XNYS:GSE Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
 
 
FORM 10-Q

 
þ 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2012

OR

 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 001-35382
 
GSE Holding, Inc.
(Exact Name of Registrant as Specified in its Charter)
 
Delaware
 
77-0619069
(State or Other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification No.)
 
19103 Gundle Road, Houston, Texas
77073
(Address of Principal Executive Offices)
(Zip Code)
  
(281) 443-8564
(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   þ     No   o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   þ      No   o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  o
 
Accelerated filer  o
 
Non-accelerated filer  þ
 
Smaller reporting company  o
 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   o     No   þ

As of August 3, 2012, 19,395,754 shares of the registrant’s common stock were outstanding.
 
 
 

 
GSE Holding, Inc.
FORM 10-Q
For the Quarter Ended June 30, 2012

TABLE OF CONTENTS

   
Page
PART I
Financial Information
 
   
   
   
   
     
PART II
Other Information
 
     
 
 
2

 
FORWARD-LOOKING STATEMENTS
 
This Quarterly Report on Form 10-Q contains forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical fact included in this Quarterly Report on Form 10-Q are forward-looking statements. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “plan,” “intend,” “believe,” “may,” “will,” “should,” “can have,” “likely” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events.
 
The statements we make regarding the following subjects are forward-looking by their nature. These statements include, but are not limited to, statements about our beliefs concerning our capital expenditure requirements and liquidity needs; our beliefs regarding the impact of future regulations; our ability to secure project bids; our expectations regarding future demand for our products; our expectation that sales and total gross profits derived from outside North America will increase; our ability to manufacture our higher-margin proprietary products globally; and our belief in the sufficiency of our cash flows to meet our liquidity needs. The preceding list is not intended to be an exhaustive list of all of our forward-looking statements. The forward-looking statements are based on our beliefs, assumptions and expectations of future performance, taking into account the information currently available to us. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors, that could affect our actual results. Important factors that could cause actual results to differ materially from our expectations, or cautionary statements, include, but are not limited to, (i) general economic conditions and cyclicality in the markets we serve; (ii) our ability to secure project bids; (iii) increases in prices or disruptions in supply of the raw materials we use; (iv) our ability to develop new applications and markets for our products; (v) unexpected equipment failures or significant damage to our manufacturing facilities; (vi) competition; (vii) our ability to anticipate and effectively manage risks associated with our international operations; (viii) currency exchange rate fluctuations; (ix) our ability to retain key executives and other personnel; (x) extensive and evolving environmental and health and safety regulations; and (xi) other factors described in more detail under “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 filed with the Securities Exchange Commission (the “SEC”) on March 30, 2012.
 
All written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements as well as other cautionary statements that are made from time to time in our other filings with the SEC and public communications. You should evaluate all forward-looking statements made in this Quarterly Report on Form 10-Q in the context of these risks and uncertainties.
 
We cannot assure you that we will realize the results or developments we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our operations in the way we expect. The forward-looking statements included in this Quarterly Report on Form 10-Q are made only as of the date hereof. We undertake no obligation to update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.
 
 
3

 
ITEM 1. FINANCIAL STATEMENTS
 
 
 
 
4

 
GSE Holding, Inc.
 
Condensed Consolidated Balance Sheets
 
(in thousands, except share amounts)
 
(Unaudited)
 
   
June 30,
 2012
   
December, 31,
2011
 
ASSETS
 
Current assets:
           
Cash and cash equivalents
  $ 8,764     $ 9,076  
Accounts receivable:
               
Trade, net of allowance for doubtful accounts of $1,629 and $1,736
    101,451       80,705  
Other
    5,889       3,054  
Inventory, net
    71,417       58,109  
Deferred income taxes
    482       935  
Prepaid expenses and other
    10,455       5,741  
Income taxes receivable
    2,483       2,447  
Total current assets
    200,941       160,067  
Property, plant and equipment, net
    63,792       57,270  
Goodwill
    58,895       58,895  
Intangible assets, net
    2,109       2,727  
Deferred income taxes
    3,050       2,519  
Deferred debt issuance costs, net
    7,420       8,387  
Other assets
    255       2,561  
TOTAL ASSETS
  $ 336,462     $ 292,426  
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
Current liabilities:
               
Accounts payable
  $ 34,734     $ 31,396  
Accrued liabilities and other
    24,193       26,264  
Short-term debt
    3,673       2,864  
Current portion of long-term debt
    2,248       2,709  
Income taxes payable
    2,009       964  
Deferred income taxes
    1,109       1,135  
Total current liabilities
    67,966       65,332  
Other liabilities
    1,027       1,124  
Deferred income taxes
    1,345       1,416  
Long-term debt, net of current portion
    176,177       192,885  
Total liabilities
    246,515       260,757  
Commitments and contingencies (Note 13)
               
Stockholders’ equity:
               
Common stock, $.01 par value, 150,000,000 shares authorized, 19,395,754 and 10,809,987 shares issued and outstanding at June 30, 2012 and December 31, 2011, respectively
    194       108  
Additional paid-in capital
    129,277       61,407  
Accumulated deficit
    (38,426 )     (29,456 )
Accumulated other comprehensive loss
    (1,098 )     (390 )
Total stockholders’ equity
    89,947       31,669  
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 336,462     $ 292,426  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
5

 
GSE Holding, Inc.
 
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
 
(in thousands, except per share amounts)
 
(Unaudited)
 
   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2012
   
2011
   
2012
   
2011
                       
Net sales
  $ 139,168     $ 118,487     $ 234,085     $ 206,949  
Cost of products
    115,675       100,911       196,509       174,919  
Gross profit
    23,493       17,576       37,576       32,030  
Selling, general and administrative expenses
    11,814       9,395       22,739       18,738  
Public offering related costs
                9,655        
Amortization of intangibles
    297       334       598       728  
Operating income
    11,382       7,847       4,584       12,564  
Other expenses (income):
                               
Interest expense, net
    3,890       5,480       9,637       10,321  
Foreign currency transaction loss
    631       363       58       1,653  
Loss on extinguishment of debt
    1,555       2,016       1,555       2,016  
Other income, net
    (488 )     (282 )     (664 )     (706 )
Income (loss) from continuing operations before income taxes
    5,794       270       (6,002 )     (720 )
Income tax provision
    2,078       1,074       2,727       1,201  
Income (loss) from continuing operations
    3,716       (804 )     (8,729 )     (1,921 )
Income (loss) from discontinued operations, net of tax
    80       (379 )     (241 )     7  
Net income (loss)
    3,796       (1,183 )     (8,970 )     (1,914 )
Other comprehensive income (loss):
                               
Foreign currency translation adjustment
    (1,844 )     1,280       (708 )     4,393  
Comprehensive income (loss)
  $ 1,952     $ 97     $ (9,678 )   $ 2,479  
                                 
Basic net income (loss) per common share:
                               
Continuing operations
  $ 0.19     $ (0.07 )   $ (0.51 )   $ (0.18 )
Discontinued operations
    0.01       (0.04 )     (0.01 )      
    $ 0.20     $ (0.11 )   $ (0.52 )   $ (0.18 )
Diluted net income (loss) per common share:
                               
Continuing operations
  $ 0.18     $ (0.07 )   $ (0.51 )   $ (0.18 )
Discontinued operations
    0.01       (0.04 )     (0.01 )      
    $ 0.19     $ (0.11 )   $ (0.52 )   $ (0.18 )
Basic weighted-average common shares outstanding
    19,338       10,810       17,230       10,810  
Diluted weighted-average common shares outstanding
    20,399       10,810       17,230       10,810  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
6

 
GSE Holding, Inc.
 
Condensed Consolidated Statements of Cash Flows
 
(in thousands)
 
(Unaudited)
 
   
Six Months Ended
June 30,
 
   
2012
   
2011
 
             
Cash flows from operating activities:
           
Net loss
  $ (8,970 )   $ (1,914 )
(Income) loss from discontinued operations
    241       (7 )
Adjustments to reconcile net loss to cash provided by (used in) operating activities:
               
Depreciation and amortization
    9,315       7,618  
Loss on extinguishment of debt
    1,555       2,016  
Revaluation of non-dollar denominated debt
    91       1,508  
Stock-based compensation
    4,341       75  
Increase in accounts receivable
    (21,191 )     (10,685 )
Increase in inventory
    (14,282 )     (12,760 )
Increase in accounts payable
    3,606       11,230  
All other items, net
    (9,509 )     (7,237 )
Net cash used in operating activities – continuing operations
    (34,803 )     (10,156 )
Net cash provided by (used in) operating activities – discontinued operations
    (143 )     4,400  
Net cash used in operating activities
    (34,946 )     (5,756 )
Cash flows from investing activities:
               
Purchase of property, plant and equipment
    (13,206 )     (4,785 )
Net cash used in investing activities
    (13,206 )     (4,785 )
Cash flows from financing activities:
               
Proceeds from lines of credit
    53,673       75,760  
Repayments of lines of credit
    (51,013 )     (83,102 )
Proceeds from long-term debt
    22,000       173,085  
Repayments of long-term debt
    (42,073 )     (151,657 )
Net proceeds from initial public offering
    65,927       -  
Payments for debt issuance costs
    (1,260 )     (7,378 )
Net cash provided by financing activities – continuing operations
    47,254       6,708  
Net cash used in financing activities – discontinued operations
    -       (650 )
Net cash provided by financing activities                                                                                     
    47,254       6,058  
Effect of exchange rate changes on cash – continuing operations
    560       (310 )
Effect of exchange rate changes on cash – discontinued operations
    26       56  
Net decrease in cash and cash equivalents
    (312 )     (4,737 )
Cash and cash equivalents at beginning of period
    9,076       15,184  
Cash and cash equivalents at end of period
  $  8,764     $  10,447  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
7

 
GSE Holding, Inc.
 
