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AMERICAN ELECTRIC TECHNOLOGIES INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (in thousands, except share, per share and percentages)
(Edgar Glimpses Via Acquire Media NewsEdge)
The following discussion should be read in conjunction with the financial
statements and notes thereto included elsewhere in this Form 10-Q and the
financial statements in the 2011 Annual Report on Form 10-K filed on March 30,
2012. Historical results and percentage relationships set forth in the condensed
consolidated statements of operations and cash flows, including trends that
might appear, are not necessarily indicative of future operations or cash flows.
FORWARD-LOOKING STATEMENTS
Except for historical and factual information, this document contains
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements include
statements that address activities, events or developments that we expect,
believe or anticipate will or may occur in the future, such as predictions of
future financial performance. All forward-looking statements are based on
assumptions made by us based on our experience and perception of historical
trends, current conditions, expected future developments and other factors we
believe are appropriate under the circumstances.
These statements, including statements regarding our capital needs, business
strategy, expectations and intentions, are subject to numerous risks and
uncertainties, many of which are beyond our control, including our ability to
maintain key products' sales or effectively react to other risks including those
discussed in Part I, Item 1A, Risk Factors, of our 2011 Annual Report on Form
10-K filed on March 30, 2012. We urge you to consider that statements that use
the terms "believe," "do not believe," "anticipate," "expect," "plan,"
"estimate," "intend" and similar expressions are intended to identify
forward-looking statements. No forward-looking statement can be guaranteed, and
actual results may differ materially from those projected. We undertake no
obligation to publicly update any forward-looking statement, whether as a result
of new information, future events or otherwise.
BUSINESS
American Electric Technologies, Inc. is a leading global supplier of power
delivery solutions to the energy industry. AETI offers M&I Electric™ power
distribution and control products, electrical services, and E&I Construction
services, as well as American Access Technologies zone enclosures, and Omega
Metals custom fabrication services. South Coast Electric Systems L.L.C. a
subsidiary, services U.S. Gulf Coast marine vessel customers.
We report our business in three segments: Technical Products and Services
("TP&S"), Electrical and Instrumentation Construction ("E&I") and American
Access Technologies ("AAT").
Foreign Joint Ventures
We have interests in three joint ventures outside of the United States which are
accounted for on the equity method:
• BOMAY Electric Industries Company, Ltd. ("BOMAY"), in which the Company holds
a 40% interest, BOMCO. (a subsidiary of China National Petroleum Corporation)
holds a 51% interest, and AA Energies, Inc., holds a 9% interest;
• M&I Electric Far East, Ltd. ("MIEFE"), in which the Company holds a 41%
interest, MIEFE's general manager holds an 8% interest and, Oakwell
Engineering, Ltd., of Singapore, holds a 51% interest, and;
• AETI Alliance Group do Brazil Sistemas E Servicos Em Energia LTDA. ("AAG"),
in which the Company holds a 49% interest and, Five Stars De Macae Servicos
De Petroleo LTDA., of Brazil, holds a 51% interest.
Industry Conditions
Our power delivery products which support the various segments of the energy
industry are capital intensive and cyclical in nature. The U.S. upstream,
midstream and downstream oil & gas markets continues to favorably impact the
demand for our technical products and services. Our products through our joint
ventures in China, Singapore and Brazil continue to experience favorable market
conditions related to the energy demands in these countries. Our industrial
markets remain weak. As the company previously announced, we decided in the
first quarter 2012 to exit the water and wastewater construction markets as we
complete our existing backlog which is expected to be substantially completed by
December 31, 2012.
TP&S
The TP&S segment has three main components: power distribution equipment, power
conversion equipment and electrical services.
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Our power distribution equipment group designs, manufactures, markets and
provides products designed to distribute the flow of electricity for energy
projects and protect electrical equipment such as motors, transformers and
cables. The main products offered by this group include low and medium voltage
ANSI ("American National Standards Institute") certified and IEC ("International
Electrotechnical Commission") certified switchgear for generator control and
power distribution applications. We also manufacture complimentary equipment
including motor control centers (MCCs), bus duct, and the power control rooms
that the power distribution equipment is located within for customer projects.
