Williams Industrial Services Group Inc. - Quarter Report: 2003 September (Form 10-Q)

e10vq

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 27, 2003

o 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 x No o


	Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes x No o

The number of shares of the Registrant’s common stock, $.01 par value, outstanding at November 4, 2003 was 44,953,755.

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-31.1 Chief Executive Officer Certification
EX-31.2 Chief Financial Officer Certification
EX-32.1 Chief Executive Officer Certification
EX-32.2 Chief Financial Officer Certification

GLOBAL POWER EQUIPMENT GROUP INC.

FORM 10-Q
September 27, 2003

INDEX


			Page

Part I.	Financial Information
	Item 1.	Financial Statements
		Condensed Consolidated Balance Sheets at September 27, 2003 and December 28, 2002	1
		Condensed Consolidated Statements of Income for the Three Months and Nine Months Ended September 27, 2003 and September 28, 2002	2
		Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 27, 2003 and September 28, 2002	3
		Notes to Condensed Consolidated Financial Statements	4
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	22
	Item 4.	Controls and Procedures	23
Part II.	Other Information
	Item 6.	Exhibits and Reports on Form 8-K	24
Signatures			25

PART I. FINANCIAL INFORMATION

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


			September 27,			December 28,
			2003			2002

ASSETS
Current assets:
	Cash and cash equivalents		$	66,271		$	59,042
	Accounts receivable, net of allowance of $1,985 and $1,775			44,684			82,844
	Inventories at FIFO			4,069			4,403
	Costs and estimated earnings in excess of billings			38,574			62,289
	Deferred income taxes			17,875			22,385
	Other current assets			2,618			2,082

		Total current assets		174,091			233,045
Property, plant and equipment, net				21,861			25,469
Deferred income taxes				59,596			64,803
Goodwill				45,000			45,000
Other assets				1,591			1,387

		Total assets	$	302,139		$	369,704

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Current maturities of long-term debt		$	19		$	5,423
	Accounts payable			23,305			29,773
	Accrued compensation and employee benefits			6,239			9,301
	Accrued warranty			18,515			19,460
	Billings in excess of costs and estimated earnings			69,537			107,242
	Accrued income taxes			275			9,471
	Other current liabilities			5,069			4,417

		Total current liabilities		122,959			185,087
Long-term debt, net of current maturities				33,265			54,650
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, 44,907,357 and 43,976,679 shares issued and outstanding, respectively			449			440
	Paid-in capital deficit			(26,268	)		(28,321	)
	Accumulated other comprehensive income			7			822
	Retained earnings			171,727			157,026

		Total stockholders’ equity		145,915			129,967

		Total liabilities and stockholders’ equity	$	302,139		$	369,704

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 27,		September 28,		September 27,		September 28,
		2003		2002		2003		2002

Revenues		$	57,301	$	112,673	$	198,329	$	479,116
Cost of sales			43,454		84,175		146,314		378,000

	Gross profit		13,847		28,498		52,015		101,116
Selling and administrative expenses			8,578		11,138		26,697		32,414

	Operating income		5,269		17,360		25,318		68,702
Interest expense			326		1,149		1,218		3,537

	Income before income taxes		4,943		16,211		24,100		65,165
Income tax provision			1,928		6,322		9,399		25,414

	Net income available to common stockholders	$	3,015	$	9,889	$	14,701	$	39,751

Earnings per weighted average common share:
	Basic	$	0.07	$	0.22	$	0.33	$	0.90

	Weighted average number of shares of common stock outstanding-basic		44,785		43,953		44,327		43,953

	Diluted	$	0.07	$	0.22	$	0.32	$	0.87

	Weighted average number of shares of common stock outstanding-diluted		45,996		45,604		45,788		45,633

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 27,			September 28,
				2003			2002

Operating activities:
	Net income			$	14,701		$	39,751
	Adjustments to reconcile net income to net cash used in operating activities-
		Depreciation and amortization			3,183			3,474
		Deferred income taxes			9,717			2,409
		Loss on disposal of equipment			164			—
		Changes in operating items (Note 10)			5,623			8,667

			Net cash provided by operating activities		33,388			54,301

Investing activities:
	Proceeds from sale of equipment				593			—
	Purchases of property, plant and equipment				(298	)		(1,018	)

			Net cash provided by (used in) investing activities		295			(1,018	)
Financing activities:
	Proceeds from revolving credit facility				—			121,150
	Payments on revolving credit facility				—			(129,700	)
	Payments on long-term debt				(26,789	)		(36,988	)
	Proceeds from issuance of common stock				335			—

			Net cash used in financing activities		(26,454	)		(45,538	)

			Net increase in cash and cash equivalents		7,229			7,745
Cash and cash equivalents, beginning of period					59,042			2,435

Cash and cash equivalents, end of period				$	66,271		$	10,180

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) designs, engineers and manufactures heat recovery and auxiliary power equipment. Our products include:

	•		heat recovery steam generators;

	•		filter houses;

	•		inlet systems;

	•		gas turbine, steam turbine and generator enclosures;

	•		exhaust systems;

	•		diverter dampers; and

	•		specialty boilers and related products

The Company’s corporate headquarters are located in Tulsa, Oklahoma, with operating facilities in Plymouth, Minnesota; Tulsa, Oklahoma; Auburn, Massachusetts; Clinton, South Carolina; Monterrey, Mexico; Toluca, 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, includes normal recurring adjustments and reflects 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 28, 2002, 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. GOODWILL

There were no changes in the carrying amount of goodwill during the first nine months of fiscal 2003. The Company will complete its annual impairment testing during the fourth quarter of this year or as necessary if circumstances warrant a possible impairment in subsequent periods. The balances by operating segment are as follows (in thousands):


