Attached files
file | filename |
---|---|
EX-21.1 - EXHIBIT 21.1 - Pike Corp | c08114exv21w1.htm |
EX-32.1 - EXHIBIT 32.1 - Pike Corp | c08114exv32w1.htm |
EX-31.2 - EXHIBIT 31.2 - Pike Corp | c08114exv31w2.htm |
EX-31.1 - EXHIBIT 31.1 - Pike Corp | c08114exv31w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2010
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
COMMISSION FILE NUMBER 001-32582
PIKE ELECTRIC CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 20-3112047 | |
(State of incorporation) | (I.R.S. Employer Identification No.) |
100 Pike Way, PO Box 868, Mount Airy, NC 27030
(Address of principal executive office)
(336) 789-2171
(Registrants telephone number, including area code)
(Address of principal executive office)
(336) 789-2171
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
As of October 29, 2010, there were 33,541,212 shares of our Common Stock, par value $0.001 per
share, outstanding.
PIKE ELECTRIC CORPORATION
FORM 10-Q
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2010
FORM 10-Q
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2010
INDEX
Part I. FINANCIAL INFORMATION |
||||||||
1 | ||||||||
2 | ||||||||
3 | ||||||||
4 | ||||||||
12 | ||||||||
19 | ||||||||
19 | ||||||||
Part II. OTHER INFORMATION |
||||||||
20 | ||||||||
20 | ||||||||
21 | ||||||||
22 | ||||||||
Exhibit 21.1 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 |
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
PIKE ELECTRIC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
(In thousands, except per share amounts)
September 30, | June 30, | |||||||
2010 | 2010 | |||||||
(Unaudited) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 5,775 | $ | 11,133 | ||||
Accounts receivable from customers, net |
64,374 | 64,672 | ||||||
Costs and estimated earnings in excess of billings on uncompleted contracts |
49,540 | 50,215 | ||||||
Inventories |
6,763 | 6,401 | ||||||
Prepaid expenses and other |
9,985 | 9,115 | ||||||
Deferred income taxes |
10,017 | 10,526 | ||||||
Total current assets |
146,454 | 152,062 | ||||||
Property and equipment, net |
189,226 | 194,885 | ||||||
Goodwill |
114,866 | 114,778 | ||||||
Other intangibles, net |
37,334 | 38,527 | ||||||
Deferred loan costs, net |
3,573 | 3,021 | ||||||
Other assets |
1,804 | 2,105 | ||||||
Total assets |
$ | 493,257 | $ | 505,378 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 17,604 | $ | 17,484 | ||||
Accrued compensation |
19,735 | 22,589 | ||||||
Billings in excess of costs and estimated earnings on uncompleted contracts |
8,111 | 8,925 | ||||||
Accrued expenses and other |
6,128 | 6,112 | ||||||
Current portion of insurance and claim accruals |
21,693 | 23,422 | ||||||
Total current liabilities |
73,271 | 78,532 | ||||||
Long-term debt |
111,000 | 114,500 | ||||||
Insurance and claim accruals, net of current portion |
5,934 | 6,005 | ||||||
Deferred compensation, net of current portion |
5,918 | 5,844 | ||||||
Deferred income taxes |
47,323 | 48,170 | ||||||
Other liabilities |
2,528 | 2,859 | ||||||
Commitments and contingencies |
||||||||
Stockholders equity: |
||||||||
Preferred stock, par value $0.001 per share; 100,000 authorized shares; no
shares issued and outstanding |
| | ||||||
Common stock, par value $0.001 per share; 100,000 authorized shares; 33,548
and 33,544 shares issued and outstanding at September 30, 2010 and
June 30, 2010, respectively |
6,427 | 6,427 | ||||||
Additional paid-in capital |
158,265 | 158,030 | ||||||
Accumulated other comprehensive loss, net of taxes |
(272 | ) | (142 | ) | ||||
Retained earnings |
82,863 | 85,153 | ||||||
Total stockholders equity |
247,283 | 249,468 | ||||||
Total liabilities and stockholders equity |
$ | 493,257 | $ | 505,378 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
1
Table of Contents
PIKE ELECTRIC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended | ||||||||
September 30, | ||||||||
2010 | 2009 | |||||||
Revenues |
$ | 128,759 | $ | 127,220 | ||||
Cost of operations |
117,036 | 115,525 | ||||||
Gross profit |
11,723 | 11,695 | ||||||
General and administrative expenses |
13,557 | 13,123 | ||||||
Loss on sale and impairment of property
and equipment |
167 | 661 | ||||||
Loss from operations |
(2,001 | ) | (2,089 | ) | ||||
Other expense (income): |
||||||||
Interest expense |
1,660 | 2,371 | ||||||
Other, net |
(9 | ) | (101 | ) | ||||
Total other expense |
1,651 | 2,270 | ||||||
Loss before income taxes |
(3,652 | ) | (4,359 | ) | ||||
Income tax benefit |
(1,362 | ) | (1,654 | ) | ||||
Net loss |
$ | (2,290 | ) | $ | (2,705 | ) | ||
Loss per share: |
||||||||
Basic |
$ | (0.07 | ) | $ | (0.08 | ) | ||
Diluted |
$ | (0.07 | ) | $ | (0.08 | ) | ||
Shares used in computing loss per share: |
||||||||
Basic |
33,272 | 33,077 | ||||||
Diluted |
33,272 | 33,077 | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
Table of Contents
PIKE ELECTRIC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
(Unaudited)
(In thousands)
Three Months Ended | ||||||||
September 30, | ||||||||
2010 | 2009 | |||||||
Cash flows from operating activities: |
||||||||
Net loss |
$ | (2,290 | ) | $ | (2,705 | ) | ||
Adjustments to reconcile net loss to net cash provided by
operating activities: |
||||||||
Depreciation and amortization |
9,797 | 9,243 | ||||||
Non-cash interest expense |
513 | 510 | ||||||
Deferred income taxes |
(1,325 | ) | (987 | ) | ||||
Loss on sale and impairment of property and equipment |
167 | 661 | ||||||
Equity compensation expense |
1,063 | 1,083 | ||||||
Excess tax expense from stock-based compensation |
| 33 | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable and costs and estimated earnings in excess
of billings on uncompleted contracts |
972 | (981 | ) | |||||
Inventories, prepaid expenses and other |
(533 | ) | (104 | ) | ||||
Insurance and claim accruals |
(1,800 | ) | (1,540 | ) | ||||
Accounts payable and other |
(4,066 | ) | 1,286 | |||||
Deferred compensation |
| (1,402 | ) | |||||
Net cash provided by operating activities |
2,498 | 5,097 | ||||||
Cash flows from investing activities: |
||||||||
Purchases of property and equipment |
(3,416 | ) | (4,680 | ) | ||||
Net proceeds from sale of property and equipment |
534 | 902 | ||||||
Net cash used in investing activities |
(2,882 | ) | (3,778 | ) | ||||
Cash flows from financing activities: |
||||||||
Principal payments on long-term debt |
(3,500 | ) | | |||||
Stock option and employee stock purchase activity, net |
(483 | ) | 129 | |||||
Excess tax expense from stock-based compensation |
| (33 | ) | |||||
Deferred loan costs |
(991 | ) | (2,792 | ) | ||||
Net cash used in financing activities |
(4,974 | ) | (2,696 | ) | ||||
Net decrease in cash and cash equivalents |
(5,358 | ) | (1,377 | ) | ||||
Cash and cash equivalents beginning of year |
11,133 | 43,820 | ||||||
Cash and cash equivalents end of period |
$ | 5,775 | $ | 42,443 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
Table of Contents
PIKE ELECTRIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended September 30, 2010 and 2009
(In thousands, except per share amounts)
For the three months ended September 30, 2010 and 2009
(In thousands, except per share amounts)
1. Basis of Presentation
The accompanying condensed consolidated financial statements of Pike Electric Corporation and
its wholly-owned subsidiaries (Pike, we, us, and our) are unaudited and have been prepared
in accordance with United States generally accepted accounting principles (U.S. GAAP) for interim
financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for
complete financial statements. In the opinion of management, the unaudited consolidated financial
statements included herein contain all adjustments necessary to present fairly our financial
position, results of operations and cash flows for the periods indicated. Such adjustments, other
than nonrecurring adjustments that have been separately disclosed, are of a normal, recurring
nature. We recorded a $2.0 million reduction of costs and estimated earnings in excess of billings
on uncompleted contracts during the quarter ended September 30, 2010 that relates to prior periods,
the impact of which is not material to any individual prior period or our expected annual results
for fiscal 2011. The operating results for interim periods are not necessarily indicative of
results to be expected for a full year or future interim periods. The balance sheet at June 30,
2010 has been derived from our audited financial statements but does not include all of the
information and footnotes required by U.S. GAAP for complete financial statements. Certain amounts
reported previously have been reclassified to conform to the current year presentation. These
financial statements should be read in conjunction with our financial statements and related notes
included in our report on Form 10-K for the year ended June 30, 2010.
