þ | Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
o | Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
DELAWARE | 88-0106100 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
8550 Mosley Drive, Houston, Texas | 77075-1180 | |
(Address of principal executive offices) | (Zip Code) |
2
December 31, | September 30, | |||||||
2006 | 2006 | |||||||
(Unaudited) | (See Note A) | |||||||
Assets |
||||||||
Current Assets: |
||||||||
Cash and cash equivalents |
$ | 4,955 | $ | 10,495 | ||||
Accounts receivable, less allowance for doubtful accounts of $1,119 and
$1,044, respectively |
111,648 | 108,002 | ||||||
Costs and estimated earnings in excess of billings on uncompleted contracts |
52,325 | 43,067 | ||||||
Inventories, net |
36,712 | 28,940 | ||||||
Income taxes receivable |
1,291 | 44 | ||||||
Deferred income taxes |
162 | | ||||||
Prepaid expenses and other current assets |
5,813 | 2,398 | ||||||
Total Current Assets |
212,906 | 192,946 | ||||||
Property, plant and equipment, net |
64,521 | 60,336 | ||||||
Goodwill |
1,084 | 1,084 | ||||||
Intangible assets, net |
31,498 | 32,263 | ||||||
Other assets |
5,670 | 5,495 | ||||||
Total Assets |
$ | 315,679 | $ | 292,124 | ||||
Liabilities and Stockholders Equity |
||||||||
Current Liabilities: |
||||||||
Current maturities of long-term debt and capital lease obligations |
$ | 8,454 | $ | 8,510 | ||||
Income taxes payable |
1,761 | 156 | ||||||
Accounts payable |
39,263 | 44,377 | ||||||
Accrued salaries, bonuses and commissions |
11,148 | 13,183 | ||||||
Billings in excess of costs and estimated earnings on uncompleted contracts |
37,536 | 16,752 | ||||||
Accrued product warranty |
3,836 | 3,443 | ||||||
Other accrued expenses |
8,041 | 9,806 | ||||||
Total Current Liabilities |
110,039 | 96,227 | ||||||
Long-term debt and capital lease obligations, net of current maturities |
38,295 | 33,886 | ||||||
Deferred compensation |
1,739 | 1,735 | ||||||
Postretirement benefits obligation |
1,171 | 1,146 | ||||||
Other liabilities |
63 | 90 | ||||||
Total Liabilities |
151,307 | 133,084 | ||||||
Commitments and contingencies (Note G) |
||||||||
Minority interest |
337 | 278 | ||||||
Stockholders Equity: |
||||||||
Preferred stock, par value $.01; 5,000,000 shares authorized; none issued |
| | ||||||
Common stock, par value $.01; 30,000,000 shares authorized; 11,002,779 and
11,001,733 shares issued, respectively; 11,002,779 and 10,924,046 shares
outstanding, respectively |
110 | 110 | ||||||
Additional paid-in capital |
13,830 | 12,776 | ||||||
Retained earnings |
149,382 | 146,490 | ||||||
Treasury stock, -0- and 77,687 shares, respectively, at cost |
| (525 | ) | |||||
Accumulated other comprehensive income |
1,533 | 817 | ||||||
Deferred compensation |
(820 | ) | (906 | ) | ||||
Total Stockholders Equity |
164,035 | 158,762 | ||||||
Total Liabilities and Stockholders Equity |
$ | 315,679 | $ | 292,124 | ||||
3
Three Months Ended | ||||||||
December 31, 2006 | January 31, 2006 | |||||||
(See Note A) | ||||||||
Revenues |
$ | 122,776 | $ | 83,813 | ||||
Cost of goods sold |
101,319 | 69,036 | ||||||
Gross profit |
21,457 | 14,777 | ||||||
Selling, general and administrative expenses |
16,274 | 12,984 | ||||||
Income before interest, income taxes and minority interest |
5,183 | 1,793 | ||||||
Interest expense |
688 | 335 | ||||||
Interest income |
(180 | ) | (302 | ) | ||||
Income before income taxes and minority interest |
4,675 | 1,760 | ||||||
Income tax provision |
1,724 | 649 | ||||||
Minority interest in net income |
59 | 18 | ||||||
Net income |
$ | 2,892 | $ | 1,093 | ||||
Net earnings per common share: |
||||||||
Basic |
$ | 0.26 | $ | 0.10 | ||||
Diluted |
$ | 0.26 | $ | 0.10 | ||||
Weighted average shares: |
||||||||
Basic |
10,942 | 10,853 | ||||||
Diluted |
11,121 | 11,004 | ||||||
4
Three Months Ended | ||||||||
December 31, 2006 | January 31, 2006 | |||||||
(See Note A) | ||||||||
Operating Activities: |
||||||||
Net income |
$ | 2,892 | $ | 1,093 | ||||
Adjustments to reconcile net income to net cash used in operating activities: |
||||||||
Depreciation |
1,551 | 1,470 | ||||||
Amortization |
947 | 335 | ||||||
Amortization of unearned restricted stock |
68 | 52 | ||||||
Stock-based compensation |
206 | 417 | ||||||
Bad debt expense |
58 | 98 | ||||||
(Gain) loss on disposition of assets |
(10 | ) | 48 | |||||
Deferred income taxes |
(182 | ) | 331 | |||||
Minority interest earnings |
59 | 18 | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable, net |
(2,984 | ) | 2,914 | |||||
Costs and estimated earnings in excess of billings on uncompleted
contracts |
(9,054 | ) | (9,195 | ) | ||||
Inventories |
(7,588 | ) | (3,607 | ) | ||||
Prepaid expenses and other current assets |
(4,694 | ) | (2,985 | ) | ||||
Other assets |
(42 | ) | 1,301 | |||||
Accounts payable and income taxes payable |
(3,968 | ) | 816 | |||||
Accrued liabilities |
(3,580 | ) | (725 | ) | ||||
Billings in excess of costs and estimated earnings on uncompleted
contracts |
20,645 | 2,678 | ||||||
Deferred compensation |
90 | (111 | ) | |||||
Other liabilities |
1 | 117 | ||||||
Net cash used in operating activities |
