Williams Industrial Services Group Inc. - Quarter Report: 2002 September (Form 10-Q)

Global Power Equipment Group Inc.

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 28, 2002

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

For the transition period from .......... to ..........

Commission File Number: 001-16501

GLOBAL POWER EQUIPMENT GROUP INC.
(Exact name of registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)		73-1541378 (I.R.S. Employer Identification No.)

6120 South Yale, Suite 1480, Tulsa, Oklahoma
(Address of principal executive offices)

74136
(Zip Code)

(918) 488-0828
(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 (XBox)

The number of shares of the Registrant’s common stock, $.01 par value, outstanding at November 5, 2002 was 43,953,340.

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION
	ITEM I. FINANCIAL STATEMENTS
		CONDENSED CONSOLIDATED BALANCE SHEETS
		CONDENSED CONSOLIDATED STATEMENTS OF INCOME
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	ITEM 4. CONTROLS AND PROCEDURES
PART II. OTHER INFORMATION
	ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
Exhibit Index
EX-99.1 Certification of Chief Executive Officer
EX-99.2 Certification of Chief Financial Officer

GLOBAL POWER EQUIPMENT GROUP INC.

FORM 10-Q
September 28, 2002

INDEX


			Page


Part I.	Financial Information

	Item 1.	Financial Statements

		Condensed Consolidated Balance Sheets at September 28, 2002 and December 29, 2001	1

		Condensed Consolidated Statements of Income for the Three Months and Nine Months Ended September 28, 2002 and September 29, 2001	2

		Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 28, 2002 and September 29, 2001	3

		Notes to Condensed Consolidated Financial Statements	4

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26

	Item 4.	Controls and Procedures	27

Part II.	Other Information

	Item 6.	Exhibits and Reports on Form 8-K	28

Signatures			29

PART I. FINANCIAL INFORMATION

ITEM I. FINANCIAL STATEMENTS
GLOBAL POWER EQUIPMENT GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except shares and per share amounts)


			September 28,			December 29,
			2002			2001

ASSETS
Current assets:
	Cash and cash equivalents		$	10,180		$	2,435
	Accounts receivable, net of allowance of $1,701 and $2,385			114,147			123,182
	Inventories at FIFO			5,874			5,973
	Costs and estimated earnings in excess of billings			77,457			131,355
	Deferred tax assets			20,627			19,068
	Other current assets			2,033			1,920

		Total current assets		230,318			283,933
Property, plant and equipment, net				26,094			27,810
Deferred tax assets				67,486			71,454
Goodwill, net				45,000			45,000
Other assets				1,431			2,434

		Total assets	$	370,329		$	430,631

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Current maturities of long-term debt		$	57		$	15,505
	Accounts payable			25,875			56,005
	Accrued compensation and employee benefits			8,616			11,838
	Accrued warranty			17,776			16,489
	Billings in excess of costs and estimated earnings			126,370			145,522
	Other current liabilities			14,342			17,968

		Total current liabilities		193,036			263,327
Long-term debt, net of current maturities				60,034			90,124
Commitments and contingencies
Stockholders’ equity:
	Preferred stock, $0.01 par value, 5,000,000 shares authorized, no shares issued or outstanding			—			—
	Common stock, $0.01 par value, 100,000,000 shares authorized, 43,953,340 shares issued and outstanding			440			440
	Paid-in capital deficit			(28,329	)		(28,329	)
	Accumulated comprehensive income (loss)			248			(80	)
	Retained earnings			144,900			105,149

		Total stockholders’ equity		117,259			77,180

		Total liabilities and stockholders’ equity	$	370,329		$	430,631

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

GLOBAL POWER EQUIPMENT GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(in thousands, except per share amounts)


		Three Months Ended				Nine Months Ended

		September 28,		September 29,		September 28,		September 29,
		2002		2001		2002		2001

Revenues		$	112,673	$	180,757	$	479,116	$	508,362
Cost of sales			84,175		149,230		378,000		419,414

	Gross profit		28,498		31,527		101,116		88,948
Selling and administrative expenses			11,138		9,816		32,414		28,739
Amortization expense			—		435		—		1,282

	Operating income		17,360		21,276		68,702		58,927
Interest expense			1,149		2,331		3,537		14,714

	Income before income taxes and extraordinary loss		16,211		18,945		65,165		44,213
Income tax provision			6,322		7,389		25,414		11,444
Income tax benefit from tax status change			—		—		—		(88,000	)

	Income before extraordinary loss		9,889		11,556		39,751		120,769
Extraordinary loss on debt extinguishment, net of tax			—		—		—		18,060

	Net income		9,889		11,556		39,751		102,709
Preferred dividend			—		—		—		2,947

	Net income available to common stockholders	$	9,889	$	11,556	$	39,751	$	99,762

Earnings per weighted average common share:
	Basic:
	Income before extraordinary loss	$	0.22	$	0.26	$	0.90	$	3.12
	Extraordinary loss		—		—		—		(0.48	)

	Net income available to common stockholders	$	0.22	$	0.26	$	0.90	$	2.64

	Diluted:
	Income before extraordinary loss	$	0.22	$	0.25	$	0.87	$	2.99
	Extraordinary loss		—		—		—		(0.46	)

	Net income available to common stockholders	$	0.22	$	0.25	$	0.87	$	2.53

Unaudited pro forma amounts to reflect pro forma income taxes and adjustment of tax benefit from tax status change (a):
	Income before income taxes and extraordinary loss	$	16,211	$	18,945	$	65,165	$	44,213
	Income tax provision		6,322		7,389		25,414		17,243

	Income before income tax benefit from tax status change and extraordinary loss	$	9,889	$	11,556	$	39,751	$	26,970

	Income per common share before extraordinary loss:
	Basic income per common share	$	0.22	$	0.26	$	0.90	$	0.72

	Diluted income per common share	$	0.22	$	0.25	$	0.87	$	0.68

(a) See discussion on change in tax entity in Note 5.

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

GLOBAL POWER EQUIPMENT GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)


				Nine Months Ended

				September 28,			September 29,
				2002			2001

Operating activities:
	Net income			$	39,751		$	102,709
	Adjustments to reconcile net income to net cash provided by operating activities-
		Extraordinary loss			—			18,060
		Income tax benefit from tax status change			—			(88,000	)
		Depreciation and amortization			3,474			5,281
		Deferred income taxes			2,409			(1,525	)
		Changes in operating items (Note 13)			8,667			(18,053	)

			Net cash provided by operating activities		54,301			18,472

Investing activities:
	Purchases of property, plant and equipment, net of dispositions				(1,018	)		(9,607	)

Financing activities:
	Proceeds from revolving credit facility				121,150			131,575
	Payments on revolving credit facility				(129,700	)		(130,825	)
	Proceeds from issuance of long-term debt				—			110,696
	Payments on long-term debt				(36,988	)		(255,788	)
	Net proceeds from stock issuance				—			131,243
	Preferred dividends				—			(6,334	)
	Member tax distribution				—			(11,017	)
	Increase in deferred financing costs				—			(1,309	)

			Net cash used in financing activities		(45,538	)		(31,759	)

			Net increase (decrease) in cash and cash equivalents		7,745			(22,894	)
Cash and cash equivalents, beginning of period					2,435			26,308

Cash and cash equivalents, end of period				$	10,180		$	3,414

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

GLOBAL POWER EQUIPMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. BUSINESS AND ORGANIZATION

Global Power Equipment Group Inc. and Subsidiaries (the Company or GPEG, formerly GEEG Holdings, L.L.C.) designs, engineers and manufactures heat recovery and auxiliary power equipment. Our products include:


•	heat recovery steam generators;	•	exhaust systems;
•	filter houses;	•	diverter dampers; and
•	inlet systems;	•	specialty boilers and related products
•	gas and steam turbine enclosures;

The Company’s corporate headquarters are located in Tulsa, Oklahoma, with operating facilities in Plymouth, Minnesota; Tulsa, Oklahoma; Auburn, Massachusetts; Worcester, Massachusetts; Clinton, South Carolina; Monterrey, Mexico; Toluca, Mexico; San Antonio, Mexico; and Heerlen, Netherlands.