2. Business
Pike is headquartered in Mount Airy, North Carolina and is one of the largest providers of
energy solutions for investor-owned, municipal and co-operative utilities in the United States.
Since our founding in 1945, we have evolved from our roots as a specialty non-unionized contractor
for electric utilities focused on the distribution sector in the southeastern United States to a
leading turnkey energy solutions provider throughout the United States with diverse capabilities
servicing over 200 electric utilities. Our comprehensive suite of energy solutions now includes
siting, permitting, engineering, designing, planning, constructing, maintaining and repairing power
delivery systems, including renewable energy projects. We currently operate our business as one
reportable segment.
To date, we have not had operations or assets outside of the United States. During our first
quarter of fiscal 2011, we, along with a joint service provider, were awarded approximately $84.0
million in distribution overhead powerline projects in Tanzania. These projects will utilize our
engineering, procurement and construction capabilities. The project is expected to begin during
the third quarter of fiscal 2011 and continue through the second quarter of fiscal 2013. We
continue to explore other international opportunities.
We monitor revenue by two categories of services: core and storm restoration. We use this
breakdown because core services represent ongoing service revenues, most of which are generated by
our customers recurring maintenance needs, and storm restoration revenues represent additional
revenue opportunities that depend on weather conditions.
The table below sets forth our revenues by category of service for the periods indicated:
Three Months Ended | ||||||||||||||||
September 30, | ||||||||||||||||
2010 | 2009 | |||||||||||||||
Core services |
$ | 123,778 | 96.1 | % | $ | 124,713 | 98.0 | % | ||||||||
Storm restoration services |
4,981 | 3.9 | % | 2,507 | 2.0 | % | ||||||||||
Total |
$ | 128,759 | 100.0 | % | $ | 127,220 | 100.0 | % | ||||||||
4
Table of Contents
3. Acquisition of Klondyke
On June 30, 2010, we acquired Klondyke Construction LLC (Klondyke) based in Phoenix, AZ, for
a price of $17,000 ($15,157 net of cash acquired), plus the assumption of certain operating
liabilities. Klondyke provides construction and maintenance services primarily associated with
electric substation, transmission and distribution infrastructure. Klondyke also constructs
renewable energy generation facilities. Klondykes range of construction services complements our
west coast engineering capabilities and enables the continued expansion of turnkey EPC
(engineering, procurement and construction) services.
The purchase price of approximately $17,000 has been allocated to the assets acquired and
liabilities assumed at the effective date of the acquisition based on estimated fair values as
follows: $6,348 of tangible net assets and $2,000 in identifiable intangible assets, resulting in
goodwill of approximately $8,652. The allocation of the purchase price remains preliminary as
management continues to assess the valuation of the acquired assets and liabilities. The goodwill
recognized is attributable primarily to expected synergies and the assembled workforce, and is
expected to be amortizable for tax purposes.
The financial results of the operations of Klondyke have been included in our consolidated
financial statements since the date of the acquisition. The following unaudited pro forma
statement of income data gives effect to the acquisition of Klondyke as if it had occurred on July
1, 2009. The pro forma results are not necessarily indicative of what actually would have occurred
had the acquisition been in effect for the periods presented.
Three months ended | ||||||||
September 30, | ||||||||
2010 | 2009 | |||||||
Revenues |
$ | 128,759 | $ | 138,566 | ||||
Net loss |
$ | (2,290 | ) | $ | (2,328 | ) | ||
Basic loss per common share |
$ | (0.07 | ) | $ | (0.07 | ) | ||
Diluted loss per common share |
$ | (0.07 | ) | $ | (0.07 | ) | ||
4. Stock-Based Compensation
Compensation expense related to stock-based compensation plans was $1,063 and $1,083 for the
three months ended September 30, 2010 and September 30, 2009, respectively. The income tax benefit
recognized for stock-based compensation arrangements was $415 and $423 for the three months ended
September 30, 2010 and September 30, 2009, respectively.
5. Property and Equipment
Amounts reported as loss on sale and impairment of property and equipment relate primarily to
aging, damaged or excess fleet equipment. Assets held for sale are recorded at the lower of
carrying value or fair value, less selling costs. Fair value for this purpose is generally
determined based on prices in the used equipment market. Assets held for sale totaled $788 and
$898 at September 30, 2010 and June 30, 2010, respectively, and are included in prepaid expenses
and other in the condensed consolidated balance sheets. Substantially all of the assets held for
sale at September 30, 2010 are expected to be sold in the next twelve months.
5
Table of Contents
6. Debt
On August 30, 2010, we entered into an amendment to our senior credit facility, which: (i)
amended the required leverage ratio to be no more than 3.75 to 1.00 for the fiscal quarters ending
June 30, 2010 through March 31, 2011 and 3.25 to 1.00 for the fiscal quarter ending June 30, 2011
and thereafter; (ii) waived non-compliance with the leverage ratio covenant prior to giving effect
to the foregoing amendment with regard to the quarter ending June 30, 2010; and (iii) added
Qualified Remedial Expenses (as defined in the first amendment) into the calculation of adjusted
EBITDA in our senior credit facility. We paid and capitalized $991 of fees related to the
amendment that are being amortized on an effective interest basis as part of interest expense over
the remaining term of our senior credit facility.
7. Loss Per Share
The following table sets forth the calculations of basic and diluted loss per share:
Three Months Ended | ||||||||
September 30, | ||||||||
2010 | 2009 | |||||||
Basic: |
||||||||
Net loss |
$ | (2,290 | ) | $ | (2,705 | ) | ||
Weighted average common shares |
33,272 | 33,077 | ||||||
Basic loss per share |
$ | (0.07 | ) | $ | (0.08 | ) | ||
Diluted: |
||||||||
Net loss |
$ | (2,290 | ) | $ | (2,705 | ) | ||
Weighted average common shares |
33,272 | 33,077 | ||||||
Potential common stock arising from stock
options and restricted stock |
| | ||||||
Weighted average common shares diluted |
33,272 | 33,077 | ||||||
Diluted loss per share |
$ | (0.07 | ) | $ | (0.08 | ) | ||
All outstanding options and restricted stock awards were excluded from the calculation of
diluted earnings per share for both the three months ended September 30, 2010 and 2009,
respectively, because their effect would have been anti-dilutive.
