Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
(Mark one)
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended July 31, 2002
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 incorporation or organization) (I.R.S. Employer Identification No.)
8550 Mosley Drive, Houston, Texas 77075-1180
- -------------------------------------------------------------- ------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (713) 944-6900
--------------
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
----- ------
Common Stock, par value $.01 per share; 10,978,578 shares outstanding as of
August 14, 2002.
Powell Industries, Inc. and Subsidiaries
Part I - Financial Information
Item 1. Condensed Consolidated Financial Statements...........................................3
Item 2. Management's Discussion and Analysis of
Financial Condition and
Results of Operations.............................................................12
Item 3. Quantitative and Qualitative Disclosures
About Market Risk.................................................................17
Part II - Other Information and Signatures..............................................................18
2
POWELL INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
JULY 31, OCTOBER 31,
2002 2001
--------- -----------
ASSETS
Current Assets:
Cash and cash equivalents (includes restricted cash of $920 and $5,838 respectively)........ $13,629 $6,520
Accounts receivable, less allowance for doubtful accounts of
$842 and $551, respectively............................................................. 58,711 76,592
Costs and estimated earnings in excess of billings.......................................... 39,831 36,164
Inventories, net............................................................................ 23,785 21,425
Deferred income taxes and income taxes receivable........................................... 0 1,043
Prepaid expenses and other current assets................................................... 3,420 835
-------- --------
Total Current Assets.................................................................... 139,376 142,579
Property, plant and equipment, net............................................................... 44,178 37,409
Deferred income taxes............................................................................ 1,136 1,064
Other assets .................................................................................... 5,775 5,309
-------- --------
Total Assets............................................................................ $190,465 $186,361
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt........................................................ $1,429 $1,429
Accounts and income taxes payable........................................................... 14,823 18,857
Accrued salaries, bonuses and commissions................................................... 9,523 9,670
Billings in excess of costs and estimated earnings.......................................... 15,702 14,858
Accrued product warranty.................................................................... 2,634 1,860
Deferred income tax liability............................................................... 2,895 833
Other accrued expenses...................................................................... 6,762 6,091
-------- --------
Total Current Liabilities............................................................... 53,768 53,598
Long-term debt, net of current maturities ....................................................... 11,214 21,285
Deferred compensation expense.................................................................... 1,457 1,404
Other liabilities................................................................................ 571 705
-------- --------
Total Liabilities....................................................................... 67,010 76,992
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; 10,979,000 and
10,964,000
shares issued, respectively............................................................. 109 109
Additional paid-in capital.................................................................. 8,801 8,680
Retained earnings........................................................................... 120,740 107,967
Treasury stock, 386,184 shares and 530,100 shares respectively, at cost..................... (3,927) (4,887)
Accumulated other comprehensive (loss): fair value of interest rate swap.................... (102) (140)
Deferred compensation-ESOP.................................................................. (2,166) (2,360)
-------- --------
Total Stockholders' Equity.............................................................. 123,455 109,369
-------- --------
Total Liabilities and Stockholders' Equity.............................................. $190,465 $186,361
======== ========
The accompanying notes are an integral part
of these condensed consolidated financial statements.
3
POWELL INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED JULY 31,
------------------------------
2002 2001
------- -------
Revenues............................................................................ $74,287 $70,780
------- -------
Cost of goods sold.................................................................. 57,857 55,028
------- -------
Gross profit........................................................................ 16,430 15,752
Selling, general and administrative expenses........................................ 9,710 9,129
------- -------
Earnings before interest and income taxes........................................... 6,720 6,623
Interest expense (income), net...................................................... (396) 154
------- -------
Earnings before income taxes........................................................ 7,116 6,469
Income tax provision................................................................ 2,593 2,243
------- -------
Net earnings........................................................................ $ 4,523 $ 4,226
======= =======
Net earnings per common share:
Basic............................................................................ $ 0.43 $ 0.41
Diluted.......................................................................... 0.42 0.40
Weighted average number of common shares outstanding................................ 10,543 10,427
======= =======
Weighted average number of common and common equivalent shares outstanding.......... 10,742 10,617
======= =======
The accompanying notes are an integral part
of these condensed consolidated financial statements.