Notes to Unaudited Condensed Consolidated Financial Statements
 
1. Nature of Business
 
Organization and Description of Business —
 
GSE Holding, Inc. (the “Company”) is a leading global manufacturer and marketer of highly engineered geosynthetic lining products for environmental protection and confinement applications. These lining products are used in a wide range of infrastructure end markets such as mining, waste management, liquid containment (including water infrastructure, agriculture and aquaculture), coal ash containment and shale oil and gas. The Company offers a full range of products, including geomembranes, drainage products, geosynthetic clay liners, nonwoven geotextiles, and other specialty products. The Company generates the majority of its sales outside of the United States, including emerging markets in Asia, Latin America, Africa and the Middle East. Its comprehensive product offering and global infrastructure, along with its extensive relationships with customers and end-users, provide it with access to high-growth markets worldwide, visibility into upcoming projects and the flexibility to serve customers regardless of geographic location. The Company believes that its market share, broad product offering, strong customer relationships, diverse end markets and global presence provide it with key competitive advantages in the environmental geosynthetic products industry. The Company manufactures its products at facilities located in the United States, Germany, Thailand, Chile and Egypt.
 
Effective February 10, 2012, the Company completed its initial public offering (“IPO”) of 7,000,000 shares of common stock.  The Company also granted the underwriters a 30-day option to purchase up to an additional 1,050,000 shares at the IPO price to cover over-allotments, which was exercised. The IPO price was $9.00 per share and the common stock is currently listed on The New York Stock Exchange under the symbol “GSE”.  The Company received proceeds from the IPO, after deducting underwriter’s fees, of approximately $67.4 million.  The Company incurred direct and incremental costs associated with the IPO of approximately $3.8 million.  At December 31, 2011, $2.3 million of these costs had been deferred in Other assets and were subsequently netted against the proceeds from the IPO and classified in Additional paid-in capital.  The proceeds from the IPO were used to pay down debt ($51.5 million) and for general working capital purposes.  The Company also incurred and expensed compensation costs of $6.6 million related to IPO bonuses that were paid in cash ($2.3 million) and the issuance of fully vested common stock ($4.3 million) to certain key executives and directors, and $3.0 million related to a management agreement termination fee, which became payable upon the closing of the IPO.
 
2. Basis of Presentation —
 
The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (‘‘GAAP’’) on the same basis as those in the Company’s audited consolidated financial statements as of and for the year ended December 31, 2011. The December 31, 2011 Condensed Consolidated Balance Sheet data was derived from the Company’s year-end audited consolidated financial statements but does not include all disclosures required by GAAP. These condensed consolidated financial statements reflect all normal recurring adjustments that are, in the opinion of management, necessary for the fair presentation of such financial statements for the periods indicated. The Company believes that the disclosures herein are adequate to make the information presented not misleading. Operating results for the three and six months ended June 30, 2012 are not necessarily indicative of results to be expected for the full year ending December 31, 2012. These unaudited interim consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements as of and for the year ended December 31, 2011, and the notes thereto included in the 2011 Annual Report on Form 10-K.

The preparation of financial statements in conformity with GAAP requires estimates and assumptions that affect the reported amounts as well as certain disclosures. The Company’s financial statements include amounts that are based on management’s best estimates and judgments. Actual results could differ from those estimates.

 
8

 
3.  Recent Accounting Pronouncements —

In September 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-08, Intangibles – Goodwill and Other: Testing Goodwill for Impairment, to allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under these amendments, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amendments include a number of events and circumstances for an entity to consider in conducting the qualitative assessment. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011.  The Company will adopt this ASU for its 2012 goodwill impairment testing, with an annual test date of October 1, and does not believe it will have a material impact on the Company’s results of operations or financial position.
 
4. Net Income (Loss) per Share
 
The Company computes basic net income (loss) per share by dividing net income (loss) by the weighted-average number of shares of common stock outstanding during the period. Diluted net income (loss) per share is computed by dividing net income (loss) by the weighted-average number of shares of common stock outstanding during the period, increased to include the number of shares of common stock that would have been outstanding had potential dilutive shares of common stock been issued. The dilutive effect of employee stock options is reflected in diluted net income (loss) per share by applying the treasury stock method.
 
The basic and diluted net income (loss) per share calculations are presented below (thousands, except for per share amounts):
 
   
For the three months ended
June 30,
   
For the six months ended
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
Net income (loss):
                       
From continuing operations
    3,716       (804 )     (8,729 )     (1,921 )
From discontinued operation
    80       (379 )     (241 )     7  
    $ 3,796     $ (1,183 )   $ (8,970 )   $ (1,914 )
Common share information:
                               
Weighted-average common shares outstanding – basic
    19,338       10,810       17,230       10,810  
Dilutive effect of employee stock options
    1,061                    
Weighted-average common shares outstanding – dilutive
    20,399       10,810       17,230       10,810  
Basic net income (loss) per share:
                               
Continuing operations
  $ 0.19     $ (0.07 )   $ (0.51 )   $ (0.18 )
Discontinued operations
    0.01       (0.04 )     (0.01 )      
    $ 0.20     $ (0.11 )   $ (0.52 )   $ (0.18 )
Diluted net income (loss) per share:
                               
Continuing operations
  $ 0.18     $ (0.07 )   $ (0.51 )   $ (0.18 )
Discontinued operations
    0.01       (0.04 )     (0.01 )      
    $ 0.19     $ (0.11 )   $ (0.52 )   $ (0.18 )
 
For the three months ended June 30, 2011 and the six months ended June 30, 2012 and 2011, 1.2 million, 1.7 million and 1.2 million of in-the-money options, respectively, have been excluded from the calculation of diluted earnings per share because their effect would have been anti-dilutive given the net loss reported by the Company for those periods.
 
 
9

 
5. Inventory –
 
Inventory consisted of the following:
 
   
June 30,
2012
   
December 31,
2011
 
   
(in thousands)
 
Raw materials
  $ 36,400     $ 24,479  
Finished goods
    32,478       31,732  
Supplies
    5,516       4,996  
Obsolescence and slow moving allowance
    (2,977 )     (3,098 )
    $ 71,417     $ 58,109  
 
6. Property, Plant and Equipment –
 
Property, plant and equipment consisted of the following:
 
   
Estimated useful
lives years
   
June 30,
2012
   
December 31,
2011
 
         
(in thousands)
 
Land
        $ 4,785     $ 4,820  
Buildings and improvements
    7-30       48,890       24,022  
Machinery and equipment
    3-10       85,281       97,524  
Software
    3       8,025       8,025  
Furniture and fixtures
    3-5       789       720  
              147,770       135,111  
Less – accumulated depreciation and amortization
            (83,978 )     (77,841 )
            $ 63,792     $ 57,270  

Depreciation and amortization expense for the three months ended June 30, 2012 and 2011was $3.2 million and $2.8 million, respectively.  Depreciation and amortization expense for the six months ended June 30, 2012 and 2011 was $6.5 million and $5.4 million, respectively.
  
7. Intangible Assets –
 
Intangible assets consisted of the following:
 
   
Estimated useful
lives years
   
June 30,
2012
   
December 31,
2011
 
         
(in thousands)
 
Customer lists
    5-10     $ 25,127     $ 25,307  
Non-compete agreements
    5-10       2,469       2,469  
Other
    1       363       363  
              27,959       28,139  
Less accumulated amortization
            (25,850 )     (25,412 )
Intangible assets, net
          $ 2,109     $ 2,727  
 
Amortization expense for intangible assets during the three months ended June 30, 2012 and 2011was $0.3 million in each period.  Amortization expense for intangible assets during the six months ended June 30, 2012 and 2011was $0.6 million and $0.7 million, respectively.
 
 
10

 
8. Accrued Liabilities and Other –
 
Accrued liabilities and other consisted of the following:
 
 
   
June 30,
2012
   
December 31,
2011
 
   
(in thousands)
 
Customer prepayments
  $ 932     $ 167  
Accrued operating expenses
    10,044       6,043  
Self-insurance reserves
    2,077       3,167  
Compensation and benefits
    3,257       6,096  
Accrued interest
    2,860       4,026  
Taxes, other than income
    1,907       2,025  
Other accrued liabilities
    3,116       4,740  
    $ 24,193     $ 26,264  
 
9. Long-Term Debt –
 
Long-term debt consisted of the following:
 
   
June 30,
2012
   
December 31,
2011
 
   
(in thousands)
 
First Lien Credit Facility
  $ 179,248     $ 155,982  
Second Lien Term Loan, including payment in kind (“PIK”) interest
          40,488  
Term Loan – German bank secured by equipment, 5.15%, maturing March 2014
    541       702  
Term Loan – Thailand bank secured by equipment, monthly installments of $113,000, 6.75% variable through May 2013
    376       1,097  
      180,165       198,269  
Less – current maturities
    (2,248 )     (2,709 )
Unamortized discounts on first lien loans
    (1,740 )     (2,675 )
    $ 176,177     $ 192,885  
 
First Lien Credit Facility –
 
On May 27, 2011, we entered into a five-year, $160.0 million first lien senior secured credit facility with General Electric Capital Corporation, Jefferies Finance LLC and the other financial institutions party thereto, consisting of $135.0 million of term loan commitments (the “First Lien Term Loan”) and $25.0 million of revolving loan commitments (the “Revolving Credit Facility” and together with the First Lien Term Loan, the “First Lien Credit Facility”). On October 18, 2011, the Revolving Credit Facility was amended to increase the aggregate revolving loan commitments from $25.0 million to $35.0 million. On December 12, 2011, the First Lien Credit Facility was amended to, among other matters, modify the definition of “Change of Control” to reduce Code Hennessy & Simmons LLP (“CHS”) specified ownership percentage following the consummation of our IPO from 35% to 20%.
 