8. Fair Value of Financial Instruments
Fair value rules currently apply to all financial assets and liabilities and for certain
nonfinancial assets and liabilities that are required to be recognized or disclosed at fair value
on a recurring basis. For this purpose, fair value is defined as the price that would be received
to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. Valuation techniques used to measure fair value must
maximize the use of observable inputs and minimize the use of unobservable inputs.
There is a three-tier fair value hierarchy, which prioritizes the inputs used in measuring
fair value. These tiers include:
| Level 1 Valuations based on quoted prices in active markets for identical instruments that we are able to access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment. | ||
| Level 2 Valuations based on quoted prices in active markets for instruments that are similar, or quoted prices in markets that are not active for identical or similar instruments, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. | ||
| Level 3 Valuations based on inputs that are unobservable and significant to the overall fair value measurement. |
6
Table of Contents
As of September 30, 2010, we held certain items that are required to be measured at fair value
on a recurring basis. These included interest rate derivative instruments and diesel fuel
derivative instruments. Derivative instruments are used to hedge a portion of our diesel fuel
costs and our exposure to interest rate fluctuations. These derivative instruments currently
consist of swaps only. See Note 10 for further information on our derivative instruments and
hedging activities.
Our interest rate derivative instruments and diesel fuel derivative instruments consist of
over-the-counter contracts, which are not traded on a public exchange. The fair values for our
interest rate swaps and diesel fuel swaps are based on current settlement values and represent the
estimated amount we would have received or paid upon termination of these agreements. The fair
values are derived using pricing models that rely on market observable inputs such as yield curves
and commodity forward prices, and therefore are classified as Level 2. We also consider
counterparty credit risk in our determination of all estimated fair values. We have consistently
applied these valuation techniques in all periods presented.
At September 30, 2010 and June 30, 2010, both the carrying amounts and fair values for our
interest rate swaps and diesel fuel swaps were as follows:
September 30, | ||||||||||||||||
Description | 2010 | Level 1 | Level 2 | Level 3 | ||||||||||||
Asset: |
||||||||||||||||
Diesel fuel swap agreements |
$ | 435 | $ | | $ | 435 | $ | | ||||||||
Liability: |
||||||||||||||||
Interest rate swap agreements |
(446 | ) | | (446 | ) | | ||||||||||
Total |
$ | (11 | ) | $ | | $ | (11 | ) | $ | | ||||||
Description | June 30, 2010 | Level 1 | Level 2 | Level 3 | ||||||||||||
Asset: |
||||||||||||||||
Diesel fuel swap agreements |
$ | 3 | $ | | $ | 3 | $ | | ||||||||
Liability: |
||||||||||||||||
Interest rate swap agreements |
(245 | ) | | (245 | ) | | ||||||||||
Total |
$ | (242 | ) | $ | | $ | (242 | ) | $ | | ||||||
The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable
approximate fair values due to the short-term nature of these instruments. The carrying value of
our debt approximates fair value based on the market-determined, variable interest rates.
Assets and liabilities that are measured at fair value on a nonrecurring basis include
reporting units valued in connection with annual and interim goodwill impairment testing and assets
held for sale. For goodwill impairment testing we rely primarily on a discounted cash flow
approach using Level 3 inputs. This approach requires significant estimates and judgmental
factors, including revenue growth rates, terminal values, and weighted average cost of capital,
which is used to discount future cash flows. Assets held for sale are valued using Level 2 inputs,
primarily observed prices for similar assets in the used equipment market.
9. Income Taxes
Effective income tax rates of 37.3% and 37.9% for the three months ended September 30, 2010
and 2009, respectively, varied from the statutory federal income tax rate of 35% primarily as a
result of the effect of state income taxes.
7
Table of Contents
10. Derivative Instruments and Hedging Activities
All derivative instruments are recorded on the consolidated balance sheets at their respective
fair values. Changes in fair value are recognized either in income (loss) or other comprehensive
income (loss) (OCI), depending on whether the transaction qualifies for hedge accounting and, if
so, the nature of the underlying exposure being hedged and how effective the derivatives are at
offsetting price movements in the underlying exposure. The effective portions recorded in OCI are
recognized in the statement of operations when the hedged item affects earnings.
We have used certain derivative instruments to enhance our ability to manage risk relating to
diesel fuel and interest rate exposure. Derivative instruments are not entered into for trading or
speculative purposes. We document all relationships between derivative instruments and related
items, as well as our risk-management objectives and strategies for undertaking various derivative
transactions.
Interest Rate Risk
We are exposed to market risk related to changes in interest rates on borrowings under our
senior credit facility, which bears interest based on LIBOR, plus an applicable margin dependent
upon our total leverage ratio. We use derivative financial instruments to manage exposure to
fluctuations in interest rates on our senior credit facility.
Effective December 2007, we entered into two interest rate swap agreements (the 2007 Swaps)
with a total notional amount of $100,000 to help manage a portion of our interest risk related to
our floating-rate debt interest risk. The 2007 Swaps expired in December 2009. Under both 2007
Swap agreements, we paid a fixed rate of 3.99% and received a rate equivalent to the thirty-day
LIBOR, adjusted monthly. The 2007 swaps qualified for hedge accounting and were designated as cash
flow hedges. There was no hedge ineffectiveness for the 2007 Swaps for the three months ended
September 30, 2009. The 2007 Swaps expired in December 2009.
Effective May 2010, we entered into an interest rate swap agreement (the May 2010 Swap) with
a notional amount of $20,000 to help manage a portion of our interest risk related to our
floating-rate debt interest risk. The May 2010 Swap will expire in May 2012. Under the May 2010
Swap agreement, we pay a fixed rate of 1.1375% and receive a rate equivalent to the thirty-day
LIBOR, adjusted monthly. The May 2010 swap qualified for hedge accounting and was designated as a
cash flow hedge. There was no hedge ineffectiveness for the May 2010 Swap for the three months
ended September 30, 2010.
Effective June 2010, we entered into an interest rate swap agreement (the June 2010 Swap)
with a notional amount of $20,000 to help manage a portion of our interest risk related to our
floating-rate debt interest risk. The June 2010 Swap will expire in June 2012. Under the June
2010 Swap agreement, we pay a fixed rate of 1.0525% and receive a rate equivalent to the thirty-day
LIBOR, adjusted monthly. The June 2010 swap qualified for hedge accounting and was designated as a
cash flow hedge. There was no hedge ineffectiveness for the June 2010 Swap for the three months
ended September 30, 2010.
The net derivative income (loss) recorded in OCI will be reclassified into earnings over the
term of the underlying cash flow hedge. The amount that will be reclassified into earnings will
vary depending upon the movement of the underlying interest rates. As interest rates decrease, the
charge to earnings will increase. Conversely, as interest rates increase, the charge to earnings
will decrease.
Diesel Fuel Risk
We have a large fleet of vehicles and equipment that primarily uses diesel fuel. As a result,
we have market risk for changes in diesel fuel prices. If diesel prices rise, our gross profit and
operating income (loss) would be negatively affected due to additional costs that may not be fully
recovered through increases in prices to customers.
We periodically enter into diesel fuel swaps to decrease our price volatility. As of
September 30, 2010, we had hedged approximately 50% of our next 12 months of projected diesel fuel
purchases at prices ranging from $2.76 to $3.26 per gallon at a weighted-average price of $3.06.