4
POWELL INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS ENDED JULY 31,
--------------------------------
2002 2001
-------- --------
Revenues............................................................................ $231,061 $194,650
Cost of goods sold.................................................................. 181,773 153,458
-------- --------
Gross profit........................................................................ 49,288 41,192
Selling, general and administrative expenses........................................ 29,048 26,743
-------- --------
Earnings before interest and income taxes........................................... 20,240 14,449
Interest expense, net............................................................... 172 232
-------- --------
Earnings before income taxes........................................................ 20,068 14,217
Income tax provision................................................................ 7,295 4,986
-------- --------
Net earnings........................................................................ $ 12,773 $ 9,231
Net earnings per common share:
Basic............................................................................ $ 1.22 $ 0.89
Diluted.......................................................................... 1.19 0.88
Weighted average number of common shares outstanding................................ 10,483 10,362
======== ========
Weighted average number of common and common equivalent shares outstanding.......... 10,699 10,513
======== ========
The accompanying notes are an integral part
of these condensed consolidated financial statements.
5
POWELL INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED JULY 31,
----------------------------
2002 2001
-------- --------
Operating Activities:
Net earnings ....................................................................... $ 12,773 $ 9,231
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization................................................... 3,546 3,338
Loss on disposition of assets................................................... 25 121
Deferred income tax provision (benefit)......................................... 1,991 (219)
Changes in operating assets and liabilities:
Accounts receivable, net................................................... 17,881 1,973
Costs and estimated earnings in excess of billings......................... (3,667) (11,014)
Inventories, net........................................................... (2,360) (6,294)
Prepaid expenses and other current assets.................................. (1,220) (842)
Other assets............................................................... (616) (102)
Accounts payable and income taxes payable or receivable.................... (2,991) (1,284)
Accrued liabilities........................................................ 1,299 2,533
Billings in excess of costs and estimated earnings......................... 844 4,021
Deferred compensation expense.............................................. 247 306
Other liabilities.......................................................... (97) (1)
-------- --------
Net cash provided by operating activities.............................. 27,655 1,767
Investing Activities:
Purchases of property, plant and equipment.......................................... (11,556) (6,197)
-------- --------
Net cash used in investing activities.................................. (11,556) (6,197)
-------- --------
Financing Activities:
Borrowings on revolving line of credit.............................................. -- 19,750
Repayments on revolving line of credit.............................................. (9,000) (17,250)
Repayments of long-term debt........................................................ (1,071) (1,071)
Decrease in restricted cash......................................................... 4,918 --
Payments to reacquire common stock.................................................. -- (267)
Issuance of common stock............................................................ 1,081 1,385
-------- --------
Net cash provided by (used in) financing activities.................... (4,072) 2,547
-------- --------
Net increase (decrease) in cash and cash equivalents..................................... 12,027 (1,883)
Cash and cash equivalents at beginning of period......................................... 682 2,114
-------- --------
Cash and cash equivalents at end of period............................................... $ 12,709 $ 231
======== ========
Supplemental disclosure of cash flow information (in thousands):
Cash paid during the period for:
Interest ....................................................................... $ 465 $ 506
Income taxes.................................................................... $ 3,200 $ 4,100
The accompanying notes are an integral part
of these condensed consolidated financial statements.
6
Part I
Item 1
POWELL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with the instructions of Form 10-Q and, in the
opinion of management, reflect all adjustments which are of a normal
recurring nature necessary for a fair presentation of financial position,
results of operations, and cash flows. These financial statements should be
read in conjunction with the financial statements and notes thereto
included in our October 31, 2001 annual report on Form 10-K.
New Accounting Standards
In June 2001 the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141 "Business
Combinations". SFAS No. 141 is effective for fiscal years beginning after
December 15, 2001. SFAS No. 141 requires that all business combinations
completed after June 30, 2001, be accounted for using the purchase method.
In June 2001 we adopted of SFAS No. 141 and there was no material effect on
our financial statements.
In June 2001 the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142 "Goodwill and
Other Intangible Assets". SFAS No. 142 is effective for fiscal years
beginning after December 15, 2001. We plan to adopt this statement
effective November 1, 2002. SFAS No. 142 requires that goodwill no longer
be amortized but be subject to an annual assessment for impairment based on
a fair value test. In addition, acquired intangible assets are required
under SFAS No. 142 to be separately recognized if the benefit of the asset
is based on contractual or legal rights. We are evaluating the impact of
SFAS No. 142 on our financial statements. Goodwill included in other assets
on the financial statements is $2,133,000 and accumulated amortization of
$1,179,000 as of July 31, 2002. Goodwill amortization for nine months ended
July 31, 2002 was $108,000.