Our power distribution solutions are primarily sold into the upstream, midstream
and downstream oil & gas, the power generation and distribution markets, and the
marine vessel and industrial markets. The Company provides switchgear for power
generation applications up to 38,000 volts. We have recently expanded our
offerings into the renewable energy marketplace with the introduction of the
world's first switchgear designed for wind farm deployment, which includes our
arc-mitigation technology. Arc-mitigation technology enables power system
operators to significantly reduce the risk from arc-flash explosions and the
resulting downtime and liability exposure.
Our power conversion group provides products that convert AC and DC power into
usable power using a variety of technologies. We provide analog (Hill Hays) DC
drives, digital SCR drives, AC variable frequency drives (also known as "VFDs"),
inverters, converters, programmable logic control ("PLC") based automation
systems, and human machine interface ("HMI") systems. Our analog DC drives,
digital SCR drives and AC VFDs are used in a variety of applications including
land and offshore drilling, marine propulsion and pipeline applications. The
Company has recently introduced a line of wind converter products that convert
the AC power produced by wind turbine generators to DC, then inverts the power
back to AC for delivery to the electrical grid. We also offer our ISIS™
solution, a 1 and 1.5 MW fully integrated solar farm power station designed to
integrate all of the power conversion and power distribution equipment of the
solar farm. ISIS™ is the world's first 1000V, 1MW solar inverter to be tested by
TUV Rhineland, a nationally recognized test laboratory, to UL 1741 standards.
Our power distribution and power conversion products are built for application
voltages from 480 volts to 40,000 volts and are used in a wide variety of
industries. We have the technical expertise to provide these services in
compliance with a number of applicable industry standards such as NEMA
("National Electrical Manufacturers Association"), ANSI ("American National
Standards Institute"), IEC ("International Electrotechnical Commission"), ABS
("American Bureau of Shipping"), USCG ("United States Coast Guard"), Lloyd's
Register, a provider of marine certification services, and DNV ("Det Norske
Veritas"), a leading certifying body/registrar for management systems
certification services standards.
Our electrical services group includes both technical services and power
services. Technical services include global start-up and service of AETI power
conversion systems, electrical equipment retrofits and upgrades. Our power
services group provides electrical infrastructure start-up and commissioning,
preventative maintenance, and emergency repair services to industrial, marine
and renewable projects globally. Our team of trained technicians maintains
substations up to 500KV. We also offer in-shop services including refurbishment
and repair services for circuit breakers and switchgear.
E&I
The E&I segment provides a full range of electrical and instrumentation
construction and installation services to the oil & gas, power generation and
distribution and marine and industrial markets.. The segment's services include
new construction as well as electrical and instrumentation turnarounds,
upgrades, maintenance, and renovation projects. Applications include
installation of switchgear, AC and DC motors, drives, motor controls, lighting
systems, and high voltage cable. The company also provides projects that include
complete electrical system rig-ups, modifications, start-ups and testing for
offshore drilling rigs, and production platforms, marine (vessels) etc.
In the first quarter 2012, we decided to complete the existing backlog related
to the water and wastewater construction sector of the industrial market and
exit that market sector based on its continued weakness and lack of strategic
alignment.
AAT
The AAT segment manufactures and markets zone cabling enclosures and custom
formed metal products for a variety of industrial markets. The zone cabling
product line provides state-of-the-art flexible cabling and wireless solutions
for the high-speed communication networks found throughout office buildings,
hospitals, schools, industrial complexes and government buildings. Our patented
enclosures mount in ceilings, walls, raised floors, and certain modular
furniture to facilitate the routing of telecommunications network cabling, fiber
optics and wireless solutions in a streamlined, flexible, and cost effective
fashion. AAT also operates a precision sheet metal fabrication and assembly
operation and provides services such as precision "CNC" ("Computer Numerical
Controlled") punching, laser cutting, bending, assembling, painting, powder
coating and silk screening to a diverse client base including engineering,
technology and electronics companies, primarily in the Southeast.