Amended First Lien Credit Facility
 
On April 18, 2012, we entered into a third amendment to the First Lien Credit Facility (as amended, the “Amended First Lien Credit Facility”), which, among other things, increased the aggregate term loan commitments from $135.0 million to $157.0 million. We used the additional borrowing capacity under the term loan to repay in full all outstanding indebtedness under, and to terminate, the Second Lien Term Loan (as defined below) and to pay related fees and expenses. We paid customary amendment fees to consenting lenders in connection with the amendment.
 
The Amended First Lien Credit Facility will continue to mature in May 2016. Borrowings under the Amended First Lien Credit Facility will continue to incur interest expense that is variable in relation to the London Interbank Offer Rates (“LIBOR”) (and/or Prime) rate. In addition to paying interest on outstanding borrowings under the Amended First Lien Credit Facility, we remain required to pay a 0.75% per annum commitment fee to the lenders in respect of the unutilized commitments, and letter of credit fees equal to the LIBOR margin on the undrawn amount of all outstanding letters of credit.  As of June 30, 2012, there was $179.2 million outstanding under our Amended First Lien Credit Facility consisting of $155.7 million in term loans and $23.5 million in revolving loans, and the interest rate on such loans was 7.12%.  We had $10.4 million of capacity under the Revolving Credit Facility after taking into account outstanding loan advances and letters of credit.
 
 
11

 
Guarantees; Security.  The obligations under the Amended First Lien Credit Facility are guaranteed on a senior secured basis by the Company and each of its existing and future wholly owned domestic subsidiaries, other than GSE International, Inc. and any other excluded subsidiaries. The obligations are secured by a first priority perfected security interest in substantially all of the guarantors’ assets, subject to certain exceptions, permitted liens and permitted encumbrances under the Amended First Lien Credit Facility.
 
Restrictive Covenants.  The Amended First Lien Credit Facility contains various restrictive covenants that include, among other things, restrictions or limitations on the Company’s ability to incur additional indebtedness or issue disqualified capital stock unless certain financial tests are satisfied; pay dividends, redeem subordinated debt or make other restricted payments; make certain loans, investments or acquisitions; issue stock of subsidiaries; grant or permit certain liens on assets; enter into certain transactions with affiliates; merge, consolidate or transfer substantially all of its assets; incur dividend or other payment restrictions affecting certain subsidiaries; transfer or sell assets including, but not limited to, capital stock of subsidiaries; and change the business the Company conducts. However, all of these covenants are subject to exceptions. For the twelve months ended June 30, 2012 and December 31, 2011, the Company was subject to a Total Leverage Ratio not to exceed 6.15:1.00 and an Interest Coverage Ratio of not less than 1.90:1.00.  For the year ended December 31, 2011, the Company was also subject to a maximum Capital Expenditure Limitation of $17.5 million.  These ratios become progressively more restrictive over the term of the loans.  For all periods presented, the Company was in compliance with all financial debt covenants under the existing agreements.
 
Second Lien Term Loan –
 
On May 27, 2011, the Company also entered into a 5.5 year, $40.0 million second lien senior secured credit facility consisting of $40.0 million of term loan commitments (the “Second Lien Term Loan”). The Second Lien Term Loan was paid in full on April 18, 2012, and the arrangement was terminated.  In connection with this refinancing, the Company recorded a $1.6 million loss from extinguishment of debt, primarily related to the write-off of unamortized debt issuance cost and discount.
 
10. Fair Value of Financial Instruments –
 
Under GAAP, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Additionally, GAAP requires the use of valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.
 
The three levels of inputs used are as follows:
 
Level 1 – Observable inputs such as quoted prices in active markets for identical assets or liabilities.
 
Level 2 – Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
 
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
 
The Company’s financial instruments consist primarily of cash and cash equivalents, trade receivables, trade payables and debt instruments. The carrying values of cash and cash equivalents, trade receivables and trade payables are considered to be representative of their respective fair values due to the short-term nature of these instruments. The carrying amount of the our long-term debt of $180.2 million as of June 30, 2012 approximates fair value because our current borrowing rate does not materially differ from market rates for similar bank borrowings. The long-term debt is classified as a Level 2 item within the fair value hierarchy.
 
 
12

 
11. Stock-Based Compensation –
 
During the three months ended June 30, 2012, 0.2 million stock options were granted with an exercise price of $11.57. As of June 30, 2012, there were approximately 1.9 million stock options outstanding with an exercise price range of $0.67 to $11.57 and a weighted average exercise price of $3.46.  Of these stock options, 1.7 million were exercisable at June 30, 2012 and had an intrinsic value of $13.7 million.  Also during the three months ended June 30, 2012, 0.1 million shares of restricted stock were granted with a three year vesting period.  As of  December 31, 2011, there were approximately 1.7 million stock options outstanding with an exercise price range of $0.67 to $6.35 and a weighted average exercise price of $2.50.  These options had an intrinsic value of $5.4 million.
 
The value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for the six months ended June 30.
 
   
2012
   
2011
 
Risk Free Interest Rate
    0.54 %     1.0 %
Expected Volatility
    45.9 %     22.25 %
Expected Dividend Yield
    0 %     0 %
Expected Life
 
4 years
   
3 years
 
Weighted Average Calculated Value per Option
  $ 3.57     $ 0.65  

There was less than $0.1 million of stock-based compensation expense related to stock options and restricted stock for the three months ended June 30, 2012 and no stock-based compensation expense for the three months ended June 30, 2011.  For the six months ended June 30, 2012, stock-based compensation expense of $4.3 million was recognized related to 478,467 shares of fully vested common stock that was issued to certain key executives and directors in connection with the IPO.  Stock-based compensation expense of $0.1 million was recognized during the six months ended June 30, 2011.
 
All outstanding stock options are held by employees and former employees of the Company and have an expiration date of 10 years from the date of grant. At June 30, 2012 and December 31, 2011, the average remaining contractual life of options outstanding and exercisable was 3.7 years and 3.2 years, respectively.  At June 30, 2012, there was approximately $1.3 million of total unrecognized compensation expense related to non-vested employee stock options and restricted stock grants.
 
12. Income Taxes –
 
Income tax expense from continuing operations for the three months ended June 30, 2012 and 2011was $2.1 million and $1.1 million, respectively.  Our provision for income taxes is recorded at the estimated annual effective tax rates for each tax jurisdiction based on fiscal year to date results. Income tax expense from continuing operations for the six months ended June 30, 2012 and 2011was $2.7 million and $1.2 million, respectively.  The difference in the effective tax rate compared with the U.S. federal statutory rate is due to the mix of the international jurisdictional rates and the changes in valuation allowance, which relates to the United States.  North American operations had a loss from continuing operations before income taxes of $0.7 million and $14.1 million during the three and six months ended June 30, 2012, respectively, for which no income tax benefit was recorded as we believe it is more likely than not these deferred tax assets will not be realized.
 
13. Commitments and Contingencies –
 
Warranties
 
The Company’s products are sold and installed with specified limited warranties as to material quality and workmanship. These limited warranties may last for up to 20 years, but are generally limited to repair or replacement by the Company of the defective liner or the dollar amount of the contract involved, on a prorated basis. The Company may also indemnify the site owner or general contractor for other damages resulting from negligence of the Company’s employees. The Company accrues a warranty reserve based on estimates for warranty claims included in Accrued liabilities and other in the consolidated balance sheet. This estimate is based on historical claims history and current business activities and is accrued as a cost of sales in the period such business activity occurs. The table below reflects a summary of activity of the Company’s operations for warranty obligations for the six months ended June 30, 2012 and 2011 (in thousands) as recorded in accrued liabilities and other on the condensed consolidated balance sheet:
 
 
13

 
   
2012
   
2011
 
Balance at January 1
  $ 2,225     $ 2,802  
Changes in estimates
    9       46  
Payments
    (35 )     (89 )
Balance at March 31
  $ 2,199       2,759  
Changes in estimates
    (739 )     45  
Payments
    (42 )     (351 )
Balance at June 30
  $ 1,418     $ 2,453  
 
Although the Company is not exposed to the type of potential liability that might arise from being in the business of handling, transporting or storing hazardous waste or materials, the Company could be susceptible to liability for environmental damage or personal injury resulting from defects in the Company’s products or negligence by Company employees in the installation of its lining systems. Such liability could be substantial because of the potential that hazardous or other waste materials might leak out of their containment system into the environment. The Company maintains liability insurance, which includes contractor’s pollution liability coverage in amounts which it believes to be prudent. However, there is no assurance that this coverage will remain available to the Company. While the Company’s claims experience to date may not be a meaningful measure of its potential exposure for product liability, the Company has experienced no material losses from defects in products and installations.
 
Bonding – Bank Guarantees –
 
The Company, in some direct sales and raw material acquisition situations, is required to post performance bonds or bank guarantees as part of the contractual guarantee for its performance. The performance bonds or bank guarantees can be in the full amount of the contracts. To date the Company has not received any claims against any of the posted securities, most of which terminate at the final completion date of the contracts. As of June 30, 2012, the Company had $6.1 million of bonds outstanding and $4.6 million of guarantees issued under its bank lines.
 
Litigation and Claims –
 
The Company is a party to various legal actions arising in the ordinary course of our business. These legal actions cover a broad variety of claims spanning the Company’s entire business. We believe it is not probable and reasonably estimable that resolution of these legal actions will, individually or in the aggregate, have a material adverse effect on our financial condition, results of operations or cash flows.
 
14. Related Party Transaction –
 
Management Agreement with CHS Management IV LP
 
In connection with the Merger in 2004, the Company entered into a management agreement with GEO Holdings and CHS Management IV LP (“CHS Management”) a limited partnership (1) of which CHS is the general partner and (2) which is the general partner of CHS IV. Pursuant to the management agreement, CHS Management provides certain financial and management consulting services to GEO Holdings and to the Company. In consideration of those services, the Company paid fees to CHS Management in an aggregate annual amount of $2.0 million payable in equal monthly installments. Under this agreement, the Company paid and expensed $0.2 million and $0.5 million during the six months ended June 30, 2012 and 2011, respectively, which are included in selling, general and administrative expenses in the Consolidated Statements of Operations. In connection with the Company’s IPO, the management agreement was terminated and a fee of $3.0 million was paid and expensed during the six months ended June 30, 2012, which are included in non-recurring initial public offering related costs in the Consolidated Statements of Operations. As of June 30, 2012, there were no amounts payable to CHS under this agreement.
 