In August 2001 the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of." SFAS No. 144 establishes a single accounting
model for long-lived assets to be disposed of by sale and requires that
these long-lived assets be measured at the lower of carrying amount or fair
value less cost to sell, whether reported in continuing operations or in
discontinued operations. SFAS No. 144 is effective for fiscal years
beginning after December 15, 2001. We will adopt this standard on November
1, 2002, and are in the process of assessing the impact that the adoption
of this standard will have on our financial position and results of
operations.
In June 2002 FASB issued SFAS No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities". This Statement requires the recognition of
costs associated with the exit or disposal activities when incurred rather
than at the date of commitment to an exit or disposal plan. This Statement
replaces Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including Certain Costs Incurred in a Restructuring)",
which required the recognition of costs at the date of a commitment to an
exit or disposal plan. SFAS No. 146 is effective for exit or disposal
activities initiated after December 31, 2002. We are currently assessing
the new standard and any potential impact on our consolidated statement of
operations, cash flows, or financial position.
7
B. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS (unaudited)
Activity in our allowance for doubtful accounts receivable consists of
the following (in thousands):
July 31, October 31,
2002 2001
-------- -----------
Balance at beginning of period............................................ $ 551 $ 505
Additions to costs and expenses........................................... 361 62
Deductions for uncollectible accounts written off, net of recoveries...... (70) (16)
------- -------
Balance at end of period.................................................. $ 842 $ 551
======= =======
The components of inventories, net are summarized below (in
thousands):
July 31, October 31,
2002 2001
-------- -----------
Raw materials, parts and subassemblies...................................... $17,795 $15,687
Work-in-process ............................................................ 7,392 6,239
Reserve for obsolescence.................................................... (1,402) (501)
------- -------
Total inventories........................................................... $23,785 $21,425
======= =======
Property, plant and equipment, net are summarized below (in
thousands):
July 31, October 31,
2002 2001
-------- -----------
Land........................................................................ $ 5,005 $ 5,232
Buildings and improvements.................................................. 35,794 30,952
Machinery and equipment..................................................... 37,537 31,559
Furniture & fixtures........................................................ 3,012 3,829
Construction in process..................................................... 4,765 4,985
-------- ---------
86,113 76,557
Less accumulated depreciation............................................... (41,935) (39,148)
-------- ---------
Total property, plant and equipment, net.................................... $ 44,178 $ 37,409
======== ========
The components of cost and estimated earnings in excess of billings
are as follows (in thousands):
July 31, October 31,
2002 2001
--------- -----------
Costs and estimated earnings................................................ $ 183,911 $ 156,822
Progress billings........................................................... (144,080) (120,658)
---------- ---------
Total costs and estimated earnings in excess of billings.................... $ 39,831 $ 36,164
========= =========
The components of billings in excess of cost and estimated earnings
are as follows (in thousands):
July 31, October 31,
2002 2001
-------- ----------
Progress billings........................................................... $137,426 $111,963
Costs and estimated earnings................................................ (121,724) (97,105)
-------- --------
Total billings in excess of costs and estimated earnings.................... $ 15,702 $ 14,858
======== ========
8
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 July 31, Nine Months Ended July 31,
2002 2001 2002 2001
---- ---- ---- ----
(unaudited) (unaudited)
Numerator:
Numerator for basic and diluted earnings per
share-earnings from operations
available to common stockholders..................... $4,523 $4,226 $12,773 $9,231
====== ====== ======= ======
Denominator:
Denominator for basic earnings per share-
weighted average shares............................... 10,543 10,427 10,483 10,362
Effect of dilutive securities-employee stock options .. 199 190 216 151
------ ------ ------ ------
Denominator for diluted earnings per share-
adjusted weighted-average shares with assumed
conversions.......................................... 10,742 10,617 10,699 10,513
====== ====== ====== ======
Basic earnings per share................................... $0.43 $0.41 $1.22 $0.89
===== ===== ===== =====
Diluted earnings per share................................. $0.42 $0.40 $1.19 $0.88
===== ===== ===== =====
For the quarters ended July 31, 2002 and 2001, there were 10,000 and 0
stock options, respectively, excluded from the computation of diluted
earnings per share because the options' exercise prices were greater than
the average market price of our common stock.
