Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q


 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2018

 

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                 to                

 

Commission File No. 001-16501

C:\Users\lbpayne\Desktop\GlobalPower500x177.jpg

Global Power Equipment Group Inc.

(Exact name of registrant as specified in its charter)

 


 

 

 

 

Delaware

 

73-1541378

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

400 E. Las Colinas Blvd., Suite 400

Irving, TX 75039

(Address of principal executive offices) (Zip code)

 

(214) 574-2700

(Registrant’s telephone number, including area code)

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No   ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☐    No  ☒

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

Large accelerated filer

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

(Do not check if a smaller reporting company)

Smaller reporting company

 

Emerging growth company

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

 

As of May 17, 2018, there were 18,464,405 shares of common stock of Global Power Equipment Group Inc. outstanding.

 

 

 


 

GLOBAL POWER EQUIPMENT GROUP INC. AND SUBSIDIARIES

Table of Contents

 

 

Part I—FINANCIAL INFORMATION 

3

 

 

Item 1. Financial Statements 

3

 

 

Condensed Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017 (unaudited) 

3

 

 

Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2018 and 2017 (unaudited) 

4

 

 

Condensed Consolidated Statements of Comprehensive Loss for the Three Months Ended March 31, 2018 and 2017 (unaudited) 

5

 

 

Condensed Consolidated Statement of Stockholders’ Equity for the Three Months Ended March 31, 2018 (unaudited) 

6

 

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2018 and 2017 (unaudited) 

7

 

 

Notes to Condensed Consolidated Financial Statements (unaudited) 

8

 

 

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

21

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk 

27

 

 

Item 4. Controls and Procedures 

27

 

 

Part II—OTHER INFORMATION 

 

 

 

Item 1. Legal Proceedings 

27

 

 

Item 1A. Risk Factors 

28

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 

28

 

 

Item 3. Defaults Upon Senior Securities 

28

 

 

Item 4. Mine Safety Disclosures 

28

 

 

Item 5. Other Information 

28

 

 

Item 6. Exhibits 

28

 

 

SIGNATURES 

30

 

 


 

Table of Contents

Part I—FINANCIAL INFORMATION

Item 1. Financial Statements.

GLOBAL POWER EQUIPMENT GROUP INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 

 

 

 

 

 

 

(in thousands, except share data)

 

March 31, 2018

  

December 31, 2017

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents 

 

$

8,021

 

$

4,594

Restricted cash 

 

 

10,421

 

 

11,562

Accounts receivable, net of allowance of $1,501 and $1,568, respectively

 

 

18,816

 

 

26,060

Costs and estimated earnings in excess of billings 

 

 

9,846

 

 

11,487

Other current assets 

 

 

2,240

 

 

4,006

Current assets of discontinued operations

 

 

25,534

 

 

27,922

Total current assets 

 

 

74,878

 

 

85,631

 

 

 

 

 

 

 

Property, plant and equipment, net 

 

 

1,428

 

 

1,712

Goodwill 

 

 

35,400

 

 

35,400

Intangible assets, net 

 

 

12,500

 

 

12,500

Other long-term assets 

 

 

767

 

 

573

Total assets 

 

$

124,973

 

$

135,816

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable 

 

$

3,988

 

$

5,080

Accrued compensation and benefits 

 

 

9,379

 

 

7,481

Billings in excess of costs and estimated earnings 

 

 

5,294

 

 

7,049

Other current liabilities 

 

 

3,840

 

 

5,552

Current liabilities of discontinued operations

 

 

23,534

 

 

28,802

Total current liabilities 

 

 

46,035

 

 

53,964

Long-term debt, net

 

 

25,003

 

 

24,304

Deferred tax liabilities

 

 

10,123

 

 

9,921

Other long-term liabilities 

 

 

1,913

 

 

2,390

Long-term liabilities of discontinued operations

 

 

3,193

 

 

3,110

Total liabilities 

 

 

86,267

 

 

93,689

Commitments and contingencies (Note 8 and 10)

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

Common stock, $0.01 par value, 170,000,000 shares authorized and 19,527,867 and 19,360,026 shares issued, respectively, and 18,091,066 and 17,946,386 shares outstanding, respectively 

 

 

195

 

 

193

Paid-in capital 

 

 

79,475

 

 

78,910

Retained earnings (deficit)

 

 

(40,950)

 

 

(36,962)

Treasury stock, at par (1,436,801 and 1,413,640 common shares, respectively)

 

 

(14)

 

 

(14)

Total stockholders’ equity 

 

 

38,706

 

 

42,127

Total liabilities and stockholders’ equity 

 

$

124,973

 

$

135,816

 

See accompanying notes to condensed consolidated financial statements.

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GLOBAL POWER EQUIPMENT GROUP INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS  (UNAUDITED)

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

(in thousands, except per share data)

  

 

2018

   

 

2017

Revenue

 

$

43,121

 

$

45,632

Cost of revenue

 

 

36,671

 

 

47,187

 

 

 

 

 

 

 

 Gross profit (loss)

 

 

6,450

 

 

(1,555)

 

 

 

 

 

 

 

Selling and marketing expenses

 

 

426

 

 

567

General and administrative expenses

 

 

6,590

 

 

9,545

Depreciation and amortization expense

 

 

221

 

 

335

Total operating expenses

 

 

7,237

 

 

10,447

 

 

 

 

 

 

 

Operating loss

 

 

(787)

 

 

(12,002)

 

 

 

 

 

 

 

Interest expense, net

 

 

1,378

 

 

1,701

Gain on sale of business and net assets held for sale

 

 

 —

 

 

(239)

Other (income) expense, net

 

 

(212)

 

 

(1)

Total other (income) expenses, net

 

 

1,166

 

 

1,461

 

 

 

 

 

 

 

Loss from continuing operations before income tax expense (benefit)

 

 

(1,953)

 

 

(13,463)

Income tax expense (benefit)

 

 

285

 

 

(1,838)

Loss from continuing operations

 

 

(2,238)

 

 

(11,625)

 

 

 

 

 

 

 

Loss from discontinued operations before income tax expense (benefit)

 

 

(1,708)

 

 

(4,244)

Income tax expense (benefit)

 

 

42

 

 

979

Income (loss) from discontinued operations

 

 

(1,750)

 

 

(5,223)

 

 

 

 

 

 

 

Net loss

 

$

(3,988)

 

$

(16,848)

 

 

 

 

 

 

 

Basic earnings (loss) per common share  

 

 

 

 

 

 

Loss from continuing operations

 

$

(0.12)

 

$

(0.67)

Earnings (loss) from discontinued operations

 

 

(0.10)

 

 

(0.30)

Basic earnings (loss) per common share  

 

$

(0.22)

 

$

(0.97)

 

 

 

 

 

 

 

Diluted earnings (loss) per common share

 

 

 

 

 

 

Loss from continuing operations

 

$

(0.12)

 

$

(0.67)

Earnings (loss) from discontinued operations

 

 

(0.10)

 

 

(0.30)

Diluted loss per common share

 

$

(0.22)

 

$

(0.97)

 

 

See accompanying notes to condensed consolidated financial statements.

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GLOBAL POWER EQUIPMENT GROUP INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED)

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

(in thousands)

  

 

2018

  

 

2017

 

Net loss

 

$

(3,988)

 

$

(16,848)

 

Foreign currency translation adjustment

 

 

 —

 

 

589

 

Comprehensive loss

 

$

(3,988)

 

$

(16,259)

 

 

See accompanying notes to condensed consolidated financial statements.

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GLOBAL POWER EQUIPMENT GROUP INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Shares

 

 

 

 

 

Retained

 

 

 

 

 

 

 

 

 

 

$0.01 Per Share

 

 

Paid-in

 

 

Earnings  

 

Treasury Shares

 

 

 

(in thousands, except share data)

  

Shares

  

 

Amount

  

 

Capital

  

 

(deficit)

  

Shares

  

 

Amount

  

 

Total

Balance, December 31, 2017

 

19,360,026

 

$

193

 

$

78,910

 

$

(36,962)

 

(1,413,640)

 

$

(14)

 

$

42,127

Issuance of restricted stock units

 

167,841

 

 

 2

 

 

(2)

 

 

 —

 

 —

 

 

 —

 

 

 —

Tax withholding on restricted stock units

 

 —

 

 

 —

 

 

(186)

 

 

 —

 

(23,161)

 

 

 —

 

 

(186)

Stock-based compensation

 

 —

 

 

 —

 

 

753

 

 

 —

 

 —

 

 

 —

 

 

753

Net loss

 

 —

 

 

 —

 

 

 —

 

 

(3,988)

 

 —

 

 

 —

 

 

(3,988)

Balance, March 31, 2018

 

19,527,867

 

$

195

 

$

79,475

 

$

(40,950)

 

(1,436,801)

 

$

(14)

 

$

38,706

 

See accompanying notes to condensed consolidated financial statements.