 
14

 
15. Segment Information –
 
 
The Company’s operating and external reporting segments are based on geographic regions, which is consistent with the basis of how management internally reports and evaluates financial information used to make operating decisions. The Company’s reportable segments are North America, Europe Africa, Asia Pacific, Latin America and Middle East.
 
 
The following tables present information about the results from continuing operations and assets of the Company’s reportable segments for the periods presented.
 
   
Three months ended June 30, 2012
 
   
N. America
   
Europe Africa
   
Asia Pacific
   
Latin America
   
Middle East
   
Total
 
   
(in thousands)
 
Net sales to external customers
  $ 60,106     $ 41,167     $ 24,074     $ 11,197     $ 2,624     $ 139,168  
Intersegment sales
    8,192             2,310             1,162       11,664  
Total segment net sales
    68,298       41,167       26,384       11,197       3,786       150,832  
Gross profit
    12,332       5,120       3,853       1,839       349       23,493  
Gross margin
    20.5 %     12.4 %     16.0 %     16.4 %     13.3 %     16.9 %
 
   
Three months ended June 30, 2011
 
   
N. America
   
Europe Africa
   
Asia Pacific
   
Latin America
   
Middle East
   
Total
 
   
(in thousands)
 
Net sales to external customers
  $ 44,865     $ 37,956     $ 22,562     $ 10,793     $ 2,311     $ 118,487  
Intersegment sales
    9,892       (85 )     2,679       -       140       12,626  
Total segment net sales
    54,757       37,871       25,241       10,793       2,451       131,113  
Gross profit
    9,598       3,669       2,825       1,303       181       17,576  
Gross margin
    21.4 %     9.7 %     12.5 %     12.1 %     7.8 %     14.8 %
 
   
Six months ended June 30, 2012
 
   
N. America
   
Europe Africa
   
Asia Pacific
   
Latin America
   
Middle East
   
Total
 
   
(in thousands)
 
Net sales to external customers
  $ 96,332     $ 67,018     $ 42,644     $ 23,673     $ 4,418     $ 234,085  
Intersegment sales
    18,572             5,452             2,326       26,350  
Total segment net sales
    114,904       67,018       48,096       23,673       6,744       260,435  
Gross profit
    21,257       6,080       7,173       2,598       468       37,576  
Gross margin
    22.1 %     9.1 %     16.8 %     11.0 %     10.6 %     16.1 %

   
Six months ended June 30, 2011
 
   
N. America
   
Europe Africa
   
Asia Pacific
   
Latin America
   
Middle East
   
Total
 
   
(in thousands)
 
Net sales to external customers
  $ 88,283     $ 58,339     $ 34,699     $ 20,454     $ 5,174     $ 206,949  
Intersegment sales
    12,030       -       6,127       -       140       18,297  
Total segment net sales
    100,313       58,339       40,826       20,454       5,314       225,246  
Gross profit
    19,946       4,470       4,830       2,351       433       32,030  
Gross margin
    22.6 %     7.7 %     13.9 %     11.5 %     8.4 %     15.5 %
 
 
15

 
The following tables reconcile the segment information presented above to the consolidated financial information.
 
Net sales
 
   
Reconciliation to Consolidated Sales
   
Three months ended
June 30,
   
Six months ended
 June 30,
   
2012
   
2011
   
2012
   
2011
   
(in thousands)
                       
Total segment net sales
  $ 150,832     $ 131,113     $ 260,435     $ 225,246  
Intersegment sales
    (11,664 )     (12,626 )     (26,350 )     (18,297 )
Consolidated net sales
  $ 139,168     $ 118,487     $ 234,085     $ 206,949  
 
16. Discontinued operations –
 
The Company closed its manufacturing facility located in the United Kingdom and exited the United States Installation business in 2010.  Additionally, the Company completed the exit from the synthetic turf business as of December 31, 2008.  For the three months ended June 30, 2012 and 2011, the Company recorded after tax income of $0.1 million and an after tax loss of $0.4 million, respectively, related to discontinued operations.   For the six months ended June 30, 2012 and 2011, the Company recorded an after tax loss of $0.2 million and after tax income of less than $0.1 million, respectively, related to discontinued operations.  At June 30, 2012 and December 31, 2011, there were approximately $0.6 million and $1.7 million, respectively, in assets and less than $1.0 million in liabilities at each period end related to discontinued operations.
 
 
 
16

 
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
You should read this discussion and analysis together with our unaudited condensed consolidated financial statements and the related notes included in Item 1 of this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 filed with the SEC on March 30, 2012. This discussion and analysis contain forward-looking statements that are based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management. Actual results could differ materially from those discussed in or implied by forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Quarterly Report on Form 10-Q, particularly in “Forward-Looking Statements.”
 
Unless we state otherwise or the context otherwise requires, the terms “we,” “us,” “our,”  “GSE Holding,” “our business” and “our company” refer to GSE Holding, Inc. and its consolidated subsidiaries as a combined entity.

Overview
 
We believe we are the leading global provider of sales of highly engineered geosynthetic containment solutions for environmental protection and confinement applications. Our products are used in a wide range of infrastructure end markets such as mining, waste management, liquid containment (including water infrastructure, agriculture and aquaculture), coal ash containment and shale oil and gas. We are one of the few providers with the full suite of products required to deliver customized solutions for complex projects on a global basis, including geomembranes, drainage products, geosynthetic clay liners, nonwoven geotextiles and specialty products. We have a global infrastructure that includes seven manufacturing facilities located in the United States, Germany, Chile, Egypt and Thailand, 18 regional sales offices located in 12 countries and engineers and technical salespeople located on four continents. We generate the majority of our sales outside of North America, including high-growth emerging markets in Asia, Latin America, Africa and the Middle East. Our comprehensive product offering and global infrastructure, along with our extensive relationships with customers and end-users, provide us with access to high-growth markets worldwide and the flexibility to serve customers regardless of geographic location.
 
 
17

 
Segment Data
 
We have organized our operations into five principal reporting segments: North America, Europe Africa, Asia Pacific, Latin America and Middle East. We generate a greater proportion of our gross profit, as compared to our sales, in our North America segment, which consists of the United States, Canada and Mexico, because our product mix in this segment is focused on higher-margin products. We expect the percentage of total gross profit derived from outside North America to increase in future periods as we continue to focus on selling these higher-value products in our other segments. We also expect the percentage of sales derived from outside North America to increase in future periods as we continue to expand globally.
 
The following table presents our net sales and gross profit by segment for the period presented, as well as gross profit as a percentage of net sales from each segment:
 
   
North
America
   
Europe
Africa
   
Asia
Pacific
   
Latin
America
   
Middle
East
 
   
(in thousands, except percentages)
 
Three months ended June 30, 2012
                             
Net sales
  $ 60,106     $ 41,167     $ 24,074     $ 11,197     $ 2,624  
Gross profit
    12,332       5,120       3,853       1,839       349  
Gross margin
    20.5 %     12.4 %     16.0 %     16.4 %     13.3 %
 
   
North
America
   
Europe
Africa
   
Asia
Pacific
   
Latin
America
   
Middle
East
 
   
(in thousands, except percentages)
 
Six months ended June 30, 2012
                             
Net sales
  $ 96,332     $ 67,018     $ 42,644     $ 23,673     $ 4,418  
Gross profit
    21,257       6,080       7,173       2,598       468  
Gross margin
    22.1 %     9.1 %     16.8 %     11.0 %     10.6 %
 
The following table presents our net sales from each segment, as a percentage of total net sales:
 
   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
North America
    43.2 %     37.9 %     41.2 %     42.6 %
Europe Africa
    29.6       32.0       28.6       28.2  
Asia Pacific
    17.3       19.0       18.2       16.8  
Latin America
    8.0       9.1       10.1       9.9  
Middle East
    1.9       2.0       1.9       2.5  
Total
    100.0 %     100.0 %     100.0 %     100.0 %
 
North America
 
North America net sales increased $15.2 million, or 33.9%, during the three months ended June 30, 2012 to $60.1 million from $44.9 million during the three months ended June 30, 2011 primarily due to higher volume shipped.  North America gross profit increased $2.7 million, or 28.1%, to $12.3 million during the three months ended June 30, 2012 from $9.6 million in the prior year period. North America gross profit increased $3.3 million primarily due to the increase in volume shipped.
 
North America net sales increased $8.0 million, or 9.1%, during the six months ended June 30, 2012 to $96.3 million from $88.3 million in the six months ended June 30, 2011. Higher volume shipped contributed $6.8 million, and increases in raw material costs and changes in product mix contributed $1.2 million. North America gross profit increased $1.4 million, or 7.0%, during the six months ended June 30, 2012 to $21.3 million from $19.9 million in the prior year period primarily due to the higher volume shipped and increases in raw material costs and changes in product mix, which were partially offset by an increase in manufacturing costs.
 
 
18

 
Europe Africa
 
Europe Africa net sales increased $3.2 million, or 8.4%, during the three months ended June 30, 2012 to $41.2 million from $38.0 million in the three months ended June 30, 2011. Net sales increased $5.9 million due to higher volume shipped and $2.9 million due to increases in raw material costs and changes in product mix. Europe Africa net sales were negatively affected by approximately $5.6 million from changes in foreign currency exchange rates. Europe Africa gross profit increased $1.5 million, or 41.7%, to $5.1 million in the three months ended June 30, 2012 compared to $3.6 million in the three months of ended June 30, 2011 primarily due to increases in raw material costs and changes in product mix and increased volume, which were partially offset by increased manufacturing costs and changes in foreign currency exchange rates.
 