2. INTERIM FINANCIAL STATEMENTS

The unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. The information furnished in the condensed consolidated financial statements, in the opinion of management, include normal recurring adjustments and reflect all adjustments which are necessary for a fair presentation of such financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. Although the Company believes that the disclosures are adequate to make the information presented not misleading, these condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Form 10-K for the fiscal year ended December 29, 2001, filed with the Securities and Exchange Commission. The quarterly results are not necessarily indicative of the actual results that may occur for the entire fiscal year.

3. PUBLIC OFFERING OF COMMON STOCK

On May 18, 2001, the Company sold 7,350,000 shares of common stock, $.01 par value, in an underwritten initial public offering (IPO) at a price of $20.00 per share, less underwriting discounts and commissions. The underwriters also exercised an option to purchase an additional 1,102,500 shares of common stock from existing shareholders to cover over-allotments. The net proceeds of the offering to the Company totaled approximately $131.2 million. The net proceeds were used (1) to repay a portion of the senior term loans and a portion of the senior subordinated loan and to pay related prepayment premiums, (2) to pay a distribution in an aggregate amount equal to the accrued and unpaid dividends on the preferred units of GEEG Holdings, LLC, and (3) for general corporate purposes.

Upon completion of the IPO, the Company’s previously outstanding 1,008,968 preferred units with a $100 par value and 1,122,280 common units with a $10 par value were converted to 5,044,839 and 31,558,501 shares of common stock, respectively. The 103,889 outstanding options to purchase common units at the time of the IPO were converted to 2,921,359 common share options. All share and per share amounts on the accompanying condensed consolidated financial statements have been restated to give effect to the conversion of common units to common shares using a 28:1 conversion ratio.

4. GOODWILL

The Company adopted Statement of Financial Accounting Standards (SFAS) 142, “Goodwill and Other Intangible Assets”, effective December 30, 2001, the beginning of our 2002 fiscal year. Under SFAS 142, goodwill is no longer amortized but reviewed annually, or more frequently if certain indicators arise. The Company has completed its transitional impairment testing and no material changes to the carrying value of goodwill and other intangible assets were made as a result of the adoption of SFAS 142. Had the Company been accounting for its goodwill under SFAS 142 for all periods presented, the Company’s net income and income per share would have been as follows (in thousands, except per share amounts):


		Three Months Ended				Nine Months Ended

		September 28,		September 29,		September 28,		September 29,
		2002		2001		2002		2001

Reported net income		$	9,889	$	11,556	$	39,751	$	102,709
Add back goodwill amortization			—		435		—		1,282

Adjusted net income		$	9,889	$	11,991	$	39,751	$	103,991

Basic earnings per common share:
	Reported	$	0.22	$	0.26	$	0.90	$	2.64
	Goodwill amortization per basic share		—		0.01		—		0.03

Adjusted basic earnings per share		$	0.22	$	0.27	$	0.90	$	2.67

Diluted earnings per common share:
	Reported	$	0.22	$	0.25	$	0.87	$	2.53
	Goodwill amortization per diluted share		—		0.01		—		0.03

Adjusted diluted earnings per share		$	0.22	$	0.26	$	0.87	$	2.56

Earnings per share is calculated by dividing net income after adjusting for preferred dividends by the weighted-average number of common shares outstanding during the period. Preferred dividends were $0 and $2.9 million for the three months and nine months ended September 29, 2001. There were no preferred dividends for the three months and nine months ended September 28, 2002.

The changes in the carrying amount of goodwill for the year ended December 29, 2001 and the quarter ended September 28, 2002 by operating segment are as follows (in thousands):


		Heat			Auxiliary
		Recovery			Power
		Equipment			Equipment			Corporate			Total

Balance as of December 30, 2000		$	26,185		$	18,447		$	1,247		$	45,879
	Goodwill from business acquisition		—			802			—			802
	Amortization		(955	)		(626	)		(100	)		(1,681	)

Balance as of December 29, 2001		$	25,230		$	18,623		$	1,147		$	45,000

Balance as of September 28, 2002		$	25,230		$	18,623		$	1,147		$	45,000

5. INCOME TAXES

Prior to the Company’s IPO, the Company and its primary operating subsidiaries were limited liability companies (LLCs) treated as partnerships for federal income tax purposes. Due to the Company’s change in tax status at the IPO date from an LLC to a taxable entity, the Company was required to record all deferred tax assets and liabilities which were previously the responsibility of the LLC members. As a result, the Company recorded a net deferred tax asset on the date of the reorganization of approximately $88.0 million and recorded a corresponding $88.0 million income tax benefit. The Company’s effective tax rate is different from its statutory rate for the nine month period ended September 29, 2001 due to the Company being a non-taxable LLC entity for a portion of that time.

The unaudited pro forma tax provision shown on the condensed consolidated statements of income is presented assuming the Company had been a C-Corporation during the entire nine month period ended September 29, 2001 using an effective rate of 39 percent.

6. DEBT EXTINGUISHMENT

On May 23, 2001, the Company retired certain existing debt of approximately $172.9 million by refinancing $60.0 million into a Term A loan under an amended and restated senior credit facility and using $112.9 million of IPO proceeds to pay off the outstanding balances on the senior Term B and Term C loans of $103.8 million and $13.9 million, respectively, and $27.5 million of the senior subordinated loan. On June 15, 2001, the Company retired the remaining $40.0 million of its senior subordinated loan by borrowing an additional $35.0 million on the new Term A senior loan and $5.0 million on the Company’s new $75.0 million revolving credit facility entered into under the amended and restated senior credit facility.

An extraordinary loss, net of tax, on these debt extinguishments of approximately $18.1 million was recognized during the second quarter of 2001. The loss included $13.4 million of retirement premiums, $8.0 million write-off of the senior subordinated loan discount, and $8.2 million write-off of associated debt issuance costs, net of a tax benefit of $11.5 million.

The Company’s amended and restated senior credit facility matures in May 2005. At the Company’s option, borrowings under the amended and restated senior credit facility will bear interest at either the Eurodollar rate or an alternate base rate, plus, in each case, an applicable margin. The applicable margin will range from 1.0% to 2.25% in the case of a Eurodollar based loan and from 0% to 1.25% in the case of a base rate loan, in each case, based on a leverage ratio. The amended and restated senior credit facility is guaranteed by all of the Company’s domestic subsidiaries, and is secured by a lien on all of the Company’s assets. The amended and restated senior credit facility contains various restrictions and covenants, which among others, include maximum leverage and capital expenditures levels and minimum interest and fixed charge coverage ratios. Restrictions are also in place related to additional borrowings, payment of dividends, sales of assets and mergers and acquisitions. As of September 28, 2002, the Company was in compliance with all such restrictions and covenants.

7. RESTRUCTURING CHARGE

In March 2002, management, in efforts to increase efficiencies in its manufacturing costs, approved and executed a plan to shut down our facility in Fort Smith, Arkansas, effective April 30, 2002. The assets, which are included in our Auxiliary Power Equipment segment, are in the final process of being disposed. An analysis of the carrying value of the facility and related equipment indicated that the assets are not impaired and, as such, the Company continues to carry the remaining assets at their book value until disposition. Additionally, in connection with the announcement of the plan to the employees, the Auxiliary Power Equipment segment recorded $875,000 of severance costs (included as a component of cost of goods sold), related to the elimination of approximately 100 employee positions at the Fort Smith plant, during the first quarter of 2002. As of September 28, 2002, substantially all of the severance costs have been paid.