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GLOBAL POWER EQUIPMENT GROUP INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

(in thousands)

  

2018

  

2017

Operating activities:

 

 

 

 

 

 

Net loss

 

$

(3,988)

 

$

(16,848)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

 

 

 

 

 

 

Net loss from discontinued operations

 

 

1,750

 

 

5,223

Deferred income tax expense (benefit)

 

 

202

 

 

(1,884)

Depreciation and amortization on plant, property and equipment and intangible assets

 

 

221

 

 

335

Amortization of deferred financing costs

 

 

56

 

 

35

Loss on disposals of property, plant and equipment

 

 

117

 

 

30

(Gain) loss on sale of business and net assets held for sale

 

 

 —

 

 

(239)

Bad debt expense

 

 

(67)

 

 

 2

Stock-based compensation

 

 

194

 

 

721

Payable-in-kind interest

 

 

642

 

 

78

Changes in operating assets and liabilities, net of business sold:

 

 

 

 

 

 

Accounts receivable

 

 

7,311

 

 

(6,314)

Costs and estimated earnings in excess of billings

 

 

1,641

 

 

6,341

Other current assets

 

 

1,765

 

 

4,932

Other assets

 

 

(194)

 

 

505

Accounts payable

 

 

(1,092)

 

 

(1,774)

Accrued and other liabilities

 

 

268

 

 

1,074

Billings in excess of costs and estimated earnings

 

 

(1,755)

 

 

1,009

Net cash provided by (used in) operating activities, continuing operations

 

 

7,071

 

 

(6,774)

Net cash provided by (used in) operating activities, discontinued operations

 

 

(4,864)

 

 

13,144

Net cash provided by (used in) operating activities

 

 

2,207

 

 

6,370

Investing activities:

 

 

 

 

 

 

Proceeds from sale of business, net of restricted cash and transaction costs

 

 

 —

 

 

20,206

Purchase of property, plant and equipment

 

 

(54)

 

 

(11)

Net cash provided by (used in) investing activities, continuing operations

 

 

(54)

 

 

20,195

Net cash provided by (used in) investing activities, discontinued operations

 

 

319

 

 

(276)

Net cash provided by (used in) investing activities

 

 

265

 

 

19,919

Financing activities:

 

 

 

 

 

 

Repurchase of stock-based awards for payment of statutory taxes due on stock-based compensation

 

 

(186)

 

 

(185)

Debt issuance costs

 

 

 —

 

 

(57)

Dividends paid

 

 

 —

 

 

(9)

Proceeds from long-term debt

 

 

 —

 

 

83,100

Payments of long-term debt

 

 

 —

 

 

(102,647)

Net cash provided by (used in) financing activities, continuing operations

 

 

(186)

 

 

(19,798)

Net cash provided by (used in) financing activities, discontinued operations

 

 

 —

 

 

 —

Net cash provided by (used in) financing activities

 

 

(186)

 

 

(19,798)

Effect of exchange rate change on cash, continuing operations

 

 

 —

 

 

(7)

Effect of exchange rate change on cash, discontinued operations

 

 

 —

 

 

78

Effect of exchange rate change on cash

 

 

 —

 

 

71

Net change in cash, cash equivalents and restricted cash

 

 

2,286

 

 

6,562

Cash, cash equivalents and restricted cash, beginning of period

 

 

16,156

 

 

11,570

Cash, cash equivalents and restricted cash, end of period

 

$

18,442

 

$

18,132

 

 

 

 

 

 

 

Supplemental Disclosures:

 

 

 

 

 

 

Cash paid for interest

 

$

673

 

$

1,863

Cash paid for income taxes, net of refunds

 

$

 —

 

$

86

 

See accompanying notes to condensed consolidated financial statements.

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GLOBAL POWER EQUIPMENT GROUP INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1—BASIS OF PRESENTATION

Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) on a basis consistent with that used in the Annual Report on Form 10-K for the year ended December 31, 2017 filed by Global Power Equipment Group Inc. and its wholly owned subsidiaries (“Global Power,” “we,” “us,” “our” or the “Company”) with the United States (the “U.S.”) Securities and Exchange Commission (“SEC”) on April 16, 2018 (the “2017 Report”) and include all normal recurring adjustments necessary to present fairly the unaudited condensed consolidated balance sheets and statements of operations, comprehensive loss, cash flows and stockholders’ equity for the periods indicated. All significant intercompany transactions have been eliminated. These notes should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the 2017 Report. Accounting measurements at interim dates inherently involve greater reliance on estimates than at year-end. The results of operations for the three month period are not necessarily indicative of the results to be expected for the full year.

The Company reports on a fiscal quarter basis utilizing a “modified” 4-4-5 calendar (modified in that the fiscal year always begins on January 1 and ends on December 31). However, the Company has continued to label its quarterly information using a calendar convention. The effects of this practice are modest and only exist when comparing interim period results. The reporting periods and corresponding fiscal interim periods are as follows:

 

 

 

 

 

Reporting Interim Period

 

Fiscal Interim Period

 

 

2018

 

2017

Three Months Ended March 31

 

January 1, 2018 to April 1, 2018

 

January 1, 2017 to April 2, 2017

Three Months Ended June 30

 

April 2, 2018 to July 1, 2018

 

April 3, 2017 to July 2, 2017

Three Months Ended September 30

 

July 2, 2018 to September 30, 2018

 

July 3, 2017 to October 1, 2017

 

 

NOTE 2—LIQUIDITY

The Company’s condensed consolidated financial statements have been prepared on a going concern basis, which assumes that it will be able to meet its obligations and continue its operations during the twelve-month period following the issuance of this Quarterly Report on Form 10-Q for the three months ended March 31, 2018 (this “Form 10-Q”). These financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern.

Management has assessed the Company’s financial condition and has concluded that the following factors, taken in the aggregate, raise substantial doubt regarding the Company’s ability to continue as a going concern for the twelve-month period following the issuance of this Form 10-Q:

·

For the past several years, the Company has incurred both net losses and negative cash flows from operations.

·

For the three months ended March 31, 2018, the Company had a net loss (including discontinued operations) of $4.0 million.

·

As of both March 31, 2018 and December 31, 2017, Electrical Solutions was classified as held-for-sale and presented as a discontinued operation. However, the Company continues to incur operating losses at its Electrical Solutions Houston facility.

·

The Company’s liquidity has been, and is currently projected to remain, very constrained. The Company’s lack of access to readily available capital resources and unexpected delays in collecting projected cash receipts could create significant liquidity problems.

·

Under the Centre Lane Facility (as defined below), tax refunds and/or any extraordinary receipts in excess of $0.5 million in the aggregate in any fiscal year, with the exception of $3.7 million of extraordinary receipts waived in

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the Fourth Amendment (as defined below), must be used to prepay amounts outstanding under the Centre Lane Facility.

·

The Fourth Amendment to the Centre Lane facility requires prepayment of all outstanding amounts due and payable on the earlier of (i) May 31, 2019 (although that date is just outside the ensuing twelve month period following the date this Form 10-Q is filed) (ii) the date Williams Industrial Services Group, LLC and its subsidiaries are sold or (iii) the date of acceleration of the loans pursuant to an additional event of default.

Management’s mitigation plans, which aim to alleviate the factors that caused the substantial doubt, include the following:

·

In April 2018, as part of the Fourth Amendment to the Centre Lane Facility, the Company negotiated a $3.0 million Incremental Loan Commitment the Company can draw upon in minimum increments of $1.0 million. This Loan Commitment can provide emergency funding to the Company in the event of a cash shortfall.

·

The Company is aggressively pursuing the sale of Electrical Solutions. Additionally, the Company has initiated the closure of a certain leased facility to streamline its operations in an effort to curtail further losses and negative cash flows.

·

With the more streamlined company structure resulting from the completed disposal of Mechanical Solutions and the anticipated disposal of Electrical Solutions, the Company began implementing its plan to significantly reduce the corporate headquarters costs, including headcount, in April 2018.

While management believes its mitigation plans alleviate the substantial doubt regarding the Company’s ability to continue as a going concern during the ensuing twelve-month period, the Company may not ultimately be able to successfully implement these plans, and investors could lose the full value of their investment in the Company’s common stock if bankruptcy protection is ultimately sought.

NOTE 3—RECENT ACCOUNTING PRONOUNCEMENTS

Recently Adopted Accounting Pronouncements

In the first quarter of 2018, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-18, “Restricted Cash (a consensus of the FASB Emerging Issues Task Force).” ASU 2016-18 requires an entity to include in its cash and cash-equivalent balances in the statement of cash flows those amounts that are deemed to be restricted cash and restricted cash equivalents. The Company adopted ASU 2016-18 on a retrospective basis, and net transfers of restricted cash of $1.1 million and $2.8 million have been presented in net change in cash and cash equivalents in the condensed consolidated statements of cash flows for the three months ended March 31, 2018 and 2017, respectively.

In the first quarter of 2018, the Company adopted ASU 2016-15, “Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments.” ASU 2016-15 requires an entity to classify distributions received from equity method investees in the statement of cash flows using either the cumulative earnings approach or the nature of distribution approach. The Company adopted ASU 2016-15 on a retrospective basis and elected to classify distributions received from its equity method investees using the cumulative earnings approach. The adoption of ASC 2016-15 did not have an impact on the condensed consolidated statements of cash flows for the three months ended March 31, 2018 and 2017, respectively.