	Heat		Auxiliary
	Recovery		Power
	Equipment		Equipment		Corporate		Total

Balance as of September 27, 2003	$	25,230	$	18,623	$	1,147	$	45,000

4. EARNINGS PER SHARE

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 27,		September 28,		September 27,		September 28,
		2003		2002		2003		2002

Basic earnings per common share:
Numerator:
	Net income available to common stockholders	$	3,015	$	9,889	$	14,701	$	39,751

Denominator:
Weighted average shares outstanding *			44,784,823		43,953,340		44,327,406		43,953,340

Basic earnings per common share		$	0.07	$	0.22	$	0.33	$	0.90

Diluted earnings per common share:
Numerator:
	Net income available to common stockholders	$	3,015	$	9,889	$	14,701	$	39,751

Denominator:
	Weighted average shares outstanding *		44,784,823		43,953,340		44,327,406		43,953,340
	Dilutive effect of options to purchase common stock		1,211,340		1,651,144		1,461,083		1,680,151

	Weighted average shares outstanding assuming dilution		45,996,163		45,604,484		45,788,489		45,633,491

Diluted earnings per common share		$	0.07	$	0.22	$	0.32	$	0.87

* The change in the number of weighted average shares outstanding is due to 930,678 stock options being exercised in the first nine months of fiscal 2003.

5. DERIVATIVE FINANCIAL INSTRUMENTS

SFAS 133, “Accounting for Derivative Instruments and Hedging Activities,” 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.

Periodically, the Company uses derivative financial instruments in the management of its foreign currency exchange and interest rate exposures. As of September 27, 2003 there were no foreign currency forward exchange contracts or interest rate instruments outstanding. 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. Changes in the fair values of the forward agreements were recognized through earnings.

6. LITIGATION

On June 3, 2003, Stone & Webster, Inc. and Stone & Webster Purchasing, Inc. (collectively, “S&W”) commenced a lawsuit in the U.S. District Court for the Southern District of Iowa Central Division, against Deltak, L.L.C., one of our subsidiaries. S&W alleges Deltak committed breach of contract and warranty and made certain intentional misrepresentations in connection with a contract to

provide two heat recovery steam generators for a project in which S&W was the general contractor. S&W alleges it incurred significant cost increases and delays on the project resulting from certain design, constructability and fabrication issues related to the heat recovery steam generators provided by Deltak, and S&W is seeking unspecified damages for costs incurred plus interest and punitive damages. We believe we have meritorious defenses to the allegations and intend to defend this action vigorously. In addition, Deltak has filed counterclaims against S&W alleging, among other things, breach of contract and unjust enrichment. The ultimate impact of this matter on the consolidated financial position or results of operations cannot be determined at this time.

The Company is also involved in other 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.

7. COMMITMENTS AND CONTINGENCIES

Estimated costs related to product warranty are accrued and included in cost of sales as revenue is recognized. 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.

A reconciliation of the changes to our warranty accrual for the periods indicated is as follows:


		Three Months Ended						Nine Months Ended

		September 27,			September 28,			September 27,			September 28,
		2003			2002			2003			2002

Balance at beginning of period		$	18,940		$	18,722		$	19,460		$	16,489
	Accruals during the period		2,830			1,553			8,145			6,859
	Changes in previous accruals		(274	)		(3	)		(2,159	)		(643	)
	Settlements made (in cash or in kind) during the period		(2,981	)		(2,496	)		(6,931	)		(4,929	)

	Ending balance	$	18,515		$	17,776		$	18,515		$	17,776

During the periods presented above, the Company had changes in previous accruals due to the lapse of warranty periods and lesser or greater than expected settlements under warranty claims. The Company continues to review its warranty accrual policy in light of its changing business operations and settlement experience.

At September 27, 2003 we had a contingent liability for stand-by letters of credit totaling $36.2 million that have been issued and are outstanding that generally were issued to secure performance on customer contracts. Currently, there are no amounts drawn upon these letters of credit.

The Company is subject to certain debt covenants as well as restrictions on the ability to incur additional debt, sell assets and pay dividends as described in more detail in the Company’s Form 10-K for the fiscal year ended December 28, 2002. The Company is currently in compliance with these covenants and restrictions.

Under a management agreement with Harvest Partners, Inc. we are contractually committed to annual payments of certain fees for financial advisory and strategic planning services to Harvest of $1.25 million per year. The terms of the management agreement provide for automatic renewals of additional one-year periods commencing each August unless terminated for cause or by Harvest. During any subsequent renewal period of the management agreement the management fee will decrease to $750,000 per year if the affiliates of Harvest Partners, Inc. sell more than 50% of the shares of the Company’s common stock they owned at the time of the Company’s initial public offering on May 23, 2001. The management fee will be eliminated and the management agreement will terminate, if in any subsequent renewal period the affiliates of Harvest Partners, Inc. sell more than 66.6% of the shares of the Company’s common stock they owned on May 23, 2001.