D. COMPREHENSIVE INCOME
We adopted SFAS No. 133 as amended on November 1, 2000. Accordingly on that
date, we recorded an asset of $192,000 representing the fair value of an
interest rate swap agreement, which is used in the management of interest
rate exposure. We also realized this amount as a component of comprehensive
income. Our comprehensive income, which encompasses net income and the
change in fair value of hedge instruments, is as follows (in thousands):
Three Months Ended July 31, Nine Months Ended July 31,
2002 2001 2002 2001
---- ---- ---- ----
(unaudited) (unaudited)
Net income.......................................... $4,523 $4,226 $12,773 $9,231
Initial adoption of SFAS 133........................ --- 192 --- 192
Change in fair value of hedge instrument............ (9) (66) 38 (298)
------- ------ ------- ------
Comprehensive income................................ $4,514 $4,352 $12,811 $9,125
====== ====== ======= ======
E. BUSINESS SEGMENTS
We have three reportable segments: Switchgear and related equipment and
service (Switchgear) for the distribution, control and management of
electrical energy; Bus duct products (Bus Duct) for the distribution of
electric power; and Process Control Systems which consists principally of
instrumentation, computer control, communications and data management
systems for the control of dynamic processes.
The tables below reflect certain information relating to our operations by
segment. Substantially all revenues represent sales to unaffiliated
customers. The accounting policies of the segments are the same as those
described in the summary of significant accounting policies as discussed in
our annual report on Form 10-K for the year ended October 31, 2001. For
purposes of this presentation, all general corporate expenses have been
allocated among operating segments based primarily on revenues. In
addition, the corporate assets are mainly cash and cash equivalents
transferred to the corporate office from the segments. Interest charges and
credits to the segments from the corporate office are based on use of
funds.
9
The required disclosures for the business segments are set forth below (in
thousands):
Three Months Ended July 31, Nine Months Ended July 31,
2002 2001 2002 2001
---- ---- ---- ----
(unaudited) (unaudited)
Revenues:
Switchgear..................................... $58,647 $52,925 $185,945 $143,787
Bus Duct....................................... 9,157 11,557 28,091 31,052
Process Control Systems........................... 6,483 6,298 17,025 19,811
------- ------- -------- --------
Total Revenues.................................... $74,287 $70,780 $231,061 $194,650
======= ======= ======== ========
Earnings before income taxes:
Switchgear..................................... $ 5,980 $ 4,480 $16,439 $ 8,632
Bus Duct....................................... 757 1,650 3,259 5,031
Process Control Systems........................ 379 339 370 554
------- -------- ------- --------
Total earnings before income taxes................ $ 7,116 $ 6,469 $20,068 $ 14,217
======= ======== ======= ========
July 31, October 31,
2002 2001
---- ----
(unaudited)
Assets
Switchgear.......................................................... $131,925 $134,872
Bus Duct............................................................ 23,797 21,576
Process Control Systems............................................. 16,463 17,579
Corporate........................................................... 18,280 12,334
-------- --------
Total Assets........................................................... $190,465 $186,361
======== ========
F. COMMITMENTS AND CONTINGENCIES
Certain customers require us to post a bank letter of credit guarantee or
performance bonds issued by a surety. These assure our customers that we
will perform under terms of our contract and with associated vendors and
subcontractors. 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 are contingently liable for secured
and unsecured letters of credit of $12,463,000 as of July 31, 2002. We also
had performance bonds totaling approximately $160,904,000 that were
outstanding at July 31, 2002.
The Company is a partner in a joint venture (the "Joint Venture"),which
provided process control systems to the Central Artery/Tunnel Project (the
"Project") in Boston, Massachusetts, under a contract with the
Massachusetts Turnpike Authority (the "MTA"). The Joint Venture has
submitted claims against the MTA seeking additional reimbursement for work
done by the Joint Venture on the project. In a separate matter, the Joint
Venture received notice dated May 9, 2002 (the "Notice") from the MTA that
a follow-on contractor has asserted a claim against the MTA in connection
with work done or to be done by the follow-on contractor on the project.
One component of the Project involved the Joint Venture performing specific
work that the MTA then bid for the follow-on contractor to complete. Part
of the follow-on contractor's claim contains unsubstantiated allegations
that such work performed by the Joint Venture was insufficient and
defective, thus possibly contributing to the follow-on contractor's claims
for damages against the MTA. In the Notice of the potential claim, the MTA
advised the Joint Venture that if it is required to pay the follow-on
contractor additional amounts and such payment is the result of defective
work by the Joint Venture, the MTA will seek indemnification from the Joint
Venture for such additional amounts.
The Joint Venture has no reason to believe the systems it delivered under
contract to MTA were defective and accordingly it intends to vigorously
defend any such allegations. The ultimate disposition of the Joint
Venture's claim against the MTA and the MTA's potential claim for
indemnification based on the follow-on contractor's claims are not
presently determinable. Although an unfavorable outcome to the follow-on
contractor's claim could have a material adverse effect on the Company's
financial
10
condition, results of operations, and cash flow the Company believes that
an unfavorable outcome with respect to these matters, under the
circumstances and on the basis of the information now available, is
unlikely.