In the first quarter of 2018, the Company adopted ASU 2014-09 (ASC Topic 606), “Revenue from Contracts with Customers,” and the related ASUs, which provided new guidance for revenue recognized from contracts with customers and replaced the previously existing revenue recognition guidance. ASU 2014-09 requires that revenue be recognized at an amount the Company is entitled to upon transferring control of goods or services to customers, as opposed to when risks and rewards transfer to a customer. The Company adopted ASC Topic 606 using the modified retrospective method, and accordingly, the new guidance was applied retrospectively to contracts that were not completed as of December 31, 2017. Results for operating periods beginning after January 1, 2018 are presented under ASC Topic 606, while comparative information for prior periods has not been restated and continues to be reported in accordance with the accounting standards in effect for those periods. The adoption of ASC Topic 606 did not yield changes to the method or timing of revenue recognized and did not have a material impact on the Company’s financial position, results of operations and cash flows as of and for the three months ended March 31, 2018.

There was no material difference in the Company’s results for the three months ended March 31, 2018 with application of ASC

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Topic 606 on its contracts and what results would have been if such contracts had been reported using accounting standards previously in effect for such contracts. The Company elected to utilize the modified retrospective transition practical expedient that allows the Company to evaluate the impact of contract modifications as of January 1, 2018 rather than evaluating the impact of the modifications at the time they occurred. There was no material impact associated with the election of this practical expedient.

The Company also elected to utilize the practical expedient to recognize revenue in the amount to which it has a right to invoice for services performed when it has a right to consideration from a customer in an amount that corresponds directly with the value of its performance completed to date.

Please refer to Note 5 Revenue for additional discussion of the Company’s revenue recognition accounting policies and expanded disclosures required by ASC Topic 606.

Recently Issued Accounting Pronouncements Not Yet Adopted

In February 2018, the FASB issued ASU 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,” which gives entities the option to reclassify the tax effects stranded in accumulated other comprehensive income as a result of the enactment of comprehensive tax legislation, commonly referred to as the Tax Cuts and Jobs Act of 2017 (the “Tax Act”), to retained earnings. ASU 2018-02 is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. The Company does not expect the adoption of ASU 2018-02 to have a material impact on its financial position, results of operations and cash flows.

In February 2016, the FASB issued ASU 2016-02, “Leases.” The primary difference between the current requirement under GAAP and ASU 2016-02 is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases. ASU 2016-02 requires that a lessee recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term (other than leases that meet the definition of a short-term lease). The liability will be equal to the present value of lease payments. The asset will be based on the liability, subject to adjustment, such as for initial direct costs. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Operating leases will result in straight-line expense (similar to current operating leases), while finance leases will result in a front-loaded expense pattern (similar to current capital leases). Classification will be based on criteria that are largely similar to those applied in current lease accounting. ASU 2016-02 is effective for annual and interim periods beginning after December 15, 2018, and early adoption is permitted. ASU 2016-02 must be adopted using a modified retrospective transition, and provides for certain practical expedients. The Company has not determined the potential impact of the adoption of ASU 2016-02 on its financial position, results of operations and cash flows.

 

NOTE 4—CHANGES IN BUSINESS

Discontinued Operations

During the fourth quarter of 2017, the Company made the decision to exit and sell its Electrical Solutions segment in an effort to reduce the Company’s outstanding term debt. The Company determined that the decision to exit this segment met the definition of a discontinued operation. As a result, this segment has been presented as a discontinued operation for all periods presented. As a result of the Company’s decision to sell the Electrical Solutions segment, the Company performed an impairment analysis on this segment’s finite- and indefinite-lived intangible assets (customer relationships and trade names, respectively) and determined that their carrying value exceeded their fair value. As a result, in the fourth quarter of 2017, the Company recorded an impairment charge of $9.7 million related to these intangible assets. After the impairment charge, the fair value of this segment’s intangible assets was zero at December 31, 2017. Determining fair value is judgmental in nature and requires the use of significant estimates and assumptions, considered to be Level 3 inputs. There were no other non-recurring fair value remeasurements related to the Electrical Solutions segment during the year ended December 31, 2017 or three months ended March 31, 2018.

During the third quarter of 2017, the Company made the decision to exit and sell substantially all of the operating assets and liabilities of its Mechanical Solutions segment in an effort to reduce the Company’s outstanding term debt. The Company determined that the decision to exit this segment met the definition of a discontinued operation. As a result, this segment has been presented as a discontinued operation for all periods presented. The Mechanical Solutions and the Electrical Solutions segments were the only components of the business that qualified for discontinued operations for all periods presented.

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On October 11, 2017, the Company sold substantially all of the operating assets and liabilities of its Mechanical Solutions segment for $43.0 million and used a portion of the proceeds to pay down $34.0 million of the Company’s outstanding debt and related fees, including full repayment of the First-Out Loan (as defined below). Additionally, on October 31, 2017, the Company completed the sale of its manufacturing facility in Mexico and auctioned the remaining production equipment and other assets for net proceeds of $3.6 million, of which $1.9 million was used to reduce the principal amount of the Initial Centre Lane Facility (as defined below). The remainder was used to fund working capital requirements. In the fourth quarter of 2017, the Company recorded a total gain of $6.3 million related to these sales.

The Company excluded an asset and liability from the sale of the Mechanical Solutions segment, which were comprised of the Company’s office building located in Heerlen, Netherlands and its liability for uncertain tax positions. The liability was included in long-term liabilities of discontinued operations in the March 31, 2018 and December 31, 2017 condensed consolidated balance sheets. The asset was included in current assets of discontinued operations in the December 31, 2017 condensed consolidated balance sheet. At the time the Heerlen office building met the “asset held for sale” criteria, its carrying value was $0.5 million; however, the Company subsequently determined that the building’s carrying value exceeded its fair value and, consequently, it recorded an impairment charge of $0.2 million during the fourth quarter of 2017. The impairment charge was included in loss from discontinued operations before income tax expense (benefit) in the consolidated statement of operations for the year ended December 31, 2017. After the impairment charge, the fair value of the Heerlen building was $0.3 million at December 31, 2017. Determining fair value is judgmental in nature and requires the use of significant estimates and assumptions, considered to be Level 3 inputs. There were no other non-recurring fair value remeasurements related to the Mechanical Solutions segment during the year ended December 31, 2017.

On March 21, 2018, the Company closed on the sale of its office building in Heerlen, Netherlands for $0.3 million, resulting in an immaterial gain on sale, which was reflected in loss from discontinued operations before income tax expense (benefit) in the Company’s condensed consolidated statement of operations for the three months ended March 31, 2018.

In connection with the sale of its Mechanical Solutions segment, the Company entered into a transition services agreement with the purchaser to provide certain accounting and administrative services for an initial period of nine months. For the three months ended March 31, 2018, the Company provided less than $0.1 million in services for the purchaser, which was included in general and administrative expenses from continuing operations in the condensed consolidated statement of operations.

The following table presents a reconciliation of the carrying amounts of major classes of assets and liabilities of discontinued operations:

 

 

 

 

 

 

 

(in thousands)

  

March 31, 2018

 

December 31, 2017

Assets:

 

 

 

 

 

 

Accounts receivable

 

$

11,488

 

$

12,296

Inventories, net

 

 

160

 

 

178

Cost and estimated earnings in excess of billings

 

 

9,885

 

 

11,325

Other current assets

 

 

627

 

 

493

Property, plant and equipment, net

 

 

3,374

 

 

3,630

Current assets of discontinued operations*

 

$

25,534

 

$

27,922

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

Accounts payable

 

$

9,038

 

$

7,004

Accrued compensation and benefits 

 

 

1,073

 

 

1,191

Billings in excess of costs and estimated earnings 

 

 

1,113

 

 

948

Accrued warranties

 

 

1,246

 

 

1,166

Other current liabilities

 

 

11,064

 

 

18,493

Current liabilities of discontinued operations

 

 

23,534

 

 

28,802

Liability for uncertain tax positions

 

 

3,193

 

 

3,110

Long-term liabilities of discontinued operations

 

 

3,193

 

 

3,110

Total liabilities of discontinued operations

 

$

26,727

 

$

31,912

* The total assets of discontinued operations were classified as current on the March 31, 2018 and December 31, 2017 condensed consolidated balance sheets because it is probable that a sale will occur and proceeds will be collected within one year.

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The following table presents a reconciliation of the major classes of line items constituting the net income (loss) from discontinued operations. In accordance with GAAP, the amounts in the table below do not include an allocation of corporate overhead.