We are not currently utilizing hedge accounting for any active diesel fuel derivatives.
8
Table of Contents
Balance Sheet and Statement of Operations Information
The fair value of derivatives at September 30, 2010 and June 30, 2010 is summarized below:
Asset Derivatives | Liability Derivatives | |||||||||||||||||||
Fair Value | Fair Value | Fair Value | Fair Value | |||||||||||||||||
at Sept. 30, | at June 30, | at Sept. 30, | at June 30, | |||||||||||||||||
Balance Sheet Location | 2010 | 2010 | 2010 | 2010 | ||||||||||||||||
Derivatives designated as hedging
instruments: |
||||||||||||||||||||
Interest rate swaps |
Accrued expenses and other | $ | | $ | | $ | 446 | $ | 245 | |||||||||||
Total derivatives designated as
hedging instruments under SFAS 133 |
$ | | $ | | $ | 446 | $ | 245 | ||||||||||||
Derivatives not designated as hedging
instruments: |
||||||||||||||||||||
Diesel fuel swaps (gross) (1) |
Prepaid expenses and other | $ | 456 | $ | 169 | $ | | $ | | |||||||||||
Diesel fuel swaps (gross) (1) |
Accrued expenses and other | | | 21 | 166 | |||||||||||||||
Total derivatives not designated as hedging instruments under SFAS 133 |
$ | 456 | $ | 169 | $ | 21 | $ | 166 | ||||||||||||
Total derivatives |
$ | 456 | $ | 169 | $ | 467 | $ | 411 | ||||||||||||
(1) | The fair values of asset and liability derivatives with the same counterparty are netted on the balance sheet. |
The effects of derivative instruments on the condensed consolidated statements of operations
for the three months ended September 30, 2010 and 2009 are summarized in the following tables:
Derivatives designated as cash flow hedging instruments:
Amount of Loss | ||||||||||||||||||||
Amount of (Loss) Gain | Location of Loss | Reclassified from | ||||||||||||||||||
Recognized in OCI | Reclassified from | Accumulated OCI into | ||||||||||||||||||
For the Three Months Ended | (Effective Portion) | Accumulated OCI | Earnings | |||||||||||||||||
September 30, | 2010 | 2009 | into Earnings | 2010 | 2009 | |||||||||||||||
Interest rate swaps (1) |
$ | (122 | ) | $ | 533 | Interest expense (1) | $ | (49 | ) | $ | (575 | ) | ||||||||
Totals |
$ | (122 | ) | $ | 533 | $ | (49 | ) | $ | (575 | ) | |||||||||
(1) | Net of tax. |
Derivatives not designated as cash flow hedging instruments:
Location of Gain | Amount of Gain Recognized in | |||||||||||
For the Three Months Ended | Recognized in | Earnings | ||||||||||
September 30, | Earnings | 2010 | 2009 | |||||||||
Diesel fuel swaps |
Cost of operations | $ | 432 | $ | 368 | |||||||
Total |
$ | 432 | $ | 368 | ||||||||
9
Table of Contents
Accumulated OCI
For the interest rate swaps, the following table summarizes the net derivative gains or
losses, net of taxes, recorded into accumulated OCI and reclassified to loss for the periods
indicated below.
For the Three Months Ended | ||||||||
September 30, | ||||||||
2010 | 2009 | |||||||
Net accumulated derivative loss deferred at beginning of period |
$ | (142 | ) | $ | (1,109 | ) | ||
Changes in fair value |
(179 | ) | (42 | ) | ||||
Reclassification to net loss |
49 | 575 | ||||||
Net accumulated derivative loss deferred at end of period |
$ | (272 | ) | $ | (576 | ) | ||
The estimated net amount of the existing losses in OCI at September 30, 2010 expected to be
reclassified into net income (loss) over the next twelve months is approximately $200. This amount
was computed using the fair value of the cash flow hedges at September 30, 2010 and will differ
from actual reclassifications from OCI to net income (loss) during the next twelve months.
For the three months ended September 30, 2010 and 2009, there were no reclassifications to
earnings due to hedged firm commitments no longer deemed probable or due to hedged forecasted
transactions that had not occurred by the end of the originally specified time period.
11. Comprehensive Loss
The components of comprehensive loss were as follows for the periods presented:
For the Three Months Ended | ||||||||
September 30, | ||||||||
2010 | 2009 | |||||||
Net loss |
$ | (2,290 | ) | $ | (2,705 | ) | ||
Change in fair value of interest rate
cash flow hedges,
net of income taxes of ($78) and
$342, respectively |
(130 | ) | 533 | |||||
Comprehensive loss |
$ | (2,420 | ) | $ | (2,172 | ) | ||
12. Recent Accounting Pronouncements
Disclosures for Fair Value Measurements
In January 2010, the FASB issued new guidance which requires additional disclosures for
recurring and nonrecurring fair value measurements and clarifies certain existing disclosure
requirements. These additional disclosures include: amounts and reasons for significant transfers
between Level 1 and Level 2 of the fair value hierarchy; reasons for significant transfers in and
out of Level 3 of the fair value hierarchy; and information about purchases, sales, issuances and
settlements on a gross basis in the reconciliation of recurring Level 3 measurements.
The clarification of existing fair value disclosure requirements include the requirement for
entities to disclose information about both the inputs and valuation techniques used in estimating
Level 2 and Level 3 fair value measurements and to provide disclosures for fair value measurements
for each class of assets and liabilities. The requirements of this guidance were effective for
periods beginning after December 15, 2009, with the exception of the requirement of information
about purchases, sales, issuances and settlements of Level 3 measurements, which becomes effective
for periods ending after December 15, 2010. We do not expect this new guidance to have a material
impact on our consolidated financial statements.
10
Table of Contents
13. Commitments and Contingencies
Legal Proceedings
We are from time to time a party to various lawsuits, claims and other legal proceedings that
arise in the ordinary course of business. These actions typically seek, among other things: (i)
compensation for alleged personal injury, workers compensation, employment discrimination, breach
of contract or property damage, (ii) punitive damages, civil penalties or other damages, or (iii)
injunctive or declaratory relief. With respect to all such lawsuits, claims and proceedings, we
accrue reserves when it is probable that a liability has been incurred and the amount of loss can
be reasonably estimated. We do not believe that any of these proceedings, individually or in the
aggregate, would be expected to have a material adverse effect on our results of operations,
financial position or cash flows.
Performance Bonds and Parent Guarantees
In the ordinary course of business, we are required by certain customers to post surety or
performance bonds in connection with services that we provide to them. These bonds provide a
guarantee to the customer that we will perform under the terms of a contract and that we will pay
subcontractors and vendors. If we fail to perform under a contract or to pay subcontractors and
vendors, the customer may demand that the surety make payments or provide services under the bond.
We must reimburse the surety for any expenses or outlays it incurs. As of September 30, 2010, we
had $138,770 in surety bonds outstanding and we also had provided collateral in the form of letters
of credit to sureties in the amount of $2,000. To date, we have not been required to make any
reimbursements to our sureties for bond-related costs. We believe that it is unlikely that we will
have to fund significant claims under our surety arrangements in the foreseeable future. Pike
Electric Corporation, from time to time, guarantees the obligations of its wholly owned
subsidiaries, including obligations under certain contracts with customers.
Collective Bargaining Agreements
With the acquisition of Klondyke (Note 3), we are now party to various collective bargaining
agreements with various unions representing craftworkers performing field construction operations.