The previous discussion should be read in conjunction with the consolidated
financial statements.
11
Part I
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENT
Any forward-looking statements contained in this Form 10-Q are made pursuant to
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. Investors are cautioned that such forward-looking statements involve risks
and uncertainties in those actual results may differ materially from that
projected in the forward-looking statements. These risks and uncertainties
include, without limitation, difficulties which could arise in obtaining
materials or components in sufficient quantities as needed for our manufacturing
and assembly operations, unforeseen political or economic problems in countries
to which we export products in relation to our principal competitors, any
significant decrease in our backlog of orders, any material employee relations
problems, or any material litigation or claims made against us, as well as
general market conditions, competition and pricing.
CRITICAL ACCOUNTING POLICIES
In response to the Securities and Exchange Commission Release No. 33-8040,
"Cautionary Advice Regarding Disclosure About Critical Accounting Policies," we
have identified the accounting principles which we believe are most critical to
our reported financial status by considering accounting policies that involve
the most complex or subjective decisions or assessments. Management identified
our most critical accounting policies to be those related to the
percentage-of-completion revenue recognition method. Revenue from construction
and certain production contracts are recognized in accordance with the American
Institute of Certified Public Accountants Statement of Position 81-1 "Accounting
for Performance of Construction-Type and Certain Production-Type Contracts".
Percentage-of-completion for contracts is measured principally by the percentage
of costs incurred and accrued to date for each contract compared to the
estimated total costs for such contract. Contracts are generally considered to
be substantially complete upon acceptance by the customer. Changes in job
performance, job conditions, estimated contract costs and profitability may
result in revisions in the period in which the revisions are determined.
Provisions for total estimated losses on uncompleted contracts are made in the
period in which such losses are determined.
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of revenues, certain items from
the Condensed Consolidated Statements of Operations.
July 31, 2002 July 31, 2001
--------------------------------------------------------------
Three Months Nine months Three Months Nine months
Ended Ended Ended Ended
------------ ----------- ------------ -----------
Revenues 100.0% 100.0% 100.0% 100.0%
Gross profit 22.1 21.3 22.3 21.2
Selling, general and administrative expenses 13.1 12.6 12.9 13.7
Interest expense, net -0.5 0.1 0.2 0.1
Earnings from operations before income
taxes 9.6 8.7 9.1 7.3
Income tax provision 3.5 3.2 3.1 2.6
Net earnings 6.1 5.5 6.0 4.7
12
The following table sets forth the percentage of total revenues attributable to
each business segment:
July 31, 2002 July 31, 2001
------------------------------------------------------------
Three Months Nine months Three Months Nine months
Ended Ended Ended Ended
------------ ----------- ------------ -----------
Revenues:
Switchgear 79.0 80.5 74.8 73.9
Bus Duct 12.3 12.2 16.3 16.0
Process Control Systems 8.7 7.3 8.9 10.1
---- ---- ---- ----
Total 100% 100% 100% 100%
Revenues for the quarter ended July 31, 2002, were up 5.0 percent to $74,287,000
from $70,780,000 in the third quarter of last year. The increase in revenues for
the quarter was attributed to the Switchgear products segment experiencing an
increased demand for our products and services from the oil and gas production
markets. Revenues for the nine months ended July 31, 2002, were up 18.7 percent
to $231,061,000 from $194,650,000 for the nine months ended July 31, 2001. The
increase in revenues for the nine months was attributed to the Switchgear
products segment experiencing an increased demand for our products and services
from oil and gas production markets and domestic electric utility markets. This
increase was partially offset by lower revenues from the Process Control segment
due to a shift of value added professional work which has less pass through
charges and the Bus Duct segment with a softer overall marketplace.
Gross profit, as a percentage of revenues, was 22.1 percent and 22.3 percent for
the quarter ended July 31, 2002 and 2001, respectively. The lower percentages
for the 2002 quarter were mainly due to lower margins for Bus Duct and pass
through procurements on a major project in the Switchgear segment. Gross profit,
as a percentage of revenues, was 21.3 percent and 21.2 percent for the nine
months ended July 31, 2002 and 2001, respectively. The higher percentages for
the 2002 period were mainly due to increased margins for Switchgear products as
well as the benefits of cost effective manufacturing techniques. This is
partially offset by lower margins for the Process Control Systems due to costs
being expensed on contracts awaiting change orders.
