1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
---------------------
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-6050
---------------------
POWELL INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
NEVADA 88-0106100
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8550 MOSLEY DRIVE, HOUSTON, TEXAS 77075-1180
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713)944-6900
Securities registered pursuant to section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
Indicate by "X" whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by "X" if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein and will not be contained, to the best of
the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant was approximately $97,049,000 as of January 14, 1998. The number
of shares of the Company's Common Stock outstanding on that date was 10,645,946
shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 1998 annual meeting of stockholders
to be filed not later than 120 days after October 31, 1997 are incorporated by
reference into Part III.
================================================================================
2
PART I
ITEM 1. BUSINESS
Powell Industries, Inc. ("Powell" or the "Company") was incorporated under
the laws of the State of Nevada in December 1968. The Company is the successor
to a corporation founded by William E. Powell in 1947, which merged into the
Company in 1977.
The Company sells, designs, develops, manufactures, packages and services
systems and equipment for the distribution, control and management of electrical
energy and other dynamic processes. The Company's offices are located in
Houston, Texas with plants located in Houston, Greenville and Jacinto Port,
Texas; Elyria and North Canton, Ohio; Franklin Park, Illinois; Pleasanton and
Watsonville, California; and Norcross, Georgia. Most of the products
manufactured by the Company are made pursuant to specifications required for a
particular order.
PRODUCTS AND SYSTEMS
Powell designs, develops, manufactures, sells and services electrical power
distribution and control equipment and systems through its subsidiaries: Powell
Electrical Manufacturing Company; Powell-ESCO Company; Unibus, Inc.;
Delta-Unibus Corp. and Transdyn Controls, Inc. As applicable to the context,
"Company" is also sometimes used herein to refer to Powell and its subsidiaries.
The principal products are switchgear and related equipment, bus duct and
process control systems. These products and systems are utilized primarily by
refineries, petrochemical plants, utilities, paper mills, offshore platforms,
commuter railways, vehicular transportation and numerous other industrial,
commercial and governmental facilities. A brief description of each of the major
products follows:
Switchgear and other related Equipment:
Free-standing metal enclosures containing a selection of electrical
components that protect, monitor and control the flow of electricity from its
source to motors, transformers and other electrically powered equipment as well
as customized portable buildings to house switchgear and related equipment
(PCRH). Major electrical components include circuit breakers, protective relays,
meters, control switches, fuses, motor control centers and both current and
potential transformers. During the fiscal years ended October 31, 1997, 1996 and
1995, sales and service of switchgear and other related equipment accounted for
73%, 76% and 73%, respectively, of consolidated revenues of the Company.
Bus Duct:
Bus duct consists of insulated power conductors housed in a metal
enclosure. Individual pieces of bus duct are arranged in whatever physical
configuration may be required to distribute electrical power to or from a
generator, transformer, switching device or other electrical apparatus. The
Company can provide the nonsegregated phase, segregated phase and isolated phase
styles of bus duct with numerous amperage and voltage ratings. Sales of bus duct
accounted for 17%, 15% and 15% of consolidated revenues for fiscal years 1997,
1996 and 1995, respectively.
Process Control Systems:
The process control systems supplied by the Company consist principally of
instrumentation, computer control, communications, and data management systems.
Demand for process control systems has been for modernization and expansion
projects as well as new facilities that mainly serve the transportation,
environmental and utilities industries. During the fiscal years ended October
31, 1997, 1996 and 1995, sales of process control systems accounted for 10%, 9%
and 12%, respectively, of consolidated revenues of the Company.
2
3
SUPPLIERS
All of the Company's products are manufactured using components and
materials that are readily available from numerous domestic suppliers. The
Company has three principal suppliers of components and anticipates no
difficulty in obtaining its components in sufficient quantities to support its
manufacturing and assembly operations.
METHODS OF DISTRIBUTION AND CUSTOMERS
The Company's products are sold through manufacturers' representatives and
its internal sales force. The Company is not dependent on any single customer
for sales and the loss of any specific customer would not have a material
adverse effect upon the Company. No single customer or export country accounted
for more than 10% of consolidated revenues in the fiscal years ended 1997, 1996
or 1995. Export revenues were $88,107,000, $63,884,000 and $39,491,000 in fiscal
years 1997, 1996 and 1995, respectively. See Note H of the Notes to Consolidated
Financial Statements showing the geographic areas in which these revenues were
recorded.
COMPETITION
The Company is engaged in a highly competitive business which is
characterized by a small number of much larger companies that dominate the bulk
of the market and a large number of smaller companies that compete for a limited
share of such market. In the opinion of management, the competitive position of
the Company is dependent on the ability of the Company to provide quality
products to a customer's specifications, on a timely basis, at a competitive
price, utilizing state-of-the-art materials, design and production methods. Some
of the Company's principal competitors are larger and have greater capital and
management resources.
EMPLOYEES
At October 31, 1997, the Company employed 1,163 employees on a full-time
basis. Management considers its employee relations to be good.
BACKLOG
The Company's backlog of orders was $137,295,000 and $106,457,000 at
October 31, 1997 and 1996, respectively, and the percentage of its 1997 year end
backlog that it does not expect to fill in fiscal year 1998 is 15.3%. Orders
included in the backlog are represented by purchase orders which the Company
believes to be firm. The terms on which the Company accepts orders include a
penalty for cancellation. Historically, no material amount of orders included in
backlog has been canceled. No material portion of the Company's business is
seasonal in nature.
RESEARCH AND DEVELOPMENT
During the fiscal years ended October 31, 1997, 1996 and 1995, the Company
spent approximately $2,649,000, $2,283,000 and $1,843,000 respectively, on
research and development programs.
3
4
ITEM 2. PROPERTIES
The following table sets forth information about the Company's principal
facilities at October 31, 1997.
SQUARE
FOOTAGE
OF
LOCATION ACRES FACILITIES OCCUPANCY
-------- ----- ---------- ---------
Owned:
Franklin Park, IL........... 2.0 64,000 Delta-Unibus Corp. (Delta)
Greenville, TX.............. 19.0 109,000 Powell-ESCO Company (Esco)
Houston, TX................. 26.2 421,000 Powell Electrical Manufacturing Co. (PEMCO)
Jacinto Port, TX............ 42.0 9,600 PEMCO-Offshore Division
Elyria, OH.................. 8.6 64,000 Unibus, Inc. (Unibus)
Leased:
Pleasanton, CA.............. 39,100 Transdyn Controls, Inc. (Transdyn)
Watsonville, CA............. 9,600 Powell Electrical Manufacturing Co.
Norcross, GA................ 19,200 Transdyn Controls, Inc.
North Canton, OH............ 53,000 PEMCO-North Canton Division
ITEM 3. LEGAL PROCEEDINGS
On August 5, 1993, the Company was served with a lawsuit by National
Westminster Bank plc ("NatWest") alleging the Company had defaulted on a
Construction Guaranty provided to NatWest in 1992 in connection with a project
at MacDill Air Force Base. NatWest is seeking damages in excess of $20,000,000.
The Company has denied the substantive allegations of the complaint and has
filed counterclaims for damages against NatWest alleging fraud, bad faith and
failure to preserve and protect its collateral and seeking a declaratory
judgement that the Company is not in default of the Construction Guaranty.
On May 30, 1997, the United States District Court Southern District of New
York issued a memorandum and order denying the Company's motion to dismiss the
complaint for lack of subject matter jurisdiction and, alternatively, to stay
its prosecution pending disposition by the Armed Services Board of Contract
Appeals of an appeal by NatWest's borrower, Empire Energy Management Systems,
Inc., from the allegedly wrongful default termination of a contract between
Empire and the United States Air Force (the "Air Force Contract"). In reaching
its decision on the stay motion, the Court rejected one of the Company's several
alleged defenses, in particular, its defense that the Air Force Contract was
terminated for the convenience of the government.
NatWest has expressed an interest in a prompt trial date on several
occasions, but the Court has yet to set a trial date. Two motions remain pending
before the Court.
The ultimate disposition of the NatWest litigation is not presently
determinable. Accordingly, although an unfavorable outcome to the NatWest
litigation could have a material adverse effect on the Company's financial
position and results of operations, the Company believes it would be
unreasonable to conclude that an unfavorable outcome is probable.