8. SEGMENT INFORMATION

The “management approach” called for by SFAS 131, “Disclosures about Segments of an Enterprise and Related Information” 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 and transactions 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 27, 2003, 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 27,		September 28,		September 27,		September 28,
	2003		2002		2003		2002

Revenues	$	29,428	$	52,404	$	27,873	$	60,269
Interest expense		191		508		308		662
Depreciation and amortization		327		447		531		525
Income tax provision		215		2,021		1,780		4,415
Segment income		336		3,162		2,784		6,906
Assets		77,821		160,002		94,603		131,412
Capital expenditures		13		25		73		317


	Nine Months Ended				Nine Months Ended

	September 27,		September 28,		September 27,		September 28,
	2003		2002		2003		2002

Revenues	$	96,605	$	258,926	$	101,724	$	220,190
Interest expense		651		1,455		1,008		2,159
Depreciation and amortization		1,009		1,082		1,633		1,625
Income tax provision		656		10,967		6,918		14,824
Segment income		2,778		17,154		14,340		23,185
Assets		77,821		160,002		94,603		131,412
Capital expenditures		109		298		189		1,243

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


		Three Months Ended						Nine Months Ended

		September 27,			September 28,			September 27,			September 28,
		2003			2002			2003			2002

Net income:
Total segment income		$	3,120		$	10,068		$	17,118		$	40,339
Unallocated interest income			173			21			441			77
Other			(278	)		(200	)		(2,858	)		(665	)

	Consolidated net income	$	3,015		$	9,889		$	14,701		$	39,751


		September 27,		December 28,
		2003		2002

Assets:
Total segment assets		$	172,424	$	246,400
Corporate cash and cash equivalents			62,913		52,805
Other unallocated amounts, principally deferred tax assets			66,802		70,499

	Consolidated total assets	$	302,139	$	369,704

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


			Three Months Ended				Nine Months Ended

			September 27,		September 28,		September 27,		September 28,
			2003		2002		2003		2002

Heat Recovery Equipment segment:
	HRSGs		$	23,769	$	41,451	$	74,915	$	194,614
	Specialty boilers			5,659		10,953		21,690		64,312

				29,428		52,404		96,605		258,926

Auxiliary Power Equipment segment:
	Exhaust systems			10,574		7,652		37,381		47,046
	Inlet systems			12,520		34,259		40,103		114,032
	Other			4,779		18,358		24,240		59,112

				27,873		60,269		101,724		220,190

		Total	$	57,301	$	112,673	$	198,329	$	479,116

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


		Three Months Ended				Nine Months Ended

		September 27,		September 28,		September 27,		September 28,
		2003		2002		2003		2002

North America		$	41,586	$	82,763	$	142,281	$	411,259
South America			176		4,389		1,365		8,489
Europe			11,370		13,373		25,769		26,011
Asia			409		11,338		8,487		23,873
Other			3,760		810		20,427		9,484

	Total	$	57,301	$	112,673	$	198,329	$	479,116

9. 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 balances, at and for the three and nine months ended September 27, 2003 and September 28, 2002 are as follows:


	Revenues

	Three Months Ended						Accounts Receivable

	September 27,			September 28,			September 27,			September 28,
	2003			2002			2003			2002

General Electric		35	%		38	%		17	%		15	%
Exxon Mobil		16	%		1	%		3	%		0	%
Southern Company		13	%		11	%		0	%		22	%


	Nine Months Ended

	September 27,			September 28,
	2003			2002

General Electric		28	%		36	%
Exxon Mobil		10	%		1	%
Southern Company		9	%		16	%

Not included in the tables above is a customer that accounts for approximately 30% and 16% of our accounts receivable balance as of September 27, 2003 and September 28, 2002, respectively. They comprise under 10 percent of our revenues for the three and nine month periods presented above. A portion of the amount due relates to revenue recognized in 2002 and 2001 with payment on these amounts delayed due to issues between our customer and the end-user. Resolution is not expected to materially affect the Company’s operations.

10. SUPPLEMENTAL CASH FLOW INFORMATION

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


	Nine Months Ended

	September 27,			September 28,
	2003			2002

Accounts receivable	$	38,160		$	9,035
Inventories		334			99
Costs and estimated earnings in excess of billings		23,715			53,898
Accounts payable		(6,468	)		(30,130	)
Accrued expenses and other		(12,413	)		(5,083	)
Billings in excess of costs and estimated earnings		(37,705	)		(19,152	)

	$	5,623		$	8,667

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


		Nine Months Ended

		September 27,		September 28,
		2003		2002

Cash paid during the period for:
	Interest	$	1,378	$	3,254
	Income taxes		3,546		24,364

11. 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 adoption of SFAS 143 did not have a material impact on the Company’s consolidated financial statements.

In July 2002, the FASB issued SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities”. Under SFAS 146, the recognition of costs associated with exit or disposal activities occurs at the time they are incurred/paid rather than when management commits to a plan of exit or disposal. Since SFAS 146 is to be applied prospectively there is no impact of adoption. However, timing differences may exist between the announced restructuring plans and corresponding amounts recognized in the financial statements. See footnote 13 for more information.

In December 2002, the FASB issued SFAS 148, “Accounting for Stock-Based Compensation- Transition and Disclosure”, which amends SFAS 123, “Accounting for Stock-Based Compensation”. SFAS 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. Additionally, SFAS 148 amends the disclosure requirements of SFAS 123 to require more prominent and more frequent disclosures in financial statements of the effects of stock-based compensation. SFAS 148 is effective for fiscal years ending after December 15, 2002 with interim disclosure provisions being effective for financial reports containing financial statements for interim periods beginning after

December 15, 2002. The Company does not currently plan to change to the fair value method of accounting for its stock based compensation. Therefore, the Company anticipates that the adoption of this statement will not have a material impact on its financial condition or results of operations.

In April, 2003, the FASB issued SFAS 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities”. SFAS 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS 133. The new guidance amends SFAS 133 for decisions made as part of the Derivatives Implementation Group (“DIG”) process that effectively required amendments to SFAS 133, and decisions made in connection with other FASB projects dealing with financial instruments and in connection with implementation issues raised in relation to the application of the definition of a derivative and characteristics of a derivative that contains financing components. It also clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows. SFAS 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The Company believes that the effects of adopting this standard will not have a material impact on its financial condition or results of operations.