The Company has facilities and sales offices in Texas, Mississippi and Florida.
We have minority interests in foreign joint ventures which have facilities in
Singapore; Xian, China; and Macae, Rio De Janeiro, Brazil.
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We have adopted various critical accounting policies that govern the application
of accounting principles generally accepted in the United States of America
("U.S. GAAP") in the preparation of our condensed consolidated financial
statements. The preparation of financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Although these
estimates are based on management's knowledge of current events and actions it
may undertake in the future, they may ultimately differ from actual results.
Certain accounting policies involve significant estimates and assumptions by us
that have a material impact on our financial condition or operating performance.
Management believes the following critical accounting policies reflect the most
significant estimates and assumptions used in the preparation of our condensed
consolidated financial statements. We do not have off-balance sheet
arrangements, financings, or other relationships with unconsolidated entities or
other persons, also known as "special purpose entities", nor do we have any
"variable interest entities".
Inventory Valuation - Inventories are stated at the lower of cost or market,
with material being accounted for using the average cost method. Inventory costs
for finished goods and work-in-process include direct material, direct labor,
production overhead and outside services. TP&S and E&I indirect overhead is
apportioned to work-in-process based on direct labor incurred. AAT production
overhead, including indirect labor, is allocated to finished goods and
work-in-process based on material consumption, which is an estimate that could
be subject to change in the near term as additional information is obtained and
as our operating environment changes.
Allowance for Obsolete and Slow-Moving Inventory - We regularly review the value
of inventory on hand using specific aging categories, and record a provision for
obsolete and slow-moving inventory based on historical usage and estimated
future usage. As actual future demand or market conditions may vary from those
projected, adjustments to our inventory reserve may be required.
Allowance for Doubtful Accounts - We maintain an allowance for doubtful accounts
for estimated losses resulting from the failure of our customers to make
required payments. The estimate is based on management's assessment of the
collectability of specific customer accounts and includes consideration for
credit worthiness and financial condition of those specific customers. We also
review historical experience with the customer, the general economic environment
and the aging of our receivables. We record an allowance to reduce receivables
to the amount that we reasonably believe to be collectible. Based on our
assessment, we believe our allowance for doubtful accounts is adequate.
Revenue Recognition - We report earnings from fixed-price and modified
fixed-price long-term contracts on the percentage-of-completion method. Earnings
are accrued based on the ratio of costs incurred to total estimated costs.
However, for TP&S, we have determined that labor incurred provides an improved
measure of percentage-of-completion. Costs include direct material, direct
labor, and job related overhead. Losses expected to be incurred on contracts are
charged to operations in the period such losses are determined. A contract is
considered complete when all costs except insignificant items have been incurred
and the facility has been accepted by the customer. Revenue from non-time and
material jobs of a short-term nature (typically less than one month) is
recognized on the completed-contract method after considering the attributes of
such contracts. This method is used because these contracts are typically
completed in a short period of time and the financial position and results of
operations do not vary materially from those which would result from use of the
percentage-of-completion method. The asset, "Work-in-process," which is included
in inventories, represents the cost of labor, material, and overhead on jobs
accounted for under the completed-contract method. For contracts accounted for
under the percentage-of-completion method, the asset, "Costs and estimated
earnings in excess of billings on uncompleted contracts," represents revenue
recognized in excess of amounts billed and the liability, "Billings in excess of
costs and estimated earnings on uncompleted contracts," represents billings in
excess of revenue recognized.
Foreign Currency Gains and Losses - Foreign currency translations are included
as a separate component of comprehensive income. We have determined the local
currency of our foreign joint ventures to be the functional currency. In
accordance with ASC 830, the assets and liabilities of the foreign equity
investees, denominated in foreign currency, are translated into United States
Dollars at exchange rates in effect at the condensed consolidated balance sheet
date and revenue and expenses are translated at the average exchange rate for
the period. Related translation adjustments are reported as comprehensive income
which is a separate component of stockholders' equity, whereas gains and losses
resulting from foreign currency transactions are included in results of
operations.