Selling, general and administrative expenses as a percentage of revenues were
13.1 percent and 12.9 percent for the quarter ended July 31, 2002 and 2001,
respectively. The higher percentages for the quarter were due to strengthening
our allowance for doubtful accounts in accordance with our policy based upon
ageing of one customer receivable. Selling, general and administrative expenses
as a percentage of revenues were 12.6 percent and 13.7 percent for the nine
months ended July 31, 2002 and 2001, respectively. The lower percentages for the
nine months were due to controlling of salaries and selling expenses as volumes
increased.
Interest expense (income) is shown in the following schedule (in thousands):
July 31, 2002 July 31, 2001
Three Months Nine Months Three Months Nine Months
Ended Ended Ended Ended
------------ ----------- ------------ -----------
Expense............................. $(263) $413 $244 $530
Income.............................. (133) (241) (90) (298)
----- ---- ---- ----
Net................................. $(396) $172 $154 $232
===== ==== ==== ====
Interest expense for the third quarter of 2002 and 2001 was primarily related to
bank notes payable at rates between 1.3 percent and 5.2 percent. Interest
expense for the quarter was a credit due to reversal of higher estimates than
actual variable interest expense. Sources of the interest income were related to
notes receivable and short-term investment of available funds at various rates
between 0.4 percent and 7.0 percent.
Income tax provision is represented by an effective tax rate on earnings of 36.4
percent and 34.7 percent for the quarters ended July 31, 2002 and 2001,
respectively. The increase was due to higher graduated federal tax rates, higher
state income taxes and lower foreign sales tax credits. The effective tax rate
on earnings was 36.4 percent and 35.1 percent for the nine-months ended July 31,
2002 and 2001, respectively. This increase for the nine months was also due to
higher graduated federal and state income tax rates and lower estimated foreign
sales corporation credits because of lower export sales compared to the prior
year.
Net earnings were $4,523,000 or $0.42 per diluted share for the third quarter of
fiscal 2002, an increase of 7.0 percent from $4,226,000 or $0.40 per diluted
share for the same period last year. The increase was mainly due to higher
volume flow gross margin of pass through contract costs on a major project in
the Switchgear segment and lower margins in the Bus Duct segment due to general
market conditions.
13
Also included in the quarterly results was a revision of an
estimated interest expense increasing earnings by $208,000 net of tax. Net
earnings were $12,773,000 or $1.19 per diluted share for the first nine months
of fiscal 2002, an increase of 38.4 percent from $9,231,000 or $0.88 per diluted
share for the same period last year. The increase was due to significantly
higher volume and increased gross margins in the Switchgear segment.
Backlog at July 31, 2002 was $215,346,000 compared to $221,722,000 and
$208,938,000 at April 30, 2002, and at October 31, 2001, respectively, a
decrease of $6,376,000 for the three months. The decrease for the quarter was
primarily in the Bus Duct segment down $4,001,000 or 16.1% and the Process
Control Systems segment down $3,540,000 or 8.1%. The increase of $6,408,000 in
backlog for the nine month period was primarily in the Switchgear segment up
12.3% due to increased bookings from the oil and gas production markets.
The following table sets forth the value of total backlog attributable to each
business segment (in thousands):
July 31, April 30, October 31,
2002 2002 2001
------------------------------------------------------------
Switchgear.......................... $154,248 $153,083 $137,361
Bus Duct............................ 20,815 24,816 30,232
Process Control Systems............. 40,283 43,823 41,345
-------- -------- --------
Total $215,346 $221,722 $208,938
======== ======== ========
LIQUIDITY AND CAPITAL RESOURCES
Our ability to satisfy cash requirements is evaluated by analyzing key measures
of liquidity applicable to us. The following table is a summary of the measures
which are significant to management:
July 31, October 31,
2002 2001
--------------------------------
Working Capital $85,608,000 $88,981,000
Current Ratio 2.60 to 1 2.66 to 1
Long-term Debt to Capitalization .1 to 1 .2 to 1
Management believes that we can continue to maintain a strong liquidity
position. The $3,373,000 decrease in working capital was invested in property
and equipment and to pay off long-term debt.
Cash and cash equivalents increased by $304,000 during the three months ended
July 31, 2002, primarily through collections on accounts receivable and release
of restricted cash balances. The primary use of cash during this period was to
fund investing activities and increases in costs and estimated earnings in
excess of billings and inventory balances.