12. COMPREHENSIVE INCOME

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


	Three Months Ended						Nine Months Ended

	September 27,			September 28,			September 27,			September 28,
	2003			2002			2003			2002

Net income	$	3,015		$	9,889		$	14,701		$	39,751
Foreign currency translation adjustments		(1,757	)		(584	)		(815	)		328

Comprehensive income	$	1,258		$	9,305		$	13,886		$	40,079

13. SUBSEQUENT EVENT

The Company announced a management restructuring plan on October 24, 2003. Under the terms of the plan, certain employees are being offered either one-time termination or retirement benefits. These staff reductions are an element of the Company’s continuing efforts to reduce costs and improve competitiveness. Although the total cost related to these programs is not certain at this time, the Company expects to incur charges of approximately $5 million to $6 million during the fourth quarter of fiscal year 2003. Under FAS 146, the recognition of costs associated with exit activities occurs at the time such costs are incurred. As such, there are no liabilities or costs reflected in the third quarter of fiscal year 2003.

In addition to the above mentioned fourth quarter charge, certain employees that have been offered the retirement incentive packages may also enter into consulting agreements subsequent to their retirement. Any costs associated with the consulting agreements will be expensed as services are rendered, primarily during fiscal year 2004.

Also under the restructuring plan, retiring employees have been offered the right to amend their stock option agreements to extend the date such options remain exercisable from 90 days after termination of employment to one year after termination of employment. In some cases, this plan also allows for the acceleration of vesting for certain stock options. There may be costs associated with these changes due to variable plan option accounting under APB Opinion No. 25, “Accounting for Stock Issued to Employees”, the amount of which will be determined upon the effectiveness of the related stock option extension agreements.

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 28, 2002, 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; Clinton, South Carolina; Monterrey, Mexico; Toluca, Mexico; and Heerlen, Netherlands.

During the second quarter of 2003, we decided to permanently close our San Antonio, Mexico plant effective April 30, 2003. The decision was based primarily on a reduction in volume due to the downturn in new power plant construction within the U.S. The Auxiliary Power Equipment segment recorded approximately $170,000 in severance and other costs associated with the elimination of approximately 35 employees and the closing of the plant. This plant closing follows our decision in the first quarter of 2002 to close our Ft. Smith, Arkansas plant effective April 30, 2002. The decision to close the Ft. Smith plant 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. Severance costs related to the elimination of approximately 100 employee positions in the Auxiliary Power Equipment segment for this closure totaled $875,000. During 2002 and continuing into 2003 we have also scaled back operations at other locations in our efforts to continually seek to further our use of low-cost subcontractor fabrication as well as manage our costs due to the downturn in the U.S. market. Additional workforce reductions taking place in 2002 in the Auxiliary Power Equipment segment either through lay-offs or attrition were 199, with severance costs of $125,000. The Heat Recovery Equipment segment reductions totaled 213, with total severance costs of $340,000. In 2003 the Auxiliary Power Equipment and Heat Recovery segments have further reduced their workforce by 201 and 41, respectively. The severance costs associated with these 2003 workforce reductions totaled approximately $390,000. All amounts have been paid.

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 27,		September 28,		September 27,		September 28,
		2003		2002		2003		2002

Revenues		$	57,301	$	112,673	$	198,329	$	479,116
Cost of sales			43,454		84,175		146,314		378,000

	Gross profit		13,847		28,498		52,015		101,116
Selling and administrative expenses			8,578		11,138		26,697		32,414

	Operating income		5,269		17,360		25,318		68,702
Interest expense			326		1,149		1,218		3,537

Income before income taxes			4,943		16,211		24,100		65,165
Income tax provision			1,928		6,322		9,399		25,414

Net income		$	3,015	$	9,889	$	14,701	$	39,751

Our fiscal year ends on the last Saturday in December. As a result, references in this quarterly report to fiscal year 2003 refer to the fiscal year ending December 27, 2003, and to fiscal year 2002 refer to the fiscal year ended December 28, 2002. References to the third quarter of fiscal year 2003 refer to the three months ended September 27, 2003 and references to the third quarter of fiscal year 2002 refer to the three months ended September 28, 2002.

Three months ended September 27, 2003 compared to three months ended September 28, 2002

Revenues

Revenues decreased 49.1% to $57.3 million for the third quarter of fiscal year 2003 from $112.7 million for the third quarter of fiscal year 2002. This decrease is primarily the result of lower revenue recognition, in the current quarter, due to a continued decline in new orders for both Heat Recovery and Auxiliary Power equipment. Demand in the gas turbine power generation equipment industry began to decrease during the latter half of 2001 and that trend has continued into 2003. Consequently, the development of domestic gas turbine power plants has slowed considerably from September of 2001. We anticipate that revenues in fiscal 2003 will be significantly lower than revenues in 2002 due to the downturn in new power plant construction within the United States.

The following table sets forth our segment revenues for the third quarter of fiscal years 2003 and 2002 (dollars in thousands):


			Three Months Ended

			September 27,		September 28,		Percentage
			2003		2002		Change

Heat Recovery Equipment segment:
	HRSGs		$	23,769	$	41,451		-42.7	%
	Specialty boilers			5,659		10,953		-48.3	%

		Total segment	$	29,428	$	52,404		-43.8	%

Auxiliary Power Equipment segment:
	Exhaust systems		$	10,574	$	7,652		38.2	%
	Inlet systems			12,520		34,259		-63.5	%
	Other			4,779		18,358		-74.0	%

		Total segment	$	27,873	$	60,269		-53.8	%

The Heat Recovery Equipment segment revenues decreased 43.8% to $29.4 million for the third quarter of fiscal year 2003. Revenues for HRSGs decreased 42.7% to $23.8 million. The volume and size of orders booked into backlog decreased dramatically during 2002. This trend has continued into the first nine months of 2003. Consequently, lower recognition of revenues has occurred in the following periods. Revenues for specialty boilers decreased by 48.3% to $5.7 million. This decrease was also due primarily to a significantly lower level of orders booked in prior periods and subsequently recognized as revenue.

