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 March 31, 2015
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 001-12488
Powell Industries, Inc.
(Exact name of registrant as specified in its charter)
Delaware |
|
88-0106100 |
(State or other jurisdiction of incorporation or organization) |
|
(I.R.S. Employer Identification No.) |
|
||
8550 Mosley Road Houston, Texas |
|
77075-1180 |
|
||
(Address of principal executive offices) |
|
(Zip Code) |
Registrant’s telephone number, including area code:
(713) 944-6900
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. x Yes ¨ No
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). x Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨ |
Accelerated filer x |
Non-accelerated filer ¨ |
Smaller reporting company ¨ |
(Do not check if a 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 x No
At April 30, 2015, there were 11,818,282 outstanding shares of the registrant’s common stock, par value $0.01 per share.
POWELL INDUSTRIES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
2
PART I — FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
POWELL INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
(In thousands, except share and per share data)
|
March 31, |
|
|
September 30, |
|
||
|
2015 |
|
|
2014 |
|
||
ASSETS |
|
|
|
|
|
|
|
Current Assets: |
|
|
|
|
|
|
|
Cash and cash equivalents |
$ |
55,672 |
|
|
$ |
103,118 |
|
Accounts receivable, less allowance for doubtful accounts of $1,881 and $1,577 |
|
121,366 |
|
|
|
107,162 |
|
Costs and estimated earnings in excess of billings on uncompleted contracts |
|
96,709 |
|
|
|
95,970 |
|
Inventories |
|
35,735 |
|
|
|
32,815 |
|
Income taxes receivable |
|
3,493 |
|
|
|
2,804 |
|
Deferred income taxes |
|
5,170 |
|
|
|
5,297 |
|
Prepaid expenses |
|
2,894 |
|
|
|
5,870 |
|
Other current assets |
|
4,828 |
|
|
|
4,291 |
|
Total Current Assets |
|
325,867 |
|
|
|
357,327 |
|
Property, plant and equipment, net |
|
161,789 |
|
|
|
156,896 |
|
Goodwill |
|
1,003 |
|
|
|
1,003 |
|
Intangible assets, net |
|
1,607 |
|
|
|
1,904 |
|
Deferred income taxes |
|
3,941 |
|
|
|
11,422 |
|
Other assets |
|
9,824 |
|
|
|
8,224 |
|
Long-term receivable (Note D) |
|
2,333 |
|
|
|
4,667 |
|
Total Assets |
$ |
506,364 |
|
|
$ |
541,443 |
|
LIABILITIES AND STOCKHOLDERS' EQUITY |
|
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
|
|
Current maturities of long-term debt and capital lease obligations |
$ |
400 |
|
|
$ |
400 |
|
Income taxes payable |
|
966 |
|
|
|
705 |
|
Accounts payable |
|
53,339 |
|
|
|
70,209 |
|
Accrued salaries, bonuses and commissions |
|
19,388 |
|
|
|
25,206 |
|
Billings in excess of costs and estimated earnings on uncompleted contracts |
|
64,171 |
|
|
|
48,702 |
|
Accrued product warranty |
|
4,375 |
|
|
|
4,557 |
|
Other accrued expenses |
|
4,603 |
|
|
|
6,291 |
|
Deferred credit ─ short term (Note D) |
|
2,029 |
|
|
|
2,029 |
|
Total Current Liabilities |
|
149,271 |
|
|
|
158,099 |
|
Long-term debt and capital lease obligations, net of current maturities |
|
2,400 |
|
|
|
2,800 |
|
Deferred compensation |
|
5,446 |
|
|
|
4,226 |
|
Other long-term liabilities |
|
669 |
|
|
|
655 |
|
Deferred credit ─ long term (Note D) |
|
3,551 |
|
|
|
4,566 |
|
Total Liabilities |
$ |
161,337 |
|
|
$ |
170,346 |
|
Commitments and Contingencies (Note F) |
|
|
|
|
|
|
|
Stockholders' Equity: |
|
|
|
|
|
|
|
Preferred stock, par value $.01; 5,000,000 shares authorized; none issued |
|
— |
|
|