Federal Income Taxes - The liability method is used in accounting for federal
income taxes. Under this method, deferred tax assets and liabilities are
determined based on differences between the financial reporting and tax basis of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse. The
realizability of deferred tax assets are evaluated annually and a valuation
allowance is provided if it is more likely than not that the deferred tax assets
will not give rise to future benefits in the Company's tax returns.
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Contingencies - We record an estimated loss from a loss contingency when
information indicates that it is probable that an asset has been impaired or a
liability has been incurred and the amount of loss can be reasonably estimated.
Contingencies are often resolved over long time periods, are based on unique
facts and circumstances, and are inherently uncertain. We regularly evaluate
current information available to us to determine whether such accruals should be
adjusted or other disclosures related to contingencies are required. We are a
party to a number of legal proceedings in the normal course of our business for
which we have made appropriate provisions where we believe an ultimate loss is
probable. The ultimate resolution of these matters, individually or in the
aggregate, is not likely to have a material impact on the Company's financial
position or results of operations.
Equity Income from Foreign Joint Ventures' Operations - We account for our
investments in foreign joint ventures' operations using the equity method of
accounting. Under the equity method, the Company's share of the joint ventures'
operations' earnings or loss is recognized in the condensed consolidated
statements of operations as equity income (loss) from foreign joint ventures'
operations. Joint venture income increases the carrying value of the joint
venture investment and joint venture losses, as well as dividends received from
the joint ventures, reduce the carrying value of the investment.
Carrying Value of Joint Venture Investments - We evaluate the carrying value of
equity method investments as to whether an impairment adjustment may be
necessary. In making this evaluation, a variety of quantitative and qualitative
factors are considered including national and local economic, political and
market conditions, industry trends and prospects, liquidity and capital
resources and other pertinent factors.
OVERALL RESULTS OF OPERATIONS
The Company's management does not separately review and analyze its assets on a
segment basis for TP&S, E&I, and AAT and all assets for the segments are
recorded within the corporate segment's records. Corporate and other unallocated
expenses include compensation costs and other expenses that cannot be
meaningfully associated with the individual segments, all other costs, expenses
and other income have been allocated to their respective segments.
Sales to foreign joint ventures are made on an arms-length basis and
intercompany profits, if any, are eliminated in consolidation. See Footnote 5 in
Notes to Condensed Consolidated Financial statements for detailed financial
information on the foreign joint ventures.
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The following table represents revenue and income (loss) from domestic
operations and equity in foreign joint ventures attributable to the business
segments for the period indicated (in thousands):
Three Months Ended September 30, Nine Months Ended September 30,
2012 2011 2012 2011
Revenue:
Technical Products and Services $ 8,903 $ 8,123 $ 27,373 $ 19,907
Electrical and Instrumentation
Construction 1,495 3,561 7,102 11,839
American Access Technologies 1,327 2,020 4,554 5,454
$ 11,725 $ 13,704 $ 39,029 $ 37,200
Gross profit:
Technical Products and Services $ 1,507 $ 1,487 $ 4,464 $ 2,830
Electrical and Instrumentation
Construction 61 214 593 830
American Access Technologies 121 482 577 1,227
$ 1,689 $ 2,183 $ 5,634 $ 4,887
Income (loss) from domestic operations
and net equity income from foreign
joint ventures' operations:
Technical Products and Services $ 1,389 $ 1,140 $ 3,941 $ 1,754
Electrical and Instrumentation
Construction 61 214 593 830
American Access Technologies (227 ) 66 (530 ) 55
Corporate and other unallocated
expenses (1,100 ) (1,368 ) (3,912 ) (4,460 )
Income (loss) from domestic operations 123 52 92 (1,821 )
Equity income from BOMAY 624 666 2,385 1,343
Equity income (loss) from MIEFE (1 ) 66 19 (72 )
Equity income (loss) from AAG 123 90 167 49
Foreign operations expenses (23 ) (113 ) (246 ) (359 )
Net equity income from foreign joint
ventures' operations 723 709 2,325 961
Income (loss) from domestic operations
and net equity income from foreign
joint ventures' operations $ 846 $ 761 $ 2,417 $ (860 )
Non-GAAP Financial Measures
A non- GAAP financial measure is generally defined as one that purports to
measure historical or future financial performance, financial position or cash
flows, but excludes or includes amounts that would not be so adjusted in the
most comparable GAAP measure. In this report, we define and use the non-GAAP
financial measure Adjusted EBITDA as set forth below.