The Company is a party to other disputes arising in the ordinary course of
business. Management does not believe the ultimate outcome of these disputes
will materially effect the financial position or results of operations of the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters which were submitted to a vote of security holders
through proxies, or otherwise, during the fourth quarter of the fiscal year
ended October 31, 1997.
4
5
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of October 31, 1997, there were approximately 898 holders of record of
Powell Industries, Inc. common stock, which is traded on the over-the-counter
market and listed on the NASDAQ National Market System under the symbol POWL.
Quarterly stock prices and trading volumes for the last two fiscal years
are as follows:
AVERAGE
HIGH LOW LAST DAILY VOLUME
------ ------ ------ ------------
1997
First Quarter............................. $15.25 $ 9.88 $14.13 46,614
Second Quarter............................ 15.00 10.50 14.00 20,302
Third Quarter............................. 18.25 13.75 16.50 16,490
Fourth Quarter............................ 17.75 14.75 14.75 13,031
1996
First Quarter............................. $ 8.88 $ 6.38 $ 8.50 23,295
Second Quarter............................ 10.63 8.38 9.63 31,914
Third Quarter............................. 12.38 9.13 10.00 29,380
Fourth Quarter............................ 12.25 8.75 10.50 20,617
The Company has paid no dividends on its common stock during the last three
years and anticipates that it will not do so in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The following data has been derived from consolidated financial statements
that have been audited by Arthur Andersen LLP, independent public accountants.
The information set forth below is not necessarily indicative of the results of
future operations and should be read in conjunction with the consolidated
financial statements and notes thereto appearing elsewhere in this Annual Report
on Form 10-K.
YEARS ENDED OCTOBER 31,
-----------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ -----------
Statements of operations data:
Revenues............................ $191,651,000 $170,123,000 $139,534,000 $119,453,000 $94,790,000
Earnings from continuing
operations........................ 12,629,000 10,758,000 7,080,000 4,559,000 3,555,000
Earnings (loss) from discontinued
operations (net of income
taxes)............................ -- (5,998,000) (1,382,000) (164,000) 964,000
Cumulative effect of change in
accounting principles (net of
income taxes)..................... -- -- -- -- (1,588,000)
------------ ------------ ------------ ------------ -----------
Net earnings.......................... $ 12,629,000 $ 4,760,000 $ 5,698,000 $ 4,395,000 $ 2,931,000
============ ============ ============ ============ ===========
Net earnings per common and common
equivalent share:
Continuing operations............... $ 1.17 $ 1.00 $ .67 $ .43 $ .34
Discontinued operations............. -- (.56) (.13) (.01) .09
Cumulative effect of change in
accounting principles............. -- -- -- -- (.15)
------------ ------------ ------------ ------------ -----------
Net earnings per common and common
equivalent share.................... $ 1.17 $ .44 $ .54 $ .42 $ .28
============ ============ ============ ============ ===========
5
6
YEARS ENDED OCTOBER 31,
-----------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ -----------
Weighted average shares outstanding... 10,808,384 10,764,656 10,611,331 10,509,371 10,478,632
Balance Sheet Data:
Working capital..................... $ 51,769,000 $ 46,505,000 $ 32,642,000 $ 30,351,000 $33,153,000
Total assets........................ 122,867,000 99,523,000 90,534,000 84,327,000 76,114,000
Long-term debt...................... 6,000,000 -- 3,750,000 6,563,000 9,375,000
Stockholders' equity................ 76,307,000 63,225,000 57,657,000 51,656,000 46,631,000
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements.
Any forward-looking statements made by or on behalf of the Company are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Readers are cautioned that such forward-looking statements
involve risks and uncertainty in that actual results may differ materially from
those projected in the forward-looking statements. These risks and uncertainties
include, without limitation, the following:
- Difficulties in scheduling which could arise from the inability to obtain
materials or components in sufficient quantities as needed for the
Company's manufacturing and assembly operations,
- Difficulties in scheduling which could arise from significant customer
directed shipment delay,
- Significant decrease in the Company's backlog,
- Unforeseen political or economic problems in countries to which the
Company exports its products,
- Unforeseen material employee relations problems,
- Problems in the quality, the design, the production methods or pricing of
its products,
- Unfavorable material litigation or claims made against the Company, and
- Changes in general market conditions, competition and pricing.
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of revenues, certain items
from the Consolidated Statements of Operations.
YEARS ENDED OCTOBER 31,
-----------------------
1997 1996 1995
----- ----- -----
Revenues.................................................... 100.0% 100.0% 100.0%
Gross profit................................................ 24.5 25.3 22.2
Selling, general and administrative expenses................ 15.1 15.8 14.5
Interest (income) expense, net.............................. (.2) .1 .5
Earnings from continuing operations......................... 6.6 6.3 5.1
Losses from discontinued operations......................... -- (3.5) (1.0)
Net earnings................................................ 6.6 2.8 4.1
REVENUES
The Company reported revenues of $191,651,000, $170,123,000 and
$139,534,000 in fiscal years 1997, 1996 and 1995, respectively. Revenues
increased 13% in fiscal year 1997 as compared to fiscal year 1996 and 22% in
fiscal year 1996 as compared to fiscal year 1995 due primarily to the increased
volume of shipments of electrical distribution equipment to export customers.
Export revenues continued to be an important component of the Company's
operations accounting for 46%, 38% and 28% of consolidated revenues in fiscal
years 1997, 1996 and 1995, respectively. A schedule is
6
7
provided in Note H of the Notes to Consolidated Financial Statements showing the
geographic areas in which these sales were made. Management anticipates that
consolidated revenues will increase in fiscal 1998 and that export revenues will
continue to contribute approximately 35% to 40% of consolidated revenues.
GROSS PROFIT
Gross profit, as a percentage of revenues, was 24.5%, 25.3% and 22.2% in
fiscal years 1997, 1996 and 1995, respectively. The gross profit percentage
decreased slightly in 1997 due primarily to product mix. Gross profit improved
in fiscal year 1996 from fiscal year 1995 due to improved prices, higher volumes
and higher margin contracts and services resulting primarily from a more
favorable economy in most of the markets in which the Company competes. The
Company continues to focus on productivity improvements to respond to the
competitive markets it serves.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses as a percentage of revenues
were 15.1%, 15.8% and 14.5% for fiscal years 1997, 1996 and 1995, respectively.
The increase in fiscal year 1996, as a percentage of revenues, was due to higher
marketing, incentives and commission expenses.
INTEREST (INCOME) EXPENSE, NET
Interest (income) expense, net reflects a net interest income in fiscal
year 1997 and a net interest expense in fiscal years 1996 and 1995. The more
favorable amounts were primarily due to a reduction in total debt and the
increased availability of funds to invest in 1997.
INCOME TAX PROVISION
The effective tax rate on earnings from continuing operations before income
taxes was 32%, 33% and 30% for fiscal years 1997, 1996 and 1995, respectively.
The effective tax rates are lower than the statutory rate due primarily to
foreign sales corporation credits.
EARNINGS FROM CONTINUING OPERATIONS
Earnings from continuing operations recorded in fiscal year 1997 were
$12,629,000 or $1.17 per share. This represented a 17.4% increase in earnings
when compared to fiscal year 1996 earnings. The increase was primarily due to
the factors discussed above. Earnings from continuing operations recorded in
fiscal year 1996 were $10,758,000 or $1.00 per share, an increase of 52.0%
compared to net earnings in fiscal year 1995.
DISCONTINUED OPERATIONS
See Note L to Notes to Consolidated Financial Statements for discussion of
the operations that were discontinued in fiscal year 1996.
NET EARNINGS
Net earnings were $12,629,000 or $1.17 per share in fiscal year 1997
compared to $4,760,000 or $.44 per share and $5,688,000 or $.54 per share in
fiscal year 1996 and 1995, respectively. The losses from discontinued
operations, referred to in the previous paragraph, resulted in lower net
earnings in fiscal year 1996 as compared to 1995.
LIQUIDITY AND CAPITAL RESOURCES
In August 1997, the Company entered into a $20,000,000 revolving line of
credit agreement with a major domestic bank. As of October 31, 1997, the Company
had $6,000,000 in borrowings outstanding under this revolving line of credit.
The Company's ability to satisfy its cash requirements is evaluated by analyzing
key
7
8
measures of liquidity applicable to the Company. The following table is a
summary of the liquidity measures which management believes to be significant.