The Auxiliary Power Equipment segment revenues decreased 53.8% to $27.9 million for the third quarter of fiscal year 2003. Revenues for exhaust systems increased by 38.2% to $10.6 million. This increase is primarily due to several large orders received during the second half of 2002 and the first half of 2003 as compared to the same periods for 2002. Revenues for inlet systems and other equipment decreased by 63.5% to $12.5 million and 74.0% to $4.8 million, respectively. The significant decrease this quarter is due to a significantly lower level of orders booked during 2002 and the first half of 2003.

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


		Three Months Ended

		September 27, 2003					September 28, 2002

				Percent					Percent
		Revenue		of Total			Revenue		of Total

North America		$	41,586		72.6	%	$	82,763		73.4	%
South America			176		0.3	%		4,389		3.9	%
Europe			11,370		19.8	%		13,373		11.9	%
Asia			409		0.7	%		11,338		10.1	%
Other			3,760		6.6	%		810		0.7	%

	Total	$	57,301		100.0	%	$	112,673		100.0	%

Revenues in North America comprised 72.6% of our revenues for the third quarter of fiscal year 2003 and 73.4% for the third quarter of fiscal year 2002. Revenues in North America decreased 49.8% to $41.6 million for the third quarter of fiscal year 2003, primarily as a result of a significant decrease in the volume of products sold. This volume decrease was caused primarily by the decrease in the development of gas turbine power plants in the U.S. gas turbine power generation equipment industry beginning in the latter half of

2001 and continuing into 2003. A number of factors have contributed to this situation such as debt and liquidity issues of several merchant power producing companies. While it is believed that the long-term need for power plants on a world-wide basis is substantial, the current demand, in the U.S., has slowed considerably.

Revenues in Asia decreased 96.4% for the third quarter of fiscal year 2003 to $0.4 million. However, the Company continues to believe Asia represents a significant growth opportunity and will account for an increasingly larger proportion of the Company’s revenues over the next several years. For the third quarter, delays in booking new business in Asia has impacted revenue recognition. While the outbreak of Severe Acute Respiratory Syndrome (SARS) is no longer an issue, delays for other components on certain Asia projects from other vendors has impacted the timing of recording bookings and corresponding revenue. Revenues in Europe decreased by 15.0% to $11.4 million due to the timing of revenue recognized on several projects being sold last year compared to this year.

Other revenues increased to $3.8 million for the third quarter of fiscal year 2003 primarily as a result of an increase in the number of projects in the Middle East.

Gross Profit

Gross profit decreased 51.4% to $13.8 million for the third quarter of fiscal year 2003 from $28.5 million for the third quarter of fiscal year 2002. Gross profit as a percentage of revenues decreased to 24.2% in the third quarter of fiscal year 2003 from 25.3% in the third quarter of fiscal year 2002. Beginning in 2002 our gross profit as a percentage of revenues increased each quarter from 18.0% in the first quarter of 2002 to 28.2% in the fourth quarter. However, as seen in the first three quarters of 2003, this percentage has begun to decrease. Gross profit benefited by approximately $2.5 million during the third quarter as a result of actual project costs being lower than originally estimated and recognized on jobs closed in the third quarter. Factors contributing to this include our continuing efforts to shift production to lower cost countries as well as improved product quality that has reduced rework costs. In addition, a shift in the product mix within our two operating segments as well as an increase of $1.0 million due to cancellation fees exceeding our out-of-pocket costs on cancelled jobs have also positively contributed to the gross profit percentage in the third quarter. However, our gross margin percentage is expected to continue to decline during the rest of this fiscal year and into the next fiscal year. This expected decline is due primarily to an increasingly competitive market, which will likely reduce our gross profit percentages to more historic levels experienced prior to 2002.

Selling and Administrative Expenses

Selling and administrative expenses decreased 23.0% to $8.6 million for the third quarter of fiscal year 2003 from $11.1 million for the third quarter of fiscal year 2002. This decrease is due to decreases in sales and administrative personnel occurring in the latter part of 2002 as well as other cost savings measures implemented in response to the downturn in the U.S. power market. As a percentage of revenues, selling and administrative expenses increased to 15.0% for the third quarter of fiscal year 2003 from 9.9% for the comparable period of fiscal year 2002 as a result of our decreasing revenues.

Operating Income

Operating income decreased to $5.3 million for the third quarter of fiscal year 2003 from $17.4 million in the third quarter of fiscal year 2002. The decrease in revenues and associated gross profit were the main contributors to this decrease.

Interest Expense

Interest expense decreased to $0.3 million for the third quarter of fiscal year 2003 from $1.1 million for the third quarter of fiscal year 2002. This decrease is due primarily to a reduction in total debt of $26.8 million, of which, voluntary principal payments made in the third quarter amounted to $7.1 million. Additionally, our borrowing rate has decreased by approximately 100 basis points due to general market interest rate reductions. At September 27, 2003, our term debt bore interest at an average rate of 2.46%.

Income Taxes

The Company is currently reflecting a 39.0% effective tax rate in the tax provision. Also, the reduction of the deferred tax asset related to the amortization of goodwill 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 27, 2003.