On April 30, 2001, the Board of Directors approved our planned plant expansion
in the Chicago operations of the Bus Duct segment. We invested a total of $9.0
million in this project during fiscal 2001and 2002. The project was completed
and the facility opened on schedule in May 2002. On June 15, 2001, the Board of
Directors approved planned plant expansion in the North Canton, Ohio and
Houston, Texas operations of the Switchgear segment. We expect to invest a total
of approximately $8.6 million during fiscal 2002 and 2003 on these projects. The
North Canton plant was substantially completed in the second quarter. The
Houston expansion has experienced construction delays since the second quarter.
Approximately $4,000,000 has been expended to date.
In September 1998, we amended a revolving line of credit agreement with a major
domestic bank. The amendment provided for a $10,000,000 term loan and a
revolving line of credit of $20,000,000. The term of the loan was five years
with nineteen equal quarterly payments of $357,143 and a final payment of the
remaining principal balance on September 30, 2003. The effective interest rate,
after including an interest rate swap negotiated with the trust company of the
same domestic bank, is 5.2 percent per annum plus a .75 to 1.25 percent fee
based on financial covenants. In December 1999 the revolving line of credit was
amended to reduce the revolving line of credit to $15,000,000. In October 2001,
the credit agreement was amended and restated to increase the revolving line of
credit to $25,000,000 and to extend the maturity date to February 28, 2003. As
of July 31, 2002 we have had no outstanding borrowings on this line of credit.
A Company subsidiary ("Borrower") borrowed $8 million on October 25, 2001,
through a loan agreement funded with proceeds from certain tax-exempt industrial
development revenue bonds ("Bonds"). The Bonds were issued by the Illinois
Development Finance Authority and are to be used strictly for the completion of
our Northlake, Illinois production facility. A reimbursement agreement between
the Borrower and a major U.S. bank, required an issuance by the bank of an
irrevocable direct-pay letter of credit to the Bonds' trustee that
14
guarantees payment of the Bonds' principal and interest when due. The letter of
credit terminates on October 25, 2004, and is subject to both early termination
and extension provisions customary to such agreements. The Bonds mature in 2021,
but the reimbursement agreement requires Borrower to provide for redemption of
one twentieth of the par amount of the Bonds on October 25, 2002, and each
subsequent anniversary. A sinking fund equal to one twentieth of the total Bonds
outstanding will be funded each year for redemption of the 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. As of
July 31, 2002, the rate was 1.6%.
We had a stock repurchase plan under which we were authorized to spend up to
$5,000,000 for purchases of our common stock. Pursuant to this plan, we
repurchased 530,100 shares of our common stock at an aggregate cost of
approximately $4,887,000 through April 30, 2001. Repurchased shares were added
to treasury stock and 143,916 have been used this fiscal year for issuance under
our employee stock option plan. No additional shares will be purchased under
this plan.
We believe the current credit facilities, coupled with our additional borrowing
capacity, along with cash generated from operations, will be sufficient to fund
current operations, internal growth and possible acquisitions. As of July 31,
2002 we were in compliance with all debt covenants.
OTHER COMMITMENTS
Off balance sheet transactions include liabilities associated with noncancelable
operating leases, letter of credit obligations and surety guarantees.
Non-cancelable operating leases are entered into for certain offices,
facilities, equipment and vehicles that are not owned and require monthly lease
rental fees. At the end of the lease, there is no further obligation to the
lessor and many leases have cancellation and termination clauses prior to
reaching the end of the lease. A cancelled or terminated lease may contain fees
for canceling before reaching the final termination date. This amount is
typically the difference between the fair market value of the leased asset and
the implied book value of the leased asset as determined in accordance with the
lease agreement.
At July 31, 2002, the minimum annual rental commitments under leases having
terms in excess of one year and annual maturities of long-term debt and capital
lease obligations are as follows (in thousands):
Year Ending Operating Debt & Capital
October 31 Leases Obligations
----------------------------------------------------------------------------------
2002.......................................... 1,555 357
2003.......................................... 1,174 4,286
2004.......................................... 1,249 ---
2005.......................................... 1,079 ---
2006.......................................... 947 ---
Thereafter.................................... 2,102 8,000
------ -------
Total lease commitments/debt
and capital lease obligations............ $8,106 $12,643
====== =======
Certain customers require us to post a bank letter of credit guarantee or
performance bonds issued by a surety. These assure our customers that we will
perform under terms of our contract and with associated vendors and
subcontractors. 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 are contingently liable for secured and unsecured letters
of credit of $12,463,000 as of July 31, 2002. We also had performance bonds
totaling approximately $160,904,000 that were outstanding at July 31, 2002.