8. EARNINGS PER SHARE

All share and per share amounts have been restated to give effect to the conversion of common units to common shares using the applicable conversion ratio. See Note 3 to these condensed consolidated financial statements. Basic and diluted earnings per common share are calculated as follows (in thousands, except share and per share data):


			Three Months Ended				Nine Months Ended

			September 28,		September 29,		September 28,		September 29,
			2002		2001		2002		2001

Basic earnings per common share:
Numerator:
	Income before extraordinary loss		$	9,889	$	11,556	$	39,751	$	120,769
	Preferred stock dividend			—		—		—		(2,947	)

	Income available to common stockholders			9,889		11,556		39,751		117,822
	Extraordinary loss			—		—		—		(18,060	)

		Net income available to common stockholders	$	9,889	$	11,556	$	39,751	$	99,762

Denominator:
	Weighted average shares outstanding			43,953,340		43,953,340		43,953,340		37,710,351

Basic earnings per common share:
	Income before extraordinary loss		$	0.22	$	0.26	$	0.90	$	3.12
	Extraordinary loss			—		—		—		(0.48	)

		Net income available to common stockholders	$	0.22	$	0.26	$	0.90	$	2.64

Diluted earnings per common share:
Numerator:
	Income before extraordinary loss		$	9,889	$	11,556	$	39,751	$	120,769
	Preferred stock dividend			—		—		—		(2,947	)

	Income available to common stockholders			9,889		11,556		39,751		117,822
	Extraordinary loss			—		—		—		(18,060	)

		Net income available to common stockholders	$	9,889	$	11,556	$	39,751	$	99,762

Denominator:
	Weighted average shares outstanding			43,953,340		43,953,340		43,953,340		37,710,351
	Dilutive effect of options to purchase common stock			1,651,144		1,749,213		1,680,151		1,727,188

	Weighted average shares outstanding assuming dilution			45,604,484		45,702,553		45,633,491		39,437,539

Diluted earnings per common share:
	Income before extraordinary loss		$	0.22	$	0.25	$	0.87	$	2.99
	Extraordinary loss			—		—		—		(0.46	)

		Net income available to common stockholders	$	0.22	$	0.25	$	0.87	$	2.53

9. DERIVATIVE FINANCIAL INSTRUMENTS

The Company adopted SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” effective December 31, 2000. This standard establishes accounting and reporting standards requiring that every derivative instrument be recorded on the balance sheet as either an asset or a liability measured at fair value. SFAS 133 requires that changes in a derivative’s fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative’s gains and losses to be deferred in other comprehensive income until the transaction occurs (“cash flow hedge”) or to offset related results on the hedged item in the income statement (“fair value hedge”). Hedge accounting requires that a company formally document, designate and assess the effectiveness of transactions that receive hedge accounting treatment. The impact of adopting SFAS 133 was not material.

Periodically, the Company uses derivative financial instruments in the management of its foreign currency exchange and interest rate exposures. As of September 28, 2002, notional amounts outstanding under foreign currency forward exchange agreements were $27 million. The fair values of the forward agreements were approximately $0.1 million at September 28, 2002. Currently, the Company recognizes changes in the fair values of the forward agreements through earnings.

On December 29, 2000, the Company entered into a zero-cost interest rate collar whereby it held an 8% interest rate cap and had written a 5.36% interest rate floor. The Company designated the interest rate collar as a hedge of the variability of a portion of its floating-rate interest payments attributable to changes in market interest rates. As such, the Company used the interest rate collar to place both a minimum and maximum limit on the total interest payments the Company was obligated to pay on approximately $77.1 million of its floating rate debt under its former debt agreements. The interest rate collar agreement was cancelled on July 20, 2001 and a charge of approximately $1.9 million was taken through interest expense which approximated the fair value of the collar.

10. LITIGATION

The Company is involved in legal actions which arise in the ordinary course of its business. Although the outcomes of any such legal actions cannot be predicted, in the opinion of management, the resolution of any currently pending or threatened actions will not have a material adverse effect upon the consolidated financial position or results of operations of the Company.

11. SEGMENT INFORMATION

The “management approach” called for by SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” (SFAS 131) has been used by GPEG management to present the segment information which follows. GPEG considered the way its management team organizes its operations for making operating decisions and assessing performance and considered which components of its enterprise have discrete financial information available. Management makes decisions using a product group focus and its analysis resulted in two operating segments, Heat Recovery Equipment and Auxiliary Power Equipment. The Company evaluates performance based on net income or loss not including certain items as noted below. Intersegment revenues were not significant. Corporate assets consist primarily of cash and deferred tax assets. Interest income has not been allocated as cash management activities are handled at a corporate level. During the period ended September 28, 2002, there have been no changes in the Company’s basis for segmentation or the measurement of segment income.

The following table presents information about segment income and assets (in thousands):


	Heat Recovery Equipment				Auxiliary Power Equipment

	Three Months Ended				Three Months Ended

	September 28,		September 29,		September 28,		September 29,
	2002		2001		2002		2001

Revenues	$	52,404	$	106,788	$	60,269	$	73,969
Interest expense		508		749		662		1,596
Depreciation and amortization		447		511		525		626
Income tax provision		2,021		3,775		4,415		3,738
Segment income		3,162		5,905		6,906		5,846
Assets		160,002		141,446		131,412		146,039
Capital expenditures		25		221		317		847


	Nine Months Ended				Nine Months Ended

	September 28,		September 29,		September 28,		September 29,
	2002		2001		2002		2001

Revenues	$	258,926	$	308,026	$	220,190	$	200,336
Interest expense		1,455		5,401		2,159		9,481
Depreciation and amortization		1,082		1,652		1,625		1,872
Income tax provision		10,967		5,184		14,824		6,599
Segment income		17,154		20,588		23,185		13,427
Assets		160,002		141,446		131,412		146,039
Capital expenditures		298		623		1,243		8,984

The following tables present information which reconciles segment information to consolidated totals (in thousands):


		Three Months Ended						Nine Months Ended

		September 28,			September 29,			September 28,			September 29,
		2002			2001			2002			2001

Income before extraordinary loss:
Total segment income		$	10,068		$	11,751		$	40,339		$	34,015
Tax benefit from tax status change			—			—			—			88,000
Unallocated interest income			21			14			77			168
Other			(200	)		(209	)		(665	)		(1,414	)

	Consolidated income before extraordinary loss	$	9,889		$	11,556		$	39,751		$	120,769


		September 28,		December 29,
		2002		2001

Assets:
Total segment assets		$	291,414	$	354,121
Corporate cash and cash equivalents			6,378		707
Other unallocated amounts, principally deferred tax assets			72,537		75,803

	Consolidated total assets	$	370,329	$	430,631

The following table represents revenues by product group (in thousands):


			Three Months Ended				Nine Months Ended

			September 28,		September 29,		September 28,		September 29,
			2002		2001		2002		2001

Heat Recovery Equipment segment:
	HRSGs		$	41,451	$	89,123	$	194,614	$	236,491
	Specialty boilers			10,953		17,665		64,312		71,535

				52,404		106,788		258,926		308,026

Auxiliary Power Equipment segment:
	Exhaust systems			7,652		37,582		47,046		94,843
	Inlet systems			34,259		19,488		114,032		51,423
	Other			18,358		16,899		59,112		54,070

				60,269		73,969		220,190		200,336

		Total	$	112,673	$	180,757	$	479,116	$	508,362

The following table presents revenues by geographic region (in thousands):


	Three Months Ended				Nine Months Ended

	September 28,		September 29,		September 28,		September 29,
	2002		2001		2002		2001

North America	$	82,763	$	168,535	$	411,259	$	471,575
South America		4,389		6,669		8,489		14,865
Europe		13,373		1,764		26,011		8,879
Asia		11,338		593		23,873		5,361
Other		810		3,196		9,484		7,682

Total	$	112,673	$	180,757	$	479,116	$	508,362

12. MAJOR CUSTOMERS

The Company has certain customers that represent more than 10 percent of consolidated revenues. The revenue for these customers, as well as corresponding accounts receivable, as a percentage of the consolidated revenues and accounts receivable balance, at and for the three months and nine months ended September 28, 2002 and September 29, 2001 are as follows:


	Revenues

	Three Months Ended

	September 28,			September 29,
	2002			2001

Customer A		38	%		26	%
Customer B		5	%		17	%
Customer C		11	%		13	%
Customer D		7	%		11	%


	Nine Months Ended						Accounts Receivable

	September 28,			September 29,			September 28,			September 29,
	2002			2001			2002			2001

Customer A		36	%		24	%		15	%		23	%
Customer B		5	%		15	%		16	%		9	%
Customer C		16	%		11	%		22	%		0	%
Customer D		6	%		8	%		0	%		2	%

13. SUPPLEMENTAL CASH FLOW INFORMATION

Changes in current operating items were as follows (in thousands):


	Nine Months Ended

	September 28,			September 29,
	2002			2001

Accounts receivable	$	9,035		$	(33,267	)
Inventories		99			(2,015	)
Costs and estimated earnings in excess of billings		53,898			(13,692	)
Accounts payable		(30,130	)		(13,687	)
Accrued expenses and other		(5,083	)		8,780
Billings in excess of costs and estimated earnings		(19,152	)		35,828

	$	8,667		$	(18,053	)

Supplemental cash flow disclosures are as follows (in thousands):


		Nine Months Ended

		September 28,		September 29,
		2002		2001

Cash paid during the period for:
	Interest	$	3,254	$	17,333
	Income taxes		24,364		1,503

14. RECENT ACCOUNTING PRONOUNCEMENTS

In June 2001, the FASB issued SFAS 143, “Accounting for Asset Retirement Obligations”. SFAS 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. SFAS 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company does not believe that SFAS 143 will have a material impact on its consolidated financial statements.