(5,585 | ) | (4,935 | ) | ||||
Investing Activities: |
||||||||
Proceeds from sale of fixed assets |
155 | 21 | ||||||
Purchases of property, plant and equipment |
(5,430 | ) | (1,178 | ) | ||||
Purchases of short-term auction rate securities |
| (2,000 | ) | |||||
Net cash used in investing activities |
(5,275 | ) | (3,157 | ) | ||||
Financing Activities: |
||||||||
Borrowings on U.S. revolving line of credit |
8,892 | 2,820 | ||||||
Payments on U.S. revolving line of credit |
(5,892 | ) | (2,820 | ) | ||||
Borrowings on UK revolving line of credit |
1,959 | | ||||||
Payments on UK revolving line of credit |
(588 | ) | | |||||
Payments on short-term financing |
(160 | ) | | |||||
Payments on capital lease obligations |
(13 | ) | (13 | ) | ||||
Payments on tax exempt industrial development revenue bonds |
(400 | ) | | |||||
Tax benefit from exercise of stock options |
264 | 19 | ||||||
Proceeds from exercise of stock options |
925 | 67 | ||||||
Net cash provided by financing activities |
4,987 | 73 | ||||||
Net decrease in cash and cash equivalents |
(5,873 | ) | (8,019 | ) | ||||
Effect of exchange rate changes on cash and cash equivalents |
333 | (9 | ) | |||||
Cash and cash equivalents at beginning of period |
10,495 | 24,844 | ||||||
Cash and cash equivalents at end of period |
$ | 4,955 | $ | 16,816 | ||||
5
A. | OVERVIEW AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | |
Change in Fiscal Year-End | ||
Effective September 30, 2006, we changed our fiscal year from October 31 to September 30. We have not restated prior year financial statements to conform to the new fiscal year as we do not believe the results would be materially different because our operations and cash flows do not fluctuate on a seasonal basis and the change in fiscal year end is 30 days. Therefore, our consolidated operating results and cash flows for the three months ended December 31, 2006 (first quarter of fiscal 2007) will be compared to the operating results for the three months ended January 31, 2006 (first quarter of fiscal 2006). | ||
Overview | ||
We develop, design, manufacture and service equipment and systems for the management and control of electrical energy and other critical processes. Headquartered in Houston, Texas, we serve the transportation, environmental, energy, industrial, and utility industries. Our business operations are consolidated into two business segments: Electrical Power Products and Process Control Systems. Financial information related to these business segments is included in Note I herein. | ||
Note B contains information related to our acquisition of medium voltage switchgear and circuit breaker product lines from General Electric in August 2006, herein referred to as Power/Vac®. Additionally, we acquired a service company located in Louisiana in July 2006. The operating results of both acquisitions are included in our Electrical Power Products business segment from their respective acquisition dates. | ||
Basis of Presentation | ||
The condensed consolidated financial statements include the accounts of Powell Industries, Inc. and its wholly-owned subsidiaries (we, us, our, Powell, or the Company). All significant intercompany accounts and transactions are eliminated in consolidation. | ||
The accompanying unaudited condensed consolidated financial statements have been prepared using accounting principles generally accepted in the United States of America (GAAP) for interim financial information in accordance with the rules of Regulation S-X of the Securities and Exchange Commission. Accordingly, these interim financial statements do not include all annual disclosures required by GAAP. These financial statements should be read in conjunction with the financial statements and related footnotes included in the Companys Transition Report on Form 10-K for the year ended September 30, 2006. In the opinion of management, these condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments that are necessary for a fair presentation of our financial position, results of operations and cash flows. The interim period results are not necessarily indicative of the results to be expected for the full fiscal year. | ||
Use of Estimates | ||
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying footnotes. The amounts we record for insurance claims, warranties, legal and other contingent liabilities require judgments regarding the amount of expenses that will ultimately be incurred. We base our estimates on historical experience and on various other assumptions, as well as the specific circumstances surrounding these contingent liabilities, in evaluating the amount of liability that should be recorded. Estimates may change as new events occur, additional information becomes available, or operating environments change. Actual results may differ from our estimates. The most significant estimates used in our financial statements |
6
affect revenue and cost recognition for construction contracts, legal accruals, the allowance for doubtful accounts, self-insurance, warranty accruals and postretirement benefit obligations. | ||
Foreign Currency Translation | ||