1997 1996 1995
---------- ----------- -----------
Working capital.............................. 51,769,000 $46,505,000 $32,642,000
Current ratio................................ 2.36 to 1 2.42 to 1 2.30 to 1
Debt to total capitalization................. .1 to 1 .1 to 1 .1 to 1
Management believes that the Company continues to maintain a strong
liquidity position. The increase in working capital at October 31, 1997, as
compared to October 31, 1996, is due mainly to increases in accounts receivable
and costs and estimated earnings in excess of billings, partially offset by
increases in accrued liabilities, and billings in excess of costs and estimated
earnings.
Capital expenditures totaled $14,773,000 during fiscal year 1997 compared
to $3,349,000 during fiscal year 1996. During fiscal year 1997 the majority of
the capital expenditures was for plant expansions of operating facilities at
PEMCO, Delta, and Unibus totaling approximately $12,000,000. Management expects
the Company's capital expenditures program to be approximately $5,000,000 in
fiscal year 1998 primarily for additions and replacement of machinery and
equipment and the completion of the facility at Pemco.
The Company's fiscal year 1998 asset management program will continue to
focus on the reduction of receivables days outstanding and reduction in
inventories. Management believes that the cash and cash equivalents of
$2,219,000 at October 31, 1997, along with funds generated from operating
activities and funds available through borrowings from the credit line will be
sufficient to meet the capital requirements and operating needs of the Company.
EFFECTS OF INFLATION AND RECESSION
During the last three years, the Company has not experienced any
significant effects of inflation on its operations. Management continues to
evaluate the potential impact inflation could have on future growth and minimize
the impact by including escalation clauses in long-term contracts. Recent
marketing and financial reports indicate that the current economic conditions
should improve slightly in 1998 and the Company does not anticipate significant
increases in inflation in the immediate future.
YEAR 2000 COMPLIANCE
The Company has and will continue to make certain investments in its
software systems and applications to ensure the Company is year 2000 compliant.
The financial impact of such investments has not been and is not anticipated to
be material to its financial position or its results of operations in any given
year.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Financial Statements:
Report of Independent Public Accountants.................. 9
Consolidated Balance Sheets as of October 31, 1997 and
1996................................................... 10
Consolidated Statements of Operations for the three years
ended October 31, 1997................................. 11
Consolidated Statements of Stockholders' Equity for the
three years ended October 31, 1997..................... 12
Consolidated Statements of Cash Flows for the three years
ended October 31, 1997................................. 13
Notes to Consolidated Financial Statements................ 14
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
8
9
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Board of Directors and Stockholders of Powell Industries, Inc.:
We have audited the accompanying consolidated balance sheets of Powell
Industries, Inc. (a Nevada corporation) and subsidiaries as of October 31, 1997
and 1996, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended October
31, 1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Powell
Industries, Inc. and subsidiaries as of October 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended October 31, 1997, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Houston, Texas
December 3, 1997
9
10
POWELL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS
OCTOBER 31,
-------------------
1997 1996
-------- -------
Current Assets:
Cash and cash equivalents................................. $ 2,219 $ 8,935
Accounts receivable, less allowance for doubtful accounts
of $465 and $777, respectively......................... 50,391 37,013
Costs and estimated earnings in excess of billings........ 18,986 13,934
Inventories............................................... 13,603 14,114
Deferred income taxes..................................... 825 2,572
Income taxes receivable................................... 1,351 876
Prepaid expenses and other current assets................. 2,594 1,700
-------- -------
Total Current Assets.............................. 89,969 79,144
Property, plant and equipment, net.......................... 26,374 14,602
Deferred income taxes....................................... 1,578 1,164
Other assets................................................ 4,946 4,613
-------- -------
Total Assets...................................... $122,867 $99,523
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts and income taxes payable......................... $ 11,929 $ 8,543
Accrued salaries, bonuses and commissions................. 6,737 5,687
Accrued product warranty.................................. 1,511 1,614
Accrued legal expenses.................................... 3,785 3,903
Other accrued expenses.................................... 3,282 3,717
Billings in excess of costs and estimated earnings........ 10,956 5,425
Current maturities of long-term debt...................... -- 3,750
-------- -------
Total Current Liabilities......................... 38,200 32,639
Long-term debt, net of current maturities................... 6,000 --
Deferred compensation expense............................... 1,128 2,157
Postretirement benefits liability........................... 1,232 1,502
Commitments and contingencies
Stockholders' Equity:
Preferred stock, par value $.01; 5,000,000 shares
authorized; none issued
Common stock, par value $.01; 30,000,000 shares
authorized; 10,642,779 and 10,604,644 shares issued and
outstanding, respectively.............................. 106 106
Additional paid-in capital................................ 5,782 5,601
Retained earnings......................................... 73,572 60,943
Deferred compensation-ESOP................................ (3,153) (3,425)
-------- -------
Total Stockholders' Equity........................ 76,307 63,225
-------- -------
Total Liabilities and Stockholders' Equity........ $122,867 $99,523
======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
10
11
POWELL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED OCTOBER 31,
------------------------------
1997 1996 1995
-------- -------- --------
Revenues.................................................... $191,651 $170,123 $139,534
Cost of goods sold.......................................... 144,645 127,075 108,525
-------- -------- --------
Gross profit................................................ 47,006 43,048 31,009
Selling, general and administrative expenses................ 28,982 26,928 20,286
-------- -------- --------
Earnings from continuing operations before interest and
income taxes.............................................. 18,024 16,120 10,723
Interest (income) expense, net.............................. (416) 117 633
-------- -------- --------
Earnings from continuing operations before income taxes..... 18,440 16,003 10,090
Income tax provision........................................ 5,811 5,245 3,010
-------- -------- --------
Earnings from continuing operations......................... 12,629 10,758 7,080
Discontinued operations (net of income taxes):
Loss from operations...................................... -- (4,860) (1,382)
Loss on disposal of discontinued operations............... -- (1,138) --
-------- -------- --------
Net earnings................................................ $ 12,629 $ 4,760 $ 5,698
======== ======== ========
Earnings (loss) per common and common equivalent share:
Continuing operations..................................... $ 1.17 $ 1.00 $ .67
Discontinued operations................................... -- (.56) (.13)
-------- -------- --------
Net earnings per common and common equivalent share......... $ 1.17 $ .44 $ .54
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
11
12
POWELL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK ADDITIONAL DEFERRED
-------------------- PAID-IN RETAINED COMPENSATION
SHARES AMOUNT CAPITAL EARNINGS ESOP
---------- ------ ---------- -------- ------------
Balance, October 31, 1994........... 10,517,704 $105 $4,906 $50,485 $(3,840)
Net earnings...................... 5,698
Amortization of deferred
compensation -- ESOP........... 147
Stock grants...................... 25,000 -- 156
---------- ---- ------ ------- -------
Balance, October 31, 1995........... 10,542,704 105 5,062 56,183 (3,693)
Net earnings...................... 4,760
Amortization of deferred
compensation -- ESOP........... 268
Exercise of Stock options......... 11,940 -- 52
Stock grants...................... 50,000 1 487
---------- ---- ------ ------- -------
Balance, October 31, 1996........... 10,604,644 106 5,601 60,943 (3,425)
Net earnings...................... 12,629
Amortization of deferred
compensation -- ESOP........... 272
Exercise of stock options......... 38,135 -- 181
---------- ---- ------ ------- -------
Balance, October 31, 1997........... 10,642,779 $106 $5,782 $73,572 $(3,153)
========== ==== ====== ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
12
13
POWELL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED OCTOBER 31,
-------------------------------
1997 1996 1995
-------- -------- -------
Operating Activities:
Net earnings............................................ $ 12,629 $ 4,760 $ 5,698
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization........................ 3,376 3,270 2,800
Deferred income taxes (benefit)...................... 1,333 (2,112) 742
Postretirement benefits liability.................... (270) (455) (418)
Changes in operating assets and liabilities:
Accounts receivable................................ (13,378) (11,092) (1,290)
Costs and estimated earnings in excess of
billings........................................ (5,052) (2,820) (3,876)
Inventories........................................ 511 948 (4,079)
Prepaid expenses and other current assets.......... (894) (7) (749)
Other assets....................................... (708) (205) (273)
Accounts payable and income taxes payable or
receivable...................................... 2,911 (272) 562
Accrued liabilities................................ 394 5,334 (276)
Billings in excess of costs and estimated
earnings........................................ 5,531 1,318 2,314
Deferred compensation expense...................... (757) 420 266
Changes in net assets of discontinued operations... -- 12,674 109
-------- -------- -------
Net cash provided by operating activities................. 5,626 11,761 1,530
-------- -------- -------
Investing Activities:
Purchases of property, plant and equipment.............. (14,773) (3,349) (3,378)
-------- -------- -------
Net cash used in investing activities..................... (14,773) (3,349) (3,378)
-------- -------- -------
Financing Activities:
Borrowings of long-term debt............................ 6,000 -- --
Payments of long-term debt.............................. (3,750) (2,813) (2,813)
Exercise of stock grants and options.................... 181 540 156
-------- -------- -------
Net cash provided by (used in) financing activities....... 2,431 (2,273) (2,657)
-------- -------- -------
Net increase (decrease) in cash and cash equivalents...... (6,716) 6,139 (4,505)
Cash and cash equivalents at beginning of year............ 8,935 2,796 7,301
-------- -------- -------
Cash and cash equivalents at end of year.................. $ 2,219 $ 8,935 $ 2,796
======== ======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
13
14
POWELL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. BUSINESS AND ORGANIZATION
Powell Industries, Inc. ("Powell" or the "Company") was incorporated under
the laws of the state of Nevada in December 1968. The Company is the successor
to a corporation founded by William E. Powell in 1947, which merged into the
Company in 1977.