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

(in thousands)

  

2018

  

2017

Revenue

 

 

 

 

 

 

Electrical Solutions

 

$

12,844

 

$

13,547

Mechanical Solutions

 

 

 —

 

 

16,678

Total revenue

 

 

12,844

 

 

30,225

Cost of revenue

 

 

 

 

 

 

Electrical Solutions

 

 

13,455

 

 

15,170

Mechanical Solutions

 

 

 —

 

 

13,530

Total cost of revenue

 

 

13,455

 

 

28,700

 

 

 

 

 

 

 

Selling and marketing expenses

 

 

(61)

 

 

1,269

General and administrative expenses

 

 

1,143

 

 

4,339

Gain on disposal - Mechanical Solutions

 

 

(24)

 

 

 —

Other

 

 

39

 

 

161

Income (loss) from discontinued operations before income taxes

 

 

(1,708)

 

 

(4,244)

Income tax expense (benefit)

 

 

42

 

 

979

Income (loss) from discontinued operations 

 

$

(1,750)

 

$

(5,223)

Disposition of Hetsco

In June 2016, the Company engaged a financial advisor to assist with the sale of its wholly owned subsidiary, Hetsco, Inc. (“Hetsco”), in order to pay down debt. Hetsco was previously included in the Services segment. In connection with the Company’s decision to sell Hetsco, the net assets were adjusted to estimated fair value less estimated selling expenses, which resulted in a write-down of $8.3 million in 2016.

On January 13, 2017, the Company sold the stock of Hetsco for $23.2 million in cash, inclusive of working capital adjustments. After transaction costs and an escrow withholding of $1.5 million, the net proceeds of $20.2 million were used to reduce debt. In connection with the Company’s decision to sell Hetsco, the net assets were adjusted to estimated fair value less estimated selling expenses, which resulted in a write-down of $8.3 million in 2016. In the first quarter of 2017, the Company recorded a $0.2 million adjustment, which reduced the $8.3 million loss recorded in 2016.

A summary of Hetsco’s income before income taxes for the three months ended March 31, 2018 and 2017 was as follows:

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

(in thousands)

  

2018

  

2017

Income (loss) before income taxes

 

$

 —

 

$

489

 

 

NOTE 5—REVENUE

The Company provides a comprehensive range of maintenance, modification and construction support services for nuclear power plants and a wide range of utility and industrial customers in the fossil fuel, industrial gas, natural gas and petrochemical industries, as well as other industrial operations. The Company provides these services in the United States both on a constant presence basis and for discrete projects. The services the Company provides are designed to improve or sustain operating efficiencies and extend the useful lives of process equipment.

The Company’s contracts are awarded on a competitively bid and negotiated basis and the timing of revenue recognition is impacted by the terms of such contracts. The Company enters into a variety of contract structures including cost plus reimbursement contracts and fixed-price contracts. The determination of contract structure is based on the scope of work, complexity and project length, and customer preference of contract terms. Cost plus contracts represent the majority of the Company’s contracts. There were no direct and incremental costs to the acquisition of a new contract that required a deferral of costs.

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Performance obligations

A performance obligation is a contractual promise to transfer a distinct good or service to the customer. The transaction price of a contract is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. To the extent a contract is deemed to have multiple performance obligations, the Company allocates the transaction price of the contract to each performance obligation using its best estimate of the standalone selling price of each distinct good or service in the contract. In addition, certain contracts may be combined and deemed to be a single performance obligation.

The majority of the Company’s contracts are in the form of master service agreements, basic ordering agreements and other similar agreements, and related subsequent purchase orders, contract work authorizations and other similar agreements. The Company’s purchase orders, contract work authorizations and other similar agreements are generally deemed to be single performance obligations, and its contracts with multiple performance obligations were not material during the three months ended March 31, 2018. These performance obligations are satisfied over time as the performance of the Company’s services create or enhance a customer-controlled asset. Therefore, the Company recognizes revenue in the same period the services are performed. For cost-plus reimbursement contracts, revenue is recognized when services are performed and contractually billable based on an agreed-upon price for the completed services or based on the agreed-upon hours incurred and agreed-upon hourly rates. Revenue on fixed-price contracts is recognized and invoiced over time using the cost-to-cost percentage-of-completion method. The Company does not adjust the price of the contract price for the effects of a significant financing component. Change orders are generally not distinct from the existing contract due to the significant integration service provided in the context of the contract and are accounted for as a modification of the existing contract and performance obligation.

Variable consideration

The Company’s contracts may include several types of variable consideration, including unapproved change orders and claims, incentives, penalties and liquidated damages. The Company estimates the amount of revenue to be recognized on variable consideration using estimation methods that best predict the amount of consideration to which the Company expects to be entitled or expects to incur. The Company includes variable consideration in the estimated transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur or when the uncertainty associated with the variable consideration is resolved. The Company’s estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of its anticipated performance and all information (historical, current and forecasted) that is reasonably available. The Company updates its estimate of the transaction price each reporting period and the effect of variable consideration on the transaction price is recognized as an adjustment to revenue on a cumulative catch-up basis.

The Company generally provides a limited warranty for a term of two years or less following completion of services performed under its contracts. Historically, warranty claims have not resulted in material costs incurred.

Disaggregation of revenue

Disaggregated revenue by type of contract was as follows.  

 

 

 

 

(in thousands)

 

Three Months Ended March 31, 2018

Cost-plus reimbursement contracts

 

$

33,777

Fixed-price contracts

 

 

9,344

Total

 

$

43,121

 

Contract balances

The Company enters into contracts that allow for periodic billings over the contract term that are dependent upon specific advance billing terms, as services are provided, or milestone billings based on completion of certain phases of work. Projects with performance obligations recognized over time that have costs and estimated earnings recognized to date in excess of cumulative billings are reported in the Company’s condensed consolidated balance sheet as costs and estimated earnings in excess of billings (i.e., contract assets). Projects with performance obligations recognized over time that have cumulative billings in excess of costs and estimated earnings recognized to date are reported in the Company’s condensed consolidated balance sheet as billings in excess of costs and estimated earnings (i.e., contract liabilities). At any point in time, each project

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in process could have either costs and estimated earnings in excess of billings or billings in excess of costs and estimated earnings.

The following table provides information about contract assets and contract liabilities from contracts with customers. The table also includes changes in the contract assets and the contract liabilities balances during the period.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018

 

December 31, 2017 (1)

(in thousands)

 

Asset

 

Liability

 

Asset

 

Liability

Costs and estimated earnings on contracts in progress

 

$

33,758

 

$

(2,559)

 

$

22,274

 

$

(422)

Billings on contracts in progress

 

 

(23,912)

 

 

(2,735)

 

 

(10,787)

 

 

(6,627)

Contracts in progress, net

 

$

9,846

 

$

(5,294)

 

$

11,487

 

$

(7,049)

 

(1)

Prior period amounts have not been adjusted for the adoption of ASC Topic 606 under the modified retrospective method.

For the three months ended March 31, 2018, the Company recognized revenue of approximately $4.5 million that was included in the corresponding contracts in progress liability balance at December 31, 2017.

Transaction price allocated to the remaining performance obligations

The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) at the end of the reporting period.

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

2019

 

2020

 

Thereafter

Total

Fixed-price contracts

 

$

6,500

 

$

6,500

 

$

9,526

 

 

22,526

 

NOTE 6—EARNINGS PER SHARE

As of March 31, 2018, the Company’s 18,091,066 shares outstanding included 6,060 shares of contingently issued but unvested restricted stock. As of March 31, 2017, the Company’s 17,565,465 shares outstanding included 19,362 shares of contingently issued but unvested restricted stock. Restricted stock is excluded from the calculation of basic weighted average shares outstanding, but its impact, if dilutive, is included in the calculation of diluted weighted average shares outstanding.

Basic earnings per common share are calculated by dividing net income (loss) by the weighted average common shares outstanding during the period. Diluted earnings per common share are based on the weighted average common shares outstanding during the period, adjusted for the potential dilutive effect of common shares that would be issued upon the vesting and release of restricted stock awards and units.

Basic and diluted loss per common share from continuing operations are calculated as follows:

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

(in thousands, except per share data)

  

2018

 

2017

Loss from continuing operations

 

$

(2,238)

 

$

(11,625)

 

 

 

 

 

 

 

Basic loss per common share:

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

17,939,888

 

 

17,470,817

 

 

 

 

 

 

 

Basic loss per common share

 

$

(0.12)

 

$

(0.67)

 

 

 

 

 

 

 

Diluted loss per common share:

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

17,939,888

 

 

17,470,817

 

 

 

 

 

 

 

Diluted effect:

 

 

 

 

 

 

Unvested portion of restricted stock units and awards

 

 

 —

 

 

 —

Weighted average diluted common shares outstanding

 

 

17,939,888

 

 

17,470,817

 

 

 

 

 

 

 

Diluted loss per common share

 

$

(0.12)

 

$

(0.67)

 

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The weighted average number of shares outstanding used in the computation of basic and diluted earnings (loss) per share does not include the effect of the following potential outstanding common stock. The effects of these potentially outstanding shares were not included in the calculation of diluted earnings (loss) per share because the effect would have been anti-dilutive.