The functional currency for our foreign subsidiaries is the local currency in which the entity is located. The financial statements of all subsidiaries with a functional currency other than the U.S. Dollar have been translated into U.S. Dollars in accordance with Statement of Financial Accounting Standards No. 52, Foreign Currency Translation. All assets and liabilities of foreign operations are translated into U.S. Dollars using period-end exchange rates and all revenues and expenses are translated at average rates during the respective period. The U.S. Dollar results that arise from such translation, as well as exchange gains and losses on intercompany balances of a long-term investment nature, are included in the cumulative currency translation adjustments in accumulated other comprehensive income in stockholders equity. | ||
Stock-Based Compensation | ||
Under Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (SFAS No. 123R), we use the Black-Scholes option pricing model to estimate the fair value of our stock options. We apply the expanded guidance under SFAS No. 123R for the development of our assumptions used as inputs for the Black-Scholes option pricing model for grants issued after November 1, 2005. Expected volatility is determined using historical volatilities based on historical stock prices for a period equal to the expected term. The expected volatility assumption is adjusted if future volatility is expected to vary from historical experience. The expected term of options represents the period of time that options granted are expected to be outstanding and falls between the options vesting and contractual expiration dates. The risk-free interest rate is based on the yield at the date of grant of a zero-coupon U.S. Treasury bond whose maturity period equals the options expected term. | ||
Accumulated Other Comprehensive Income | ||
Accumulated other comprehensive income, which is included as a component of stockholders equity net of tax, includes unrealized gains or losses on currency translation adjustments in foreign consolidated subsidiaries. | ||
New Accounting Standards | ||
In July 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in the Companys financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 also prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return and provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The provisions of FIN 48 are to be applied to all tax positions upon initial adoption of this standard. Only tax positions that meet the more likely than not recognition threshold at the effective date may be recognized or continue to be recognized upon adoption of FIN 48. FIN 48 is effective for our fiscal year beginning October 1, 2007. The Company is currently evaluating the impact of adopting FIN 48. | ||
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. SFAS No. 157 is effective for our fiscal year beginning October 1, 2008. The Company is currently evaluating the impact of adopting SFAS No. 157. | ||
In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Benefits, an Amendment of FASB Statements No. 87, 88, 106 and 123R. SFAS No. 158 requires an employer with a defined benefit pension plan to (1) recognize the funded status of the benefit plan in its statement of financial position, (2) recognize as a component of other comprehensive income, net of tax, the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit cost pursuant to FASB Statement No. 87 or FASB Statement No. 106, (3) measure defined |
7
benefit plan assets and obligations as of the date of the employers fiscal year-end statement of financial position, and (4) disclose in the notes to the financial statements additional information about certain effects on net periodic benefit cost for the next fiscal year that arise from delayed recognition of the gains or losses, prior service costs or credits, and transition asset or obligation. SFAS No. 158 is required to be adopted by September 30, 2007. We do not expect the adoption of SFAS No. 158 to have a material impact on our consolidated financial position, results of operations or cash flows. | ||
B. | ACQUISITION | |
Louisiana Acquisition | ||
On July 14, 2006, we acquired certain assets and hired the service and administrative employees of an electrical services company in Louisiana for approximately $1.5 million. The purchase price was paid from existing cash and short-term marketable securities. This acquisition allows us to extend sales and service to the Eastern Gulf Coast Region. As this acquisition is not material to the consolidated financial results or financial position of the Company, no additional disclosure is included in these Notes to Condensed Consolidated Financial Statements. | ||
General Electric Companys Medium Voltage Switchgear and Circuit Breakers (Power/Vac®) | ||