Powell designs, develops, manufactures, sells and services electrical power
distribution and control equipment and systems through its subsidiaries: Powell
Electrical Manufacturing Company; Powell-ESCO Company; Unibus, Inc.;
Delta-Unibus Corp. and Transdyn Controls, Inc. As applicable to the context,
"Company" is also sometimes used herein to refer to Powell and its subsidiaries.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Powell Industries, Inc. and its wholly-owned subsidiaries (the Company). All
material intercompany accounts and transactions have been eliminated.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of less than three months to be cash equivalents.
Accounts Receivable
The Company's receivables are generally not collateralized. Management
performs ongoing credit analyses of the accounts of its customers and provides
allowances as deemed necessary. Accounts receivable at October 31, 1997 and 1996
include $2,296,000 and $3,603,000, respectively, due from customers in
accordance with applicable retainage provisions of engineering and construction
contracts, which will become billable upon completion of such contracts.
Approximately $533,000 of the retained amount at October 31, 1997 is expected to
be billed subsequent to 1998.
Inventories
Inventories are stated at the lower of cost (primarily first-in, first-out
method) or market and include material, labor and manufacturing overhead.
Property, Plant and Equipment
Property, plant and equipment is stated at cost and is depreciated using
the straight-line method over the estimated useful lives of the assets.
Expenditures for repairs and maintenance are charged to expense when incurred.
Expenditures for major renewals and betterments which extend the useful lives of
existing equipment are capitalized and depreciated. Upon retirement or
disposition of property, plant and equipment, the cost and related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
recognized in the statements of operations.
Amortization of Intangibles
Included in other assets are net intangible assets totaling $2,272,000 and
$2,172,000 at October 31, 1997 and 1996, respectively. Intangible assets
primarily include goodwill and patents which are amortized using the
straight-line method over periods ranging from five to twenty years. The
accumulated amortization of intangible accounts totaled $1,476,000 and
$1,873,000 at October 31, 1997 and 1996, respectively. Management continually
evaluates whether events or circumstances have occurred that indicate the
remaining
14
15
POWELL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
estimated useful life of intangible assets may warrant revision or that
remaining balances may not be recoverable.
Revenue Recognition
Revenues from product sales are recognized at the time of shipment.
Revenues related to multiple unit orders and their associated costs are recorded
as identifiable units are delivered. Contract revenues are recognized on a
percentage-of-completion basis primarily using labor dollars incurred to date in
relation to estimated total labor dollars of the contracts to measure the stage
of completion. Contract costs include all direct material and labor costs and
those indirect costs related to contract performance, such as indirect labor,
supplies and depreciation costs. Provisions for total estimated losses on
uncompleted contracts are recorded in the period in which they become evident.
Warranties
The Company provides for estimated warranty costs at the time of sale based
upon historical rates applicable to individual product lines. In addition,
specific provisions are made when the costs of such warranties are expected to
exceed accruals.
Research and Development Expense
Research and development costs are charged to expense as incurred. Such
amounts were $2,649,000, $2,283,000 and $1,843,000 in fiscal years 1997, 1996
and 1995, respectively.
Earnings per Common and Common Equivalent Share
Per share data has been computed based on the weighted average number of
common and common equivalent shares outstanding of 10,808,384, 10,764,656 and
10,611,331 in fiscal years 1997, 1996 and 1995, respectively.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassification
Certain reclassifications of prior year amounts have been made in order to
conform with the classifications used in the current year presentation.
Income Taxes
The Company accounts for income taxes using Statement of Financial
Accounting Standards (SFAS) No. 109 "Accounting for Income Taxes". Under SFAS
No. 109, deferred tax assets and liabilities are computed based on the
difference between the financial statements and income tax bases of assets and
liabilities using enacted tax rates. Under this standard, the effect on deferred
taxes of a change in tax rates is recognized in income in the period that the
tax rate changes.
15
16
POWELL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
New Accounting Standards
The Company adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed Of" and SFAS No. 123,
"Accounting for Stock Based Compensation" during its fiscal year ending October
31, 1997. Adoption of SFAS No. 121 had no effect on the Company's consolidated
financial statements. The fair value of options granted are disclosed in Note J
of the Notes to Consolidated Financial Statements, as required by SFAS No. 123.
SFAS No. 128, "Earnings per Share", was issued in February 1997. The
Company is required to adopt SFAS No. 128 in the first quarter of 1998. SFAS No.
128 revises the methodology to be used in computing earnings per share (EPS)
such that the computations required for primary and fully diluted EPS are to be
replaced with "basic" and "diluted" EPS. Basic EPS is computed by dividing net
income by the weighted average number of shares of common stock outstanding
during the year. Diluted EPS is computed in the same manner as fully diluted
EPS, except that, among other changes, the average share price for the period is
used in all cases when applying the treasury stock method to potentially
dilative outstanding options. If the Company had adopted the statement in the
current year, earnings per share would have been reported as follows:
1997 1996 1995
---- ---- ----
Basic....................................................... $1.19 $.45 $.54
Diluted..................................................... 1.17 .44 .54
SFAS No. 130, "Reporting Comprehensive Income", was issued in June 1997.
SFAS No. 130 requires the presentation of comprehensive income in an entity's
financial statements. Comprehensive income represents all changes in equity of
an entity during the reporting period, including net income and charges directly
to equity which are excluded from net income. The Company will present the
components of Comprehensive Income within its Consolidated Statements of
Stockholder's Equity during its fiscal year ending October 31, 1999. The Company
expects the adoption will not have a material effect on its consolidated
financial position of results of operations.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information", was issued in June 1997. SFAS No. 131 provides revised disclosure
guidelines for segments of an enterprise based on a management approach to
defining operating segments. The Company will provide reporting disclosures as
required by the statement during its fiscal year ending October 31, 1999.
C. INVENTORIES
The components of inventories are summarized below (in thousands):
OCTOBER 31,
------------------
1997 1996
------- -------
Raw materials, parts and subassemblies...................... $ 8,706 $ 8,118
Work-in-process............................................. 4,897 5,996
------- -------
Total inventories................................. $13,603 $14,114
======= =======
16
17
POWELL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
D. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is summarized below (in thousands):
OCTOBER 31,
------------------- RANGE OF
1997 1996 ASSET LIVES
-------- -------- -----------
Land............................................... $ 2,720 $ 2,362 --
Buildings and improvements......................... 20,662 13,255 3-39 Years
Machinery and equipment............................ 24,912 21,157 3-15 Years
Furniture and fixtures............................. 3,121 2,923 3-10 Years
Construction in progress........................... 4,596 1,869 --
-------- --------
56,011 41,566
Less-accumulated depreciation...................... (29,637) (26,964)
-------- --------
Total property, plant and equipment,
net.................................... $ 26,374 $ 14,602
======== ========
E. EMPLOYEE BENEFIT PLANS
The Company has a defined contribution plan (401K) for substantially all of
its employees. The Company matches 50% of employee contributions up to six
percent of their salary. The Company recognized expense of $848,000, $736,000
and $658,000 in fiscal years 1997, 1996 and 1995, respectively, under this plan.
