairment charge of $10.1 million related to the goodwill of the Broadband Cable reporting unit. Refer to the discussion of interim impairment testing in the section entitled "Critical Accounting Policies and Estimates" for additional details. Depreciation and Amortization
Depreciation and amortization decreased $2.0 million, or 33.5%, to $4.0 million from $6.0 million for the three months ended March 29, 2014 and March 30, 2013, respectively. The decrease was driven by lower amortization of $0.7 million caused by intangible assets reaching the end of their amortizable lives, partially offset by new amortization from the intangible assets acquired from Skylink, and lower depreciation of $1.4 million resulting from a reduction in our vehicle fleet.
Interest Expense
Interest expense increased $3.7 million, or 80.3%, to $8.4 million from $4.6 million for the three months ended March 29, 2014 and March 30, 2013, respectively. The increase was caused by higher cash and non-cash interest as a result of the refinancing in July 2013 of our debt at higher interest rates; higher average principal balances as well as, higher amortization of deferred financing fees and debt discount.
Other Income, Net
Net other income, consisting mainly of gains and losses on the sale of property and equipment, increased $0.6 million in the three months ended to $0.6 million compared to the prior year quarter. The disposal of assets is generally dependent on vehicle and other equipment needs of the Company. Income Tax Benefit or Expense
Income tax benefit or expense was not material to our results of operations for the three months ended March 29, 2014 and March 30, 2013. Our effective tax rate differs from the Federal statutory tax rate of 35% primarily because we have not yet achieved profitable operations outside of Canada. As a result, our non-Canadian deferred tax assets do not satisfy the criteria for realizability, and we have established a full valuation allowance for such assets. In addition, we are required to pay incomes taxes in certain states and localities in which we do business.
Loss from Discontinued Operations
In the three months ended March 30, 2013 we incurred a loss from discontinued operations of $0.6 million, related to the sale in the fourth quarter of 2012 of our wireline telecommunication business.


Net Loss Excluding Certain Items and Adjusted EBITDA The following table presents the reconciliation of net loss to net loss excluding certain items and Adjusted EBITDA:

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