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

2018

 

2017

Unvested service-based restricted stock units and awards

 

6,060

 

32,913

Unvested performance- and market-based restricted stock units

 

404,304

 

889,128

Stock options

 

122,000

 

122,000

 

 

 

NOTE 7—INCOME TAXES

The effective income tax rate for continuing operations for the three months ended March 31, 2018 and 2017 was as follows:

 

 

 

 

 

 

 

Three Months Ended March 31,

 

    

2018

    

2017

Effective income tax rate for continuing operations

 

(14.6)%

 

13.7%

 

The effective income tax rate differs from the statutory federal income tax rate of 21% primarily because of the full valuation allowances recorded on the Company’s U.S. and Mexico deferred tax assets. 

For the three months ended March 31, 2018, the Company recorded income tax expense from continuing operations of $0.3 million, or (14.6)% of pretax loss from continuing operations, compared with income tax benefit from continuing operations of $1.8 million, or 13.7% of pretax loss from continuing operations, in the corresponding period of 2017. The increase in income tax provision from continuing operations for the three months ended March 31, 2018 compared with the corresponding period in 2017 was primarily related to a reduction in net deferred tax liabilities from a $2.2 million decrease in indefinite-lived intangibles deferred tax liabilities that cannot be used to offset deferred tax assets subject to valuation allowance as a result of the disposition of Hetsco, which was a discrete event in the first quarter of 2017.

As of March 31, 2018 and 2017, the Company would have needed to generate approximately $250.9 million and $223.2 million, respectively, of future financial taxable income to realize its deferred tax assets.

The Company withdrew the permanent reinvestment assertion of its foreign earnings from its Netherlands-based operations in the third quarter of fiscal 2015. As a result of the sale of the Company’s Mechanical Solutions segment in the fourth quarter of 2017, the Company no longer needs to recognize a deferred tax liability as a result of withdrawal of the permanent reinvestment assertion on the earnings generated by its Netherlands-based foreign subsidiaries as of December 31, 2017. As of March 31, 2018, the Company does not have any undistributed earnings in any of its foreign subsidiaries because all of their earnings were either taxed as deemed dividends or included with the provisional estimate of one-time transition tax as of December 31, 2017.

As of both March 31, 2018 and December 31, 2017, the Company provided for a total liability of $3.3 million, of which $1.4 million was related to its discontinued operations, for unrecognized tax benefits related to various federal, foreign and state income tax matters, which was included in long-term deferred tax assets and other long-term liabilities. If recognized, the entire amount of the liability would affect the effective tax rate. As of March 31, 2018, the Company accrued approximately $2.1 million, of which $1.7 million was related to its discontinued operations, in other long-term liabilities for potential payment of interest and penalties related to uncertain income tax positions.

On December 22, 2017, the SEC staff issued Staff Accounting Bulletin 118 (“SAB 118”), “Income Tax Accounting Implications of the Tax Cuts and Jobs Act,” which provides guidance on accounting for the impact of the Tax Act. SAB 118 was issued to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. Pursuant to the disclosure provisions of SAB 118, as of March 31, 2018, the Company has completed its accounting for the tax effects of the Tax Act. The Company recorded a reasonable estimate of the impact from the Tax Act as of December 31, 2017, but is still analyzing the Tax Act and refining its calculations. Additionally, future guidance from the Internal Revenue Service, the SEC, or the FASB could result in changes to the Company’s accounting for the tax effects of the Tax Act.

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NOTE 8—DEBT

Centre Lane Term Facility

In June 2017, funds affiliated with Centre Lane purchased and assumed the outstanding debt from the Company’s then-existing lenders under its revolving credit facility (as amended or supplemented from time to time, the “Revolving Credit Facility”). The Company replaced the Revolving Credit Facility with a 4.5-year senior secured term loan facility (the “Initial Centre Lane Facility”) with an affiliate of Centre Lane Partners, LLC (“Centre Lane”) as Administrative Agent and Collateral Agent, and the other lenders from time to time party thereto (collectively, the “Lenders”). The Initial Centre Lane Facility is governed by the terms of the Senior Securred Credit Agreement, dated June 16, 2017, as amended by the First Amendment, dated August 17, 2017 (the “First Centre Lane Amendment”), the Limited Waiver and Second Amendment, dated October 11, 2017, the Second Limited Waiver and Third Amendment, dated January 9, 2018, the Third Limited Waiver, dated March 30, 2018, and the Fourth Amendment (the “Fourth Amendment”), dated April 13, 2018 (collectively, “the Centre Lane Facility”). While not a party to the Centre Lane Facility, entities associated with Wynnefield Capital, Inc., the Company’s largest equity investor, funded $6.0 million of the Centre Lane Facility. After payment of the Revolving Credit Facility and fees associated with both the Initial Centre Lane Facility and the First Centre Lane Amendment, net cash proceeds were $15.3 million.

The Initial Centre Lane Facility provided for an initial loan in an aggregate principal amount of $45.0 million, and the First Centre Lane Amendment provided for a first-out loan for an additional aggregate principal amount of $10.0 million (the “First-Out Loan”). The Initial Centre Lane Facility has a maturity date of December 16, 2021. However, the Fourth Amendment imposed a mandatory prepayment of all obligations then outstanding under the Centre Lane Facility on May 31, 2019. Had the First-Out Loan not been paid in full as a result of the sale of Mechanical Solutions in October 2017, described below, it would have matured on September 30, 2018.

The Initial Centre Lane Facility requires payment of an annual administration fee of $25,000 and an upfront fee equal to 7% of the aggregate commitments provided under the Centre Lane Facility. The upfront fee bears interest at a rate of the London Interbank Offered Rate (“LIBOR”) plus 19% annual payable-in-kind (“PIK”) interest. The upfront fee is payable upon the earlier of maturity or the occurrence of certain events, including significant debt prepayments or asset sales that may occur prior to maturity. In addition to those fees, the First Centre Lane Amendment also requires the Company to pay an upfront fee equal to 7% of the First-Out Loan commitments, which bears interest at the same rate as the initial upfront fee, and an exit fee equal to 7% of the aggregate outstanding principal amount of the First-Out Loan commitments, which is payable upon the maturity date of the First-Out Loan.

Borrowings under the Centre Lane Facility bear interest at LIBOR plus the sum of 9% per year, payable in cash, plus 10% PIK interest. Cash interest is payable monthly, and the PIK interest accrues to and increases the principal balance on a monthly basis.

On October 11, 2017, the Company sold substantially all of the operating assets and liabilities of its Mechanical Solutions segment and used a portion of the proceeds to pay down $34.0 million of the Company’s outstanding debt, including full repayment of the First-Out Loan and its related fees as well as the upfront fee on the Initial Centre Lane Facility. This payment satisfied the $25.0 million prepayment criteria necessary to avoid a PIK rate increase to 15% on January 1, 2018. Additionally, on October 31, 2017, the Company completed the sale of its manufacturing facility in Mexico and auctioned the remaining production equipment and other assets for net proceeds of $3.6 million, of which $1.9 million was used to reduce the principal amount of the Initial Centre Lane Facility. The remainder was used to fund working capital requirements.

The Company’s obligations under the Centre Lane Facility are guaranteed by all of its wholly owned domestic subsidiaries, subject to customary exceptions. The Company’s obligations are secured by first priority security interests on substantially all of its assets and those of its wholly owned domestic subsidiaries. This includes 100% of the voting equity interests of the Company’s domestic subsidiaries and certain specified foreign subsidiaries and 65% of the voting equity interests of other directly owned foreign subsidiaries, subject to customary exceptions.

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The Company may voluntarily prepay the Centre Lane Facility at any time or from time to time, in whole or in part, in a minimum amount of $1.0 million of the outstanding principal amount, plus any accrued but unpaid interest on the aggregate amount of the term loans being prepaid, plus a prepayment premium, to be calculated as follows (the “Prepayment Premium”):

 

 

 

 

 

 

Prepayment Premium as a

 

 

Percentage of Aggregate

Period

 

Outstanding Principal Prepaid

June 16, 2017 to June 16, 2018

 

 

3%

June 17, 2018 to June 16, 2019

 

 

2%

June 17, 2019 to June 16, 2020

 

 

1%

After June 16, 2020

 

 

0%

 

Subject to certain exceptions, the Company must prepay an aggregate principal amount equal to 100% of its Excess Cash Flow (as defined in the Centre Lane Facility), minus the sum of all voluntary prepayments, within five business days after the date that is 90 days following the end of each fiscal year. The Centre Lane Facility also requires mandatory prepayment of certain amounts in the event the Company or its subsidiaries receive proceeds from certain events and activities, including, among others, asset sales, casualty events, the issuance of indebtedness and equity interests not otherwise permitted under the Centre Lane Facility and the receipt of tax refunds or extraordinary receipts in excess of $500,000, plus, in certain instances, the applicable Prepayment Premium, calculated as set forth above.

The Centre Lane Facility contains customary representations and warranties, as well as customary affirmative and negative covenants. The Centre Lane Facility contains covenants that may, among other things, limit the Company’s ability to incur additional debt, incur liens, make investments or capital expenditures, declare or pay dividends, engage in mergers, acquisitions and dispositions, engage in new lines of business or certain transactions with affiliates and change accounting policies or fiscal year.