Three long service employees are participants in a deferred compensation
plan providing payments in accordance with a predetermined plan upon retirement
or death. The Company recognizes the cost of this plan over the projected years
of service of the participant. The Company has insured the lives of these key
employees to assist in the funding of the deferred compensation liability.
During January 1992, the Company established an employee stock ownership
plan (ESOP) for the benefit of substantially all full-time employees other than
employees covered by a collective bargaining agreement to which the ESOP has not
been extended by agreement or by action of the Company. The ESOP purchased
793,525 shares of the Company's common stock from a major stockholder. The
funding for this plan was provided through a loan from the Company of
$4,500,000. This loan will be repaid over a twenty-year period with equal
payments of $424,000 per year including interest at 7%. The Company recorded
deferred compensation as a contra-equity account for the amount loaned to the
ESOP in the accompanying consolidated balance sheets. The Company is required to
make annual contributions to the ESOP to enable it to repay its loan to the
Company. The deferred compensation account is amortized as compensation expense
over twenty years as employees earn their shares for services rendered. The loan
agreement also provides for prepayment of the loan if the Company elects to make
any additional contributions. The compensation expense for fiscal years 1997,
1996 and 1995 was $271,000, $268,000 and $147,000, respectively.
In November 1992, the Company established a plan for each subsidiary to
extend to retirees health benefits which are available to active employees under
the Company's existing health plans. Participants become eligible for retiree
health care benefits when they retire from active service at age 55 with ten
years of service. Generally, the health plans pay a stated percentage of medical
and dental expenses reduced for any deductible and co-payment. These plans are
unfunded. Medical coverage may be continued by the retired employee up to age 65
at the average cost to the Company of active employees. At the age of 65, when
the employee becomes eligible for Medicare, the benefits provided by the Company
are reduced by the amount provided by Medicare and the cost to the retired
employee is reduced to 50 percent of the average cost to the Company of active
employees.
In January 1994, the Company modified its postretirement benefits to
provide retiree healthcare benefits to only current retirees and active
employees who will be eligible to retire by December 31, 1999. Participants
eligible for such benefits will be required to pay between 20 percent and 100
percent of the Company's average
17
18
POWELL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
cost of benefits based on years of service. In addition, benefits will end upon
the employee's attainment of age 65. The effect of these modifications
significantly reduced the Company's postretirement benefits cost and accumulated
benefits obligation.
The following table sets forth the plans' combined status reconciled with
the accrued retirement benefits cost included in the Company's Consolidated
Balance Sheets (in thousands):
OCTOBER 31,
----------------
1997 1996
------ ------
Accumulated postretirement benefits obligation:
Retirees.................................................. $ 242 $ 364
Fully eligible active participants........................ 353 343
Other active participants................................. 62 93
------ ------
Total accumulated postretirement benefits
obligation...................................... 657 800
Unrecognized prior service credits.......................... 688 1,006
Unrecognized net loss....................................... (113) (304)
------ ------
Postretirement benefits liability................. $1,232 $1,502
====== ======
Net periodic postretirement benefits expense (income) includes the
following components (in thousands):
YEARS ENDED
OCTOBER 31,
--------------
1997 1996
----- -----
Service cost of benefits earned during the period........... $ 5 $ 10
Interest cost on accumulated postretirement benefit
obligation................................................ 45 54
Amortization of unrecognized prior service credits.......... (310) (318)
Amortization of net loss and transition obligation.......... 33 32
----- -----
Net periodic postretirement benefits expense
(income)........................................ $(227) $(222)
===== =====
The assumed health care cost trend rate in measuring the accumulated
postretirement benefits obligation was nine percent in fiscal year 1997
decreasing to six percent by fiscal year 2000. If the health care trend rate
assumptions were increased by one percent, the accumulated postretirement
benefits obligation, as of October 31, 1997, would be increased by 7.8 percent.
The effect of this change on the net postretirement benefit cost for 1997 would
be an increase of 7.2 percent. The weighted average discount rate used in
determining the accumulated postretirement benefits obligation was 6.5 and 7.0
percent for fiscal years 1997 and 1996, respectively.
F. DEBT
In August 1997, the Company entered into an agreement for a $20,000,000
unsecured revolving line of credit with a major U.S. bank that replaced an
existing line of credit. The agreement provides for the Company to elect an
interest rate on amounts borrowed of the bank's prime rate less .5 percent (on
the first $5,000,000) and prime rate on additional borrowings, or the bank's
IBOR rate plus an additional percentage of .75% to 1.25% based on the Company's
performance. Also a fee of .20 to .25 percent is charged on the unused balance
of the line. The agreement contains customary affirmative and negative covenants
and requirements to maintain a minimum level of tangible net worth and
profitability. As of October 31, 1997, $6,000,000 was borrowed against this line
of credit. The agreement expires on August 15, 2000.
18
19
POWELL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Long-term debt is summarized below (in thousands):
OCTOBER 31,
-----------------
1997 1996
------ -------
Long-term debt.............................................. $6,000 $ 3,750
Less-current maturities..................................... -- (3,750)
------ -------
Total long-term debt.............................. $6,000 $ --
====== =======
Interest paid during the year was $529,000, $683,000 and $1,157,000 in
1997, 1996 and 1995, respectively. The interest expense recorded during the year
was $381,000, $637,000 and $1,047,000 in 1997, 1996 and 1995, respectively.
G. INCOME TAXES
The net deferred income tax asset is comprised of the following (in
thousands):
OCTOBER 31,
-----------------
1997 1996
------- ------
Current deferred income taxes:
Gross assets.............................................. $ 2,469 $2,909
Gross liabilities......................................... (1,644) (337)
------- ------
Net current deferred income tax asset..................... 825 2,572
------- ------
Noncurrent deferred income taxes
Gross assets.............................................. 2,122 1,673
Gross liabilities......................................... (544) (509)
------- ------
Net noncurrent deferred income tax asset.................... 1,578 1,164
------- ------
Net deferred income tax asset..................... $ 2,403 $3,736
======= ======
The tax effect of significant temporary differences representing deferred
tax assets and liabilities are as follows (in thousands):
OCTOBER 31,
-----------------
1997 1996
------- ------
Allowance for doubtful accounts............................. $ 158 $ 264
Reserve for accrued employee benefits....................... 681 397
Warranty reserves........................................... 513 549
Uncompleted long-term contracts............................. (1,644) (337)
Depreciation and amortization............................... (132) (432)
Deferred compensation....................................... 384 733
Postretirement benefits liability........................... 419 510
Accrued legal expenses...................................... 1,287 1,327
Other....................................................... 737 725
------- ------
Net deferred income tax asset..................... $ 2,403 $3,736
======= ======
19
20
POWELL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the income tax provision (benefit) consist of the
following (in thousands):
YEARS ENDED OCTOBER 31,
--------------------------
1997 1996 1995
------ ------ ------
Current:
Federal................................................ $4,237 $7,135 $2,154
State.................................................. 241 222 114
Deferred:
Federal................................................ 1,333 (2,112) 742
------ ------ ------
Total income tax provision..................... $5,811 $5,245 $3,010
====== ====== ======
A reconciliation of the statutory U.S. income tax rate and the effective
income tax rate, as computed on earnings from continuing operations before
income taxes reflected in each of the three years presented in the Consolidated
Statements of Operations is as follows:
YEARS ENDED OCTOBER 31,
-----------------------
1997 1996 1995
----- ----- -----
Statutory rate............................................ 34% 34% 34%
Foreign sales corporation credits......................... (3) (4) (3)
Revision of previous estimates of income taxes payable.... -- -- (3)
State income taxes, net of federal benefit................ 1 1 1
Other..................................................... -- 2 1
--- --- ---
Effective rate............................................ 32% 33% 30%
=== === ===
Total cash payments for income taxes during the year were $4,799,000,
$3,211,000 and $2,062,000 in fiscal years 1997, 1996 and 1995, respectively.