In August 2001, the FASB issued SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, which supersedes SFAS 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of”, and the accounting and reporting provisions of APB Opinion 30, “Reporting the Results of Operations — Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions”, for the disposal of a segment of a business (as previously defined in that APB Opinion). SFAS 144 establishes a single accounting model, based on the framework established in SFAS 121. SFAS 144 also resolves several significant implementation issues related to SFAS 121, such as eliminating the requirement to allocate goodwill to long-lived assets to be tested for impairment and establishing criteria to define whether a long-lived asset is held for sale. The Company adopted SFAS 144 December 30, 2001, the beginning of the Company’s fiscal year 2002. The impact of adopting SFAS 144 was not material.

In July 2002, the FASB issued SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities,” which nullifies Emerging Issues Task Force Issue 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” SFAS 146 addresses significant issues regarding the recognition measurement and reporting of costs that are associated with exit and disposal activities, including restructuring activities. SFAS 146 is effective for exit or disposal activities that are initiated after December 31, 2002. The Company is evaluating the impact of the adoption of this standard. The expected impact is not considered to be material.

15. COMPREHENSIVE INCOME

The table below presents comprehensive income for all applicable periods (in thousands):


	Three Months Ended						Nine Months Ended

	September 28,			September 29,			September 28,		September 29,
	2002			2001			2002		2001

Net income	$	9,889		$	11,556		$	39,751	$	102,709
Foreign currency translation adjustments		(584	)		(143	)		328		(227	)

Comprehensive income	$	9,305		$	11,413		$	40,079	$	102,482

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Statements contained in this section include “forward-looking statements” within the meaning of U.S. federal securities laws, which are intended to be covered by the safe harbors created thereby. These forward-looking statements include, in particular, the statements about the Company’s plans, strategies and prospects. Although the Company believes that its plans, intentions and expectations reflected in or suggested by these forward-looking statements are reasonable, it may not achieve its plans, intentions or expectations.

Investors are cautioned that all forward-looking statements involve risks and uncertainties, including without limitation, the ability of the Company to develop markets and sell its products and the effects of competition and pricing. Information concerning some of the factors that could cause actual results to differ materially from those in, or implied by, the forward-looking statements are set forth under “Risk Factors” in the Company’s Form 10-K for the fiscal year ended December 29, 2001, filed with the U.S. Securities and Exchange Commission. Although the Company believes that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could be inaccurate, and therefore, there can be no assurance that the forward-looking statements included herein will prove to be accurate.

We design, engineer and fabricate a comprehensive portfolio of heat recovery and auxiliary power equipment and provide related services. The Company’s corporate headquarters are located in Tulsa, Oklahoma, with operating facilities in Plymouth, Minnesota; Tulsa, Oklahoma; Auburn, Massachusetts; Worcester, Massachusetts; Clinton, South Carolina; Monterrey, Mexico; Toluca, Mexico; San Antonio, Mexico; and Heerlen, Netherlands.

During the first quarter of fiscal year 2002, we informed the workforce at our Ft. Smith, Arkansas plant that we would close that facility permanently effective April 30, 2002. The decision was based entirely on the cost structure of that facility and we had already secured replacement capacity to offset that closure in other lower-cost locations around the globe. The Auxiliary Power Equipment segment recorded $875,000 of severance costs related to the elimination of approximately 100 employee positions at the Fort Smith plant during the first quarter of 2002. We have also scaled back operations at other U.S.-based plants where possible. We have not taken nor do we expect to take any material charges related to those locations.

On May 18, 2001, the Company completed a reorganization, as a result of which Global Power Equipment Group Inc. (“GPEG” or the “Company”) became the successor to GEEG Holdings, L.L.C. On May 23, 2001, the Company completed its IPO of 7,350,000 shares of its common stock. The beneficial ownership of the Company’s common stock immediately after completion of the reorganization transaction, but prior to the closing of the IPO, was identical to the beneficial ownership of the common and preferred units of GEEG Holdings, L.L.C. immediately before the reorganization transaction. As part of the reorganization transaction, the following occurred:

•		GEEG Holdings, L.L.C. declared a distribution on its preferred units in an aggregate amount of $6.3 million, which was equal to the accrued and unpaid dividend on those units, which was paid from the proceeds of the offering;

•		GEEG Holdings, L.L.C. declared a distribution to its members on account of their remaining fiscal year 2001 tax liability, a portion of which was paid during the second fiscal quarter after completion of the initial public offering. The remaining balance was paid during the fourth fiscal quarter out of available cash; and

•		the holders of common and preferred units of GEEG Holdings, L.L.C. exchanged their units for shares of GPEG’s common stock.

In connection with the reorganization and the IPO, the Company refinanced a portion of its outstanding indebtedness. The Company used a portion of the net proceeds from the IPO to repay $27.5 million of its outstanding senior subordinated loan and $85.4 million of the outstanding balance of its outstanding senior term loans under its senior credit facility. The Company refinanced the remaining balance on its senior term loans under its senior credit facility using the proceeds of a term A loan under an amended and restated senior credit facility. For additional information, see “Liquidity and Capital Resources” below. This refinancing of the Company’s outstanding indebtedness resulted in an approximate $8.4 million after-tax extraordinary loss from the write-off of deferred financing costs and debt discount, as well as prepayment premiums relating to the prepayment of long-term debt. On June 15, 2001, the Company retired the remaining $40.0 million of its senior subordinated loan with the proceeds of a $35.0 million increase to the new term loan facility and $5.0 million on the Company’s revolving credit facility. This debt extinguishment resulted in an approximate $9.7 million after-tax extraordinary loss from the write-off of deferred financing costs and debt discount, as well as prepayment premiums relating to the prepayment of long-term debt. These extraordinary loss amounts were charged to earnings in the second

quarter of fiscal year 2001.

Results of Operations

The table below represents the operating results of the Company for the periods indicated (in thousands):


		Three Months Ended				Nine Months Ended

		September 28,		September 29,		September 28,		September 29,
		2002		2001		2002		2001

Revenues		$	112,673	$	180,757	$	479,116	$	508,362
Cost of sales			84,175		149,230		378,000		419,414

	Gross profit		28,498		31,527		101,116		88,948
Selling and administrative expenses			11,138		9,816		32,414		28,739
Amortization expense			—		435		—		1,282

	Operating income		17,360		21,276		68,702		58,927
Interest expense			1,149		2,331		3,537		14,714

Income before income taxes and extraordinary loss			16,211		18,945		65,165		44,213
Income tax provision			6,322		7,389		25,414		11,444
Income tax benefit from tax status change			—		—		—		(88,000	)

Income before extraordinary loss		$	9,889	$	11,556	$	39,751	$	120,769

Our fiscal year ends on the last Saturday in December. As a result, references in this quarterly report to fiscal year 2002 refer to the fiscal year ended December 28, 2002, and to fiscal year 2001 refer to the fiscal year ended December 29, 2001. References to the third quarter of fiscal year 2002 refer to the three months ended September 28, 2002 and references to the third quarter of fiscal year 2001 refer to the three months ended September 29, 2001.

Three months ended September 28, 2002 compared to three months ended September 29, 2001

Revenues

Revenues decreased 37.7% to $112.7 million for the third quarter of fiscal year 2002 from $180.8 million for the third quarter of fiscal year 2001. This decrease is primarily the result of lower revenue recognition, in the current quarter, due to a decline in new orders for HRSGs and exhaust systems beginning in the second half of 2001 and continuing into 2002. Overall, demand in the gas turbine power generation equipment industry decreased during the latter half of 2001 and that trend has continued into 2002. The development of gas turbine power plants has slowed considerably from the first nine months of 2001. We continue to work off our substantial backlog accumulated in 2001 through the third quarter of fiscal year 2002.