Events of default under the Centre Lane Facility include, but are not limited to, a breach of any of the financial covenants or any representations or warranties, failure to timely pay any amounts due and owing, the commencement of any bankruptcy or other insolvency proceeding, judgments in excess of certain acceptable amounts, the occurrence of a change in control, certain events related to ERISA matters and impairment of security interests in collateral or invalidity of guarantees or security documents.

Upon a default under the Centre Lane Facility, the Company’s senior secured lenders would have the right to accelerate the then-outstanding amounts under such facility and to exercise their rights and remedies to collect such amounts, which would include foreclosing on collateral constituting substantially all of the Company’s assets and those of its subsidiaries. During the third quarter of 2017, the Company made the decision to exit and sell substantially all of the operating assets and liabilities of its Mechanical Solutions segment in an effort to reduce the Company’s outstanding term debt. As an initial step in this plan, the Company filed a certificate of dissolution and dissolved its wholly owned inactive subsidiary, Braden Construction Services, Inc., on September 5, 2017. As a result of this dissolution, the Company was in violation of one of its covenants under the Center Lane Facility as of December 31, 2017. On January 9, 2018, the Company entered into a second limited waiver and third amendment to the Centre Lane Facility, which waived the event of default caused by the dissolution and extended the first required date for the Company to satisfy the total leverage and fixed charge coverage ratios to March 31, 2019.

On March 30, 2018, the Company entered into a Third Limited Waiver to the Centre Lane Facility, which extended the delivery date of the 2017 Report and the time period for the required payment of the $0.3 million net cash proceeds from the sale of the office building in Heerlen, Netherlands, which was sold in March 2018, until May 31, 2018.

On April 13, 2018, the Company entered into the Fourth Amendment to the Centre Lane Facility, which:

·

Extended the first required date for the Company to satisfy the total leverage and fixed charge coverage ratios to September 30, 2019.

·

Waived the requirement under the Centre Lane Facility to prepay $3.7 million of future extraordinary cash receipts and any event of default that would otherwise result from failure to pay such amounts (including the $0.3 million net cash proceeds from the sale of the Heerlen office building and $2.1 million cash proceeds from the sale of pre-petition receivables due from Westinghouse).

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·

Provided a $3.0 million Incremental Loan Commitment, which can be drawn upon in minimum increments of $1.0 million, which, if utilized, bears interest at the greater of LIBOR plus 19% or 50%.

·

Assessed a 1% unused line fee on the Incremental Loan Commitment.

·

Required a payment of a $0.5 million exit fee, due and payable on May 31, 2019.

·

Required a mandatory prepayment of all the obligations due and payable under the Centre Lane Facility on the earlier of (i) May 31, 2019, (ii) the date Williams Industrial Services Group, LLC and its subsidiaries are sold or (iii) the date of acceleration of the loans pursuant to an additional event of default.

The following table summarizes the Company’s long-term debt with Centre Lane:

 

 

 

 

 

 

 

 

(in thousands)

  

As of March 31, 2018

Term loan, due 2021

 

$

25,832

Unamortized deferred financing costs

 

 

(829)

Long-term debt, net

 

$

25,003

 

The Company’s effective rate on its outstanding debt was 20.9% and 20.3% as of March 31, 2018 and December 31, 2017, respectively.

Letters of Credit and Bonds

In line with industry practice, the Company is often required to provide letters of credit and surety and performance bonds to customers. These letters of credit and bonds provide credit support and security for the customer if the Company fails to perform its obligations under the applicable contract with such customer.

The interest rate on letters of credit issued under the Revolving Credit Facility letter of credit sublimit was 8.5% per annum at the time the Company refinanced its debt in mid-June 2017. To the extent that a letter of credit had an expiration date beyond the original Revolving Credit Facility maturity date of February 21, 2017, cash collateral of an amount equal to 105% of the face amount of such letter of credit was provided as security for all reimbursement and other letter of credit obligations.

As of March 31, 2018, the Company had $8.8 million outstanding standby letters of credit that were originally issued under the Revolving Credit Facility and there were no amounts drawn upon these letters of credit. As of March 31, 2018, the Company provided cash collateral of $9.3 million for letters of credit with expiry dates beyond the Revolving Credit Facility’s original maturity date. In addition, as of March 31, 2018, the Company had outstanding surety bonds on projects of $32.0 million. The Centre Lane Facility does not provide for letters of credit; therefore, the Company is currently unable to obtain new letters of credit.

Deferred Financing Costs

Deferred financing costs are amortized over the terms of the related debt facilities using the effective yield method. Total interest expense associated with the amortization of deferred financing costs on the Centre Lane Facility was less than $0.1 million for the three months ended March 31, 2018. Total interest expense associated with the amortization of deferred financing costs on the Company’s Revolving Credit Facility was less than $0.1 million for the three months ended March 31, 2017.

As of March 31, 2018 and December 31, 2017, the Company had total unamortized deferred financing costs of $0.8 million $0.9 million, respectively, related to the Centre Lane Facility, which were included in long-term debt, net on the accompanying condensed consolidated balance sheets.

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NOTE 9FINANCIAL INSTRUMENTS

Fair Value of Financial Instruments

ASC 820–Fair Value Measurement defines fair value as the exit price, which is the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. ASC 820 also establishes a three-tier fair value hierarchy, which categorizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in the active markets for identical assets and liabilities and the lowest priority to unobservable inputs.

The Company’s financial instruments as of March 31, 2018 and 2017 consisted primarily of cash and cash equivalents, restricted cash, receivables, payables and debt instruments. The carrying values of these financial instruments approximate their respective fair values, as they are either short-term in nature or carry interest rates that are periodically adjusted to market rates. The foreign currency forward exchange contracts previously disclosed in the Company’s Quarterly Report on Form 10-Q for the first quarter of 2017 were held by its discontinued operations.

NOTE 10—COMMITMENTS AND CONTINGENCIES

Litigation and Claims

The Company is from time to time party to various lawsuits, claims and other proceedings that arise in the ordinary course of its business. With respect to all such lawsuits, claims and proceedings, the Company records a reserve when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. The Company does not believe that the resolution of any currently pending lawsuits, claims and proceedings, either individually or in the aggregate, will have a material adverse effect on its financial position, results of operations or liquidity. However, the outcomes of any currently pending lawsuits, claims and proceedings cannot be predicted, and therefore, there can be no assurance that this will be the case.

A putative shareholder class action, captioned Budde v. Global Power Equipment Group Inc., is pending in the U.S. District Court for the Northern District of Texas naming the Company and certain former officers as defendants. This action and another action were filed on May 13, 2015 and June 23, 2015, respectively, and on July 29, 2015 the court consolidated the two actions and appointed a lead plaintiff. On May 1, 2017, the lead plaintiff filed a second consolidated amended complaint that names the Company and three of its former officers as defendants. It alleges violations of the federal securities laws arising out of matters related to the Company’s restatement of certain financial periods and claims that the defendants made material misrepresentations and omissions of material fact in certain public disclosures during the putative class period in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5, as promulgated thereunder. The plaintiffs seek class certification on behalf of persons who acquired the Company’s stock between September 7, 2011 and May 6, 2015, monetary damages of “more than $200 million” on behalf of the putative class and an award of costs and expenses, including attorneys’ fees and experts’ fees. The Company intends to defend against this action. On June 26, 2017, the Company and the individual defendants filed a motion to dismiss the complaint. On August 23, 2017, the lead plaintiff filed its opposition to that motion. On September 22, 2017, defendants filed their reply brief in further support of their motion to dismiss. On December 27, 2017, the court issued a memorandum opinion and order granting the motion to dismiss, allowing the plaintiffs until January 15, 2018 to file an amended complaint. The court found that, with respect to each of the defendants, plaintiffs failed to plead facts supporting a strong inference of scienter, or the required intent to deceive, manipulate or defraud, or act with severe recklessness. On January 15, 2018, the plaintiffs filed their third amended complaint, and in response the Company filed a renewed motion to dismiss. Plaintiffs subsequently filed a motion in opposition to the Company’s motion to dismiss, and requested oral argument. Defendants filed their reply brief in further support of their motion on March 23, 2018. Litigation is subject to many uncertainties, and the outcome of this action is not predictable with assurance. At this time, the Company is unable to predict the possible loss or range of loss, if any, associated with the resolution of this litigation, or any potential effect such may have on the Company or its business or operations.

A former operating unit of Global Power has been named as a defendant in a limited number of asbestos personal injury lawsuits. Neither the Company nor its predecessors ever mined, manufactured, produced or distributed asbestos fiber, the material that allegedly caused the injury underlying these actions. The bankruptcy court’s discharge order issued upon the Company’s emergence from bankruptcy in January 2008 extinguished the claims made by all plaintiffs who had filed asbestos claims against it before that time. The Company believes the bankruptcy court’s discharge order should serve as a bar against any later claim filed against it, including any of its subsidiaries, based on alleged injury from asbestos at any time before emergence from bankruptcy. In any event, in all of the asbestos cases finalized post-bankruptcy, the Company has been successful in having such cases dismissed without liability. Moreover, during 2012, the Company secured insurance coverage

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that will help to reimburse the defense costs and potential indemnity obligations of its former operating unit relating to these claims. The Company intends to vigorously defend all currently active actions, all without liability, and it does not anticipate that any of these actions will have a material adverse effect on its financial position, results of operations or liquidity. However, the outcomes of any legal action cannot be predicted and, therefore, there can be no assurance that this will be the case.