On August 7, 2006, we purchased certain assets related to the manufacturing of American National Standards Institute (ANSI) medium voltage switchgear and circuit breaker business of General Electric Companys (GE) Consumer & Industrial unit located at its West Burlington, Iowa facility for $32.0 million, not including expenses. In connection with the acquisition, we entered into a 15 year supply agreement with GE pursuant to which GE will purchase from the Company (subject to limited conditions for exceptions) all of its requirements for ANSI medium voltage switchgear and circuit breakers and other related equipment and components. We have also agreed to purchase certain of our required product components and subassemblies from GE. In addition, GE has agreed to provide services related to transitioning the product line from West Burlington, Iowa to the Companys facilities in Houston, Texas. The relocation of the product line includes all related product technology and design information, engineering, manufacturing and related activities and is estimated to be completed during the first half of fiscal 2008. GE will continue to manufacture products and supply them to Powell during the transition period. Following the transition period, the new product line will be manufactured in Houston, Texas and will require between 300 and 350 employees. This acquisition supports our strategy to expand our product offerings and enhance our customer base. This product line has typically been marketed to customers in the distribution, commercial, industrial, and utilities sectors. The Power/Vac® product line will be marketed through the existing sales force of GE as well as our own sales team. | ||
The $32.0 million purchase price consisted of an initial payment of $8.5 million paid at closing from existing cash and short-term marketable securities with the remainder payable in four installments every 10 months over the next 40 months from August 2006 of $5.5 million, $6.25 million, $6.25 million and $5.5 million, respectively. The deferred installments resulted in a discounted purchase price of approximately $28.8 million based on an assumed discount rate of 6.6%. Approximately $1.2 million of expenses were incurred related to the acquisition resulting in a total discounted purchase price of $30.0 million. We are also required to purchase the remaining inventory at the end of the transition period for the carrying value of such inventory in sellers accounting records and have the option to purchase additional equipment after completion of the transition and product relocation to Houston, Texas. | ||
We entered into a lease agreement for a facility in Houston, Texas, in connection with this acquisition, which increased our manufacturing space by approximately 140,000 square feet. The lease costs approximately $34,000 per month. |
8
The discounted purchase price (including expenses) allocation was as follows (in thousands): |
Estimated | ||||||||
Amount | Life | |||||||
Supply agreement |
$ | 17,570 | 15 years | |||||
Unpatented technology |
5,300 | 6 years | ||||||
Non-compete agreement |
4,010 | 5 years | ||||||
Trademark |
2,650 | 15 years | ||||||
Equipment, tools and dies |
400 | 5 to 7 years | ||||||
Goodwill (tax deductible) |
88 | | ||||||
Total purchase price |
$ | 30,018 | ||||||
Three Months Ended | ||||
January 31, 2006 | ||||
Pro forma revenues |
$ | 106,341 | ||
Pro forma net income |
$ | 2,234 | ||
Net earnings per common share: |
||||
Pro forma: |
||||
Basic |
$ | 0.21 | ||
Diluted |
$ | 0.20 | ||
As reported: |
||||
Basic |
$ | 0.10 | ||
Diluted |
$ | 0.10 |
1) | Impact of additional interest expense related to the purchase price; | ||
2) | Impact of amortization expense related to intangible assets; | ||
3) | Adjustment to the income tax provision. |
9
C. | EARNINGS PER SHARE | |
The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data): |
Three Months Ended | ||||||||
December 31, 2006 | January 31, 2006 | |||||||
Numerator: |
||||||||
Net income |
$ | 2,892 | $ | 1,093 | ||||
Denominator: |
||||||||
Denominator for basic earnings
per share-weighted average shares |
10,942 | 10,853 | ||||||
Dilutive effect of stock options and restricted stock |
179 | 151 | ||||||
Denominator for diluted earnings
per share-adjusted weighted average
shares with assumed conversions |
11,121 | 11,004 | ||||||
Net earnings per share: |
||||||||
Basic |
$ | 0.26 | $ | 0.10 | ||||
Diluted |
$ | 0.26 | $ | 0.10 | ||||
Excluded from the computation of diluted earnings per share were options to purchase approximately 2,000 and 24,000 shares of common stock for the three months ended December 31, 2006 and January 31, 2006, respectively. These options were excluded from the computation because the effect of the options was not dilutive as their exercise prices were greater than the average market price of our common stock. | ||
D. | DETAIL OF SELECTED BALANCE SHEET ACCOUNTS | |
Allowance for Doubtful Accounts | ||
Activity in our allowance for doubtful accounts receivable consists of the following (in thousands): |
Three Months Ended | ||||||||
December 31, 2006 | January 31, 2006 | |||||||
Balance at beginning of period |
$ | 1,044 | $ | 567 | ||||
Adjustments to the allowance |
59 | 98 | ||||||
Deductions for uncollectible accounts
written off, net of recoveries |
| | ||||||
Increase due to foreign currency translation |
16 | | ||||||
Balance at end of period |
$ | 1,119 | $ | 665 | ||||