The agreements require Klondyke to pay specified wages, provide certain benefits to its union
employees and contribute certain amounts to multi-employer pension plans and employee benefit
trusts. If Klondyke withdrew from, or otherwise terminated participation in, one or more
multi-employer pension plans or the plans were to otherwise become underfunded, Klondyke could be
assessed liabilities for additional contributions related to the underfunding of these plans. We
do not believe that this potential underfunded liability would have a material adverse effect on
our results of operations, financial position or cash flows. The collective bargaining agreements
expire at various times and have typically been renegotiated and renewed on terms similar to the
ones contained in the expiring agreements.
Indemnities
We have indemnified various parties against specified liabilities that those parties might
incur in the future in connection with our previous acquisitions of certain companies. We also
generally indemnify our customers for the services we provide under our contracts, as well as other
specified liabilities, which may subject us to indemnity claims and liabilities and related
litigation. As of September 30, 2010, we were not aware of circumstances that would lead to future
indemnity claims against us for material amounts in connection with these indemnity obligations.
11
Table of Contents
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations
should be read in conjunction with our consolidated financial statements and related
notes thereto in this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for this
fiscal year ended June 30, 2010. The discussion below contains forward-looking statements that are based upon our current expectations and are subject to
uncertainty and changes in circumstances. Actual results may differ materially from these
expectations due to inaccurate assumptions and known or unknown risks and uncertainties, including
those identified in Uncertainty of Forward-Looking Statements and Information below in this Item 2 and in Risk Factors in Item 1A of Part 1
of our Annual Report on Form 10-K for the fiscal year ended June 30, 2010.
Overview
We are one of the largest providers of energy solutions for investor-owned, municipal and
co-operative utilities in the United States. Since our founding in 1945, we have evolved from our
roots as a specialty non-unionized contractor for electric utilities focused on the distribution
sector in the southeastern United States to a leading turnkey energy solutions provider throughout
the United States with diverse capabilities servicing over 200 electric utilities, including
American Electric Power, Dominion, Duke Energy, Duquesne Light, E.On, Florida Power & Light, Los
Angeles Department of Water and Power, PacifiCorp, Progress Energy, and Southern Company.
Leveraging our core competencies as a company primarily focused on providing a broad range of
electric infrastructure services principally for utilities customers, we believe our experienced
management team has positioned us to benefit from the substantial long term growth drivers in our
industry.
Over the past three years, we have reshaped our business platform and territory significantly
from being a distribution construction company based primarily in the southeastern United States to
a national energy solutions provider. We have done this organically and through strategic
acquisitions of companies with complementary service offerings and geographic footprints. Our
comprehensive suite of energy solutions now includes siting, permitting, engineering, designing,
planning, constructing, maintaining and repairing power delivery systems, including renewable
energy projects. Our planning and siting process leverages technology and the collection of
environmental, cultural, land use and scientific data to facilitate successful right-of-way
negotiations and permitting for transmission and distribution construction projects, powerlines,
substations and renewable energy installations. Our engineering and design capabilities include
designing, providing EPC services, owner engineering, project management, multi-entity
coordination, grid integration, electrical balance-of-plant (BOP) and system planning for
individual or turnkey powerline, substation and renewable energy projects. Our construction and
maintenance capabilities include substation, distribution (underground and overhead) and
transmission with voltages up to 345 kV. We are also a recognized leader in storm restoration due
to our ability to rapidly mobilize thousands of existing employees and equipment within 24 hours,
while maintaining a functional workforce for unaffected customers.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations are based on
our condensed consolidated financial statements, which have been prepared in accordance with U.S.
GAAP. The preparation of these financial statements requires management to make certain estimates
and assumptions for interim financial information that affect the amounts reported in the financial
statements and accompanying notes. On an ongoing basis, we evaluate these estimates and
assumptions, including those related to revenue recognition for work in progress, allowance for
doubtful accounts, self-insured claims liability, valuation of goodwill and other intangible
assets, asset lives and salvage values used in computing depreciation and amortization, including
amortization of intangibles, and accounting for income taxes, contingencies, litigation and
stock-based compensation. Application of these estimates and assumptions requires the exercise of
judgment as to future uncertainties and, as a result, actual results could differ from these
estimates. Please refer to Managements Discussion and Analysis of Financial Condition and
Results of Operations Critical Accounting Policies included in our Annual Report on Form 10-K
for the year ended June 30, 2010 for further information regarding our critical accounting policies
and estimates.
12
Table of Contents
Results of Operations
The following table sets forth selected statements of operations data as approximate
percentages of revenues for the periods indicated:
Three Months Ended | ||||||||
September 30, | ||||||||
2010 | 2009 | |||||||
Revenues: |
||||||||
Core services |
96.1 | % | 98.0 | % | ||||
Storm restoration services |
3.9 | % | 2.0 | % | ||||
Total |
100.0 | % | 100.0 | % | ||||
Cost of operations |
90.9 | % | 90.8 | % | ||||
Gross profit |
9.1 | % | 9.2 | % | ||||
General and administrative expenses |
10.5 | % | 10.3 | % | ||||
Loss on sale and impairment of property and equipment |
0.1 | % | 0.5 | % | ||||
Loss from operations |
-1.5 | % | -1.6 | % | ||||
Interest expense and other, net |
1.3 | % | 1.8 | % | ||||
Loss before income taxes |
-2.8 | % | -3.4 | % | ||||
Income tax benefit |
-1.0 | % | -1.3 | % | ||||
Net loss |
-1.8 | % | -2.1 | % | ||||
Three Months Ended September 30, 2010 Compared to Three Months Ended September 30, 2009
Revenues. Revenues increased 1.2%, or $1.6 million, to $128.8 million for the three months
ended September 30, 2010 from $127.2 million for the three months ended September 30, 2009. The
increase was attributable to a $2.5 million increase in storm restoration revenues, partially
offset by a $0.9 million decrease in core revenues.
Storm restoration revenues increased to $5.0 million for the three months ended September 30,
2010 from $2.5 million for the three months ended September 30, 2009. Our storm restoration
revenues are highly volatile and unpredictable.
Our core revenues decreased slightly to $123.8 million for the three months ended September
30, 2010 from $124.7 million for the same period in the prior year. Our acquisition of Klondyke on
June 30, 2010 provided $4.2 million in core revenues for the quarter ($1.5 million for overhead
distribution, $1.5 million for transmission and $1.2 million for substation). On a combined basis,
our core distribution revenues decreased 2.5% from the prior year and continue to be negatively
affected by depressed utility distribution maintenance spending in our service territory and, for
underground distribution, continued housing and commercial construction weakness in our service
territory. Our new diversified engineering and substation services continue to produce increased
revenues and we expect that trend to continue in the future. However, engineering and substation
revenues may fluctuate due to the timing of material procurement revenues. Also, we expect our
transmission revenues to continue to increase year over year notwithstanding the slight
year-over-year decline for the three months ended September 30, 2010, but revenues may vary period
to period due to the timing of work on significant projects. The following table contains
information on revenue and percentage changes by category for the periods indicated:
Three Months Ended | ||||||||||||
September 30, | ||||||||||||
Category of Core Revenue | 2010 | 2009 | % Change | |||||||||
Overhead distribution and other |
$ | 68.4 | $ | 70.7 | -3.3 | % | ||||||
Underground distribution |
17.2 | 17.0 | 1.0 | % | ||||||||
Transmission |
17.8 | 18.1 | -1.3 | % | ||||||||
Engineering and substation |
20.4 | 18.9 | 7.9 | % | ||||||||
Total |
$ | 123.8 | $ | 124.7 | -0.7 | % | ||||||
13
Table of Contents
The majority of our distribution services are provided to investor-owned, municipal and
co-operative utilities under master service agreements (MSAs). Services provided under these
MSAs include both overhead and
underground powerline distribution services and transmission maintenance. Our MSAs do not
guarantee a minimum volume of work. The MSAs provide a framework for core and storm restoration
pricing and provide an outline of the service territory in which we will work or the percentage of
overall outsourced distribution work we will provide for the customer. Our MSAs also provide a
platform for multi-year relationships with our customers. We can easily ramp up staffing for a
customer without exhaustive contract negotiations and the MSAs also allow our customers to reduce
staffing needs.