Adjusted EBITDA
Definition of Adjusted EBITDA
We define Adjusted EBITDA as follows:
Net income (loss) before:
• provision (benefit) for income taxes;
• non-operating (income) expense items;
• depreciation and amortization;
• non-cash stock-based compensation expense;
• dividends on mandatorily redeemable preferred stock; and
• Non-recurring items charged against or included in income(*);
* In the first quarter of 2012, we included a $212 expense in cost of sales
related primarily to the decision to exit the water/waste water market sector
for this segment which was identified as non-recurring.
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Management's Use of Adjusted EBITDA
We use Adjusted EBITDA to assess our overall financial and operating
performance. We believe this non-GAAP measure, as we have defined it, is helpful
in identifying trends in our day-to-day performance because the items excluded
have little or no significance on our day-to-day operations. This measure
provides an assessment of controllable expenses and affords management the
ability to make decisions which are expected to affiliate meeting current
financial goals as well as achieve optimal financial performance. It provides an
indicator for management to determine if adjustments to current spending
decisions are needed.
Adjusted EBITDA provides us with a measure of financial performance, independent
of items that are beyond the control of management in the short-term, such as
dividends required on preferred stock, depreciation and amortization, taxation
and interest expense associated with our capital structure. This metric measures
our financial performance based on operational factors that management can
impact in the short-term, namely the cost structure or expenses of the
organization. Adjusted EBITDA is one of the metrics used by senior management
and the board of directors to review the financial performance of the business
on a regular basis. Adjusted EBITDA is also used by research analysts and
investors to evaluate the performance of and value companies in our industry.
Limitations of Adjusted EBITDA
Adjusted EBITDA has limitations as an analytical tool. It should not be viewed
in isolation or as a substitute for GAAP measures of earnings. Material
limitations in making the adjustments to our earnings to calculate Adjusted
EBITDA, and using this non-GAAP financial measure as compared to GAAP net income
(loss), include:
• the cash portion of dividends and interest expense, income tax (benefit)
provision and non-recurring charges related to ongoing operations generally
represent charges (gains), which may significantly affect our financial
results; and
• depreciation and amortization, though not directly affecting our current cash
position, represent the wear and tear and/or reduction in value of our fixed
assets and may be indicative of future needs for capital expenditures.
An investor or potential investor may find this item important in evaluating our
performance, results of operations and financial position. We use non-GAAP
financial measures to supplement our GAAP results in order to provide a more
complete understanding of the factors and trends affecting our business.
Adjusted EBITDA is not an alternative to net income, income from operations or
cash flows provided by or used in operations as calculated and presented in
accordance with GAAP. You should not rely on Adjusted EBITDA as a substitute for
any such GAAP financial measure. We strongly urge you to review the
reconciliation of Adjusted EBITDA to GAAP net income (loss) attributable to
common stockholders, along with our condensed consolidated financial statements
included herein.
We also strongly urge you to not rely on any single financial measure to
evaluate our business. In addition, because Adjusted EBITDA is not a measure of
financial performance under GAAP and is susceptible to varying calculations, the
Adjusted EBITDA measure, as presented in this report, may differ from and may
not be comparable to similarly titled measures used by other companies.
