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GSE: Significant margin expansion in spite of reduced volume

06 Nov '12

4 min read

GSE Holding Inc, a leading global provider of highly engineered geosynthetic containment solutions for environmental protection and confinement applications, reported its financial results for the Company's third quarter of 2012.

Selected highlights for the third quarter of 2012:

• Third quarter sales of $121.2 million vs. $146.8 million in 3Q 2011
• Gross margin of 16.8% vs. 14.2% in 3Q 2011
• Net income of $5.2 million vs. $3.8 million in 3Q 2011
• Adjusted EBITDA of $12.6 million vs. $13.5 million in 3Q 2011
• Adjusted EBITDA Margin increased to 10.4% vs. 9.2% in 3Q 2011
• Adjusted EPS of $0.27; fully diluted EPS of $0.26

Mark Arnold, President and Chief Executive Officer stated that, "Despite the challenging operating environment, we expanded our margins and increased net income by 38% primarily due to the Company's focus on higher margin projects in mining, coal ash and fracking. At the same time we experienced reduced sales volume compared with the prior year quarter due to our decision to decline to bid on certain low margin projects in the U.S. landfill market."

The Company experienced strong mining orders, highlighting the relative strength of the precious metals mining segment compared to iron ore and coal. We saw increased sales of water containment projects across all of our geographies. Additionally, municipal and industrial waste opportunities in China continue to contribute to sales growth.

Mr. Arnold added, "We expect fourth quarter results to be improved relative to the prior year."

Total revenue for the third quarter was $121.2 million, compared to $146.8 million for the prior year period. Lower sales volume in North America, declines in raw material prices and changes in foreign currency exchange rates, principally the Euro, contributed to the decrease in sales. These decreases were partially offset by better pricing and changes in product mix.

Gross margin for the third quarter of 2012 improved to 16.8% from 14.2% in the prior year period, highlighting the Company's focus on more profitable end markets and higher value products. Gross profit declined slightly, $0.4 million, to $20.4 million in the third quarter of 2012 from $20.8 million in the prior year period.

During the quarter, Selling, General and Administrative (SG&A) expenses declined to $11.9 million compared to $12.8 million in the prior year. The decrease in SG&A was primarily due to higher professional fees incurred in the prior year period related to the initial public offering (IPO).

Net income for the quarter was $5.2 million, or $0.26 per fully diluted share, compared to $3.8 million, or $0.32 per fully diluted share, in the prior year period. Adjusted net income was $5.4 million, or $0.27 per fully diluted share, compared to $4.2 million, or $0.36 per fully diluted share, in the same prior year period.

Adjusted EBITDA declined $0.9 million to $12.6 million from $13.5 million in the prior year period. Adjusted EBITDA margin improved 120 basis points to 10.4% primarily because of improved project mix.

Year to date revenue was $355.3 million compared to $353.8 million for the same period last year. Improved pricing, increases in raw material costs passed on to customers, and changes in product mix contributed to the increase in net sales. This increase was partially offset by lower volume and changes in foreign currency exchange rates, principally the Euro.

Gross profit increased $5.1 million to $58.0 million from $52.9 million compared to last year. Gross margin increased 140 basis points to 16.3%.

SG&A expense for the year to date period was $34.7 million compared to $31.5 million in 2011.

Net loss for the period was $3.7 million or ($0.21) per fully diluted share. This compared to net income of $1.9 million, or $0.16 per fully diluted share, in the prior year period. Year-to-date adjusted net income was $10.1 million, or $0.56 per fully diluted share, compared to $5.3 million, or $0.45 per fully diluted share, in the same prior year period.

Adjusted EBITDA for the year to date period was $35.6 million compared to $35.7 million in the same prior year period.

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