Nine months ended September 27, 2003 compared to nine months ended September 28, 2002

Revenues

Revenues decreased 58.6% to $198.3 million for the first nine months of fiscal year 2003 from $479.1 million for the first nine months of fiscal year 2002. This decrease is primarily the result of lower revenue recognition, in the first nine months of this fiscal year, due to a continued decline in new orders for both Heat Recovery and Auxiliary Power equipment. Demand in the gas turbine power generation equipment industry began to decrease during the latter half of 2001 and that trend has continued into 2003. Consequently, the development of domestic gas turbine power plants has slowed considerably from September of 2001. We anticipate that revenues in fiscal 2003 will be significantly lower than revenues in 2002 due to the downturn in new power plant construction within the United States.

The following table sets forth our segment revenues for the first nine months of fiscal years 2003 and 2002 (dollars in thousands):


			Nine Months Ended

			September 27,		September 28,		Percentage
			2003		2002		Change

Heat Recovery Equipment segment:
	HRSGs		$	74,915	$	194,614		-61.5	%
	Specialty boilers			21,690		64,312		-66.3	%

		Total segment	$	96,605	$	258,926		-62.7	%

Auxiliary Power Equipment segment:
	Exhaust systems		$	37,381	$	47,046		-20.5	%
	Inlet systems			40,103		114,032		-64.8	%
	Other			24,240		59,112		-59.0	%

		Total segment	$	101,724	$	220,190		-53.8	%

The Heat Recovery Equipment segment revenues decreased 62.7% to $96.6 million for the first nine months of fiscal year 2003. Revenues for HRSGs decreased 61.5% to $74.9 million. The volume and size of orders booked into backlog decreased dramatically during 2002 and the first nine months of 2003, which results in lower recognition of revenues in the following periods. Revenues for specialty boilers decreased by 66.3% to $21.7 million. This decrease was due primarily to a lower level of revenue recognized for selective catalytic reduction (SCR) units. The large decrease in SCR units was expected, and is due to one-time environmental compliance-related investments made in the U.S.

The Auxiliary Power Equipment segment revenues decreased 53.8% to $101.7 million for the first nine months of fiscal year 2003. Revenues for exhaust systems decreased by 20.5% to $37.4 million. This decline is primarily due the downturn of the domestic power market resulting in a significantly lower level of orders. Revenues for inlet systems and other equipment decreased by 64.8% to $40.1 million and 59.0% to $24.2 million, respectively. The significant decrease this quarter is also due to a significantly lower level of orders booked during 2002 and the first half of 2003.

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 2003, 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 in 2002 and continuing into 2003 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 gas fired power plants on a world-wide basis is substantial, lower demand in the United States during 2002 and into the first nine months of 2003, has negatively impacted our bookings and revenue. We anticipate that increasing demand for new power plants outside of the United States will continue and provide a good market for our products.

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


		Nine Months Ended

		September 27, 2003					September 28, 2002

				Percent					Percent
		Revenue		of Total			Revenue		of Total

North America		$	142,281		71.7	%	$	411,259		85.8	%
South America			1,365		0.7	%		8,489		1.8	%
Europe			25,769		13.0	%		26,011		5.4	%
Asia			8,487		4.3	%		23,873		5.0	%
Other			20,427		10.3	%		9,484		2.0	%

	Total	$	198,329		100.0	%	$	479,116		100.0	%

Revenues in North America comprised 71.7% of our revenues for the first nine months of fiscal year 2003 and 85.8% for the first nine months of fiscal year 2002. Revenues in North America decreased 65.4% to $142.3 million for the first nine months of fiscal year 2003, primarily as a result of a significant decrease in the volume of products sold. This volume decrease was caused primarily by the decrease in the development of gas turbine power plants in the U.S. gas turbine power generation equipment industry beginning in the latter half of 2001 and continuing into 2003. A number of factors have contributed to this situation such as debt and liquidity issues of several merchant power producing companies. 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 decreased 64.4% for the first nine months of fiscal year 2003 to $8.5 million. However, the Company continues to believe Asia represents a significant growth opportunity and will account for an increasingly larger proportion of the Company’s revenues over the next several years. For the first nine months of 2003, delays in booking new business in Asia has impacted revenue recognition. While the outbreak of Severe Acute Respiratory Syndrome (SARS) is no longer an issue, delays for other components on certain Asia projects from other vendors has impacted the timing of recording bookings and corresponding revenue. Revenues in Europe were essentially flat at $25.8 million for the first nine months of 2003 compared to $26.0 million for 2002.

Other revenues increased to $20.4 million for the first nine months of fiscal year 2003 primarily as a result of an increase in the number of projects in the Middle East.

Gross Profit

Gross profit decreased 48.6% to $52.0 million for the first nine months of fiscal year 2003 from $101.1 million for the first nine months of fiscal year 2002. Gross profit as a percentage of revenues increased to 26.2% in the first nine months of fiscal year 2003 from 21.1% in the first nine months of fiscal year 2002. Beginning in 2002 our gross profit as a percentage of revenues increased each quarter from 18.0% in the first quarter of 2002 to 28.2% in the fourth quarter. However, as seen in the first three quarters of 2003, this percentage has begun to decrease. Gross profit benefited by approximately $11.7 million during the first nine months of 2003 as a result of actual project costs being lower than originally estimated and recognized on jobs closed in the first nine months of 2003. Factors contributing to this include our continuing efforts to shift production to lower cost countries as well as improved product quality that has reduced rework costs. In addition, a shift in the product mix within our two operating segments as well as an increase of $1.8 million due to cancellation fees exceeding our out-of-pocket costs on cancelled jobs have also positively contributed to the gross profit percentage increase in the first nine months of 2003. However, our gross margin percentage is expected to continue to decline during the rest of this fiscal year and into the next fiscal year. This expected decline is due primarily to an increasingly competitive market, which will likely reduce our gross profit percentages to more historic levels experienced prior to 2002.