Our underground distribution services continue to be impacted by a weak market for new
residential housing. We began experiencing a decline in underground distribution service revenue
in our first fiscal quarter of 2008. Many residential developments utilize underground
distribution powerlines for aesthetic reasons and the underground powerlines can be put in place
with required cable, phone or gas lines. Continued challenging economic conditions have also
caused our customers to reduce overhead distribution maintenance spending. Reducing maintenance
expenditures is an action taken by our customers to improve short-term cash flow and operating
results. We believe that a significant amount of pent-up demand is building and has been building
for the last 24 months and power system reliability is being challenged. We believe we remain well
positioned to benefit from a reacceleration in distribution maintenance spending, the timing of
which remains dependent primarily on the health of the broader economy.
Gross Profit. Gross profit was unchanged at $11.7 million for both the three months ended
September 30, 2010 and September 30, 2009. Gross profit as a percentage of revenues decreased
marginally to 9.1% for the three months ended September 30, 2010 from 9.2% for the same period in
the prior year. Our gross profit was positively impacted by our higher storm restoration
revenues. Offsetting this positive impact was a $2.0 million reduction of costs and estimated
earnings in excess of billings on uncompleted contracts during the quarter ended September 30, 2010
that relates to prior periods (see Note 1 in our Notes to Condensed Consolidated Financial
Statements). In addition, we had an increase in crew start-up costs that was caused by additions
to our overhead distribution headcount, which caused us to absorb costs related to the release of
certain tools and supplies from inventory and the acquisition of certain new tools. Furthermore,
we attempt to use excess fleet equipment to start new crews. Some of this equipment required
significant repairs and maintenance before being put back into service.
General and Administrative Expenses. General and administrative expenses increased 3.3% to
$13.6 million for the three months ended September 30, 2010 from $13.1 million for the three months
ended September 30, 2009. As a percentage of revenues, general and administrative expenses
increased to 10.5% for the three months ended September 30, 2010 from 10.3% for the same period in
the prior year. The increase in general and administrative expenses was primarily due to the
approximately $0.8 million of overhead costs related to Klondyke, which was acquired on June 30,
2010.
Loss on Sale and Impairment of Property and Equipment. Loss on sale and impairment of property
and equipment was $0.1 million for the three months ended September 30, 2010 compared to $0.6
million for the three months ended September 30, 2009. The level of losses is affected by several
factors, including the timing of the continued replenishment of aging, damaged or excess fleet
equipment, and conditions in the market for used equipment. We continually evaluate the
depreciable lives and salvage values of our equipment.
Interest Expense and Other, Net. Interest expense and other, net decreased 27.3% to
$1.7 million for the quarter ended September 30, 2010 from $2.3 million for the quarter ended
September 30, 2009. This decrease was primarily due to reduced settlement costs related to
interest rate swaps and reduced debt balances. See Note 10 of Notes to Consolidated Financial
Statements for full details of derivative instruments, including interest rate swaps.
14
Table of Contents
Income Tax Benefit. The income tax benefit was $1.4 million and $1.7 million for the three
months ended September 30, 2010 and September 30, 2009, respectively. The effective tax rate was
37.3% and 37.9% for the three months ended September 30, 2010 and September 30, 2009, respectively.
Liquidity and Capital Resources
Our
primary cash needs have been for working capital, capital
expenditures, payment under our senior credit facility and
acquisitions. Our primary
source of cash for both the three months ended September 30, 2010 and 2009 was cash provided by
operations.
We need working capital to support seasonal variations in our business, primarily due to the
impact of weather conditions on the electric infrastructure and the corresponding spending by our
customers on electric service and repairs. The increased service activity during storm restoration
events temporarily causes an excess of customer billings over customer collections, leading to
increased accounts receivable during those periods. In the past, we have utilized borrowings under
the revolving portion of our senior credit facility to satisfy normal cash needs during these
periods.
As
of September 30, 2010, our cash totaled $5.8 million and we
had $89.4 million available under the $115.0 million revolving portion of our senior credit facility (after giving effect to
the outstanding balance of $25.6 million of standby letters of credit). This borrowing
availability is subject to, and potentially limited by, our compliance with the covenants of our
senior credit facility, which are described below.
To date, recent distress in the financial markets has not had a significant impact on our
financial position. We consider our cash investment policies to be conservative in that we
maintain a diverse portfolio of what we believe to be high-quality cash investments with short-term
maturities. Accordingly, we do not expect that the current volatility in the capital markets will
have a material impact on the principal amounts of our cash investments.
We believe that our cash flow from operations, available cash and cash equivalents, and
borrowings available under our senior credit facility will be adequate to meet our ordinary course
liquidity needs for the foreseeable future. However, we expect our ability to satisfy our
obligations or to fund planned capital expenditures will depend on our future performance, which to
a certain extent is subject to general economic, financial, competitive, legislative, regulatory
and other factors beyond our control. In addition, if we fail to comply with the covenants
contained in our senior credit facility, we may be unable to access the revolving portion of our
senior credit facility upon which we depend for letters of credit and other short-term borrowings.
This would have a negative impact on our liquidity and require us to obtain alternative short-term
financing. We also believe that if we pursue any material acquisitions in the foreseeable future
we may need to finance this activity through additional equity or debt financing.
Changes in Cash Flows:
Three Months Ended | ||||||||
September 30, | ||||||||
2010 | 2009 | |||||||
(In millions) | ||||||||
Net cash provided by operating activities |
$ | 2.5 | $ | 5.1 | ||||
Net cash used in investing activities |
$ | (2.9 | ) | $ | (3.8 | ) | ||
Net cash used in financing activities |
$ | (5.0 | ) | $ | (2.7 | ) |
Net cash provided by operating activities decreased to $2.5 million for the three months ended
September 30, 2010 from $5.1 million for the three months ended September 30, 2009. The decrease
in operating cash flows was primarily due to the timing of working capital requirements.
15
Table of Contents
Net cash used in investing activities decreased to $2.9 million for the three months ended
September 30, 2010 from $3.8 million for the three months ended September 30, 2009. Capital
expenditures for both periods consisted primarily of purchases of vehicles and equipment used to
service our customers. For the three months ended September 30, 2009, capital expenditures also
included software purchases for both the implementation of our human resource and payroll system
and toward the implementation of our job cost reporting and billings system.
Net cash used in financing activities increased to $5.0 million for the three months ended
September 30, 2010 from $2.7 million for the three months ended September 30, 2009. Financing
activities for the three months ended September 30, 2010 included $3.5 million of term loan
payments and $1.0 million of fees associated with an amendment to our senior credit facility. Our
cash used in financing activities during the three months ended September 30, 2009 was primarily
related to $2.8 million of fees associated with the July 29, 2009 closing of our senior credit
facility.