NOTE 11—STOCK-BASED COMPENSATION PLANS

During the first quarters of 2018 and 2017, no awards were granted under the Company’s stock-based compensation plans. The stock-based compensation expense for the three months ended March 31, 2018 and 2017 was $0.2 million and $0.7 million, respectively, and was included in general and administrative expenses on the Company’s condensed consolidated statements of operations

On April 16, 2018, the Company granted 129,410 service-based restricted stock awards outside of the 2015 Equity Incentive Plan to its four non-employee directors, at a grant date fair value of $2.33 per share with a vesting period of four years. Because the Company had not granted restricted stock awards to its directors since 2015, a portion of the total awards vested on the grant date. In addition, due to the resignation of six non-employee members of the Company’s Board of Directors, on April 11, 2018, a total of 4,545 shares of previously granted restricted stock awards vested.

On May 16, 2018, the Company granted 109,192 service-based restricted stock awards outside of the 2015 Equity Incentive Plan to its four non-employee directors, at a grant date fair value of $2.20 per share with a vesting period of four years.

NOTE 12—SUBSEQUENT EVENT

In April 2018, the Company entered into an agreement with a third party financial institution and sold its outstanding receivable due for pre-petition services rendered to Westinghouse on two projects for proceeds of $2.1 million.

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

Cautionary Statement Regarding Forward-Looking Statements

This Form 10-Q and its exhibits contain or incorporate by reference various forward-looking statements that express a belief, expectation or intention or are otherwise not statements of historical fact. Forward-looking statements generally use forward-looking words, such as “may,” “will,” “could,” “project,” “believe,” “anticipate,” “expect,” “estimate,” “continue,” “potential,” “plan,” “forecast” and other words that convey the uncertainty of future events or outcomes. These forward-looking statements are not guarantees of our future performance and involve risks, uncertainties, estimates and assumptions that are difficult to predict. Therefore, our actual outcomes and results may differ materially from those expressed in these forward-looking statements. Investors should not place undue reliance on any of these forward-looking statements. Except as required by law, we undertake no obligation to further update any such statements, or the risk factors described in our 2017 Report under the heading “Item 1A. Risk Factors,” to reflect new information, the occurrence of future events or circumstances or otherwise. Forward-looking statements may include information concerning the following, among other items:

·

our high level of indebtedness;

·

our ability to make interest and principal payments on our debt and satisfy the financial and other covenants contained in the Centre Lane Facility;

·

our ability to enter into new lending facilities and to access letters of credit;

·

our ability to generate sufficient cash resources to continue funding operations;

·

our pending putative securities class action;

·

our material weaknesses in internal control over financial reporting and our ability to maintain effective controls over financial reporting in the future;

·

changes in our senior management, financial reporting and accounting teams;

·

our ability to timely prepare and file our periodic reports;

·

a failure to implement our business strategies, including our potential inability to successfully divest additional assets to reduce debt;

·

a failure to realize liquidity, operating and growth initiatives and opportunities;

·

our competitive position;

·

market outlook and trends in our industry;

·

our contract backlog and related amounts to be recognized as revenue;

·

our expected financial condition;

·

our future cash flows;

·

our expected results of operations;

·

future capital and other expenditures;

·

availability of raw materials and inventories;

·

plans and objectives of management;

·

future income tax payments and utilization of net operating loss (“NOL”) and foreign tax credit carryforwards, including any impact relating to the Tax Act;

·

future compliance with orders of and agreements with regulatory agencies;

·

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

·

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

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

In light of these risks, uncertainties and assumptions, the events described in the forward-looking statements might not occur or might occur to a different extent or at a different time than we have described. Investors should consider the areas of risk and uncertainty described above, as well as those discussed in the 2017 Report under the heading “Item 1A. Risk Factors.” Except as may be required by applicable law, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, and we caution investors not to rely upon them unduly.

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The following discussion provides an analysis of the results of continuing operations, an overview of our liquidity and capital resources and other items related to our business. During the fourth quarter of 2017, we made the decision to exit and sell our Electrical Solutions segment. Additionally, in the third quarter of 2017, we made the decision to exit and sell substantially all of the operating assets and liabilities of our Mechanical Solutions segment. We determined that the decision to exit each of those segments met the definition of a discontinued operation. As a result, those segments have been presented as discontinued operations for all periods presented. In October 2017, we sold substantially all of the operating assets and liabilities of our Mechanical Solutions segment, including our manufacturing facility in Mexico. Unless otherwise specified, the financial information and discussion in this Form 10-Q are as of and for the three months ended March 31, 2018 and are based on our continuing operations; they exclude any results of our discontinued operations. Please refer to “Note 4—Changes in Business” to the condensed consolidated financial statements included in this Form 10-Q for additional information on our discontinued operations.

This discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto included in this Form 10-Q and our audited consolidated financial statements and notes thereto included in the 2017 Report.

Backlog

Our backlog consists of firm orders or blanket authorizations from our customers. Backlog may vary significantly from reporting period to reporting period due to the timing of customer commitments.

The services we provide are typically carried out under construction contracts, long-term maintenance contracts and master service agreements. Backlog related to fixed-price contracts represents the total amount of revenue we expect to record in the future as a result of performing work under contracts that have been awarded to us. With respect to multi-year maintenance contracts, we include in backlog the amount of revenue we expect to receive for only one succeeding year, regardless of the remaining life of the contract. Revenue estimates included in our backlog can be subject to change as a result of project accelerations, cancellations or delays due to various factors, including, but not limited to, the customer’s budgetary constraints and adverse weather. These factors can also cause revenue amounts to be realized in different periods and at levels other than those originally projected. Additional work that is not identified under the original contract is added to our backlog when we reach an agreement with the customer as to the scope and pricing of that additional work. Capital project awards are typically defined in terms of scope and pricing at the time of a contractual commitment from the customer. Upon receipt of a customer commitment, we add capital project bookings to our backlog at full contract value, regardless of the time frame anticipated to complete the project. Maintenance services and capital project bookings are removed from our backlog as work is performed and revenue is recognized, or upon cancellation.

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

The following table summarizes our backlog:

 

 

 

 

 

 

 

 

  

 

 

 

(in thousands)

 

March 31, 2018

 

December 31, 2017

Backlog

 

$

150,090

 

$

137,691

 

Backlog as of March 31, 2018 increased $12.4 million from December 31, 2017. The increase was driven primarily by two new contracts in other industrial areas such as wastewater treatment, which accounted for $6.0 million of the increase. Construction activities at Plant Vogtle Units 3 & 4 expanded during the first quarter of 2018 and contributed an incremental $5.6 million to backlog.

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Results of Operations

The following summary and discussion of our results of operations is based on our continuing operations and excludes any results of our discontinued operations.

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

(in thousands)

  

 

2018

  

 

2017

Revenue

 

$

43,121

 

$

45,632

Cost of revenue

 

 

36,671

 

 

47,187

 Gross profit 

 

 

6,450

 

 

(1,555)

 

 

 

 

 

 

 

Selling and marketing expenses

 

 

426

 

 

567

General and administrative expenses

 

 

6,460

 

 

7,825

Restatement expenses

 

 

130

 

 

1,720

Depreciation and amortization expense

 

 

221

 

 

335

Total operating expenses

 

 

7,237

 

 

10,447

Operating loss

 

 

(787)

 

 

(12,002)

 

 

 

 

 

 

 

Interest expense, net

 

 

1,378

 

 

1,701

(Gain) loss on sale of business and net assets held for sale

 

 

 —

 

 

(239)

Other (income) expense, net

 

 

(212)

 

 

(1)

Loss from continuing operations before income tax expense (benefit)

 

 

(1,953)

 

 

(13,463)

Income tax expense (benefit)

 

 

285

 

 

(1,838)

Loss from continuing operations

 

$

(2,238)

 

$

(11,625)

 

Revenue for the three months ended March 31, 2018 decreased $2.5 million compared with the corresponding period in 2017. The four primary drivers of the decrease were: the non-recurrence of the first quarter 2017 release to revenue of a $4.4 million liquidated damages contingent liability, which was originally recorded in 2015 and for which we received notice that the issues had been favorably resolved; a $3.3 million decline related to non-recurring nuclear, fossil fuel and other industrial projects; a $2.0 million decline due to the timing of a nuclear outage; and a $1.2 million decline due to the divestiture of Hetsco, Inc. in January 2017. These decreases in revenue were partially offset by an $8.4 million increase from construction activities at Plant Vogtle Units 3 & 4.

Gross profit for the three months ended March 31, 2018 increased $8.0 million compared with the corresponding period in 2017 and gross margin for the first quarter of 2018 was 15.0%. The first quarter of 2017 was negatively impacted by our recording $13.1 million of cost of goods sold to reflect new or revised estimated losses on three projects, but was partially offset by the $4.4 million related to the release of the contingent liability discussed above, which had no associated cost.