Europe Africa net sales increased $8.7 million, or 14.9%, during the six months ended June 30, 2012 to $67.0 million from $58.3 million in the prior year period. Net sales increased $9.5 million due to increases in volume shipped and $6.0 million due to increases in raw material costs and changes in product mix. Europe Africa net sales were negatively affected by approximately $6.8 million from changes in foreign currency exchange rates. Europe Africa gross profit increased $1.6 million, or 35.6%, to $6.1 million in the six months ended June 30, 2012 compared to $4.5 million in the six months ended June 30, 2011 primarily due to increases in raw material costs and changes in product mix and increased volume, which were partially offset by changes in foreign currency exchange rates.
 
Asia Pacific
 
Asia Pacific net sales increased $1.5 million, or 6.6%, during the three months ended June 30, 2012 to $24.1 million from $22.6 million in the three months ended June 30, 2011. Changes in product mix contributed $0.9 million in additional net sales, and increased volume shipped contributed $0.6 million. Asia Pacific gross profit increased $1.1 million, or 39.3%, during the three months ended June 30, 2012 to $3.9 million from $2.8 million in the prior year period. Gross profit increased $2.0 million due to changes in product mix partially offset by increased manufacturing costs.
 
Asia Pacific net sales increased $7.9 million, or 22.8%, during the six months ended June 30, 2012 to $42.6 million from $34.7 million in the six months ended June 30, 2011. Increases in volume shipped contributed $6.4 million and increases in raw material costs and changes in product mix contributed $1.5 million. Asia Pacific gross profit increased $2.4 million, or 50.0%, during the six months ended June 30, 2012 to $7.2 million from $4.8 million in the prior year period. Gross profit increased $2.9 million due to increases in raw material costs and changes in product mix and $0.9 million due to higher volume shipped, which were partially offset by increased manufacturing costs.
 
Latin America
 
Latin America net sales increased $0.4 million, or 3.7%, during the three months ended June 30, 2012 to $11.2 million from $10.8 million in the three months ended June 30, 2011. Increases in raw material costs and changes in product mix contributed $1.5 million, partially offset by a decrease in volume shipped. Latin America gross profit increased $0.5 million, or 38.5%, during the three months ended June 30, 2012 to $1.8 million from $1.3 million in the prior year period primarily due to increases in raw material costs and changes in product mix.
 
Latin America net sales increased $3.2 million, or 15.6%, during the six months ended June 30, 2012 to $23.7 million from $20.5 million in the six months ended June 30, 2011. Increases in raw material costs and changes in product mix contributed $2.2 million and an increase in volume shipped contributed $1.0 million.  Latin America gross profit increased $0.2 million, or 8.3%, during the six months ended June 30, 2012 to $2.6 million from $2.4 million in the six months ended June 30, 2011 primarily due to higher volume shipped.
 
Middle East
 
Middle East net sales increased $0.3 million, or 13.0% to $2.6 million during the three months ended June 30, 2012 from $2.3 million in the three months ended June 30, 2011 primarily due to increases in raw material costs and changes in product mix and volume shipped. Middle East gross profit increased $0.1 million, or 100.0%, to $0.3 million in the three months ended June 30, 2012 from $0.2 million in the three months ended June 30, 2011 primarily due to increases in raw material costs and changes in product mix.
 
Middle East net sales decreased $0.8 million, or 15.4% to $4.4 million during the six months ended June 30, 2012 from $5.2 million in the six months ended June 30, 2011 primarily due to a decrease in volume shipped partially offset by increases in raw material costs and changes in product mix.  Middle East gross profit increased $0.1 million, or 25.0%, to $0.5 million in the six months ended June 30, 2012 from $0.4 million in the prior year period primarily due to increases in raw material costs and changes in product mix partially offset by decreased volume and increased manufacturing costs.
 
 
19

 
Key Drivers
 
The following are the key drivers of our business:
 
Timing of Projects.  Our financial results are influenced by the timing of projects that are developed and constructed by the end-users of our products in our primary end markets, including mining, waste management and liquid containment.
 
Mining projects and associated capital expenditures are driven by global commodity supply and demand factors. Our products are used primarily in metal mining, including copper, silver, uranium and gold. Metal mining projects are typically characterized by long lead times and large capital investment by the owners of the projects. In addition, these projects are often located in remote geographies with limited infrastructure, such as power and roads, creating complex logistics management requirements and long supplier lead times.
 
In our waste management end market, landfill construction and expansion projects are driven by waste volume generation and the need for additional municipal solid waste disposal resources. In developed markets, landfill construction and expansion projects are influenced by economic factors, particularly retail sales and consumer spending, housing starts and commercial and infrastructure construction. In emerging markets, waste management projects are also driven primarily by increased per capita GDP, which is positively correlated with waste generation, as well as by increasing environmental awareness and regulation, as discussed further below.
 
Finally, projects in our liquid containment end markets, including water management infrastructure, agriculture and aquaculture and industrial wastewater treatment applications, are driven by investment in civil and industrial infrastructure globally. This global spending is influenced by increased urbanization, increased wealth and protein-rich diets in developing economies necessitating higher levels of food production, population growth and other secular and economic factors, in both developed and emerging markets.
 
Environmental Regulations.  Our business is influenced by international levels of environmental regulation and mandated geosynthetics specifications, which vary across jurisdictions and by end market. For example, China has addressed the need for increased environmentally sound, solid waste disposal resources in its twelfth five-year plan, the most recent in a series of economic development initiatives, which mandates the investment of 180 billion Yuan, or approximately $28 billion, in the urban waste disposal sector between 2011 and 2015. Environmental regulations often require the use of geosynthetic products to contain materials and protect groundwater in various types of projects. In emerging markets, waste management and water infrastructure projects are driven by an ongoing increase in environmental awareness and regulation that has developed through the continued urbanization and increased affluence of these economies.
 
Although environmental regulations may not be as stringent or may not be enforced in emerging markets, we believe these regulations will continue to develop and to be enforced more diligently. In developed markets, existing regulations, which often specify our products, tend to be highly specific and stringently enforced. As a result, regulatory changes in developed markets tend to impact new end markets, such as coal ash containment in the United States.
 
Seasonality.  Due to the significant amount of our projects in the northern hemisphere (North America and Europe), our operating results are impacted by seasonal weather patterns in these markets. Our sales in the first and fourth quarters of the calendar year have historically been lower than sales in the second and third quarters. This is primarily due to lower activity levels in our primary end markets during the winter months in the northern hemisphere. The impact of this seasonality is partially mitigated by our mining and liquid containment end markets, which are located predominantly in the southern hemisphere. As our mining end market becomes a greater source of our sales, we expect seasonality to be further mitigated.
 
Resin Cost Volatility.  Resin-based material, derived from crude petroleum and natural gas, accounted for 84.2% and 84.3% of our cost of products for the three and six months ended June 30, 2012, respectively. Our ability to both manage the cost of our resin purchases as well as pass fluctuations in the cost of resin through to our customers is critical to our profitability. Fluctuations in the price of crude oil impact the cost of resin. In addition, planned and unplanned outages in facilities that produce polyethylene and its feedstock materials have historically impacted the cost of resin. In 2010, we implemented successful performance initiatives that focused on reducing the risk of volatility in resin costs on our profitability. We have developed policies, procedures, tools and organizational training procedures to enable better resin cost management and facilitate the efficient pass through of increases in our resin costs to our customers. These initiatives included diversifying our resin sources, hiring a polyethylene expert to lead procurement, implementing pricing tools that account for projected resin pricing, institutionalizing a bid approval process, creating a plant sourcing decision model, and running a large project tracking process. As a result of these policies, we successfully managed volatile resin prices between June 2010 and May 2011, when polyethylene resin prices fluctuated 23.1% between $0.78 per pound and $0.96 per pound, according to publicly available from IHS Inc. While the significant majority of our products are sold under orders that include 30-day re-pricing provisions at our option, and while we have taken advantage of this option in the past, the policies, processes, tools and organizational training procedures described above allow us to limit the need to re-price projects already under contract. This, in turn, helps us better manage our relationships with our customers. We believe that managing the risks associated with volatility in resin costs is now among our critical and core competencies.
 
 
20

 
Results of Operations
 
Three Months Ended June 30, 2012 Compared to Three Months Ended June 30, 2011
 
   
Three Months Ended
June 30,
   
Period over
 
   
2012
   
2011
   
Period Change
 
   
(in thousands)
 
             
Net sales
  $ 139,168     $ 118,487     $ 20,681       17.5 %
Cost of products
    115,675       100,911       14,764       14.6  
Gross profit
    23,493       17,576       5,917       33.7  
Selling, general and administrative expenses
    11,814       9,395       2,419       25.7  
Amortization of intangibles
    297       334       (37 )     (11.1 )
Operating income
    11,382       7,847       3,535       45.0  
Other expenses (income):
                               
Interest expense, net
    3,890       5,480       (1,590 )     (29.0 )
Foreign currency transaction loss
    631       363       268       73.8  
Loss on extinguishment of debt
    1,555       2,016       (461 )     (22.9 )
Other income, net
    (488 )     (282 )     (206 )     (73.0 )
Income from continuing operations before income taxes
    5,794       270       5,524       *  
Income tax provision
    2,078       1,074       1,004       93.5  
Income (loss) from continuing operations
  $ 3,716     $ (804 )   $ 4,520       *  
 
* Not meaningful
 
Net sales
 
Consolidated net sales increased $20.7 million, or 17.5%, to $139.2 million for the three months ended June 30, 2012 from $118.5 million for the three months ended June 30, 2011. Additional volume contributed $18.9 million.  Better pricing, increases in raw material costs passed on to the customer, and changes in product mix contributed $7.4 million. Net sales were negatively affected by approximately $5.6 million from changes in foreign currency exchange rates, principally the Euro.
 