Senior Credit Facility
As of September 30, 2010, we had $111.0 million of term loans outstanding under our senior
credit facility. As of September 30, 2010, our borrowing availability under the $115.0 million
revolving portion of our senior credit facility was $89.4 million (after giving effect to the
outstanding balance of $25.6 million of outstanding standby letters of credit). This borrowing
availability is subject to, and potentially limited by, our compliance with the covenants of our
senior credit facility. The obligations under our senior credit facility are unconditionally
guaranteed by us and each of our existing and subsequently acquired or organized subsidiaries
(other than Pike Electric, LLC, which is a borrower under the facility) and secured on a
first-priority basis by security interests (subject to permitted liens) in substantially all assets
owned by us, Pike Electric, LLC and each of our other subsidiaries, subject to limited exceptions.
On August 30, 2010, we entered into an amendment to our senior credit facility, which: (i)
amended the required leverage ratio to be no more than 3.75 to 1.00 for the fiscal quarters ending
June 30, 2010 through March 31, 2011 and 3.25 to 1.00 for the fiscal quarter ending June 30, 2011
and thereafter; (ii) waived non-compliance with the leverage ratio covenant prior to giving effect
to the foregoing amendment with regard to the quarter ending June 30, 2010; and (iii) added
Qualified Remedial Expenses (as defined in the first amendment) into the calculation of adjusted
EBITDA under our senior credit facility. We paid and capitalized $1.0 million of fees related to
the amendment that are being amortized on an effective interest basis as part of interest expense
over the remaining term of our senior credit facility.
Our senior credit facility contains a number of affirmative and restrictive covenants
including limitations on mergers, consolidations and dissolutions, sales of assets, investments and
acquisitions, indebtedness and liens, and other restricted payments. Under our senior credit
facility, we are permitted to incur maximum capital expenditures of $70.0 million in fiscal 2011
and in any fiscal year thereafter, subject to a one year carry-forward of 50% of the unused amount
from the previous fiscal year. In addition, our senior credit facility includes a requirement that
we maintain: (i) a leverage ratio, which is the ratio of total debt to adjusted EBITDA (as defined
in our senior credit facility; measured on a trailing four-quarter basis), of no more than 3.75 to
1.0 as of the last day of each fiscal quarter, declining to 3.25 on June 30, 2011 and thereafter,
and (ii) a cash interest coverage ratio, which is the ratio of adjusted EBITDA (as defined in our
senior credit facility; measured on a trailing four-quarter basis) to cash interest expense
(measured on a trailing four-quarter basis) of at least 3.5 to 1.0 as of the last day of each
fiscal quarter. We were in compliance with all of our debt covenants as of September 30, 2010,
included those noted above, with a leverage ratio of 2.79 to 1.00 and a cash interest coverage
ratio of 7.78 to 1.00.
We repaid $3.5 million of term loans outstanding under our senior credit facility during the
three months ended September 30, 2010 with cash provided by operations and cash on hand.
Concentration of Credit Risk
We are subject to concentrations of credit risk related primarily to our cash and cash
equivalents and accounts receivable. We maintain substantially all of our cash investments with
what we believe to be high credit quality financial institutions. We grant credit under normal
payment terms, generally without collateral, to our customers, which include electric power
companies, governmental entities, general contractors and builders, owners and managers of
commercial and industrial properties located in the United States. Consequently, we are subject to
potential credit risk related to changes in business and economic factors throughout the United
States. However, we generally have certain statutory lien rights with respect to services
provided.
16
Table of Contents
Legal Proceedings
We are from time to time a party to various lawsuits, claims and other legal proceedings that
arise in the ordinary course of business. These actions typically seek, among other things: (i)
compensation for alleged personal injury, workers compensation, employment discrimination, breach
of contract, or property damage, (ii) punitive damages, civil penalties or other damages, or (iii)
injunctive or declaratory relief. With respect to all such lawsuits, claims and proceedings, we
accrue reserves when it is probable that a liability has been incurred and the amount of loss can
be reasonably estimated. We do not believe that any of these proceedings, individually or in the
aggregate, would be expected to have a material adverse effect on our results of operations,
financial position or cash flows.
Off-Balance Sheet Arrangements
As is common in our industry, we have entered into certain off-balance sheet arrangements in
the ordinary course of business that result in risks not directly reflected in our balance sheets.
Our significant off-balance sheet transactions include liabilities associated with non-cancelable
operating leases, letter of credit obligations, and surety guarantees entered into in the normal
course of business. We have not engaged in any off-balance sheet financing arrangements through
special purpose entities.
Letters of Credit
Certain of our vendors require letters of credit to ensure reimbursement for amounts they are
disbursing on our behalf. In addition, from time to time some customers require us to post letters
of credit to ensure payment to our subcontractors and vendors under those contracts and to
guarantee performance under our contracts. Such letters of credit are generally issued by a bank
or similar financial institution. The letter of credit commits the issuer to pay specified amounts
to the holder of the letter of credit if the holder claims that we have failed to perform specified
actions. If this were to occur, we would be required to reimburse the issuer of the letter of
credit. Depending on the circumstances of such a reimbursement, we may also have to record a
charge to earnings for the reimbursement. We do not believe that it is likely that any material
claims will be made under a letter of credit in the foreseeable future. We use the revolving
portion of our senior credit facility to issue letters of credit. As of September 30, 2010, we had
$25.6 million of standby letters of credit issued under our senior credit facility primarily for
insurance and bonding purposes. Our ability to obtain letters of credit under the revolver portion
of our senior credit facility is conditioned on our continued compliance with the affirmative and
negative covenants of our senior credit facility.
Performance Bonds and Parent Guarantees
In the ordinary course of business, we are required by certain customers to post surety or
performance bonds in connection with services that we provide to them. These bonds provide a
guarantee to the customer that we will perform under the terms of a contract and that we will pay
subcontractors and vendors. If we fail to perform under a contract or to pay subcontractors and
vendors, the customer may demand that the surety make payments or provide services under the bond.
We must reimburse the surety for any expenses or outlays it incurs. As of September 30, 2010, we
had $138.8 million in surety bonds outstanding, and we also had provided collateral in the form of
a letter of credit to sureties in the amount of $2.0 million, which is included in the total
letters of credit outstanding above. To date, we have not been required to make any reimbursements
to our sureties for bond-related costs. We believe that it is unlikely that we will have to fund
significant claims under our surety arrangements in the foreseeable future.
Pike Electric Corporation, from time to time, guarantees the obligations of its wholly-owned
subsidiaries, including obligations under certain contracts with customers.
Seasonality; Fluctuations of Results
Because our services are performed outdoors, our results of operations can be subject to
seasonal variations due to weather conditions. These seasonal variations affect both our core and
storm restoration services. Extended periods of rain affect the deployment of our core crews,
particularly with respect to underground work. During the winter months, demand for core work is
generally lower due to inclement weather. In addition, demand for core work generally increases
during the spring months due to improved weather conditions and is typically the highest
during the summer due to better weather conditions. Due to the unpredictable nature of
storms, the level of our storm restoration revenues fluctuates from period to period.
17
Table of Contents
Recent Accounting Pronouncements
See Note 12, Recent Accounting Pronouncements, to our Notes to Condensed Consolidated
Financial Statements in Item 1 of this Quarterly Report for a description of recent accounting
pronouncements, including the expected dates of adoption and estimated effects, if any, on our
consolidated financial statements.