As a result of our focus to shift our manufacturing capacity 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 were included in our Auxiliary Power Equipment segment, have been disposed. Additionally, in connection with the lay offs of 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. All severance costs were paid in 2002.

Selling and Administrative Expenses

Selling and administrative expenses decreased 17.6% to $26.7 million for the first nine months of fiscal year 2003 from $32.4 million for the first nine months of fiscal year 2002. Not including approximately $1.0 million of costs incurred related to our strategic acquisition efforts incurred in the first nine months of fiscal year 2003, selling and administrative costs decreased approximately $6.7 million. This decrease is due to decreases in sales and administrative personnel occurring in the latter part of 2002 as well as other cost savings measures implemented in response to the downturn in the U.S. power market. Slightly offsetting these decreases in the first nine months of the year was an increase of $0.2 million to our bad debt expense. Although our bad debt experience historically has been low, the provision for bad debts increased by the $0.2 million due to uncertainty as to collection of amounts due on some small projects. Changes in our provision for bad debts primarily are impacted by the circumstances relative to specific projects and not by the overall growth or decline or our business.

As a percentage of revenues, selling and administrative expenses increased to 13.5% for the first nine months of fiscal year 2003 from 6.8% for the comparable period of fiscal year 2002 as a result of our decreasing revenues.

Operating Income

Operating income decreased to $25.3 million for the first nine months of fiscal year 2003 from $68.7 million in the first nine months of fiscal year 2002. The decrease in revenues and associated gross profit were the main contributors to this decrease.

Interest Expense

Interest expense decreased to $1.2 million for the first nine months of fiscal year 2003 from $3.5 million for the first nine months of fiscal year 2002. This decrease is due primarily to voluntary principal payments that reduced total debt by $26.8 million during the first nine months of 2003. Additionally, our borrowing rate has decreased by approximately 100 basis points due to general market interest rate reductions. At September 27, 2003, our term debt bore interest at an average rate of 2.46%.

Income Taxes

Backlog

Backlog decreased to approximately $185.3 million at September 27, 2003, compared to $341.5 million at September 28, 2002. Based on production and delivery schedules we believe that up to approximately $167 million or 90% of our backlog at September 27, 2003, 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. Backlog may vary significantly quarter to quarter due to the timing of that commitment. Through the end of the first quarter of fiscal 2003, we had experienced minimal cancellations because of this conservative policy. However, during the second and third quarters of 2003 orders totaling approximately $24 million previously included in backlog were cancelled. These de-bookings were in part due to the effect of turbine cancellations placed on our customer as well as a separate customer’s decision to terminate a U. S. power plant in development. Cancellation fees and revenue recognition have exceeded our out-of-pocket costs on these projects. The impact of these cancellations has increased our gross margin by $1.8 million or 1.0% as a percentage of revenues for the first nine months of fiscal year 2003.

Liquidity and Capital Resources

Our primary sources of cash are net cash flow from operations and borrowings under our credit facilities. 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 decreased to $33.4 million for the first nine months of fiscal year 2003 from $54.3 million for the first nine months of fiscal year 2002. Lower earnings combined with expected fluctuations in working capital are the primary factors for this decrease.

Investing Activities

Net cash provided by investing activities increased to $0.3 million for the first nine months of fiscal year 2003 from $1.0 million used for investing activities for the first nine months of fiscal year 2002 due to our decrease in capital expenditures and proceeds from the sale of Ft. Smith assets.

Financing Activities

Net cash used by financing activities was $26.5 million in the first nine months of fiscal year 2003 compared to $45.5 million in the first nine months of fiscal year 2002. Long-term debt payments and proceeds from the issuance of common stock make up the activity for the first nine months of 2003. 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.

At September 27, 2003, the Company had $33.3 million outstanding under the term loan and no amount was outstanding under the revolver. Letters of credit totaling $36.2 million were issued and outstanding at September 27, 2003. 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 27, 2003 the term debt of $33.3 million bore interest at an average rate of approximately 2.46%.

The Company’s amended and restated senior credit facility:

	•		is guaranteed by all of its domestic subsidiaries;

	•		is secured by a lien on all of 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.

The Company is currently in compliance with all covenant requirements. 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.

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.

The following table summarizes our fixed cash obligations as of September 27, 2003 over various future periods (in thousands):


		Payments Due by Period

		Less than		1-3		4-5		After 5
Contractual Cash Obligations		1 Year		Years		Years		Years		Total

Long-term Debt		$	19	$	33,265	$	—	$	—	$	33,284
Operating Leases			2,292		3,399		2,619		2,994		11,304

	Total Contractual Cash Obligations	$	2,311	$	36,664	$	2,619	$	2,994	$	44,588

Also, at September 27, 2003 we had a contingent liability for stand-by letters of credit totaling $36.2 million that have been issued and are outstanding that generally were issued to secure performance on customer contracts. Currently, there are no amounts drawn upon these letters of credit.

Finally, under a management agreement with Harvest Partners, Inc. we are contractually committed to annual payments of certain fees for financial advisory and strategic planning services to Harvest of $1.25 million per year. The terms of the management agreement provide for automatic renewals of additional one-year periods commencing each August unless terminated for cause or by Harvest. During any subsequent renewal period of the management agreement the management fee will decrease to $750,000 per year if the affiliates of Harvest Partners, Inc. sell more than 50% of the shares of the Company’s common stock they owned at the time of the Company’s initial public offering on May 23, 2001. The management fee will be eliminated and the management agreement will terminate, if in any subsequent renewal period the affiliates of Harvest Partners, Inc. sell more than 66.6% of the shares of the Company’s common stock they owned on May 23, 2001.