Cost of Products
 
Cost of products increased $14.8 million, or 14.6%, to $115.7 million for the three months ended June 30, 2012 from $100.9 million for the three months ended June 30, 2011. Cost of products increased $16.1 million due to the increase in volume shipped and $2.5 million due to the increase in raw material cost, which were partially offset by changes in foreign currency exchange rates, principally the Euro.
 
Gross Profit
 
Consolidated gross profit for the three months ended June 30, 2012 increased $5.9 million, or 33.7%, to $23.5 million compared to $17.6 million in the prior year period. Volume contributed $2.8 million to the increase in gross profit while better pricing and changes in product mix contributed $4.0 million, partially offset by changes in foreign currency.  Gross profit as a percentage of net sales was 16.9% for the three months ended June 30, 2012 compared with 14.8% for the three months ended June 30, 2011.
 
Selling, General and Administrative Expenses
 
SG&A expense for the three months ended June 30, 2012 was $11.8 million compared to $9.4 million for the three months ended June 30, 2011, an increase of $2.4 million. SG&A expense increased during the three months ended June 30, 2012 when compared to the prior year period due to the global expansion of the sales force and administrative personnel ($0.7 million), public company costs ($0.7 million), and professional fees in connection with a potential acquisition ($0.6 million).  SG&A as a percentage of net sales for the three months ended June 30, 2012 was 8.5% compared to 7.9% for the three months ended June 30, 2011.
 
Other Expenses (Income)
 
Interest expense was $3.9 million for the three months ended June 30, 2012 compared to $5.5 million for the three months ended June 30, 2011. The $1.6 million decrease in interest expense in the three months ended June 30, 2012 was due to lower debt balances outstanding with lower interest rates in 2012. The weighted average debt balance outstanding was $176.9 million and $186.3 million for the three months ended June 30, 2012 and 2011, respectively, and weighted average effective interest rates were 7.5% and 9.6% for the three months ended June 30, 2012 and 2011, respectively.
 
 
21

 
Loss on extinguishment of debt of $1.6 million in the three months ended June 30, 2012 relates to the refinancing of the Second Lien Term Loan as described in “Liquidity and Capital Resources – Description of Long-Term Indebtedness” and the $2.0 million in the three months June 30, 2011 relates to the refinancing of our 11% Senior Notes due 2012 and old revolving credit facility.
 
Income Tax Expense
 
Income tax expense from continuing operations for the three months ended June 30, 2012 and 2011 was $2.1 million and $1.1 million, respectively. Our provision for income taxes is recorded at the estimated annual effective tax rates for each tax jurisdiction based on fiscal year to date results. The difference in the effective tax rate compared with the U.S. federal statutory rate is due to the mix of the international jurisdictional rates and the changes in the valuation allowance, which relates to the United States. North American operations had a loss from continuing operations before income taxes during the three months ended June 30, 2012 of $0.7 million for which no income tax benefit was recorded as we believe it is more likely than not that these deferred tax assets will not be realized
 
EBITDA and Adjusted EBITDA
 
EBITDA represents net income or loss from continuing operations before interest, taxes, depreciation and amortization.  Adjusted EBITDA represents EBITDA before loss (gain) on foreign currency transactions, loss on extinguishment of debt, restructuring expenses, extraordinary and non-recurring professional fees, stock-based compensation expense, initial public offering (“IPO”) related costs and management fees paid to CHS Capital LLC.  EBITDA increased $4.3 million to $13.2 million during the three months ended June 30, 2012 compared to $8.9 million for the three months ended June 30, 2011. The increase in EBITDA was primarily related to an increase in our operating income of $3.5 million and a decrease of approximately $0.5 million in loss on extinguishment of debt. Adjusted EBITDA was $16.0 million during the three months ended June 30, 2012, an increase of $3.6 million, or 29.0%, from $12.4 million during the three months ended June 30, 2011. The increase in Adjusted EBITDA was primarily due to the increase in operating income of $3.5 million.
 
Disclosure in this Quarterly Report on Form 10-Q of EBITDA and Adjusted EBITDA, which are “non-GAAP financial measures,” as defined under the rules of the SEC, is intended as a supplemental measure of our performance that is not required by, or presented in accordance with, accounting principles generally accepted in the United States (“GAAP”). EBITDA and Adjusted EBITDA should not be considered as alternatives to net income, income from continuing operations or any other performance measure derived in accordance with GAAP. Our presentation of EBITDA and Adjusted EBITDA should not be construed to imply that our future results will be unaffected by unusual or non-recurring items.
 
We believe these measures are meaningful to our investors to enhance their understanding of our financial performance. Although EBITDA and Adjusted EBITDA are not necessarily measures of our ability to fund our cash needs, we understand that they are frequently used by securities analysts, investors and other interested parties as measures of financial performance and to compare our performance with the performance of other companies that report EBITDA and Adjusted EBITDA. EBITDA and Adjusted EBITDA should be considered in addition to, not as a substitute for, net income, income from continuing operations and other measures of financial performance reported in accordance with GAAP. Our calculation of EBITDA and Adjusted EBITDA may not be comparable to similarly titled measures reported by other companies.
 
 
22

 
Six Months Ended June 30, 2012 Compared to Six Months Ended June 30, 2011
 
   
Six Months Ended
June 30,
   
Period over
 
   
2012
   
2011
   
Period Change
 
   
(in thousands)
 
             
Net sales
  $ 234,085     $ 206,949     $ 27,136       13.1 %
Cost of products
    196,509       174,919       21,590       12.3  
Gross profit
    37,576       32,030       5,546       17.3  
Selling, general and administrative expenses
    22,739       18,738       4,001       21.4  
Public offering related costs
    9,655             9,655       N/A  
Amortization of intangibles
    598       728       (130 )     (17.9 )
Operating income
    4,584       12,564       (7,980 )     (63.5 )
Other expenses (income):
                               
Interest expense, net
    9,637       10,321       (684 )     (6.6 )
Foreign currency transaction loss
    58       1,653       (1,595 )     (96.5 )
Loss on extinguishment of debt
    1,555       2,016       (461 )     (22.9 )
Other income, net
    (664 )     (706 )     42       5.9  
Loss from continuing operations before income taxes
    (6,002 )     (720 )     5,282       *  
Income tax provision
    2,727       1,201       1,526       127.1 %
Loss from continuing operations
  $ (8,729 )   $ (1,921 )   $ 6,808       *  
 
* Not meaningful
 
Net sales
 
Consolidated net sales increased $27.1 million, or 13.1%, to $234.1 million for the six months ended June 30, 2012 from $207.0 million for the six months ended June 30, 2011. Additional volume contributed $20.4 million.  Better pricing, increases in raw material costs passed on to the customer, and changes in product mix contributed $13.6 million to the increase in net sales.  Net sales were partially offset by approximately $6.9 million from changes in foreign currency exchange rates, principally the Euro.
 
Cost of Products
 
Cost of products increased $21.6 million, or 12.3%, to $196.5 million for the six months ended June 30, 2012 from $174.9 million for the six months ended June 30, 2011. Cost of products increased $17.6 million due to the increase in volume shipped and $9.5 million due to the increase in raw material cost, which were partially offset by changes in foreign currency exchange rates, principally the Euro.
 
Gross Profit
 
Consolidated gross profit for the six months ended June 30, 2012 increased $5.6 million, or 17.3%, to $37.6 million compared to $32.0 million for the six months ended June 30, 2011. Gross profit as a percentage of net sales was 16.1% for the six months ended June 30, 2012 compared with 15.5% for the six months ended June 30, 2011.
 
Selling, General and Administrative Expenses
 
SG&A expense for the six months ended June 30, 2012 was $32.4 million, including public offering related costs, compared to $18.7 million for the six months ended June 30, 2011, an increase of $13.7 million. SG&A expense for the six months ended June 30, 2012 include costs related to our IPO of $6.6 million and $3.0 million associated with the termination of our management agreement with Code Hennessy & Simmons LLP (“CHS”).  SG&A expense increased during the six months ended June 30, 2012 when compared to the prior year period due to the global expansion of the sales force and build out of the management team, public company costs, increased information technology costs and professional fees related to a potential acquisition, partially offset by lower restructuring expense and management fees.  Excluding the expenses related to the IPO, SG&A as a percentage of net sales for the six months ended June 30, 2012 was 9.7% compared to 9.1% for the six months ended June 30, 2011.
 
Other Expenses (Income)
 
Interest expense was $9.6 million for the six months ended June 30, 2012 compared to $10.3 million for the six months ended June 30, 2011. The $0.7 million decrease in interest expense in the six months ended June 30, 2012 was primarily due to lower interest rates on the outstanding debt in 2012. The weighted average debt balance outstanding was $189.6 million and $180.5 million for the six months ended June 30, 2012 and 2011, respectively, and weighted average effective interest rates were 8.7% and 9.8% for the six months ended June 30, 2012 and 2011, respectively.
 
 
23

 
Foreign currency transaction loss was $0.1 million for the six months ended June 30, 2012 compared to $1.7 million for the six months ended June 30, 2011. The $1.6 million change for the six months ended June 30, 2012 was primarily due to the amendment of non-dollar denominated intersegment loans, effective January 1, 2012, to be classified as long-term in nature and the corresponding currency revaluation gains or losses being recorded as a component of other comprehensive income and no longer reported as foreign currency gains or losses in the statement of operations.
 
Income Tax Expense
 
Income tax expense from continuing operations for the six months ended June 30, 2012 and 2011 was $2.7 million and $1.2 million, respectively. Our provision for income taxes is recorded at the estimated annual effective tax rates for each tax jurisdiction based on fiscal year to date results. The difference in the effective tax rate compared with the U.S. federal statutory rate is due to the mix of the international jurisdictional rates and the changes in the valuation allowance. North American operations had a loss from continuing operations before income taxes during the six months ended June 30, 2012 and no income tax benefit was recorded as we believe it is not more likely than not these deferred tax assets will be realized.
 