The Company is a partner in a joint venture (the "Joint Venture"),which provided
process control systems to the Central Artery/Tunnel Project (the "Project") in
Boston, Massachusetts, under a contract with the Massachusetts Turnpike
Authority (the "MTA"). The Joint Venture has submitted claims against the MTA
seeking additional reimbursement for work done by the Joint Venture on the
project. In a separate matter, the Joint Venture received notice dated May 9,
2002 (the "Notice") from the MTA that a follow-on contractor has asserted a
claim against the MTA in connection with work done or to be done by the
follow-on contractor on the project. One component of the Project involved the
Joint Venture performing specific work that the MTA then bid for the follow-on
contractor to complete. Part of the follow-on contractor's claim contains
unsubstantiated allegations that such work performed by the Joint Venture was
insufficient and defective, thus possibly contributing to the follow-on
contractor's claims for damages against
15
the MTA. In the Notice of the potential claim, the MTA advised the Joint Venture
that if it is required to pay the follow-on contractor additional amounts and
such payment is the result of defective work by the Joint Venture, the MTA will
seek indemnification from the Joint Venture for such additional amounts.
The Joint Venture has no reason to believe the systems it delivered under
contract to MTA were defective and accordingly it intends to vigorously defend
any such allegations. The ultimate disposition of the Joint Venture's claim
against the MTA and the MTA's potential claim for indemnification based on the
follow-on contractor's claims are not presently determinable. Although an
unfavorable outcome to the follow-on contractor's claim could have a material
adverse effect on the Company's financial condition and results of operations,
the Company believes that an unfavorable outcome with respect to these matters,
under the circumstances and on the basis of the information now available, is
unlikely.
The previous discussion should be read in conjunction with the consolidated
financial statements.
16
Part 1
Item 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our financial instruments include cash and equivalents, accounts receivable,
accounts payable, debt obligations and an interest rate swap. The book value of
cash and cash equivalents, accounts receivable and accounts payable are
considered to be representative of fair value because of the short maturity of
these instruments. We believe that the carrying value of our borrowings under
the credit agreement approximates their fair value as they bear interest at
rates indexed to the bank's interbank offered rate. Our accounts receivable are
not concentrated in one customer or one industry and are not viewed as an
unusual credit risk. We have recorded an allowance for doubtful accounts of
$842,000 at July 31, 2002 and $551,000 at October 31, 2001, respectively, which
management believes is adequate.
The interest rate swap agreement, which is used in the management of interest
rate exposure, is accounted for on the accrual basis. Income and expense
resulting from this agreement is recorded in the same category as interest
expense accrued on the related term note. Amounts to be paid or received under
the interest rate swap agreement are recognized as adjustments to interest
expense in the periods in which they occur.
At July 31, 2002 we had $4,643,000 in borrowings subject to the interest rate
swap at a rate of 5.20 percent through September 30, 2003. The 5.20 percent rate
is currently approximately 3.4 percent above market and should represent
approximately $164,000 of increased interest expense for fiscal year 2002
assuming the current market interest rates do not change. The approximate fair
value of the swap agreement at July 31, 2002 was ($102,000). The fair value is
the estimated amount we would pay to terminate the contract. The agreements
require that we pay the counterparty at the above fixed swap rate and require
the counterparty to pay interest at the 90 day LIBOR rate. The closing 90 day
LIBOR rate on July 31, 2002 was 1.8 percent.
17
Part II
OTHER INFORMATION
ITEM 1. Legal Proceedings
We are a party to disputes arising in the ordinary course of
business. Management does not believe that the ultimate
outcome of these disputes will materially affect the financial
position or results of operations.
ITEM 2. Changes in Securities and Use of Proceeds
None
ITEM 3. Defaults Upon Senior Securities
Not applicable
ITEM 4. Other Information
None
ITEM 5. Exhibits and Reports on Form 8-K
a. Exhibits
99.1 Certification Pursuant to Section 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
99.2 Certification Pursuant to Section 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
b. Reports on Form 8-K
The Company filed a Form 8-K on May 29, 2002 announcing a
change in the Company's independent public accountants.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
POWELL INDUSTRIES, INC.
Registrant
August 26, 2002 /s/ THOMAS W. POWELL
- --------------- -------------------------------------------
Date Thomas W. Powell
President and Chief Executive Officer
(Principal Executive Officer)
August 26, 2002 /s/ DON R. MADISON
- --------------- -------------------------------------------
Date Don R. Madison
Vice President and Chief Financial Officer
(Principal Financial Officer)
19
EXHIBIT INDEX
99.1 Certification Pursuant to Section 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification Pursuant to Section 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.