The following table sets forth our segment revenues for the third quarter of fiscal years 2002 and 2001 (dollars in thousands):


			Three Months Ended

			September 28,		September 29,		Percentage
			2002		2001		Change

Heat Recovery Equipment segment:
	HRSGs		$	41,451	$	89,123		-53.5	%
	Specialty boilers			10,953		17,665		-38.0	%

		Total segment	$	52,404	$	106,788		-50.9	%

Auxiliary Power Equipment segment:
	Exhaust systems		$	7,652	$	37,582		-79.6	%
	Inlet systems			34,259		19,488		75.8	%
	Other			18,358		16,899		8.6	%

		Total segment	$	60,269	$	73,969		-18.5	%

The Heat Recovery Equipment segment revenues decreased 50.9% to $52.4 million for the third quarter of fiscal year 2002. Revenues for HRSGs decreased 53.5% to $41.5 million. The volume and size of orders booked into backlog decreased during the latter half of 2001 and into 2002, which results in lower recognition of revenues in the following periods. Revenues for specialty boilers decreased by 38.0% to $11.0 million. This decrease was due primarily to a lower level of orders booked during the last quarter of 2001 and the first half of 2002.

The Auxiliary Power Equipment segment revenues decreased 18.5% to $60.3 million for the third quarter of fiscal year 2002. Revenues for exhaust systems decreased by 79.6 % to $7.7 million. This decline is primarily the result of more plants being constructed as combined-cycle units, which require less exhaust equipment and more HRSG equipment. Revenue from the HRSG equipment is typically recognized earlier in the project cycle than the inlet systems equipment. Revenues for inlet systems increased by 75.8% to $34.3 million. The significant increase this quarter continues to reflect our expansion of our inlet fabrication in Mexico, South Asia, and Eastern Europe, which allowed us to become more competitive and improve our market share for these products. Revenues for other equipment increased by 8.6% to $18.4 million. This increase is primarily due to a higher volume of orders in the retrofit equipment portion of this category.

The demand for our products and services depends, to a significant degree, on the continued construction of gas turbine power generation plants. In the third quarter of fiscal year 2002, approximately 90% of our revenues were from sales of equipment and provision of services for gas turbine power plants. The power generation equipment industry has experienced cyclical periods of growth or decline. In periods of decreased demand for new gas turbine power plants or difficulty in raising capital to finance new power plants, our customers may be more likely to decrease expenditures on the types of products and systems that we supply and, as a result, our sales may decrease. In addition, the gas turbine power industry depends on natural gas. A rise in the price or shortage of natural gas could reduce the profitability of gas turbine power plants, which could adversely affect our sales. Liquidity concerns beginning in the latter half of 2001 and continuing into 2002 in the merchant power production sector have reduced the availability of financing for power plant development in the United States and have caused the market for our products to decline. While it is believed that the long-term need for power plants on a world-wide basis is substantial, lower demand in the United States at the end of 2001 and into the third quarter of 2002, has negatively impacted our bookings and revenue. Demand for new power plants outside of the United States will continue to be a good market for our products.

The following table presents our revenues by geographic region (dollars in thousands):


		Three Months Ended

		September 28, 2002					September 29, 2001

				Percent					Percent
		Revenue		of Total			Revenue		of Total

North America		$	82,763		73.4	%	$	168,535		93.2	%
South America			4,389		3.9	%		6,669		3.7	%
Europe			13,373		11.9	%		1,764		1.0	%
Asia			11,338		10.1	%		593		0.3	%
Other			810		0.7	%		3,196		1.8	%

	Total	$	112,673		100.0	%	$	180,757		100.0	%

Revenues in North America comprised 73.4% of our revenues for the third quarter of fiscal year 2002 and 93.2% for the third quarter of fiscal year 2001. Revenues in North America decreased 50.9% to $82.8 million for the third quarter of fiscal year 2002, primarily as a result of a softening in the volume of products sold. This volume decrease was caused primarily by the decrease in demand experienced overall in the U.S. gas turbine power generation equipment industry during the latter half of 2001 and continuing into 2002. This decrease in demand for our products reflects various issues such as credit worthiness of several companies in the power plant development industry. While it is believed that the long-term need for power plants on a world-wide basis is substantial, the current demand, in the United States, has slowed considerably.

Revenues in Asia increased substantially for the third quarter of fiscal year 2002 to $11.3 million. The Company believes Asia will account for an increasingly larger proportion of the Company’s revenues over the next several years that will partially offset the expected decline in U.S. sales. Revenues in Europe increased by 658.1% to $13.4 million due to several larger projects being sold this year compared to last year.

Gross Profit

Gross profit decreased 9.6% to $28.5 million for the third quarter of fiscal year 2002 from $31.5 million for the third quarter of fiscal year 2001. Gross profit as a percentage of revenues increased to 25.3% in the third quarter of fiscal year 2002 from 17.4% in the third quarter of fiscal year 2001. This is primarily due to the continued benefit of concentrating increased production in lower cost countries as well as improved product quality that has substantially reduced rework costs and, to a lesser degree, a change in the product mix within our two operating segments. While we will continue to manage costs by focusing on lower cost countries and maximizing product quality, the gross margin percentage experienced this quarter is not expected to continue during the coming quarter or the next fiscal year. Due to the increasingly competitive market, our gross margin percentages will likely be reduced to more historic levels experienced during the last several years.

Selling and Administrative Expenses

Selling and administrative expenses increased 13.5% to $11.1 million for the third quarter of fiscal year 2002 from $9.8 million for the third quarter of fiscal year 2001. Of this increase, $1.7 million resulted from costs related to our strategic acquisition efforts, which is offset by a $0.4 million decrease as a result of a decrease in sales and administrative personnel. As a percentage of revenues, selling and administrative expenses increased to 9.9% for the third quarter of fiscal year 2002 from 5.4% for the comparable period of fiscal year 2001 as a result of our revenues decreasing and the increased costs previously mentioned.

Operating Income

Operating income decreased to $17.4 million for the third quarter of fiscal year 2002 from $21.3 million in the third quarter of fiscal year 2001. The decrease in revenues and associated gross profit, as well as the increase in selling and administrative expenses were the main contributors to this decrease.

Interest Expense

Interest expense decreased to $1.1 million for the third quarter of fiscal year 2002 from $2.3 million for the third quarter of fiscal year 2001. This decrease is due primarily to a reduction in debt as a result of mandatory principal payments and voluntary prepayments totaling $45.5 million in 2002, including a net reduction of $8.5 million to our revolving credit facility. Additionally, our borrowing interest rate has decreased by approximately 100 basis points due to general market interest rate reductions. At September 28, 2002 our term debt bore interest at an average rate of 3.54%.

Income Taxes

The Company is currently reflecting a 39.0% effective tax rate in the tax provision. Also, as a result of the change in our tax status in connection with the reorganization, we recorded an income tax benefit and related deferred tax asset of $88.0 million, which primarily represents the excess tax basis over book basis related to the August 2000 recapitalization. The amortization of the deferred tax benefit related to the August 2000 recapitalization will allow us to reduce cash paid for future taxes by approximately $5.6 million annually, but will not reduce future income tax expense. We did not have any net operating loss carryforwards at September 28, 2002. .

Nine months ended September 28, 2002 compared to nine months ended September 29, 2001

Revenues

Revenues decreased 5.8% to $479.1 million for the first nine months of fiscal year 2002 from $508.4 million for the first nine months of fiscal year 2001. This decrease is primarily the result of lower revenue recognition, due to a decline in new orders for HRSGs and exhaust systems beginning in the second half of 2001 and continuing into 2002. A significant increase in the volume of inlet systems shipped partially offset this reduction in HRSGs and exhaust system revenue. The development of gas turbine power plants increased substantially with new order growth during the first half of 2001. As the number of projects grew our bookings and backlog increased significantly with our backlog peaking at the end of our third quarter of 2001. We continued to work off our substantial backlog accumulated in 2001 through the third quarter of fiscal year 2002.