The table below shows the reconciliation of net income (loss) attributable to
common stockholders to Adjusted EBITDA for the three and nine months ended
September 30, 2012 and 2011 (dollars in thousands):
(Unaudited)
Three months ended September 30, Nine months ended September 30,
2012 2011 2012 2011
Net Income (loss) attributable to
common stockholders $ 500 $ 359 $ 1,595 $ (690 )
Add:
Dividends on mandatorily
redeemable preferred stock 85 - 140 -
Depreciation and amortization 209 197 676 579
Interest expense and other, net 29 79 116 182
Provision (benefit) for income
taxes 232 323 566 (352 )
Non-cash charges:
Stock-based compensation 111 88 326 200
Water wastewater charges - - 212 -
Adjusted EBITDA $ 1,166 $ 1,046 $ 3,631 $ (81 )
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Three Months Ended September 30, 2012 Compared to Three Months Ended
September 30, 2011
Consolidated net revenue decreased $1,979, or 14%, to $11,725 for the three
months ended September 30, 2012 over the comparable period in 2011. The decrease
was primarily attributable to the E&I segment's net revenue decrease of $2,066.
The decline was primarily due to the Company's decision in the first quarter
2012 to exit the water/wastewater business as projects are being completed.
Consolidated gross profit for the three months ended September 30, 2012,
decreased $494 to $1,689 compared to gross profit of $2,183 in the prior year
period. The decrease in gross profit is primarily attributable to the AAT
segment's net revenue decrease of 34%, resulting in a decrease in gross profit
of $361 for the segment coupled with a decrease in the E&I segment gross profit
of $153.
The TP&S segment's net revenue of $8,903 for the three months ended September
30, 2012 was up $778 and generated gross profit of $1,507 and continues to
reflect improvement in the oil and gas market.
The E&I segment reported net revenue of $1,495 in the third quarter of 2012, a
decrease of $2,066 from the third quarter of 2011. The Company's revenue for the
E&I segment will continue to decline due to the decision to exit the
water/wastewater business based on the water/wastewater business being non-core
to the Company's products coupled with low project margins.
The AAT segment reported net revenue of $1,327 in the third quarter of 2012,
down $693 from the comparable prior year period. Gross profit decreased $361 to
$121 from $482 in the prior year period. The decrease in revenue and gross
profit is attributable to a decrease in demand for one of its products because
the customer sourced outside of the U.S. The AAT segment is examining continued
cost containment for the remainder of the year and marketing efforts to increase
revenue.
Selling and marketing expenses for the quarter ended September 30, 2012 were
$471 compared to the prior period quarter ended September 30, 2011 of $619. The
decrease is related to lower sales commissions reflecting a different revenue
mix and on reduced sales and marketing related to the Company's renewable energy
offerings.
General and administrative expenses were down for the quarter ended
September 30, 2012 over the same period in 2011 by $256. In the third quarter
2011, the Company incurred expenses related to the E&I segment's legal costs
associated with a project in mediation and 2012 reflects costs reductions from
2011 levels.
Research and development costs were down $161from the previous period as
development of the ISIS solar inverter product was substantially completed.
Net equity income from foreign joint ventures increased in the third quarter
ended September 30, 2012 by $14 as compared to the third quarter ended
September 30, 2011. The increase primarily resulted from reduced foreign
operations expenses from a one-time sharing of marketing expenses with foreign
partners in 2012.
Consolidated net other expense declined due to the lower interest on the $3.5
million reduction in the revolving credit balance in May 2012 resulting from the
$5.0 million convertible preferred stock transaction.
The effective tax expense (benefit) rates for the three month period ended
September 30, 2012 and 2011 were 28% and 47%, respectively. It was determined in
the fourth quarter of 2011 that due to the Internal revenue Code's Section 382
limitations on our ability to utilize the net operating losses carry forwards of
approximately $9,800 generated by American Access Technologies, Inc. prior to
the Company's merger in 2007 and subsequent net operating losses and foreign tax
credit carry forwards, a full valuation allowance was warranted in the fourth
quarter of 2011. As such, the tax provision on U.S. income generated in 2012 is
offset by a reduction of the valuation allowance provided in 2011. The tax
provision for 2012 reflects a 34% U.S. tax rate related to the income from the
equity in foreign joint ventures' operations, net of dividends received in 2012
for an effective rate of 28% for the period.