Operating loss for the three months ended March 31, 2018 decreased $11.2 million compared with the corresponding period in 2017 due to the increase in gross profit and a $3.2 million decrease in operating expenses. As discussed below, general and administrative expenses decreased $1.4 million compared with the corresponding period in 2017. Additionally, restatement expenses decreased $1.6 million compared with the corresponding period in 2017 due to the wind-down of restatement activities in conjunction with the March 15, 2017 filing of the Annual Report on Form 10-K for the year ended December 31, 2015, which included the restatement of certain prior period financial results.

General and Administrative Expenses

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

(in thousands)

  

2018

  

2017

Labor-related expenses

 

$

3,820

 

$

4,513

Stock-based compensation expense

 

 

161

 

 

691

Professional fees

 

 

1,466

 

 

875

Other expenses

 

 

1,013

 

 

1,746

Total

 

$

6,460

 

$

7,825

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Total general and administrative expenses for the three months ended March 31, 2018 decreased $1.4 million compared with the corresponding period in 2017 due primarily to a $0.7 million decrease in labor-related expenses, of which $0.5 million was attributed to a decrease in bonus expense. In addition, stock-based compensation expense decreased $0.5 million compared with the corresponding period in 2017. Furthermore, other expenses decreased $0.7 million compared with the corresponding period in 2017 primarily as a result of a $0.2 million decrease in bank fees and a $0.2 million decrease in computer software expenses. These decreases were partially offset by an increase in professional fees related to our strategic alternative activities.

Other (Income) Expense, Net

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

(in thousands)

  

2018

  

2017

Interest expense, net

 

$

1,378

 

$

1,701

(Gain) loss on sale of business and net assets held for sale

 

 

 —

 

 

(239)

Other (income) expense, net

 

 

(212)

 

 

(1)

Total

 

$

1,166

 

$

1,461

Total other expense, net, decreased $0.3 million compared with the corresponding period in 2017 due primarily to a $0.3 million decrease in interest expense, net. The decrease in interest expense in the first quarter of 2018 resulted from a decrease in the weighted average outstanding debt balance compared with the corresponding period in 2017.

Income Tax Expense (Benefit)

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

(in thousands)

  

2018

  

2017

Income tax expense (benefit)

 

$

285

 

$

(1,838)

Income tax expense for the interim periods is based on estimates of the effective tax rate during the entire fiscal year. The effective income tax rate is based upon the estimated income during the calendar year, the estimated composition of the income in different jurisdictions and discrete adjustments, if any, in the applicable quarterly periods for settlements of tax audits or assessments and the resolution or identification of tax position uncertainties.

For the three months ended March 31, 2018, we recorded income tax expense from continuing operations of $0.3 million, or (14.6)% of pretax loss from continuing operations, compared with income tax benefit from continuing operations of $1.8 million, or 13.7% of pretax loss from continuing operations, in the corresponding period of 2017. The difference between our effective tax rate and the federal statutory tax rate for the three months ended March 31, 2018 and 2017 was primarily related to the full valuation allowance recorded on our U.S. and Mexico deferred tax assets. The increase in income tax provision from continuing operations for the three months ended March 31, 2018 compared with the corresponding period in 2017 was primarily related to a reduction in net deferred tax liabilities from a $2.2 million decrease in indefinite-lived intangibles deferred tax liabilities that cannot be used to offset deferred tax assets subject to valuation allowance as a result of the disposition of Hetsco, which was a discrete event in the first quarter of 2017.

Discontinued Operations

See “Note 4—Changes in Business” to the unaudited condensed consolidated financial statements included in this Form 10-Q for information regarding discontinued operations.

Liquidity and Capital Resources

During the three months ended March 31, 2018, we continued to have significant liquidity constraints. Our principal sources of liquidity were cash provided by operating activities and proceeds from the sale of a building in Heerlen, Netherlands. Our principal uses of cash were to pay for customer contract-related material, labor and subcontract labor, operating expenses and interest expense on the Centre Lane Facility. See discussion in “Note 2—Liquidity” to the unaudited condensed consolidated financial statements included in this Form 10-Q.

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Net Cash Flows

Our net consolidated cash flows, including cash flows related to discontinued operations, consisted of the following:

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

Statement of Cash Flow Data (in thousands)

  

 

2018

  

 

2017

Cash flows provided by (used in):

 

 

 

 

 

 

Operating activities

 

$

2,207

 

$

6,370

Investing activities

 

 

265

 

 

19,919

Financing activities

 

 

(186)

 

 

(19,798)

Effect of exchange rate changes on cash

 

 

 —

 

 

71

Net change in cash and cash equivalents

 

$

2,286

 

$

6,562

 

Cash and Cash Equivalents

As of March 31, 2018, our operating unrestricted cash and cash equivalents increased $3.4 million to $8.0 million from $4.6 million as of December 31, 2017. As of March 31, 2018, the operating cash balance of $8.0 million was held in U.S. bank accounts. During the three months ended March 31, 2018, we primarily funded our business objectives and operations through cash flow from operating activities and proceeds from the sale of a building in Heerlen, Netherlands.

Operating Activities

Cash flows from operating activities result primarily from earnings sources and are affected by changes in operating assets and liabilities, which consist primarily of working capital balances related to our projects. For the three months ended March 31, 2018, cash provided by operating activities decreased $4.2 million compared with the corresponding period in 2017 due primarily to a decrease in our working capital.

During the three months ended March 31, 2018, our working capital decreased $2.8 million, or 8.9%, from December 31, 2017. Current assets decreased $10.8 million during the first three months of 2018, due primarily to a $7.2 million decrease in accounts receivable, net, and a $2.4 million decrease in current assets of discontinued operations. These decreases were partially offset by a $3.4 million increase in cash and cash equivalents. Current liabilities decreased $7.9 million during the first three months of 2018 due primarily to a $5.3 million decrease in current liabilities of discontinued operations, partially offset by a $1.9 million increase in accrued compensation and benefits.

Investing Activities

For the three months ended March 31, 2018, net cash provided by investing activities decreased $19.7 million due primarily to $20.2 million in net proceeds received as a result of the divestiture of Hetsco in January 2017. No significant divestitures occurred during the three months ended March 31, 2018.

Financing Activities

For the three months ended March 31, 2018, net cash used in financing activities decreased $19.6 million due primarily to borrowings and repayments on our previously outstanding Revolving Credit Facility. This facility was refinanced and replaced with the Centre Lane Facility in June 2017. During the three months ended March 31, 2018, the Company did not borrow against or make any repayments of principal under the Centre Lane Facility. For additional information, please refer to “Note 8—Debt” to the condensed consolidated financial statements included in this Form 10-Q

Effect of Exchange Rate Changes on Cash

For the three months ended March 31, 2018, our cash flows were not impacted by fluctuations in foreign currency. For the three months ended March 31, 2017, the effect of exchange rate changes increased cash by less than $0.1 million, primarily resulting from fluctuations in the Euro and the Mexican Peso against the U.S. Dollar.

Dividends

We have not declared dividends since the first quarter of 2015 and do not anticipate declaring dividends in the near term. As of March 31, 2018, the terms of our Centre Lane Facility restricted our ability to pay dividends. In addition, the timing and

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amounts of any dividends would be subject to determination and approval by our Board of Directors. Dividends reported on the unaudited condensed consolidated statements of cash flows included in this Form 10-Q are related to dividends on unvested restricted stock awards and units granted under pre-2014 long-term incentive compensation plans and are not related to a declared dividend.

Liquidity Outlook

In April 2018, as part of the Fourth Amendment to the Centre Lane Facility, we negotiated a $3.0 million Incremental Loan Commitment that can be drawn upon in minimum increments of $1.0 million. This Loan Commitment can provide us with emergency funding in the event of a cash shortfall. However, the Centre Lane Facility does not provide us with the ability to issue new letters of credit. We are actively pursuing other financing opportunities, which could provide additional liquidity through new borrowings and the release of restricted cash currently collateralizing our standby letters of credit that were issued under the previous Revolving Credit Facility. The Fourth Amendment required a mandatory prepayment of all the obligations due and payable under the Centre Lane Facility on the earlier of (i) May 31, 2019, (ii) the date Williams Industrial Services Group, LLC and its subsidiaries are sold, or (iii) the date of acceleration of the loans pursuant to an additional event of default.

The Company is currently negotiating the reduction of the face amount or complete elimination of several of its largest letters of credit with the end beneficiaries. If successful, the Company will use the released restricted cash currently collateralizing the letters of credit, excluding the $1.1 million specifically identified in the Fourth Amendment to the Centre Lane Facility, to pay down its term loan under the Centre Lane Facility. Additionally, discussions with multiple parties for an asset-based loan (“ABL”) have resumed after the Company resolved several contingencies that previously prevented the Company from closing on an ABL.

As discussed in the 2017 Report under the heading “Item 1. Business,” at the time we filed the 2017 Report, we were evaluating strategi