The following table sets forth our segment revenues for the first nine months of fiscal year 2002 and the first nine months of fiscal year 2001 (dollars in thousands):


			Nine Months Ended

			September 28,		September 29,		Percentage
			2002		2001		Change

Heat Recovery Equipment segment:
	HRSGs		$	194,614	$	236,491		-17.7	%
	Specialty boilers			64,312		71,535		-10.1	%

		Total segment	$	258,926	$	308,026		-15.9	%

Auxiliary Power Equipment segment:
	Exhaust systems		$	47,046	$	94,843		-50.4	%
	Inlet systems			114,032		51,423		121.8	%
	Other			59,112		54,070		9.3	%

		Total segment	$	220,190	$	200,336		9.9	%

The Heat Recovery Equipment segment revenues decreased 15.9% to $258.9 million for the first nine months of fiscal year 2002. Revenues for HRSGs decreased 17.7% to $194.6 million. The volume of revenue recognition has begun to decrease over the prior year, as the order activity, for HRSGs has slowed considerably compared to the same period last year. Revenues for specialty boilers decreased by 10.1% to $64.3 million.

The Auxiliary Power Equipment segment revenues increased 9.9% to $220.2 million for the first nine months of fiscal year 2002. Revenues for exhaust systems decreased by 50.4% to $47.0 million. This decline is primarily the result of more plants being constructed as combined-cycle units which require less exhaust equipment and more HRSG equipment. Revenue from the HRSG equipment is typically recognized earlier in the project cycle than the inlet systems equipment. Revenues for inlet systems increased by 121.8% to $114.0 million. The significant increase for the first nine months of fiscal year 2002 continues to reflect our expansion of our inlet fabrication in Mexico and other off-shore locations, which allowed us to become more competitive and improve our market share for these products. Revenues for other equipment increased by 9.3% to $59.1 million, driven by the continued increase in deliveries of new turbines.

The demand for our products and services depends, to a significant degree, on the continued construction of gas turbine power generation plants. In the first nine months of fiscal year 2002, approximately 87% of our revenues were from sales of equipment and provision of services for gas turbine power plants. The power generation equipment industry has experienced cyclical periods of growth or decline. In periods of decreased demand for new gas turbine power plants or difficulty in raising capital to finance new power plants, our customers may be more likely to decrease expenditures on the types of products and systems that we supply and, as a result, our sales may decrease. In addition, the gas turbine power industry depends on natural gas. A rise in the price or shortage of natural gas could reduce the profitability of gas turbine power plants, which could adversely affect our sales. Liquidity concerns beginning in the latter half of 2001 and continuing into 2002 in the merchant power production sector have reduced the availability of financing for power plant development in the United States and have caused the market for our products to decline. While it is believed that the long-term need for power plants on a world-wide basis is substantial, lower demand, in the United States at the end of 2001 and into the third quarter of 2002, has negatively impacted our bookings and revenue. Demand for new power plants outside of the United States will continue to be a good market for our products.

The following table presents our revenues by geographic region (dollars in thousands):


		Nine Months Ended

		September 28, 2002					September 29, 2001

				Percent					Percent
		Revenue		of Total			Revenue		of Total

North America		$	411,259		85.8	%	$	471,575		92.8	%
South America			8,489		1.8	%		14,865		2.9	%
Europe			26,011		5.4	%		8,879		1.7	%
Asia			23,873		5.0	%		5,361		1.1	%
Other			9,484		2.0	%		7,682		1.5	%

	Total	$	479,116		100.0	%	$	508,362		100.0	%

Revenues in North America comprised 85.8% of our revenues for the first nine months of fiscal year 2002 and 92.8% for the first nine months of fiscal year 2001. Revenues in North America decreased 12.8% to $411.3 million for the first nine months of fiscal year 2002, primarily as a result of continued softening in the volume of products sold. This volume decrease was caused primarily by the decrease in demand experienced overall in the U.S. gas turbine power generation equipment industry during the latter half of 2001 and continuing into 2002. Although current demand for our products has decreased considerably in recent months, it is believed that the long-term need for power plants around the world is substantial.

Revenues in Europe and Asia increased by 193.0% and 345.3%, respectively, for the first nine months of fiscal year 2002. This demonstrates an increased proportion of our business beginning to shift outside of North America. Other revenues increased to $9.5 million for the first nine months of fiscal year 2002, with significant projects in the Middle East and Mexico contributing to this increase.

Gross Profit

Gross profit increased 13.7% to $101.1 million for the first nine months of fiscal year 2002 from $88.9 million for the first nine months of fiscal year 2001 as a result of the increase in the gross profit as a percentage of revenues, resulting from product cost reductions. This percentage increased to 21.1% in the first nine months of fiscal year 2002 from 17.5% in the first nine months of fiscal year 2001. This increase reflects the continued benefit of concentrating increased production in lower cost countries as well as improved product quality that has substantially reduced rework costs and, to a lesser degree, a change in the product mix within our two operating segments. While we will continue to manage costs by focusing on lower cost countries and maximizing product quality, the gross margin percentage experienced this quarter is not expected to continue during the coming quarter or the next fiscal year. Due to the increasingly competitive market, our gross margin percentages will likely be reduced to more historic levels experienced during the last several years.

As a result of our focus to lower cost countries, in March 2002, management approved and executed a plan to shut down our facility in Fort Smith, Arkansas, effective April 30, 2002. The assets, which are included in our Auxiliary Power Equipment segment, are in the final process of being disposed. An analysis of the carrying value of the facility and related equipment indicated that the assets are not impaired and, as such, the Company continues to carry the remaining assets at their book value until disposition. Additionally, in connection with the announcement of the plan to the employees, the Auxiliary Power Equipment segment recorded $875,000 of severance costs (included as a component of cost of goods sold), related to the elimination of approximately 100 employee positions at the Fort Smith plant, during the first quarter of 2002. As of September 28, 2002, substantially all of the severance costs have been paid.

Selling and Administrative Expenses

Selling and administrative expenses increased 12.8% to $32.4 million for the first nine months of fiscal year 2002 from $28.7 million for the first nine months of fiscal year 2001. Of this increase, (1) costs related to our strategic acquisition efforts accounted for

approximately $1.7 million (2) $0.3 million of the increase resulted from insurance, professional, and other costs related to becoming a public company, and (3) additional incentive compensation costs reflecting the improved operating performance accounted for approximately $0.5 million of the increase. As a percentage of revenues, selling and administrative expenses were 6.8% for the first nine months of fiscal year 2002 compared to 5.7% for the comparable period of fiscal year 2001.

Operating Income

Operating income increased to $68.7 million for the first nine months of fiscal year 2002 from $58.9 million in the first nine months of fiscal year 2001. The increase in gross profit resulting from product cost reductions was the main contributor.

Interest Expense

Interest expense decreased to $3.5 million for the first nine months of fiscal year 2002 from $14.7 million for the first nine months of fiscal year 2001. This decrease is due primarily to the 2001 retirement of debt in connection with our IPO with a large portion of the first half of 2001 impacted by our 2000 recapitalization and the related senior loans and senior subordinated loans. Nearly $160 million of the additional debt related to our August 2000 recapitalization has been subsequently paid off with proceeds from the May 2001 initial public offering transaction and with funds provided from operations. Additionally, our borrowing interest rate has decreased by approximately 400 basis points due to, general market interest rate reductions and our new credit facilities.

Income Taxes

GEEG Holdings, L.L.C. and its primary operating subsidiaries were limited liability companies prior to the reorganization, and were treated as partnerships for income tax purposes. As a result, no income tax provision was made with respect to these entities for periods prior to May 18, 2001. However, because some of GEEG Holdings, L.L.C.’s subsidiaries are corporations, our historical consolidated financial statements reflect a small income tax provision.

As a result of the reorganization transaction, we became subject to corporate federal and state income taxes. Also, as a result of the change in our tax status in connection with the reorganization, we recorded an income tax benefit and related deferred tax asset of $88.0 million, which primarily represents the excess tax basis over book basis related to the August 2000 recapitalization. The amortization of the deferred tax benefit related to the August 2000 recapitalization will allow us to reduce cash paid for future taxes by approximately $5.6 million annually, but will not reduce future income tax expense. For informational purposes, our consolidated statements of income for the period ended September 29, 2001 include pro forma income on an after-tax basis assuming we had been taxed as a corporation for the entire nine months. We did not have any net operating loss carryforwards at September 28, 2002. The Company is currently reflecting a 39.0% effective tax rate in the tax provision.