In the period ended September 30, 2011, the Company recorded a $220 write down
of its deferred tax assets related to the IRS's Section 382 net operating loss
carry forward limitation resulting from an IRS audit of the Company's
December 31, 2008 federal return. After giving effect to the write down of the
deferred income taxes of $220, and adjusting for the cumulative effect of the
change in the estimated tax rate for fiscal 2011, the effective tax rate for the
third quarter 2011 was 47%.
Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30,
2011.
Consolidated net revenue increased $1,829 or 5%, to $39,029 for the nine months
ended September 30, 2012 over the comparable period in 2011. The TP&S segment
recorded a $7,466 or 38% increase in net revenue. This improvement was offset by
net revenue declines as compared to 2011 in the E&I segment of $4,737 and in a
decrease in the AAT net revenue of $900 as compared to 2011.
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Consolidated gross profit increased $747 to $5,634, or 14% of net revenue as
compared to 13% gross profit percentage for the prior nine month period. This
increase was mainly attributable to the TP&S segment's increased revenue and
improvement in direct margin. This performance reflects the improved conditions
in the oil & gas markets.
The TP&S segment's net revenue of $ 27,373 generated gross profit of $4,464 for
the first nine months ended September 30, 2012 compared to revenue of $19,907
and gross profit of $2,830 for the prior nine month period ended September 30,
2011. This segment's financial improvement reflects the improvement in the oil
and gas market.
The E&I segment reported net revenue of $7,102 for the nine months ended
September 30, 2012, a decrease of $4,737 over the nine months ended
September 30, 2011. Gross profit for the E&I segment during the nine months
ended September 30, 2012 was $593 compared to $830 in the corresponding prior
year period. Gross profit as a percentage of net revenue increased to 8% from 7%
in the comparable prior period, however the Company's revenue for the E&I
segment will continue to decline through year end 2012 due to the decision to
exit the water/wastewater business based on the water/wastewater business being
non-core to the Company's products coupled with low project margins.
The AAT segment reported revenue of $4,554 for the nine months ended
September 30, 2012, down $900 from the comparable prior year period. Gross
profit declined by $650 driven substantially by the decrease in revenue from a
shift in demand for one of its products because the customer sourced outside of
U.S. The AAT segment is examining continued cost containment for the remainder
of the year and marketing efforts to increase revenue.
Selling and marketing expenses for the nine months ended September 30, 2012 were
$1,831 essentially unchanged compared to the prior Nine month period ended
September 30, 2011 of $1,844.
General and administrative expenses were down for the nine months ended
September 30, 2012 over the same period in 2011 by $592 primarily from cost
reductions.
Research and development costs for the nine months ended September 30, 2012 were
down to $36 from $597 in the previous period based on a reduced level of ISIS
product development was completed.
Net equity income from foreign joint ventures increased for the nine months
ended September 30, 2012 by $1,364 as compared to the prior nine month period
ended September 30, 2011 primarily from improved BOMAY results.
The increase resulted from improved performance at BOMAY by $1,042, MIEFE by $91
and AAG by $118. The BOMAY operations in China continue to reflect a strong
demand for its products.
Consolidated net other expense for the nine month period was $116, a decrease of
$66 from the comparable prior year due to the lower interest on $3,500 reduction
in the revolving credit balance subsequent to the $5,000 convertible preferred
stock transaction in May 2012.
The effective tax expense (benefit) rates for the nine month period ended
September 30, 2012 and 2011 were 25% and 34%, respectively.