|
— |
|
Common stock, par value $.01; 30,000,000 shares authorized; 11,911,743 and 12,031,243 shares issued and outstanding, respectively |
|
120 |
|
|
|
120 |
|
Additional paid-in capital |
|
47,277 |
|
|
|
46,267 |
|
Retained earnings |
|
321,027 |
|
|
|
331,213 |
|
Treasury stock, 171,416 shares at cost |
|
(5,759 |
) |
|
|
— |
|
Accumulated other comprehensive loss |
|
(17,638 |
) |
|
|
(6,503 |
) |
Total Stockholders' Equity |
|
345,027 |
|
|
|
371,097 |
|
Total Liabilities and Stockholders' Equity |
$ |
506,364 |
|
|
$ |
541,443 |
|
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 March 31, |
|
|
Six months ended March 31, |
|
||||||||||
|
|
2015 |
|
|
2014 |
|
|
2015 |
|
|
2014 |
|
||||
Revenues |
|
$ |
170,199 |
|
|
$ |
162,295 |
|
|
$ |
322,800 |
|
|
$ |
334,167 |
|
Cost of goods sold |
|
|
145,898 |
|
|
|
127,367 |
|
|
|
277,430 |
|
|
|
264,081 |
|
Gross profit |
|
|
24,301 |
|
|
|
34,928 |
|
|
|
45,370 |
|
|
|
70,086 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
|
19,464 |
|
|
|
22,088 |
|
|
|
40,279 |
|
|
|
43,722 |
|
Research and development expenses |
|
|
1,626 |
|
|
|
2,157 |
|
|
|
3,466 |
|
|
|
3,996 |
|
Amortization of intangible assets |
|
|
113 |
|
|
|
121 |
|
|
|
232 |
|
|
|
536 |
|
Restructuring and separation expenses |
|
|
1,332 |
|
|
|
— |
|
|
|
1,332 |
|
|
|
— |
|
Operating income |
|
|
1,766 |
|
|
|
10,562 |
|
|
|
61 |
|
|
|
21,832 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income |
|
|
(879 |
) |
|
|
(507 |
) |
|
|
(1,386 |
) |
|
|
(507 |
) |
Interest expense |
|
|
33 |
|
|
|
41 |
|
|
|
69 |
|
|
|
110 |
|
Interest income |
|
|
(84 |
) |
|
|
(3 |
) |
|
|
(88 |
) |
|
|
(6 |
) |
Income from continuing operations before income taxes |
|
|
2,696 |
|
|
|
11,031 |
|
|
|
1,466 |
|
|
|
22,235 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision |
|
|
6,379 |
|
|
|
4,055 |
|
|
|
5,388 |
|
|
|
7,992 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
(3,683 |
) |
|
|
6,976 |
|
|
|
(3,922 |
) |
|
|
14,243 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations, net of tax (Note J) |
|
|
— |
|
|
|
8,617 |
|
|
|
— |
|
|
|
9,604 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(3,683 |
) |
|
$ |
15,593 |
|
|
$ |
(3,922 |
) |
|
$ |
23,847 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
(0.31 |
) |
|
$ |
0.58 |
|
|
$ |
(0.33 |
) |
|
$ |
1.19 |
|
Discontinued operations |
|
|
— |
|
|
|
0.72 |
|
|
|
— |
|
|
|
0.80 |
|
Basic earnings (loss) per share |
|
$ |
(0.31 |
) |
|
$ |
1.30 |
|
|
$ |
(0.33 |
) |
|
$ |
1.99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
(0.31 |
) |
|
$ |
0.58 |
|
|
$ |
(0.33 |
) |
|
$ |
1.18 |
|
Discontinued operations |
|
|
— |
|
|
|
0.71 |
|
|
|
— |
|
|
|
0.80 |
|
Diluted earnings (loss) per share |
|
$ |
(0.31 |
) |
|
$ |
1.29 |
|
|
$ |
(0.33 |
) |
|
$ |
1.98 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
12,018 |
|
|
|
12,004 |
|
|
|
12,029 |
|
|
|
11,999 |
|
Diluted |
|
|
12,018 |
|
|
|
12,064 |
|
|
|
12,029 |
|
|
|
12,057 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per share |
|
$ |
0.26 |
|
|
$ |
0.25 |
|
|
$ |
0.52 |
|
|
$ |
0.50 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
POWELL INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
(In thousands)
|
Three months ended March 31, |
|
|
Six months ended March 31, |
|
||||||||||
|
2015 |
|
|
2014 |
|
|
2015 |
|
|
2014 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
$ |
(3,683 |
) |
|
$ |
15,593 |
|
|
$ |
(3,922 |
) |
|
$ |
23,847 |
|