H. SIGNIFICANT SALES DATA
No single customer or export country accounted for more than 10 percent of
consolidated revenues in fiscal years 1997, 1996 and 1995.
Export sales are as follows (in thousands):
YEARS ENDED OCTOBER 31,
-----------------------------
1997 1996 1995
------- ------- -------
Europe (including former Soviet Union)................ $ 4,781 $ 5,680 $ 2,908
Far East.............................................. 29,343 24,948 16,778
Middle East and Africa................................ 27,035 12,928 5,997
North, Central and South America (Excluding U.S.)..... 26,948 20,328 13,808
------- ------- -------
Total export sales.......................... $88,107 $63,884 $39,491
======= ======= =======
20
21
POWELL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
I. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases certain offices, facilities and equipment under
operating leases expiring at various dates through 2003. At October 31, 1997,
the minimum annual rental commitments under leases having terms in excess of one
year are as follows (in thousands):
YEAR ENDING OPERATING
OCTOBER 31, LEASES
----------- ---------
1998....................................................... $ 876
1999....................................................... 756
2000....................................................... 611
2001....................................................... 533
2002....................................................... 408
Thereafter................................................. --
------
Total lease commitments.................................... $3,184
======
Lease expense for all operating leases, excluding leases with terms of less
than one year, was $1,067,000, $908,000 and $623,000 for fiscal years 1997, 1996
and 1995, respectively.
Letters of Credit
The Company is contingently liable for secured and unsecured letters of
credit totaling approximately $8,733,000 that were outstanding at October 31,
1997.
Litigation
On August 5, 1993, the Company was served with a lawsuit by National
Westminster Bank plc ("NatWest") alleging the Company had defaulted on a
Construction Guaranty provided to NatWest in 1992 in connection with a project
at MacDill Air Force Base. NatWest is seeking damages in excess of $20,000,000.
The Company has denied the substantive allegations of the complaint and has
filed counterclaims for damages against NatWest alleging fraud, bad faith and
failure to preserve and protect its collateral and seeking a declaratory
judgement that the Company is not in default of the Construction Guaranty.
On May 30, 1997, the Court issued a memorandum and order denying the
Company's motion to dismiss the complaint for lack of subject matter
jurisdiction and, alternatively, to stay its prosecution pending disposition by
the Armed Services Board of Contract Appeals of an appeal by NatWest's borrower,
Empire Energy Management Systems, Inc., from the allegedly wrongful default
termination of a contract between Empire and the United States Air Force (the
"Air Force Contract"). In reaching its decision on the stay motion, the Court
rejected one of the Company's several alleged defenses, in particular, its
defense that the Air Force Contract was terminated for the convenience of the
government.
NatWest has expressed an interest in a prompt trial date on several
occasions, but the Court has yet to set a trial date. Two motions remain pending
before the Court.
The ultimate disposition of the NatWest litigation is not presently
determinable. Accordingly, although an unfavorable outcome to the NatWest
litigation could have a material effect on the Company's financial position and
results of operations, the Company believes it would be unreasonable to conclude
that an unfavorable outcome is probable.
21
22
POWELL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company is a party to other disputes arising in the ordinary course of
business. Management does not believe the ultimate outcome of these disputes
will materially effect the financial position or results of operations of the
Company.
J. STOCK OPTIONS AND GRANTS
In March 1992, the stockholders approved an amendment to a plan that was
adopted in March 1989, in which 750,000 shares of common stock would be made
available through an incentive program for certain employees of the Company. In
March 1996, the stockholders approved an amendment to increase the maximum
shares available under the plan from 750,000 shares to 1,500,000 shares of
common stock. The awards available under the plan include both stock options and
stock grants and are subject to certain conditions and restrictions as
determined by the Compensation Committee of the Board of Directors.
"Stock options" -- Options granted under the plan are non-qualified and are
granted at a price equal to the fair market value of the common stock at the
date of grant. Generally, options granted have a term of ten years from the date
of grant and will vest in increments of 20 percent per year over a five year
period on the yearly anniversary of the grant date. The plan provides for
additional stock to be awarded equal to 20 percent of all options which are
exercised and then held for a period of five years.
"Stock grants" -- The fair market value of shares awarded as stock grants
has been deferred and amortized to compensation expense ratably as such shares
are vested. The Company recognized compensation expense related to stock grants
pursuant to this plan of $0, $487,000 and $156,000 in fiscal years 1997, 1996,
and 1995, respectively. At October 31, 1997, there were no stock grants awarded
under this plan which had not been exercised.
There were 595,073 shares available under the plan to be granted as of
October 31, 1997. Stock option and grant activity (number of shares) for the
Company during fiscal years 1997, 1996 and 1995 was as follows:
1997 1996 1995
---------------- ----------------- -----------------
OPTIONS GRANTS OPTIONS GRANTS OPTIONS GRANTS
------- ------ ------- ------- ------- -------
Outstanding, beginning of year...... 429,510 -- 441,450 50,000 175,800 75,000
Granted:
Stock options $6.25 per
share........................ 265,650
Stock options $15.81 per
share........................ 250,500
Exercised:
Stock grants................... (50,000) (25,000)
Stock options $6.25 per
share........................ (31,760) (7,500)
Stock options $6.75 per
share........................ (47,700) (4,440)
Forfeited:
Stock options $6.25 per
share........................ (16,400)
Stock options $6.75 per
share........................ (4,090)
Stock options $15.81 per
share........................ (5,000)
------- ------ ------- ------- ------- -------
Outstanding, ranging from $6.25 to
$15.81 per share, at the end of
year.............................. 575,060 -- 429,510 -- 441,450 50,000
======= ====== ======= ======= ======= =======
22
23
POWELL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees", in accounting for employees stock options
whereby no compensation expense is recorded related to the options granted equal
to the market value of the stock on the date of grant. If compensation expense
had been determined based on the Black-Scholes option pricing model value at the
grant date for awards in 1997 and 1996 consistent with the provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation", the Company's net income and
earnings per share would have been as follows:
1997 1996
------- ------
Net income:
As reported............................................... $12,629 $4,760
Pro forma................................................. 12,072 4,571
Earnings per share:
As reported............................................... $ 1.17 $ .44
Pro forma................................................. 1.12 .43
The SFAS No. 123 method of accounting has not been applied to options
granted prior to October 31, 1995, and the resulting pro forma compensation
expense may not be indicative of pro forma expense in future years.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions:
Expected life of options........................ 10 years
Risk-free interest rate......................... 6.07% -- 6.49%
Expected dividend yield......................... 0.00%
Expected stock price volatility................. 55.22% -- 56.31%
K. PRODUCTION CONTRACTS
For contracts in which the percentage-of-completion method is used, costs
and estimated earnings in excess of billings are reported as a current asset and
billings in excess of costs and estimated earnings are reported as a current
liability. The components of these contracts are as follows (in thousands):
OCTOBER 31,
--------------------
1997 1996
-------- --------
Costs and estimated earnings................................ $ 85,126 $ 45,559
Progress billings........................................... (66,140) (31,625)
-------- --------
Total costs and estimated earnings in excess of
billings........................................ $ 18,986 $ 13,934
======== ========
Progress billings........................................... $ 69,213 $ 50,667
Costs and estimated earnings................................ (58,257) (45,242)
-------- --------
Total billings in excess of costs and estimated
earnings........................................ $ 10,956 $ 5,425
======== ========
23
24
POWELL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
L. DISCONTINUED OPERATIONS
On July 26, 1996, the Company completed the sale of its power generation
set packaging business to Rolls-Royce Acquisition Corporation. This business was
operated by U.S. Turbine Corp. (USTC), the Company's subsidiary based in
Maineville, Ohio. Total consideration received by the Company, as adjusted, was
$12,889,000, including $3,660,000 of cash, a $500,000 note receivable bearing
interest at the prime rate due July 1997 and the assumption of liabilities of
$8,729,000. The Company recognized a gain on the sale of $89,000, net of taxes.
The Company recognized net losses from USTC operations of $3,173,000 and
$799,000 for the fiscal years 1996 and 1995, respectively.
On August 1, 1996 the Company announced the discontinuance of its
operations in the microprocessor -- based equipment manufacturing business
segment effective July 31, 1996. This business was operated by Powell-Process
Systems, Inc. (PSI), a subsidiary of the Company based in Houston. On October
31, 1996, the Company completed the sale of these assets and the related
business to Micon Systems LLC for approximately $874,000, including $650,000
cash and a $224,000 non-interest bearing note receivable due February 13, 1997.