At September 27, 2003, the Company had available cash on hand of approximately $66.3 million and approximately $38.8 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 2003. The Company estimates that its total net capital expenditures for fiscal year 2003 will be approximately $0.5 million compared to $1.3 million in 2002. 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 28, 2002, filed with the Securities and Exchange Commission. In fiscal 2003, the Company may actively seek and consider acquisitions of or investments in complementary businesses, products or services. The consummation of any acquisition using cash will affect the Company’s liquidity.

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 28, 2002, 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 would have increased or decreased our year to date fiscal 2003 revenues by approximately $1.0 million.

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. Similar to our Heat Recovery segment, changes in job performance, job conditions, estimated profitability and final contract settlements may result in revisions to job costs and income amounts that were originally estimated.

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 gross profit and related operating income.

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. In 2003, a one percent fluctuation of our warranty expense could increase or decrease cost of goods sold by approximately $28,000.

A reconciliation of the changes to our warranty accrual for the periods indicated are as follows:


		Three Months Ended						Nine Months Ended

		September 27,			September 28,			September 27,			September 28,
		2003			2002			2003			2002

Balance at beginning of period		$	18,940		$	18,722		$	19,460		$	16,489
	Accruals during the period		2,830			1,553			8,145			6,859
	Changes in previous accruals		(274	)		(3	)		(2,159	)		(643	)
	Settlements made (in cash or in kind) during the period		(2,981	)		(2,496	)		(6,931	)		(4,929	)

	Ending balance	$	18,515		$	17,776		$	18,515		$	17,776

Income Taxes- Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Company classifies deferred tax assets and liabilities into current and non-current amounts based on the classification of the related assets and liabilities. Certain judgments are made relating to recoverability of deferred tax assets, level of expected future taxable income and available tax planning strategies. These judgments are routinely reviewed by management.

Goodwill and Impairment of Long-Lived Assets- We perform annual impairment analyses during the fourth quarter on our recorded goodwill and long-lived assets or whenever events and circumstances indicate that they may be impaired. The analysis includes assumptions related to future revenues, cash flows, and net assets. Factors that would cause a more frequent test for impairment include, among other things, a significant negative change in the estimated future cash flows of a reporting unit that has goodwill because of an event or a combination of events. 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 2003 and the first nine months of fiscal 2002, we incurred consulting expenses from Harvest in the amounts of $0.9 million in each nine month period. Under a management agreement with Harvest we are contractually committed to annual payments of certain fees for financial advisory and strategic planning services to Harvest of $1.25 million per year. The terms of the management agreement provide for automatic renewals of additional one-year periods commencing each August unless terminated for cause or by Harvest. During any subsequent renewal period of the management agreement the management fee will decrease to $750,000 per year if the affiliates of Harvest Partners, Inc. sell more than 50% of the shares of the Company’s common stock they owned at the time of the Company’s initial public offering on May 23, 2001. The management fee will be eliminated and the management agreement will terminate, if in any subsequent renewal period the affiliates of Harvest Partners, Inc. sell more than 66.6% of the shares of the Company’s common stock they owned on May 23, 2001.

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 2003 by approximately $0.3 million. However, under the terms of our amended and restated senior credit facility we are allowed to lock into interest rates for a period of up to twelve months on our long-term debt. In January 2003 we entered into fixed rate agreements currently yielding an average rate of 2.46% with varying maturity dates extending as long as one year on all of our outstanding long-term debt.

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 forward exchange agreements. There were no forward agreements in place at September 27, 2003.

Recent Accounting Pronouncements

be made. SFAS 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. The adoption of SFAS 143 did not have a material impact on the Company’s consolidated financial statements.

In April 2003, the FASB issued SFAS 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities”. SFAS 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS 133. The new guidance amends SFAS 133 for decisions made as part of the Derivatives Implementation Group (“DIG”) process that effectively required amendments to SFAS 133, and decisions made in connection with other FASB projects dealing with financial instruments and in connection with implementation issues raised in relation to the application of the definition of a derivative and characteristics of a derivative that contains financing components. It also clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows. SFAS 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The Company believes that the effects of adopting this standard will not have a material impact on its financial condition or results of operations.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures (as such term is defined under Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that information related to us, including our consolidated subsidiaries, required to be disclosed in our periodic reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Security and Exchange Commissions rules and forms.

Changes in Internal Controls Over Financial Reporting

There have been no significant changes in our internal controls over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

PART II. OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K


(a) Exhibits

31.1		Chief Executive Officer Certification pursuant to Rule 13a-14(a) and Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Chief Financial Officer Certification pursuant to Rule 13a-14(a) and Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Chief Executive Officer Certification pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Chief Financial Officer Certification pursuant to Rule 13a-14(b) and 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, 2003 filed to report under Items 5, 7 and 9 earnings for the quarter ended June 28, 2003.

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 10, 2003		By: /s/ Larry Edwards

		Larry Edwards
		Chairman and Chief Executive Officer

		Global Power Equipment Group Inc.
DATED: November 10, 2003		By: /s/ Michael H. Hackner

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

Exhibit Index


Exhibit No.
31.1		Chief Executive Officer Certification pursuant to Rule 13a-14(a) and Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Chief Financial Officer Certification pursuant to Rule 13a-14(a) and Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Chief Executive Officer Certification pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Chief Financial Officer Certification pursuant to Rule 13a-14(b) and 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: 2003 September (Form 10-Q)

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