EBITDA and Adjusted EBITDA
 
EBITDA decreased $5.1 million to $10.7 million during the six months ended June 30, 2012 compared to $15.8 million for the six months ended June 30, 2011. The decrease in EBITDA was primarily related to a decrease in our operating income of $8.0 million, partially offset by a decrease in foreign exchange losses of $1.6 million and increased depreciation and amortization expense of $0.9 million. Adjusted EBITDA was $23.1 million during the six months ended June 30, 2012, an increase of $0.9 million, or 4.1%, from $22.2 million during the six months ended June 30, 2011. The increase in Adjusted EBITDA was primarily due to the decrease in operating income of $8.0 million, which was more than offset by the $9.6 million of public offering related costs discussed under “Selling, General and Administrative Expenses” above.
 
The following table reconciles net income (loss) from continuing operations, the most comparable GAAP financial measure, to EBITDA and Adjusted EBITDA for the periods presented:
 
   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
   
(in thousands)
 
Net income (loss)
  $ 3,796     $ (1,183 )   $ (8,970 )   $ (1,914 )
(Income) loss from discontinued operations, net of  tax
    (80 )     379       241       (7 )
Interest expense, net
    3,890       5,480       9,637       10,321  
Income tax expense
    2,078       1,074       2,727       1,201  
Depreciation and amortization expense
    3,522       3,127       7,066       6,172  
EBITDA
    13,206       8,877       10,701       15,773  
Foreign exchange loss
    631       363       58       1,653  
Loss on extinguishment of debt
    1,555       2,016       1,555       2,016  
Restructuring expense
    33             93       355  
Professional fees
    559       649       597       1,300  
Stock-based compensation expense
    35             35       75  
Public offering related costs
                9,655        
Management fees
    14       504       229       1,004  
Other
    10             144       8  
Adjusted EBITDA
  $ 16,043     $ 12,409     $ 23,067     $ 22,184  

Liquidity and Capital Resources
 
General
 
We rely on borrowings under our Amended First Lien Credit Facility (as defined below) and other financing arrangements as our primary source of liquidity. See “Description of Long-Term Indebtedness” for a description of our long-term debt. Our cash flow from operations serves as an additional source of liquidity to the extent available. Our primary liquidity needs are to finance working capital, capital expenditures and debt service. The most significant components of our working capital are cash and cash equivalents, accounts receivable, inventories, accounts payable and other current liabilities. Our working capital position has benefited from growth in sales, improvements in gross margin, increases in backlog and orders.
 
 
24

 
We believe that our cash on hand, together with the availability of borrowings under our Amended First Lien Credit Facility and other financing arrangements and cash generated from operations, will be sufficient to meet working capital requirements, anticipated capital expenditures and scheduled interest payments on our indebtedness for at least the next twelve months.  We cannot assure you, however, that our borrowing capacity or cash flow from operations will be sufficient to service our indebtedness or to fund our other liquidity needs.  See discussion of “Restrictive Covenants” below.
 
Cash and Cash Equivalents
 
As of June 30, 2012, we had $8.8 million in cash and cash equivalents, a decrease of $0.3 million from December 31, 2011 cash and cash equivalents of $9.1 million. We maintain cash and cash equivalents at various financial institutions located in the United States, Germany, Thailand, Egypt and Chile. As of June 30, 2012, $1.1 million, or 12%, was held in domestic accounts with various institutions and approximately $7.7 million, or 88%, was held in accounts outside of the United States with various financial institutions.
 
Description of Long-Term Indebtedness
 
First Lien Credit Facility
 
On May 27, 2011, we entered into a five-year, $160.0 million first lien senior secured credit facility with General Electric Capital Corporation, Jefferies Finance LLC and the other financial institutions party thereto, consisting of $135.0 million of term loan commitments (the “First Lien Term Loan”) and $25.0 million of revolving loan commitments (the “Revolving Credit Facility” and together with the First Lien Term Loan, the “First Lien Credit Facility”). On October 18, 2011, the Revolving Credit Facility was amended to increase the aggregate revolving loan commitments from $25.0 million to $35.0 million. On December 12, 2011, the First Lien Credit Facility was amended to, among other matters, modify the definition of “Change of Control” to reduce CHS’ specified ownership percentage following the consummation of our IPO from 35% to 20%.
 
Amended First Lien Credit Facility
 
On April 18, 2012, we entered into the First Lien Credit Facility (as so amended, the “Amended First Lien Credit Facility”), which, among other things, increased the aggregate term loan commitments from $135.0 million to $157.0 million. We used the additional borrowing capacity under the term loan to repay in full all outstanding indebtedness under, and to terminate, the Second Lien Term Loan (as defined below) and to pay related fees and expenses. We paid customary amendment fees to consenting lenders in connection with the amendment.
 
The Amended First Lien Credit Facility will continue to mature in May 2016. Borrowings under the Amended First Lien Credit Facility will continue to incur interest expense that is variable in relation to the London Interbank Offer Rates (“LIBOR”) (and/or Prime) rate. In addition to paying interest on outstanding borrowings under the Amended First Lien Credit Facility, we remain required to pay a 0.75% per annum commitment fee to the lenders in respect of the unutilized commitments, and letter of credit fees equal to the LIBOR margin on the undrawn amount of all outstanding letters of credit.  As of June 30, 2012, there was $179.2 million outstanding under our Amended First Lien Credit Facility consisting of $155.7 million in term loans and $23.5 million in revolving loans, and the interest rate on such loans was 7.12%.  We had $10.4 million of capacity under the Revolving Credit Facility after taking into account outstanding loan advances and letters of credit.
 
Guarantees; Security.  The obligations under the Amended First Lien Credit Facility continue to be guaranteed on a senior secured basis by GSE Holding and each of its existing and future wholly owned domestic subsidiaries, other than GSE International, Inc. and any other excluded subsidiaries. The obligations under the Amended First Lien Credit Facility remain secured by a first priority perfected security interest in substantially all of the guarantors’ assets, subject to certain exceptions, permitted liens and permitted encumbrances under the Amended First Lien Credit Facility.
 
Restrictive Covenants.  The Amended First Lien Credit Facility continues to contain various restrictive covenants that include, among other things, restrictions or limitations on our company’s ability to incur additional indebtedness or issue disqualified capital stock unless certain financial tests are satisfied; pay dividends, redeem subordinated debt or make other restricted payments; make certain loans, investments or acquisitions; issue stock of subsidiaries; grant or permit certain liens on assets; enter into certain transactions with affiliates; merge, consolidate or transfer substantially all of our assets; incur dividend or other payment restrictions affecting certain subsidiaries; transfer or sell assets including, but not limited to, capital stock of subsidiaries; and change the business our company conducts. However, all of these covenants are subject to exceptions. For the twelve months ended June 30, 2012, our company was subject to a Total Leverage Ratio not to exceed 6.15:1.00 and an Interest Coverage Ratio of not less than 1.90:1.00.  For fiscal year 2012, our company will be subject to a maximum Capital Expenditure Limitation of $15.6 million.  These ratios become progressively more restrictive over the term of the loan. As of June 30, 2012, we had spent $9.4 million toward our Capital Expenditure Limitation.  We believe that our current growth plans will require us to seek an amendment to this covenant.  If we are unsuccessful in obtaining an amendment, we will adjust our capital spending accordingly.  As of June 30, 2012, we were in compliance with all financial debt covenants under the Amended First Lien Credit Facility.
 
 
25

 
Second Lien Term Loan
 
On May 27, 2011, we also entered into a 5.5 year, $40.0 million second lien senior secured credit facility with Jefferies Finance LLC and the other financial institutions party thereto, consisting of $40.0 million of term loan commitments (the “Second Lien Term Loan”). On February 8, 2012, the Second Lien Term Loan was amended to, among other matters, modify the definition of “Change of Control” to reduce CHS’ specified ownership percentage following the consummation of our IPO from 35% to 20%. With the proceeds from our IPO, we paid $20.0 million on our Second Lien Term Loan in February 2012.  On April 18, 2012, in connection with the amendment of the First Lien Credit Facility described above, we repaid in full all outstanding indebtedness under and terminated the Second Lien Term Loan. In connection with this refinancing, we recorded a $1.6 million loss from extinguishment of debt, primarily related to the write-off of unamortized debt issuance cost and discount.  There is no balance outstanding as of June 30, 2012.
 
Non-Dollar Denominated Term Loans
 
In April 2011, we entered into a EUR 0.7 million ($0.9 million) term loan with a German bank, bearing interest at 5.15% which is secured by equipment. The loan requires monthly payments of principal and interest totaling EUR 21 thousand ($27 thousand) beginning April 2011 and maturing in March 2014. The term loan had a balance outstanding on June 30, 2012 of EUR 0.4 million ($0.5 million).
 
We have a BAHT 225.7 million ($7.1 million) term loan with a Thailand bank, bearing interest at the bank’s Minimum Lending Rate (“MLR”) less 1.00% for the first two years and MLR less 0.50%, thereafter, and is secured by equipment, building and lease rights of the property where the equipment and building are located. The bank’s MLR was 7.125% at June 30, 2012. The term loan had a balance outstanding on June 30, 2012 of BAHT 12.6 million ($0.4 million) and matures in May 2013.
 
Non-Dollar Denominated Credit Facilities
 
As of June 30, 2012, we had five local international credit facilities. We have credit facilities with two German banks in the amount of EUR 6.5 million ($8.2 million). These revolving credit facilities are secured by a corporate guarantee and bear interest at various market rates. These credit facilities are used primarily to guarantee the performance of European installation contracts and temporary working capital requirements. As of June 30, 2012, we had EUR 2.0 million ($2.5 million) available under these credit facilities with EUR 2.0 million ($2.5 million) of bank guarantees outstanding, and with EUR 2.5 ($3.2 million) outstanding under the line of credit.
 