Three Months Ended | ||||||||
December 31, 2006 | January 31, 2006 | |||||||
Balance at beginning of period |
$ | 3,443 | $ | 1,836 | ||||
Adjustments to the accrual |
984 | 727 | ||||||
Deductions for warranty charges |
(642 | ) | (460 | ) | ||||
Increase due to foreign currency translation |
51 | | ||||||
Balance at end of period |
$ | 3,836 | $ | 2,103 | ||||
10
December 31, | September 30, | |||||||
2006 | 2006 | |||||||
Raw materials, parts and subassemblies |
$ | 23,641 | $ | 18,772 | ||||
Work-in-progress |
13,071 | 10,168 | ||||||
Total Inventories |
$ | 36,712 | $ | 28,940 | ||||
December 31, | September 30, | |||||||
2006 | 2006 | |||||||
Costs incurred on uncompleted contracts |
$ | 315,747 | $ | 300,247 | ||||
Estimated earnings |
63,917 | 64,964 | ||||||
379,664 | 365,211 | |||||||
Less: Billings to date |
364,875 | 338,896 | ||||||
$ | 14,789 | $ | 26,315 | |||||
Included in the accompanying balance sheets under the following captions: |
||||||||
Costs and estimated earnings in excess of billings on uncompleted contracts |
$ | 52,325 | $ | 43,067 | ||||
Billings in excess of costs and estimated earnings on uncompleted contracts |
(37,536 | ) | (16,752 | ) | ||||
$ | 14,789 | $ | 26,315 | |||||
E. | COMPREHENSIVE INCOME | |
Comprehensive income is as follows (in thousands): |
Three Months Ended | ||||||||
December 31, 2006 | January 31, 2006 | |||||||
Net income |
$ | 2,892 | $ | 1,093 | ||||
Other comprehensive income, net of tax |
||||||||
Unrealized gain on foreign
currency translation translation |
716 | 13 | ||||||
Comprehensive income |
$ | 3,608 | $ | 1,106 | ||||
F. | LONG-TERM DEBT | |
Long-term debt consists of the following (in thousands): |
December 31, | September 30, | |||||||
2006 | 2006 | |||||||
US Revolver |
$ | 6,000 | $ | 3,000 | ||||
UK Revolver |
4,506 | 2,434 | ||||||
UK Term Loan |
9,404 | 9,550 | ||||||
Deferred acquisition payable |
20,273 | 20,273 | ||||||
Industrial development revenue bonds |
6,000 | 6,400 | ||||||
Capital lease obligations |
103 | 115 | ||||||
Other borrowings |
463 | 624 | ||||||
Subtotal long-term debt and capital lease obligations |
46,749 | 42,396 | ||||||
Less current portion |
(8,454 | ) | (8,510 | ) | ||||
Total long-term debt and capital lease obligations |
$ | 38,295 | $ | 33,886 | ||||
11
US and UK Revolvers | ||
On August 4, 2006, we amended our existing credit agreement (Amended Credit Agreement) with a major domestic bank and certain other financial institutions. This amendment to our credit facility was made to expand our US borrowing capacity by $20.0 million to provide partial funding for the acquisition of the Power/Vac® product line and to provide working capital support for the Company. The Amended Credit Agreement expires on December 31, 2010. Expenses associated with the issuance of the Amended Credit Agreement are classified as deferred loan costs and totaled $576,000 and are being amortized as a non-cash charge to interest expense over the term of the agreement. | ||
The Amended Credit Agreement provides for a 1) $42.0 million revolving credit facility (US Revolver), 2) £4.0 million (pounds sterling) (approximately $7.8 million) revolving credit facility (UK Revolver) and 3) £6.0 million (approximately $11.8 million) single advance term loan (UK Term Loan). The Amended Credit Agreement contains certain covenants with respect to minimum earnings (as defined), maximum capital expenditures, minimum tangible net worth and restricts our ability to pay dividends. Obligations are secured by the stock of our subsidiaries. The interest rate for amounts outstanding under the Amended Credit Agreement is a floating rate based upon LIBOR plus a margin which can range from 0% to 1%, as determined by the Companys consolidated leverage ratio as defined within the Amended Credit Agreement. | ||
The US Revolver and the UK Revolver provide for the issuance of letters of credit which would reduce the amounts which may be borrowed under the respective revolvers. The amount available under this agreement is reduced by $13.2 million for our outstanding letters of credit at December 31, 2006. There was £2.3 million, or approximately $4.5 million, outstanding under the UK Revolver and $6.0 million outstanding under the US Revolver as of December 31, 2006. | ||
UK Term Loan | ||
The UK Term Loan provides for borrowings of £6.0 million, or approximately $11.8 million, for our financing requirements related to the acquisition of S&I. Approximately £5.0 million, or approximately $8.9 million, of this facility was used to finance the portion of the purchase price of S&I that was denominated in pounds sterling. The remaining £1.0 million, or approximately $1.8 million, was utilized as the initial working capital for S&I. Quarterly installments of £300,000, or approximately $0.6 million, began March 31, 2006 with the final payment due on March 31, 2010. As of December 31, 2006, £4.8 million, or $9.4 million, was outstanding under the UK Term Loan. The interest rate for amounts outstanding under the UK Term Loan is a floating rate based upon LIBOR plus a margin which can range from 0% to 1%, as determined by the Companys consolidated leverage ratio as defined within the Amended Credit Agreement. | ||