Backlog

Backlog decreased to approximately $341.5 million at September 28, 2002, compared to $556.8 million at December 29, 2001. We believe that up to approximately $307 million or 90% of our backlog at September 28, 2002 will be recognized as a portion of our revenues during the next 12 months. Our backlog consists of firm orders from our customers for projects in progress. Backlog does not include preliminary or speculative projects. Bookings of projects can only be reflected in the backlog when the customers have made a firm commitment. To date, we have experienced minimal cancellations because of this conservative policy. Backlog may vary significantly from quarter to quarter due to the timing of that commitment.

Liquidity and Capital Resources

Our primary sources of cash are net cash flow from operations and borrowings under the amended and restated senior credit facility. Our primary uses of this cash are principal and interest payments on indebtedness, capital expenditures and general corporate purposes.

Operating Activities

Net cash provided by operations increased to $54.3 million for the first nine months of fiscal year 2002 from $18.5 million for the first nine months of fiscal year 2001. The increase in net operating cash flow is due to higher earnings and a decrease in working capital primarily caused by fluctuations in the timing of billings to customers and the receipt of payment. Large progress billings to customers

for three large Heat Recovery projects during the first three months of 2002 were collected, early in the second quarter and contributed $69 million to this decrease in working capital. These projects comprised a significant portion of the fabrication schedule for the third and fourth quarters of 2001, and were part of an advantageous multiple unit arrangement with progress billings less favorable than our normal terms. Planned fluctuations in our cash requirements for projects such as these will occur from time to time. Our $75 million revolving credit facility is available to accommodate these fluctuations.

Investing Activities

Net cash used for investing activities decreased to $1.0 million for the first nine months of fiscal year 2002 from $9.6 million for the first nine months of fiscal year 2001. In the first nine months of fiscal year 2001 the cash was primarily used for the January 2001 acquisition of a manufacturing facility in Mexico.

Financing Activities

Net cash used by financing activities was $45.5 million in the first nine months of fiscal year 2002 and net cash used by financing activities was $31.8 million in the first nine months of fiscal year 2001. Activity in 2002 consists of net payments on our revolving credit facility of $8.5 million as well as payments on our term debt of $37.0 million. The net impact of the IPO and the related financing of the Company’s bank credit facilities accounted for the major portion of the 2001 activity.

In 2001, the Company used a portion of the net proceeds of the IPO to (i) repay approximately $86.3 million of its outstanding indebtedness under the senior credit facility, including accrued and unpaid interest of $0.9 million, (ii) repay $27.5 million of its senior subordinated loan, plus accrued and unpaid interest, and (iii) pay related prepayment premiums, fees and expenses that amounted to an $8.4 million after-tax extraordinary loss. The Company extinguished the remaining borrowings under the senior credit facility outstanding after the application of the net proceeds of the IPO by using the proceeds of new loans under an amended and restated senior credit facility described below.

In connection with the IPO, the Company entered into an amended and restated senior credit facility from a syndicate of lenders. The amended and restated senior credit facility provided for term loans of up to $60.0 million and a revolving credit facility of up to $75.0 million. The amended and restated senior credit facility was further amended on June 15, 2001 to provide for term loans of up to $95.0 million. Outstanding loans under the amended and restated senior credit facility mature in May 2005. The Company utilized $60.0 million of term loans to pay remaining borrowings under the old senior credit facility and $35.0 million of term loans and $15.0 million under the revolving facility to pay off the remaining $40.0 million senior subordinated loan outstanding and accrued interest and prepayment penalties. As a result of this debt extinguishment, the Company recorded an additional $9.7 million after-tax extraordinary loss.

At September 28, 2002, the Company had $60.0 million outstanding under the term loan and no balance was outstanding under the revolver. Letters of credit totaling $41.6 million were issued and outstanding at September 28, 2002. Currently, there are no amounts drawn upon these letters of credit.

At the Company’s option, amounts borrowed under the amended and restated senior credit facility will bear interest at either the Eurodollar rate or an alternate base rate, plus, in each case, an applicable margin. The applicable margin will range from 1.0% to 2.25% in the case of a Eurodollar based loan and from 0% to 1.25% in the case of a base rate loan, in each case, based on a leverage ratio. At September 28, 2002 the term debt of $60.0 million bore interest at an average rate of approximately 3.54%.

The Company’s amended and restated senior credit facility:

	•		is guaranteed by all of its domestic subsidiaries;

	•		is secured by a lien on all its and its domestic subsidiaries’ property and assets, including, without limitation, a pledge of all capital stock owned by it and its domestic subsidiaries, subject to a limitation of 65% of the voting stock of any foreign subsidiary;

	•		requires the Company to maintain minimum interest and fixed charge coverage ratios and limit its maximum leverage; and

	•		among other things, restricts the Company’s ability to (1) incur additional indebtedness, (2) sell assets other than in the

ordinary course of business, (3) pay dividends in excess of 25% of its cumulative net income from January 1, 2001 through the most recent fiscal quarter end, subject to leverage and liquidity thresholds and other customary restrictions, (4) make capital expenditures in excess of $13 million in fiscal year 2001 or $10 million in any fiscal year, thereafter, with adjustments for carry-overs from the previous year, (5) make investments and acquisitions and (6) enter into mergers, consolidations or similar transactions.

Because our financial performance is impacted by various economic, financial, and industry factors, we cannot say with certainty whether we will satisfy these covenants in the future. Noncompliance with these covenants would constitute an event of default, allowing the lenders to accelerate the repayment of any borrowings outstanding under the related amended and restated senior credit facility. While no assurances can be given, we believe that we would be able to successfully negotiate amended covenants or obtain waivers if an event of default were imminent; however, we might be required to make certain financial concessions. Our business, results of operations and financial condition may be adversely affected if we were unable to successfully negotiate amended covenants or obtain waivers on acceptable terms.

In April 2001, GEEG Holdings, L.L.C. declared a distribution equal to $5.0 million to its members on account of their first quarter fiscal year 2001 tax liability. In addition, in connection with the reorganization transaction, the Company declared (1) a distribution on account of its members’ estimated remaining fiscal year 2001 tax liability and (2) a distribution on its preferred units in an aggregate amount of $6.3 million equal to the accrued and unpaid dividends on those units. The Company paid these distributions on May 24, 2001, after the closing of the IPO. The Company used a portion of the net proceeds from the IPO to pay the preferred distribution.

Cash Obligations

Under various agreements, we are obligated to make future cash payments in fixed amounts. These include payments under our amended and restated senior credit facility and rent payments required under operating lease agreements. During the first nine months of 2002 we made regularly scheduled principal payments on our long-term debt of $7.1 million and prepayments of $38.4 million, including a net reduction of $8.5 million to our revolving credit facility.

The following table summarizes our fixed cash obligations as of September 28, 2002 over various future periods (in thousands):


				Payments Due by Period

		2002		2003-		2004-		2006-
Contractual Cash Obligations		remaining		2004		2005		thereafter		Total

Long-term Debt		$	17	$	35,125	$	24,949	$	—	$	60,091
Operating Leases			719		4,151		2,170		3,858		10,898

	Total Contractual Cash Obligations	$	736	$	39,276	$	27,119	$	3,858	$	70,989

At September 28, 2002, the Company had available cash on hand of approximately $10.2 million and approximately $33.4 million of available capacity under its revolving credit facility. The Company may utilize borrowings under the revolving credit facility to supplement its cash requirements from time to time. The Company anticipates that it will generate sufficient cash flows from operations to satisfy its cash commitments and capital requirements for fiscal year 2002. The Company estimates that its total net capital expenditures for fiscal year 2002 will be below $1.5 million compared to $11.6 in 2001. The amount of cash flows generated from operations is subject to a number of risks and uncertainties, including the continued construction of gas turbine power generation plants as well as other risks described under “Item 1. Business- Risk Factors” in the Company’s Form 10-K for the fiscal year ended December 29, 2001, filed with the Securities and Exchange Commission. In fiscal 2002, the Company may actively seek and consider acquisitions of or investments in complementary businesses, products or services. The consummation of any acquisitions could affect the Company’s liquidity profile and level of outstanding debt and equity securities. In the event the Company desires to engage in any of these activities, there is no assurance that financing will be available in amounts or terms that are acceptable.