It was determined in the fourth quarter of 2011 that due to the Internal revenue
Code's Section 382 limitations on our ability to utilize the net operating
losses carry forwards of approximately $9,800 generated by American Access
Technologies, Inc. prior to the Company's merger in 2007 and subsequent net
operating losses and foreign tax credit carry forwards, a full valuation
allowance was warranted in the fourth quarter of 2011. As such, the tax
provision on U.S. income generated in 2012 is offset by a reduction of the
valuation allowance provided in 2011. The tax provision for 2012 reflects a 34%
U.S. tax rate related to the income from the equity in foreign joint ventures'
operations, net of dividends paid in 2012, for an effective rate of 25% for
2012.
BACKLOG
The Company's backlog as of September 30, 2012 was $22.0 million compared to
$21.2 million at December 31, 2012. The backlog for the TP&S segment was $19.6
million as of September 30, 2012, an increase of approximately $6.3 million as
compared to the backlog at June 30, 2012. The backlog for the E&I water
waste/water business of $2.4 million reflects the remaining projects in process
and will continue to decline as the Company decided to exit this business in the
first quarter 2012. Approximately 50% of this total backlog is expected to be
realized as revenue during the remainder of the fiscal year.
20--------------------------------------------------------------------------------
Table of Contents
LIQUIDITY AND CAPITAL RESOURCES
Notes Payable / Revolving Credit Agreement
The Company entered into a credit agreement with JP Morgan Chase Bank, N.A.
("Chase") in October 2007. At September 30, 2012 there was $1,500 and at
December 31, 2011 there was $5,000 of borrowings outstanding. There were
additional borrowing capacity of $3,500 million and $3,700 million at
September 30, 2012 and December 31, 2011, respectively. On August 10, 2012 the
$10,000 credit agreement was amended which extended the maturity date to July 1,
2014, modified the financial covenants to a net profitability test of $1 on a
trailing six month basis, a 1.0 to 1.0 leverage test of total liabilities to
total net worth and eliminated the $6,000 limit on borrowings if the "adjusted
net income" became less than $1.00 for any quarter. The current ratio test
remained unchanged. The agreement is collateralized by the Company's real estate
in Houston and Beaumont, Texas, trade accounts receivable, equipment,
inventories, and work-in-process, and the Company's U.S. subsidiaries are
guarantors of the borrowings.
Under the agreement, the credit facility's interest rate is LIBOR plus 3.25% per
annum and a commitment fee of 0.3% per annum of the unused portion of the credit
limit each quarter. Additionally, the terms of the agreement contain covenants
which provide for customary restrictions and limitations and restriction from
paying dividends without prior written consent of the bank. On September 30,
2012 the interest rate was 3.48%.
On May 1, 2012, the Company received an amendment from Chase consenting to the
payment of the preferred stock dividends and other terms as discussed in the
Notes to Condensed Consolidated Financial Statements as Note 10. Mandatorily
Redeemable Convertible Preferred Stock.
Operating Activities
During the Nine months ended September 30, 2012, the Company generated cash
flows from operations of $1,153 as compared to a use of cash from operation of
$1,066 for the same period in 2011. The increase in cash flow for the 2012
period was primarily due to increased accounts receivable collection of $3,066.
Investing Activities
During the nine months ended September 30, 2012, the Company generated $7 in
cash from investing activities compared to $711 for the comparable period in
2011 primarily as a result of increased capital expenditure. The Company
received cash dividends from the BOMAY of $907 and $1,052 in June 2012 and June
2011, respectively. In the first quarter 2012, the Company acquired the net
assets of Amnor Technology for cash of $100 plus 44,000 shares of our common
stock plus legal costs of $4.
Financing Activities
During the Nine months ended September 30, 2012, the Company generated $1,175 in
cash from financing activities as compared $862 for the comparable period in
2011 The main source of cash in 2012 was from the issuance of the $5.0 million
convertible preferred stock transaction. Subsequently, the Company paid $3,500
down on the revolving credit agreement.
The Company believes its existing cash, working capital and unused credit
facility combined with operating earnings will be sufficient to meet its working
capital needs for the next twelve months. The Company continues to review growth
opportunities and depending on the cash needs may raise cash in the form of
debt, equity, or a combination of both.
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