Deferred Acquisition Payable | ||
In connection with the acquisition of the Power/Vac® product line, $8.5 million of the total purchase price of $32.0 million was paid to GE at closing on August 7, 2006. The remaining balance of the purchase price of $23.5 million is payable in four installments every 10 months over the next 40 months from the acquisition date. The deferred installments result in a discounted note payable of approximately $28.8 million at December 31, 2006 based on an assumed discount rate of 6.6%. The current portion of this deferred acquisition payable is $5.2 million and is included in the current portion of long-term debt. | ||
Tax Exempt Industrial Development Revenue Bonds | ||
We borrowed $8.0 million in October 2001 through a loan agreement funded with proceeds from tax-exempt industrial development revenue bonds (Bonds). These Bonds were issued by the Illinois Development Finance Authority and were used for the completion of our Northlake, Illinois facility. Pursuant to the Bond issuance, a reimbursement agreement between the Company and a major domestic bank required an issuance by the bank of an irrevocable direct-pay letter of credit (Bond LC) to the Bonds trustee to guarantee payment of the Bonds principal and interest when due. The Bond LC is subject to both early termination and extension provisions customary to such agreements. While the Bonds mature in 2021, the reimbursement agreement requires annual redemptions of $400,000 that commenced on October 25, 2002. A sinking fund is used for the redemption of the |
12
Bonds. The Bonds bear interest at a floating rate determined weekly by the Bonds remarketing agent, which was the underwriter for the Bonds and is an affiliate of the bank. This interest rate was 4.0% per annum on December 31, 2006. | ||
We are currently engaged in an audit with the Internal Revenue Service (IRS) related to our Bonds. We have furnished the IRS with the information requested in their audit. The IRS is reviewing these materials and has not yet informed us as to their conclusions. Based on our discussions with the IRS, management does not believe the outcome of this audit will have a material impact on the consolidated financial position or results of operations. Assuming an adverse conclusion was reached by the IRS, the Company could have to redeem the Bonds, with a penalty, using the available capacity under our Amended Credit Agreement. | ||
Capital Leases and Other | ||
Some machinery and equipment used in our manufacturing facilities were financed through capital lease agreements. These capital lease agreements are collateralized by the leased property. The capital lease obligations are at a fixed interest rate of 3%. | ||
G. | COMMITMENTS AND CONTINGENCIES | |
Letters of Credit and Bonds | ||
Certain customers require us to post a bank letter of credit guarantee or performance bonds issued by a surety. These guarantees and performance bonds assure our customers that we will perform under terms of our contract. In the event of default, the customer may demand payment from the bank under a letter of credit or performance by the surety under a performance bond. To date, there have been no significant expenses related to either for the periods reported. We were contingently liable for secured and unsecured letters of credit of $14.0 million as of December 31, 2006. We also had performance bonds totaling approximately $118.6 million outstanding at December 31, 2006. | ||
In November 2005, we entered into a new facility agreement (Facility Agreement) with a large international bank. The Facility Agreement provides for 1) £15.0 million in bonds (approximately $29.4 million), 2) £1.5 million of forward exchange contracts and currency options (approximately $2.9 million), and 3) the issuance of bonds and the entering into of forward exchange contracts and currency options. At December 31, 2006, we had outstanding bonds of £4.9 million, or approximately $9.7 million. | ||
Contingencies | ||
The Company previously entered into a construction joint venture agreement to supply, install, and commission a Supervisory Control and Data Acquisition System (SCADA) to monitor and control the distribution and delivery of fresh water to the City and County of San Francisco Public Utility Commission (Commission). The project was substantially completed and has been performing to the satisfaction of the Commission. However, various factors outside of the control of the Company and its joint venture partner caused numerous changes and additions to the work that in turn delayed the completion of the project. The Commission has withheld liquidated damages and earned contract payments from the joint venture. The Company has made claims against the Commission for various matters including compensation for extra work and delay to the project. | ||