Uncertainty of Forward-Looking Statements and Information
This Quarterly Report on Form 10-Q, as well as information included in future filings by Pike
Electric Corporation with the Securities and Exchange Commission and information contained in
written material, press releases and oral statements issued by or on behalf of the Company,
contains, or may contain, certain forward-looking statements under Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking
statements include information relating to, among other matters, our future prospects,
developments and business strategies for our operations. These forward-looking statements are
based on current expectations, estimates, forecasts and projections about our company and the
industry in which we operate and managements beliefs and assumptions. Words such as may,
will, should, estimate, expect, anticipate, intend, plan, predict, potential,
project, continue, believe, seek, estimate, variations of such words and similar
expressions are intended to identify such forward-looking statements. These statements include,
among others, statements relating to:
| our expectation that the Tanzanian powerline projects will utilize our engineering, procurement and construction capabilities and that the project will begin during the third quarter of fiscal 2011 and continue through the second quarter of fiscal 2013; | ||
| our expectation the goodwill recognized in our acquisition of Klondyke will be amortizable for tax purposes; | ||
| our expectation that substantially all the assets held for sale at September 30, 2010 will be sold during the next twelve months; | ||
| our expectation that certain recent accounting pronouncements will not have a material impact on our consolidated financial statements; | ||
| our belief that the lawsuits, claims or other proceedings to which we are subject in the ordinary course of business will not have a material adverse effect on our results of operation or financial position; | ||
| our expectation that our new diversified engineering and substation services continue to produce increased revenues in the future; | ||
| our expectation that our transmission revenues continue to increase year over year; | ||
| our belief that a significant amount of pent-up demand is building and has been building for the last 24 months and power system reliability is being challenged and that we remain well positioned to benefit from a reacceleration in distribution maintenance spending, the timing of which remains dependent primarily on the health of the broader economy; | ||
| our expectation that current volatility in the capital markets will not have a material impact on the principal amounts of our cash investments; | ||
| our belief that our cash flow from operations, available cash and cash equivalents, and borrowings available under our senior credit facility will be adequate to meet our ordinary course liquidity needs for the foreseeable future; |
18
Table of Contents
| our expectation that our ability to satisfy our obligations or to fund planned capital expenditures will depend on our future performance and our belief that this is subject to a certain extent on general economic, financial, competitive, legislative, regulatory and other factors beyond our control; | ||
| the possibility that if we fail to comply with the covenants contained in our senior credit facility, we may be unable to access the revolving portion of our senior credit facility upon which we depend for letters of credit and other short-term borrowings and that this would have a negative impact on our liquidity and could require us to obtain alternative short-term financing; | ||
| our belief that if we pursue any material acquisitions in the foreseeable future we may need to finance this activity through additional equity or debt financing; | ||
| our belief that it is unlikely that any material claims will be made under a letter of credit in the foreseeable future; and | ||
| our belief that it is unlikely that we will have to fund significant claims under our surety arrangements in the foreseeable future. |
These statements are based on certain assumptions and analyses made by us in light of our
experience and perception of historical trends, current conditions, expected future developments
and other factors we believe are appropriate under the circumstances, and involve risks and
uncertainties that may cause actual future activities and results of operations to be materially
different from historical or anticipated results. Factors that could impact those differences or
adversely affect future periods include, but are not limited to, the factors set forth in Item 1A.
Risk Factors of our Annual Report on Form 10-K for the fiscal year ended June 30, 2010.
Caution should be taken not to place undue reliance on our forward-looking statements, which
reflect the expectations of management of Pike only as of the time such statements are made. We
undertake no obligation to publicly update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
For quantitative and qualitative disclosures about our market risks, see Item 7A of our Annual
Report on Form 10-K for the fiscal year ended June 30, 2010.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management has established and maintains a system of disclosure controls and procedures
that are designed to provide reasonable assurance that information required to be disclosed by us
in the reports that we file or submit under the Exchange Act, such as this quarterly report, is
recorded, processed, summarized and reported within the time periods specified in the SECs rules
and forms. The disclosure controls and procedures are also designed to provide reasonable assurance
that such information is accumulated and communicated to our management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding
required disclosure.
As of the end of the period covered by this quarterly report, we evaluated the effectiveness
of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) of
the Exchange Act. This evaluation was carried out under the supervision and with the participation
of our management, including our Chief Executive Officer and Chief Financial Officer. Based on this
evaluation, these officers have concluded that, as of September 30, 2010, our disclosure controls
and procedures were effective to provide reasonable assurance of achieving their objectives.
19
Table of Contents
Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting during the quarter
ended September 30, 2010 that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
Design and Operation of Control Systems
Our management, including the Chief Executive Officer and Chief Financial Officer, does not
expect that our disclosure controls and procedures or our internal control over financial reporting
will prevent or detect all errors and all fraud. A control system, no matter how well designed and
operated, can provide only reasonable, not absolute, assurance that the control systems objectives
will be met. The design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their costs. Further,
because of the inherent limitations in all control systems, no evaluation of controls can provide
absolute assurance that misstatements due to error or fraud will not occur or that all control
issues and instances of fraud, if any, within our company have been detected. These inherent
limitations include the realities that judgments in decision-making can be faulty and breakdowns
can occur because of simple errors or mistakes. Controls can be circumvented by the individual acts
of some persons, by collusion of two or more people, or by management override of the controls. The
design of any system of controls is based in part on certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions. Over time, controls may become inadequate because of
changes in conditions or deterioration in the degree of compliance with policies or procedures.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
We are from time to time a party to various lawsuits, claims and other legal proceedings that
arise in the ordinary course of business. These actions typically seek, among other things, (i)
compensation for alleged personal injury, workers compensation, employment discrimination, breach
of contract, or property damages, (ii) punitive damages, civil penalties or other damages, or (iii)
injunctive or declaratory relief. With respect to all such lawsuits, claims and proceedings, we
record reserves when it is probable a liability has been incurred and the amount of loss can be
reasonably estimated. We do not believe that any of these proceedings, individually or in the
aggregate, would be expected to have a material adverse effect on our results of operations,
financial position or cash flows.
Item 1A. Risk Factors
There have been no material changes from the risk factors disclosed in Part I, Item 1A, of
our Annual Report on Form 10-K for the fiscal year ended June 30, 2010.
20
Table of Contents
Item 6. Exhibits
Exhibit | Description | |||
3.1 | Certificate of Incorporation of Pike Electric Corporation
(Incorporated by reference to Exhibit 3.1 on our Registration
Statement on Form S-1/A filed July 11, 2005) |
|||
3.2 | Amended and Restated Bylaws of Pike Electric Corporation, as of
April 30, 2009 (Incorporated by reference to Exhibit 3.1 on our
Form 8-K filed May 5, 2009) |
|||
21.1 | List of subsidiaries of Pike Electric Corporation (filed herewith) |
|||
31.1 | Certification of Periodic Report by Chief Executive Officer
pursuant to Rule 13a-14(a)/15d-14a and pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 (filed herewith) |
|||
31.2 | Certification of Periodic Report by Chief Financial Officer
pursuant to Rule 13a-14(a)/15d-14a and pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 (filed herewith) |
|||
32.1 | Certification of Periodic Report by Chief Executive Officer and
Chief Financial Officer pursuant to U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(filed herewith) |
21
Table of Contents
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.
PIKE ELECTRIC CORPORATION (Registrant) |
||||
Date: November 9, 2010 | By: | /s/ J. Eric Pike | ||
J. Eric Pike | ||||
Chairman, Chief Executive Officer and President | ||||
Date: November 9, 2010 | By: | /s/ Anthony K. Slater | ||
Anthony K. Slater | ||||
Executive Vice President and Chief Financial Officer | ||||
22