The Company recognized a loss on the sale of $1,227,000, net of taxes. The
Company recognized net losses from PSI operations of $1,687,000, and $583,000
for the fiscal years 1996 and 1995, respectively.
The following summarizes the results of operations and consolidated balance
sheets of the discontinued operations:
YEARS ENDED
OCTOBER 31,
------------------
1996 1995
------- -------
Revenues.................................................... $29,182 $30,309
======= =======
Loss from operations before income taxes.................... $(7,464) $(2,085)
Benefit for income taxes.................................... 2,604 703
Loss on disposal before income taxes........................ (1,725) --
Benefit for income taxes.................................... 587 --
------- -------
Net loss from discontinued operations............. $(5,998) $(1,382)
======= =======
24
25
POWELL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
M. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The table below sets forth the unaudited consolidated operating results by
fiscal quarter for the years ended October 31, 1997 and 1996 (in thousands,
except per share data):
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
1997 --
Revenues.......................................... $43,128 $48,439 $46,061 $54,023
Gross profit...................................... 10,288 12,542 11,720 12,456
Net earnings...................................... 2,369 3,273 3,432 3,555
Net earnings per common and common equivalent
share.......................................... $ .22 $ .30 $ .32 $ .33
1996 --
Revenues.......................................... $39,861 $43,127 $45,903 $41,232
Gross profit...................................... 8,860 11,123 12,212 10,853
Net earnings:
Earnings from continuing operations............ 1,862 2,911 3,046 2,939
Losses from discontinued operations............ (178) (268) (5,506) (46)
Net earnings................................... 1,684 2,643 (2,460) 2,893
Net earnings per common and common equivalent
share:
Continuing operations.......................... $ .18 $ .27 $ .28 $ .27
Discontinued operations........................ (.02) (.03) (.51) --
Net earnings................................... $ .16 $ .24 $ (.23) $ .27
25
26
PART III
ITEMS 10, 11, 12 AND 13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT;
EXECUTIVE COMPENSATION; SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT; AND CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by these items is omitted because the Company will
file, within 120 days after the end of the fiscal year ended October 31, 1996, a
definitive proxy statement pursuant to Regulation 14A, which information is
herein incorporated by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
Financial Statements -- See Index to Consolidated Financial Statements at
Item 8 of this report
EXHIBITS
--------
2.1 -- Asset Purchase Agreement dated as of June 20, 1996 by and
between Rolls-Royce North America, Inc. and Rolls-Royce
Acquisition Corp. and U. S. Turbine Corp. and the Company
(filed as Exhibit 2.1 to the Company's Current Report on
Form 8-K dated August 8, 1996 and incorporated herein by
reference).
2.2 -- First Amendment to Asset Purchase Agreement dated July
26, 1996 by and between Rolls-Royce North America, Inc.
and Rolls-Royce Acquisition Corp. and U.S. Turbine Corp.
and the Company (filed as Exhibit 2.2 to the Company's
Current Report on Form 8-K dated August 8, 1996 and
incorporated herein by reference).
3.1 -- Articles of Incorporation and Certificates of Amendment
of Powell Industries, Inc. dated July 20, 1987 and March
13, 1992 (filed as Exhibit 3 to the Company's Form 10-K
for the fiscal year ended October 31, 1982, Form 10-Q for
the quarter ended July 31, 1987, and Form 10-Q for
quarter ended April 30, 1992, respectively, and
incorporated herein by reference).
3.2 -- By-laws of Powell Industries, Inc. (filed as Exhibit
3(ii) to the Company's Form 10-Q for the quarter ended
April 30, 1995 and incorporated herein by reference).
10.1 -- Powell Industries, Inc., Incentive Compensation Plan for
1997.
10.2 -- Salary Continuation Agreement with William E. Powell,
dated July 17, 1984 (filed as Exhibit 10 to the Company's
Form 10-K for the fiscal year ended October 31, 1984, and
incorporated herein by reference).
10.3 -- Description of Supplemental Executive Benefit Plan (filed
as Exhibit 10 to the Company's Form 10-K for the fiscal
year ended October 31, 1984, and incorporated herein by
reference).
10.5 -- Credit Agreement dated August 15, 1997 between Powell
Industries, Inc. and Bank of America Texas, N. A. (Filed
as an Exhibit to the Company's Form 10-Q for the quarter
ended July 31, 1997 and incorporated herein by
reference.)
10.7 -- 1992 Powell Industries, Inc. Stock Option Plan (filed as
Exhibit 4.2 to the Company's registration statement on
Form S-8 dated July 26, 1994 (File No. 33-81998) and
incorporated herein by reference).
26
27
EXHIBITS
--------
10.8 -- The Powell Industries, Inc. Directors' Fees Program
(filed as Exhibit 10.7 to the Company's Form 10-K for the
fiscal year ended October 31, 1992, and incorporated
herein by reference).
10.9 -- The Powell Industries, Inc. Executive Severance
Protection Plan (filed as an exhibit to the Company's
Form 10-Q for the quarter ended April 30, 1996, and
incorporated herein by reference).
10.10 -- Amendment to Powell Industries, Inc. Stock Option Plan
(filed as an exhibit to the Company's Form 10-Q for the
quarter ended April 30, 1996 and incorporated herein by
reference).
21.1 -- Subsidiaries of the Company.
23.1 -- Consent of Independent Public Accountants.
27.0 -- Financial data schedule.
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed during the last quarter of the
fiscal year covered by this report.
27
28
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
POWELL INDUSTRIES, INC.
By /s/ THOMAS W. POWELL
-----------------------------------
Thomas W. Powell
President and Chief Executive
Officer
(Principal Executive Officer)
By /s/ J.F. AHART
-----------------------------------
J.F. Ahart
Vice President
Secretary and Treasurer
(Principal Financial and Accounting
Officer)
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the registrant in the
capacities and on the date indicated:
SIGNATURE TITLE
--------- -----
/s/ THOMAS W. POWELL Chairman of the Board
- -----------------------------------------------------
Thomas W. Powell
/s/ J. F. AHART Director
- -----------------------------------------------------
J. F. Ahart
/s/ JOSEPH L. BECHERER Director
- -----------------------------------------------------
Joseph L. Becherer
/s/ EUGENE L. BUTLER Director
- -----------------------------------------------------
Eugene L. Butler
/s/ BONNIE L. POWELL Director
- -----------------------------------------------------
Bonnie L. Powell
/s/ STEPHEN W. SEALE, JR. Director
- -----------------------------------------------------
Stephen W. Seale, Jr.
/s/ D.D. SYKORA Director
- -----------------------------------------------------
D.D. Sykora
/s/ LAWRENCE R. TANNER Director
- -----------------------------------------------------
Lawrence R. Tanner
/s/ RONALD J. WOLNY Director
- -----------------------------------------------------
Ronald J. Wolny
Date: January 9, 1998
28
29
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
------- -----------
2.1 -- Asset Purchase Agreement dated as of June 20, 1996 by and
between Rolls-Royce North America, Inc. and Rolls-Royce
Acquisition Corp. and U. S. Turbine Corp. and the Company
(filed as Exhibit 2.1 to the Company's Current Report on
Form 8-K dated August 8, 1996 and incorporated herein by
reference).
2.2 -- First Amendment to Asset Purchase Agreement dated July
26, 1996 by and between Rolls-Royce North America, Inc.
and Rolls-Royce Acquisition Corp. and U.S. Turbine Corp.
and the Company (filed as Exhibit 2.2 to the Company's
Current Report on Form 8-K dated August 8, 1996 and
incorporated herein by reference).
3.1 -- Articles of Incorporation and Certificates of Amendment
of Powell Industries, Inc. dated July 20, 1987 and March
13, 1992 (filed as Exhibit 3 to the Company's Form 10-K
for the fiscal year ended October 31, 1982, Form 10-Q for
the quarter ended July 31, 1987, and Form 10-Q for
quarter ended April 30, 1992, respectively, and
incorporated herein by reference).
3.2 -- By-laws of Powell Industries, Inc. (filed as Exhibit
3(ii) to the Company's Form 10-Q for the quarter ended
April 30, 1995 and incorporated herein by reference).