The Company is currently pursuing the recovery of amounts owed under the contract, as well as legal and other costs incurred to prosecute its claim. This matter is currently being tried in court. As of December 31, 2006, the Company had approximately $1.8 million recorded in the consolidated balance sheet for contractually owed amounts in accounts receivable and costs and estimated earnings in excess of billings on uncompleted contracts related to its portion of this contract. Consistent with Company policy, only revenue to the extent of costs of directed change orders have been recorded by the Company. No amounts have been recorded by the Company related to the Companys claims and counterclaims alleging breach of the agreement. Although a failure to recover the amounts recorded could have a material adverse effect on the Companys results of operations, the Company believes that, under the circumstances and on the basis of information now available, an unfavorable outcome is unlikely. |
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See Note F for discussion related to our tax exempt industrial development revenue bonds. | ||
H. | STOCK-BASED COMPENSATION | |
Refer to the Companys Annual Report on Form 10-K for the fiscal year ended September 30, 2006 for a full description of the Companys existing stock-based compensation plans. | ||
Stock Options | ||
Stock option activity for the three months ended December 31, 2006 is as follows: |
Remaining | ||||||||||||||||
Weighted- | Weighted-Average | Aggregate | ||||||||||||||
Stock | Average | Contractual Term | Intrinsic Value | |||||||||||||
Options | Exercise Price | (years) | (in thousands) | |||||||||||||
Outstanding at September 30, 2006 |
732,770 | $ | 17.37 | |||||||||||||
Granted |
| | ||||||||||||||
Exercised |
(61,633 | ) | 16.88 | |||||||||||||
Forfeited |
| | ||||||||||||||
Outstanding at December 31, 2006 |
671,137 | 17.41 | 4.51 | $ | 5,491 | |||||||||||
Exercisable at December 31, 2006 |
486,737 | 17.40 | 4.02 | $ | 3,990 | |||||||||||
Additionally, 5,100 shares were issued in fiscal 2007 related to options exercised in fiscal 2006. | ||
Restricted Stock | ||
In September 2006, our Board of Directors approved the 2006 Equity Compensation Plan subject to stockholder approval. This plan allows the Company to grant certain employees restricted stock awards, incentive and non-qualified stock options, performance awards or stock appreciation rights. A total of 750,000 shares of our common stock have been authorized for issuance under this plan. The adoption of the 2006 Equity Compensation Plan has been submitted to the stockholders for approval at the stockholders meeting on February 23, 2007. | ||
These RSUs entitle the employee to receive common stock on the vesting date assuming that certain levels of performance are achieved. The vesting period ranges from one to three years. RSUs do not have voting rights of common stock and the common shares underlying the RSUs are not considered issued and outstanding. | ||
For fiscal 2007, Powell will grant approximately 110,000 RSUs upon stockholder approval. These RSUs will have a grant date of February 23, 2007 upon approval of the stockholders. Compensation expense will be recorded for fiscal 2007 based on the closing price on February 23, 2007. | ||
Additionally, 12,000 restricted shares were issued in the first quarter of fiscal 2007 under the Restricted Stock Plan. | ||
I. | BUSINESS SEGMENTS | |
We manage our business through operating subsidiaries, which are comprised of two reportable business segments: Electrical Power Products and Process Control Systems. Electrical Power Products includes equipment and systems for the distribution and control of electrical energy. Process Control Systems consists principally of instrumentation, computer controls, communications, and data management systems to control and manage critical processes. | ||
The operating results of the Louisiana acquisition and the Power/Vac® product lines are included in our Electrical Power Products business segment as of their respective acquisition dates. | ||
The tables below reflect certain information relating to our operations by segment. All revenues represent sales from unaffiliated customers. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Corporate expenses and certain assets are allocated to the operating segments primarily based on revenues. The corporate assets are mainly cash and cash equivalents. |
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Detailed information regarding our business segments is shown below (in thousands): |
Three Months Ended | ||||||||
December 31, 2006 | January 31, 2006 | |||||||
Revenues: |
||||||||
Electrical Power Products |
$ | 117,343 | $ | 76,642 | ||||
Process Control Systems |
5,433 | 7,171 | ||||||
Total |
$ | 122,776 | $ | 83,813 | ||||
Gross profit: |
||||||||
Electrical Power Products |
$ | 20,093 | $ | 13,064 | ||||
Process Control Systems |
1,364 | 1,713 | ||||||
Total |
$ | 21,457 | $ | 14,777 | ||||
Income before income taxes and minority interest: |
||||||||
Electrical Power Products |
$ | 4,592 | $ | 1,399 | ||||
Process Control Systems |
83 | 361 | ||||||
Total |
$ | 4,675 | $ | 1,760 | ||||
December 31, | September 30, | |||||||
2006 | 2006 | |||||||
Identifiable tangible assets: |
||||||||
Electrical Power Products |