Critical Accounting Policies

The following discussion of accounting policies is intended to supplement the Summary of Significant Accounting Policies presented as Note 2 to the consolidated financial statements, included in “Item 8. Financial Statements and Supplementary Data” of the Company’s Form 10-K for the fiscal year ended December 29, 2001, filed with the U.S. Securities and Exchange Commission. These policies were selected because a fluctuation in actual results versus expected results could materially affect our operating results and because the policies require significant judgments and estimates to be made each quarter. Our accounting related to these policies is initially based on our best estimates at the time of original entry in our accounting records. Adjustments are periodically recorded when our actual experience differs from the expected experience underlying the estimates. These adjustments could be material if our experience were to change significantly in a short period of time. We regularly, on a monthly basis, compare our actual experience and expected experience in order to further mitigate the likelihood of material adjustments.

Revenue Recognition- GPEG currently has two segments: Heat Recovery Equipment and Auxiliary Power Equipment. Revenues and cost of sales for our Heat Recovery Equipment segment are recognized on the percentage-of-completion method based on the percentage of actual hours incurred to date in relation to total estimated hours for each contract. Our estimate of the total hours to be incurred at any particular time has a significant impact on the revenue recognized for the respective period. The percentage-of-completion method is only allowed under certain circumstances in which the revenue process is long-term in nature (often in excess of one year), the products sold are highly customized and a process is in place whereby revenues, costs and margins can be accurately estimated. Changes in job performance, job conditions, estimated profitability and final contract settlements may result in revisions to costs and income, and the effects of such revisions are recognized in the period that the revisions are determined. Under percentage-of-completion accounting, management must also make key judgments in areas such as percent complete, estimates of project costs and margin, estimates of total and remaining project hours and liquidated damages assessments. A one percent fluctuation of our estimate of percent complete could increase or decrease revenues by approximately $2.6 million based on 2002 revenues.

Revenues for our Auxiliary Power Equipment segment are recognized on the completed-contract method due to the short-term nature of the product production period. Under this method, no revenue can be recognized until the contract is complete and the customer takes risk of loss and title.

Nearly all of our contracts are entered into on a fixed-price basis. As a result, we benefit from cost savings, but have limited ability to recover for any cost overruns, except in those contracts where the scope has changed. Contract prices are established based in part on our projected costs, which are subject to a number of assumptions. The costs that we incur in connection with each contract can vary, sometimes substantially, from our original projections. A large portion (averaging between 60-80%) of our costs are also contracted on a fixed-price basis with our vendors and subcontractors at the same time we commit to our customers. Because of the large scale and long duration of our contracts, unanticipated changes may occur, such as customer budget decisions, design changes, delays in receiving permits and cost increases, which may delay delivery of our products. In addition, under our contracts, we often are subject to liquidated damages for late delivery. Unanticipated cost increases or delays may occur as a result of several factors, including:

	•		increases in the cost, or shortages, of components, materials or labor;

	•		unanticipated technical problems;

	•		required project modifications not initiated by the customer; and

	•		suppliers’ or subcontractors’ failure to perform.

Cost overruns that we cannot pass on to our customers or the payment of liquidated damages under our contracts will lower our earnings.

Warranty- Estimated costs related to product warranty are accrued as revenue is recognized and included in cost of sales. Estimated costs are based upon past warranty claims and sales history. Warranty terms vary by contract but generally provide for a term of 12 to 18 months after shipment. We manage our exposure to warranty claims by having our field service and quality assurance personnel regularly monitor our projects and maintain ongoing and regular communications with the customer.

Goodwill and Impairment of Long-Lived Assets- We perform impairment analyses on our recorded goodwill and long-lived assets whenever events and circumstances indicate that they may be impaired. We did not record any impairment provisions upon the adoption of SFAS 142.

Related Parties

Affiliates of Harvest Partners, Inc. are our largest stockholders. In addition, two of the directors that serve on our board are both general partners of Harvest Partners, Inc. During the first nine months of fiscal 2002 and the first nine months of fiscal 2001, we incurred consulting expenses from Harvest in the amounts of $0.9 million and $0.6 million, respectively. We are contractually committed to annual payments of certain fees for financial advisory and strategic planning services to Harvest of $1.2 million per year through 2003. After 2003 the contract for services will be renewed on a year-to-year basis with payments subject to Harvest’s level of ownership.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risks. Market risk is the potential loss arising from adverse changes in market prices and interest and foreign currency rates. We do not enter into derivative or other financial instruments for speculative purposes. Our market risk could arise from changes in interest rates and foreign currency exchange.

Interest Rate Risk

We are subject to market risk exposure related to changes in interest rates. Assuming our current level of borrowings, a 100 basis point increase in interest rates under these borrowings would have increased our interest expense for 2002 by approximately $.6 million. During 2001, we managed our exposure to interest rate fluctuations on our variable rate debt through the use of an interest rate collar agreement with a notional amount of $77.1 million until July 2001, when the collar agreement was terminated. With the rapid decreases in interest rates through the first seven months of 2001, the obligation under the collar increased to approximately $1.9 million. In July of 2001, we decided to terminate the collar agreement, rather than incur further costs related to reductions in interest rates going forward. As a result, the interest expense for the second and third quarters of 2001 included $1.4 million and $0.5 million, respectively, to reflect the mark to market of the collar.

Foreign Currency Exchange Risk

Portions of our operations are located in foreign jurisdictions including Europe and Mexico. Our financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. In addition, sales of products and services are affected by the value of the U.S. dollar relative to other currencies. Periodically we manage our foreign currency exposure through the use of foreign currency option contracts. Contracts totaling $27 million were in place at September 28, 2002.

Recent Accounting Pronouncements

In August 2001, the FASB issued SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, which supersedes SFAS 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of”, and the accounting and reporting provisions of APB Opinion 30, “Reporting the Results of Operations — Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions”, for the disposal of a segment of a business (as previously defined in that APB Opinion). SFAS 144 establishes a single accounting model, based on the framework established in SFAS 121. SFAS 144 also resolves several significant implementation issues related to SFAS 121, such as eliminating the requirement to allocate goodwill to long-lived assets to be tested for impairment and establishing criteria to define whether a long-lived asset is held for sale. The Company adopted SFAS 144 effective December 30, 2001, the beginning of the Company’s fiscal year 2002. The impact of adopting SFAS 144 was not material.

ITEM 4. CONTROLS AND PROCEDURES

(a)		Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-14(c) under the Securities Exchange Act of 1934, as amended, within 90 days of the filing date of this report. Based on that evaluation, our management, including our principal executive officer and principal financial officer, concluded that our disclosure controls and procedures are adequate and effective to ensure that material information related to us, including our consolidated subsidiaries, required to be included in our periodic reports to be filed with the SEC is made known to them in a timely manner.

(b)		There have been no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date we carried out our evaluation referenced in paragraph (a) above.

PART II. OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)

Exhibits


99.1		Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

99.2		Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b)

Reports on Form 8-K


(1)		Form 8-K dated August 1, 2002 filed to report earnings for the quarter ended June 29, 2002

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

Global Power Equipment Group Inc.

DATED: November 12, 2002

By: /s/ Larry Edwards

Larry Edwards
President and Chief Executive Officer

Global Power Equipment Group Inc.

DATED: November 12, 2002

By: /s/ Michael H. Hackner

Michael H. Hackner
Chief Financial Officer and Vice President of Finance
(Principal Financial Officer)

CERTIFICATIONS

		I, Larry Edwards, certify that:

1)		I have reviewed this quarterly report on Form 10-Q of Global Power Equipment Group Inc.;

2)		Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3)		Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4)		The registrants’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

	a)		designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

	b)		evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

	c)		presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

	a)		all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

	b)		any fraud, whether material or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there was significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 12, 2002

/s/ Larry Edwards

Larry Edwards
President and Chief
Executive Officer

		I, Michael H. Hackner, certify that:

1)		I have reviewed this quarterly report on Form 10-Q of Global Power Equipment Group Inc.;

2)		Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3)		Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4)		The registrants’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

	a)		designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

	b)		evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

	c)		presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

any fraud, whether material or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

Date: November 12, 2002

/s/ Michael H. Hackner

Michael H. Hackner
Chief Financial Officer and
Vice President of Finance

Exhibit Index


Exhibit No.

99.1		Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

99.2		Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Williams Industrial Services Group Inc. - Quarter Report: 2002 September (Form 10-Q)

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