10.1 -- Powell Industries, Inc., Incentive Compensation Plan for
1997.
10.2 -- Salary Continuation Agreement with William E. Powell,
dated July 17, 1984 (filed as Exhibit 10 to the Company's
Form 10-K for the fiscal year ended October 31, 1984, and
incorporated herein by reference).
10.3 -- Description of Supplemental Executive Benefit Plan (filed
as Exhibit 10 to the Company's Form 10-K for the fiscal
year ended October 31, 1984, and incorporated herein by
reference).
10.5 -- Credit Agreement dated August 15, 1997 between Powell
Industries, Inc. and Bank of America Texas, N. A. (Filed
as an Exhibit to the Company's Form 10-Q for the quarter
ended July 31, 1997 and incorporated herein by
reference.)
10.7 -- 1992 Powell Industries, Inc. Stock Option Plan (filed as
Exhibit 4.2 to the Company's registration statement on
Form S-8 dated July 26, 1994 (File No. 33-81998) and
incorporated herein by reference).
10.8 -- The Powell Industries, Inc. Directors' Fees Program
(filed as Exhibit 10.7 to the Company's Form 10-K for the
fiscal year ended October 31, 1992, and incorporated
herein by reference).
10.9 -- The Powell Industries, Inc. Executive Severance
Protection Plan (filed as an exhibit to the Company's
Form 10-Q for the quarter ended April 30, 1996, and
incorporated herein by reference).
10.10 -- Amendment to Powell Industries, Inc. Stock Option Plan
(filed as an exhibit to the Company's Form 10-Q for the
quarter ended April 30, 1996 and incorporated herein by
reference).
21.1 -- Subsidiaries of the Company.
23.1 -- Consent of Independent Public Accountants.
27.0 -- Financial data schedule.
1
EXHIBIT 10.1
POWELL INDUSTRIES, INC.
INCENTIVE COMPENSATION PLAN FOR 1997
JANUARY, 1997
1. PLAN PURPOSE
The purpose of the plan is to recognize and reward key corporate and
subsidiary employees for their contributions to the growth and profitability of
Powell Industries, Inc. and its operating subsidiaries through the opportunity
to earn incentive compensation, in addition to their base salaries, based on the
performance of the Company or subsidiary.
2. GENERAL DESCRIPTION
Key corporate and subsidiary executives and managers will be selected for
participation on an annual basis. For each participant, a maximum incentive
compensation opportunity will be established, and expressed as a percentage of
the individual's base salary at the beginning of the plan year. The actual
amount of incentive compensation earned by each participant will be based on the
performance of the Company or subsidiary against pre-established performance
measures. The performance measures for the subsidiary participants will include
"return on revenues" and "revenue growth". For corporate participants, the
performance measures will include "Powell Industries, Inc. earnings per share",
and "revenue growth". Specific performance levels will be established each year
based on an assessment of historical results, the budgeted performance for the
plan year, and general business conditions.
The plan will be administered by the Compensation Committee of the Board of
Directors, in conjunction with the Chief Executive Officer.
3. ELIGIBILITY AND INCENTIVE COMPENSATION OPPORTUNITY
On an annual basis key corporate and subsidiary participants will be
identified for participation. Participation in one year does not guarantee
participation in the following year.
Subsidiary presidents will submit their recommended participants to the CEO
for approval. In addition, each subsidiary president may identify a general
incentive "pool", which may be used to recognize the contributions of
individuals within the subsidiary who are not named participants.
The CEO will recommend corporate participants for approval by the
Compensation Committee. The CEO may identify a general incentive "pool" which
may be used to recognize the contributions of individuals who are not named
participants.
For each named participant, their "maximum incentive opportunity" will be
identified, which is expressed as a percentage of base salary at the beginning
of the plan year.
4. PERFORMANCE MEASURES AND WEIGHTS
The following performance measures will be used to measure the performance
of the Company and determine the incentive award earned by each participant. The
weighting percentage reflects the relative weight given to each performance
measure.
Subsidiary Participants
- 70% Return on Revenues -- Net profits before taxes divided by total
revenues
- 30% Growth of Total Revenues
1
2
Corporate Participants
- 70% Powell Industries, Inc. Earnings Per Share
- 30% Growth of Total Revenues Over Prior Year
Prior to the beginning of the plan year, the performance standards for each
subsidiary and Powell Industries, Inc. will be finalized, approved by the
Compensation Committee, and communicated to participants. The performance
standards will be based on historical results, management's expectations for the
coming year, and the general business environment. The CEO will approve
subsidiary performance standards, and the Compensation Committee will approve
the company-wide performance standards.
For 1997 the revenue growth standard for the corporation and subsidiaries
will be 15%.
5. COMPUTATION OF AWARDS
For each subsidiary and Powell Industries, Inc., an Incentive Compensation
Calculation Form will be prepared at the beginning of the plan year, which will
include a listing of the participants, their base salary, and maximum incentive
opportunity. For each performance measure, a funding table will be attached
which establishes the amount of incentive compensation earned at various
performance levels. The Incentive Compensation Calculation Form is attached.
In order to activate the plan for each subsidiary, the threshold Return on
Revenue (ROR) must be achieved. If the ROR threshold is not achieved, no
incentive awards will be paid, regardless of the revenue growth percentage.
In order to activate the plan for corporate participants, the threshold
Earnings Per Share (EPS) must be achieved. If the EPS threshold is not achieved,
no incentive awards will be paid, regardless of the revenue growth percentage.
In computing performance results, ROR and EPS will be net of the accrued
incentive compensation payments.
In addition to the incentive award computed under this plan, the
Compensation Committee may, in its sole discretion, make additional
discretionary awards to recognize significant individual contributions. This
discretionary award is limited to no more than 30% of the individual's maximum
incentive opportunity.
The Compensation Committee, in conjunction with the CEO, may make
adjustments to the subsidiary or Company performance results to eliminate the
impact of extraordinary charges to earnings, both positive and negative. The
purpose of any such adjustment is to better reflect the performance of the
subsidiary or Company. Each August, the Company will meet to review the interim
performance results of the Company and determine if extraordinary charges have
occurred or are likely to occur that should be eliminated.
6. PAYMENT OF AWARDS
The annual incentive awards will be determined after the end of the plan
year and paid as soon as practical. Prior to payment of awards, the Compensation
Committee will review and certify the incentive awards for all participants.
Incentive awards will be computed based on the participant's base salary at
the beginning of the plan year.
A participant must be an active employee on the last day of the plan year
in order to receive an incentive award.
Participants added to the plan after the beginning of the plan year, will
be eligible to receive a prorated award based on their salary when they became
eligible.
Participants who die, retire, or become disabled during the plan year will
be eligible for a prorated award based on the number of months of active
participation during the plan year.
2
3
7. ADMINISTRATION OF PLAN
The plan will be administered by the Compensation Committee, in conjunction
with the CEO. The Committee reserves the right to amend or terminate the plan at
any time, except that such amendment or termination will not affect any awards
that have been earned but not paid.
3
1
EXHIBIT 21.1
SUBSIDIARIES OF POWELL INDUSTRIES, INC.
NAME OF DOMESTIC SUBSIDIARY STATE OF INCORPORATION
--------------------------- ----------------------
Powell Electrical Manufacturing Co. Delaware
Powell-Process Systems, Inc. (Inactive) Utah
Powell-ESCO Company Texas
Unibus, Inc. Ohio
U.S. Turbine Corp. (Inactive) Nevada
Transdyn Controls, Inc. California
NAME OF FOREIGN SUBSIDIARY COUNTRY OF INCORPORATION
-------------------------- ------------------------
Powell Foreign Sales Corporation Barbados, West Indies
1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
by reference of our reports dated December 3, 1997, included in this Form 10-K,
into the Powell Industries, Inc. previously filed Form S-8 Registration File No.
33-81998.
Arthur Andersen LLP
Houston, Texas
January 23, 1998
5
1,000
12-MOS
OCT-31-1997
OCT-31-1997
2,219
0
50,856
465
13,603
89,969
56,011
29,637
122,867
38,200
0
0
0
106
76,201
122,867
191,651
191,651
144,645
144,645
28,982
0
416
18,440
5,811
12,629
0
0
0
12,629
1.17
0