$ | 261,299 | $ | 238,798 | ||||
Process Control Systems |
9,678 | 8,813 | ||||||
Corporate |
11,629 | 10,626 | ||||||
Total |
$ | 282,606 | $ | 258,237 | ||||
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3.1 | | Certificate of Incorporation of Powell Industries, Inc. filed with the Secretary of State of the State of Delaware on February 11, 2004 (filed as Exhibit 3.1 to our Form 8-A/A filed November 1, 2004, and incorporated herein by reference). | |||
3.2 | | Bylaws of Powell Industries, Inc. (filed as Exhibit 3.2 to our Form 8-A/A filed November 1, 2004, and incorporated herein by reference). | |||
10.1 | | Fourth Amendment to Credit Agreement dated December 7, 2006 among Powell Industries, Inc., Switchgear & Instrumentation Limited, Switchgear & Instrumentation Properties Limited, Bank of America, N.A., and the other lenders party thereto (filed as Exhibit 10.17 to our Transition Report on Form 10-K for the transition period ended September 30, 2006, and incorporated herein by reference). | |||
*31.1 | | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |||
*31.2 | | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |||
*32.1 | | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |||
*32.2 | | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
* | Filed herewith. |
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February 9, 2007
|
||||
Date |
/s/ THOMAS W. POWELL | |||
Thomas W. Powell | ||||
President and Chief Executive Officer | ||||
(Principal Executive Officer) | ||||
February 9,
2007 |
||||
Date
|
/s/ DON R. MADISON | |||
Don R. Madison | ||||
Vice President and Chief Financial Officer | ||||
(Principal Financial Officer) |
22
Number | Exhibit Title | |||
3.1
|
| Certificate of Incorporation of Powell Industries, Inc. filed with the Secretary of State of the State of Delaware on February 11, 2004 (filed as Exhibit 3.1 to our Form 8-A/A filed November 1, 2004, and incorporated herein by reference). | ||
3.2
|
| Bylaws of Powell Industries, Inc. (filed as Exhibit 3.2 to our Form 8-A/A filed November 1, 2004, and incorporated herein by reference). | ||
10.1
|
| Fourth Amendment to Credit Agreement dated December 7, 2006 among Powell Industries, Inc., Switchgear & Instrumentation Limited, Switchgear & Instrumentation Properties Limited, Bank of America, N.A., and the other lenders party thereto (filed as Exhibit 10.17 to our Transition Report on Form 10-K for the transition period ended September 30, 2006, and incorporated herein by reference). | ||
*31.1
|
| Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
*31.2
|
| Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
*32.1
|
| Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
*32.2
|
| Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
* | Filed herewith. |
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1. | I have reviewed this quarterly report on Form 10-Q of Powell Industries, Inc.; | ||
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | ||
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | ||
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | ||
b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | ||
c) | evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | ||
d) | disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting, and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and | ||
b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: February 9, 2007 | ||||
/s/ THOMAS W. POWELL | ||||
Thomas W. Powell | ||||
President and Chief Executive Officer | ||||
(Principal Executive Officer) |
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1. | I have reviewed this quarterly report on Form 10-Q of Powell Industries, Inc.; | ||
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | ||
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | ||
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | ||
b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | ||
c) | evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | ||
d) | disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting, and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and | ||
b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: February 9, 2007 | ||||
/s/ DON R. MADISON | ||||
Don R. Madison | ||||
Vice President and Chief Financial Officer | ||||
(Principal Financial and Accounting Officer) |
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(1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and | ||
(2) | The information contained in the Report fairly represents, in all material respects, the financial condition and results of operations of the Company. |
Date: February 9, 2007
|
/s/ THOMAS W. POWELL | |||
Thomas W. Powell | ||||
President and Chief Executive Officer |
26
(1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and | ||
(2) | The information contained in the Report fairly represents, in all material respects, the financial condition and results of operations of the Company. |
Date: February 9, 2007
|
/s/ DON R. MADISON | |||
Don R. Madison | ||||
Vice President and Chief Financial Officer |
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