In addition, we have two credit facilities with Egyptian banks in the amount of EGP 15.0 million ($2.4 million). These credit facilities bear interest at various market rates and are primarily for cash management purposes. We had EGP 9.1 million ($1.5 million) available under these credit facilities with EGP 2.7 million ($0.4 million) of bank guarantees outstanding, and with EGP 3.2 million ($0.5 million) outstanding under the line of credit as of June 30, 2012.
 
As of June 30, 2012, we had a BAHT 44.2 million ($1.4 million) revolving credit facility with Export-Import Bank of Thailand (“EXIM”), which has a termination date at the discretion of EXIM or our company. This revolving credit facility bears interest at EXIM prime rate less 0.75% for BAHT borrowings and at LIBOR plus 3.5% for U.S. dollar borrowings. Repayments of principal are required within 90 days from the date of each draw down borrowing and interest is payable once a month on the last day of the month. The credit facility is secured by a BAHT 44.2 million ($1.4 million) mortgage on land, building and equipment. We had BAHT 25.3 million ($0.8 million) available under these credit facilities with BAHT 18.9 million ($0.6 million) of letters of credit outstanding with no amounts outstanding under the line of credit as of June 30, 2012.
 
 
26

 
Cash Flow Analysis
 
A summary of operating, investing and financing activities is shown in the following table:
 
   
Six Months Ended June 30,
   
2012
   
2011
   
(in thousands)
Net cash used in operating activities – continuing operations
  $ (34,803 )   $ (10,156 )
Net cash provided by (used in) operating activities – discontinued operations
    (143 )     4,400  
Net cash used in investing activities – continuing operations
    (13,206 )     (4,785 )
Net cash provided by financing activities – continuing operations
    47,254       6,708  
Net cash used in financing activities – discontinued operations
          (650 )
Effect of exchange rate changes on cash – continuing operations
    560       (310 )
Effect of exchange rate changes on cash – discontinued operations
    26       56  
Decrease in cash and cash equivalents
    (312 )     (4,737 )
Cash and cash equivalents at beginning of period
    9,076       15,184  
Cash and cash equivalents at end of period
  $ 8,764     $ 10,447  
 
Net Cash Provided by (Used in) Operating Activities
 
Net cash used in operating activities consists primarily of net loss adjusted for non-cash items, including depreciation and amortization, loss on extinguishment of debt, stock compensation and the effect of changes in working capital.
 
Net cash used in operating activities was $34.8 million for the six months ended June 30, 2012 compared to $10.2 million in the six months ended June 30, 2011. The $24.6 million increase was related primarily to the increased accounts receivable and inventory levels, partially offset by the increase in accounts payable.
 
Net Cash Provided by (Used in) Investing Activities
 
Net cash provided by (used in) investing activities consists primarily of:
 
·  
capital expenditures for growth, including real estate and buildings, in order to expand and upgrade manufacturing facilities or add in incremental capacity;
 
·  
capital expenditures for facility maintenance, including machinery and equipment improvements to significantly extend the useful life of the assets; and
 
·  
capital expenditures for information technology software and equipment costs.
 
Net cash used in investing activities during the six months ended June 30, 2012 was $13.2 million compared to $4.8 million during the six months ended June 30, 2011. Capital expenditures during the six months ended June 30, 2012 consisted of $10.8 million of growth expenditures and $2.4 million of maintenance expenditures.  Capital expenditures during the six months ended June 30, 2011 consisted of $0.8 million of growth expenditures, $1.8 million of maintenance expenditures and $2.2 million related to improving the functionality of our Enterprise Resource Planning System.
 
Net Cash Provided by (Used in) Financing Activities
 
Net cash provided by (used in) financing activities consists primarily of borrowings and repayments related to our credit facilities and fees and expenses paid in connection with our credit facilities.
 
Net cash provided by financing activities was $47.3 million during the six months ended June 30, 2012 compared to  $6.7 million during the six months ended June 30, 2011. This change was attributable primarily to the net proceeds from our IPO during February 2012 ($65.9 million), partially offset by the net repayment of our debt ($17.4 million).
 
Off-Balance Sheet Arrangements
 
As of June 30, 2012, we had no off-balance sheet arrangements.
 
 
27

 
Contingencies
 
We are involved in various legal and administrative proceedings and disputes that arise from time to time in the ordinary course of doing business. Some of these proceedings may result in fines, penalties or judgments being assessed against us, which, from time to time, may adversely affect our financial results. We have considered these proceedings and disputes in determining the necessity of any reserves for losses that are probable and reasonably estimable. Our recorded reserves are based on estimates developed with consideration given to the potential merits of claims or quantification of any performance obligations. In doing so, we take into account our history of claims, the limitations of any insurance coverage, advice from outside counsel, the possible range of outcomes to such claims and obligations and their associated financial impact (if known and reasonably estimable), and management’s strategy with regard to the settlement or defense of such claims and obligations. While the ultimate outcome of those claims, lawsuits or performance obligations cannot be predicted with certainty, we believe, based on our understanding of the facts of these claims and performance obligations, that adequate provisions have been recorded in the accounts where required. In addition, we believe it is not reasonably possible that resolution of these legal actions will, individually or in the aggregate, have a material adverse effect on our financial condition or results of operations. It is possible, however, that charges related to these matters could be significant to our results or cash flows in any single accounting period.
 
In addition, we provide our customers limited material product warranties. Our limited product warranties are typically five years but occasionally extend up to 20 years. These warranties are generally limited to repair or replacement of defective products or workmanship, often on a prorated basis, up to the dollar amount of the original order. In some foreign orders, we may be required to provide the customer with specified contractual limited warranties as to material quality. Our product warranty liability in many foreign countries is dictated by local laws in addition to the warranty specified in the orders. Failure of our products to operate properly or to meet specifications may increase our costs by requiring additional engineering resources, product replacement or monetary reimbursement to a customer. We have received warranty claims in the past, and we expect to continue to receive them in the future. Warranty claims are not covered by insurance, and substantial warranty claims in any period could have a material adverse effect on our financial condition, results of operations or cash flows as well as on our reputation.
 
Furthermore, in certain direct sales and raw material acquisition situations, we are required to post performance bonds or bank guarantees as part of the contractual guarantee for performance. The performance bonds or bank guarantees can be in the full amount of the orders. To date we have not received any claims against any of the posted securities, most of which terminate at the final completion date of the orders. As of June 30, 2012, we had $6.1 million of bonds outstanding and $4.6 million of guarantees issued under bank lines.
 
 
Critical Accounting Policies
 
There have been no material changes to our critical accounting policies as disclosed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 filed with the SEC on March 30, 2012.
 
 
Recently Issued Accounting Pronouncements
 
In September 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-08, Intangibles – Goodwill and Other: Testing Goodwill for Impairment, to allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under these amendments, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amendments include a number of events and circumstances for an entity to consider in conducting the qualitative assessment. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011.  We will adopt this ASU for our 2012 goodwill impairment testing and do not believe it will have a material impact on our results of operations or financial position.
 
 
28

 
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Information about market risks as of June 30, 2012 does not differ materially from the information disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 filed with the SEC on March 30, 2012, except for our entry into the Amended First Lien Credit Facility and repayment of the Second Lien Term Loan.  We estimate an annual interest expense savings of approximately $1.1 million associated with the refinancing.
 
ITEM 4. CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures
 
Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2012. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Based on the evaluation of our disclosure controls and procedures as of June 30, 2012, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
 
Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable, and not absolute, assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
 
Changes in Internal Control over Financial Reporting
 
There were no changes in our internal control over financial reporting during the quarter ended June 30, 2012 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
 
29

 
PART II
 
 
ITEM 1. LEGAL PROCEEDINGS
 
In the ordinary course of our business, we have been involved in various disputes and litigation. Although the outcome of any such disputes and litigation cannot be predicted with certainty, we do not believe that there are any pending or threatened actions, suits or proceedings against or affecting us which, if determined adversely to us, would, individually or in the aggregate, have a material adverse effect on our business, financial condition or results of operations.
 
ITEM 1A. RISK FACTORS
 
We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.
 
We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We may take advantage of these reporting exemptions until we are no longer an “emerging growth company.” We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.
 
In addition, Section 107 of the JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. An “emerging growth company” can therefore delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we are choosing to “opt out” of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.
 
We will remain an emerging growth company for up to five full fiscal years, or until the earliest of (i) the last day of the first fiscal year in which our total annual gross revenues exceed $1 billion, (ii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended, or the Exchange Act, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter or (iii) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three-year period.
 
There have been no other material changes in the status of our risk factors from those described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 filed with the SEC on March 30, 2012.
 
ITEM 6. EXHIBITS
 
The information called for by this Item is incorporated herein by reference from the Exhibit Index following the signature pages of this Quarterly Report on Form 10-Q.
 
 
30

 
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized.
 
Date:  August 3, 2012.
 
 
GSE HOLDING, INC.
 
 
 
By:  /s/ William F. lacey
Name: William F. Lacey
Title:Executive Vice President and Chief Financial Officer
           (Principal Financial Officer)
 
 
 
31

 
EXHIBIT INDEX
 
Exhibit
Number
 
Description
10.1
 
Third Amendment to First Lien Credit Agreement, dated as of April 18, 2012, by and among Gundle/SLT Environmental, Inc., the other credit parties named therein, General Electric Capital Corporation, as agent and lender, and the other lenders party thereto (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on April 19, 2012)
31.1
 
Chief Executive Officer Certification pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
31.2
 
Chief Financial Officer Certification pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
32.1
 
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*
32.2
 
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*
101.1
 
Interactive Data Files pursuant to Rule 405 of Regulation S-T: (i) Condensed Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011, (ii) Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2012 and 2011, (iii) Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011 and (iv) Notes to Unaudited Condensed Consolidated Financial Statements**
 
________________
*
Filed herewith.
 
**
Pursuant to Rule 406T of Regulation S-T, the eXtensible Business Reporting Language information contained in Exhibit 101.1 hereto is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
 
 

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