Foreign currency translation adjustments |
|
(6,897 |
) |
|
|
(1,442 |
) |
|
|
(11,135 |
) |
|
|
(3,036 |
) |
Comprehensive income (loss) |
$ |
(10,580 |
) |
|
$ |
14,151 |
|
|
$ |
(15,057 |
) |
|
$ |
20,811 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
POWELL INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders’ Equity (Unaudited)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
||
|
Common Stock |
|
|
Paid-in |
|
|
Retained |
|
|
Treasury |
|
|
Comprehensive |
|
|
|
|
|
|||||||||
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Earnings |
|
|
Stock |
|
|
Income/(Loss) |
|
|
Total |
|
|||||||
Balance, September 30, 2014 |
|
12,031 |
|
|
$ |
120 |
|
|
$ |
46,267 |
|
|
$ |
331,213 |
|
|
$ |
— |
|
|
$ |
(6,503 |
) |
|
$ |
371,097 |
|
Net loss |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(3,922 |
) |
|
|
— |
|
|
|
— |
|
|
|
(3,922 |
) |
Foreign currency translation adjustments |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(11,135 |
) |
|
|
(11,135 |
) |
Stock-based compensation |
|
36 |
|
|
|
— |
|
|
|
1,567 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,567 |
|
Shares withheld in lieu of employee tax withholding |
|
— |
|
|
|
— |
|
|
|
(557 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(557 |
) |
Issuance of restricted stock |
|
16 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Purchase of treasury shares |
|
(171 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(5,759 |
) |
|
|
— |
|
|
|
(5,759 |
) |
Dividends paid |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(6,264 |
) |
|
|
— |
|
|
|
— |
|
|
|
(6,264 |
) |
Balance, March 31, 2015 |
|
11,912 |
|
|
$ |
120 |
|
|
$ |
47,277 |
|
|
$ |
321,027 |
|
|
$ |
(5,759 |
) |
|
$ |
(17,638 |
) |
|
$ |
345,027 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
POWELL INDUSTRIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
|
Six months ended March 31, |
|
|||||
|
2015 |
|
|
2014 |
|
||
|
|
|
|
|
|
|
|
Operating Activities: |
|
|
|
|
|
|
|
Net income (loss) |
$ |
(3,922 |
) |
|
$ |
23,847 |
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
|
|
|
|
|
|
|
Depreciation |
|
6,562 |
|
|
|
5,059 |
|
Amortization |
|
232 |
|
|
|
536 |
|
Gain on sale of discontinued operations, net of tax |
|
— |
|
|
|
(8,563 |
) |
Stock-based compensation |
|
1,567 |
|
|
|
2,001 |
|
Bad debt expense (recovery) |
|
469 |
|
|
|
(60 |
) |
Deferred income tax expense (benefit) |
|
7,549 |
|
|
|
(2,823 |
) |
Gain on amended supply agreement |
|
(1,015 |
) |
|
|
(507 |
) |
Cash received from amended supply agreement |
|
2,333 |
|
|
|
10,000 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
Accounts receivable, net |
|
(18,321 |
) |
|
|
(10,472 |
) |
Costs and billings in excess of estimates on uncompleted contracts |
|
13,050 |
|
|
|
(4,840 |
) |
Inventories |
|
(3,360 |
) |
|
|
(495 |
) |
Prepaid expenses and other current assets |
|
1,613 |
|
|
|
959 |
|
Accounts payable and income taxes payable |
|
(3,564 |
) |
|
|
(10,407 |
) |
Accrued liabilities |
|
(6,845 |
) |
|
|
(11,307 |
) |
Other, net |
|
(450 |
) |
|
|
294 |
|
Net cash used in operating activities |
|
(4,102 |
) |
|
|
(6,778 |
) |
Investing Activities: |
|
|
|
|
|
|
|
Proceeds from sale of property, plant and equipment |
|
43 |
|
|
|
60 |
|
Proceeds from sale of Transdyn |
|
— |
|
|
|
14,819 |
|
Purchases of property, plant and equipment |
|
(28,692 |
) |
|
|
(8,464 |
) |
Net cash provided by (used in) investing activities |
|
(28,649 |
) |
|
|
6,415 |
|
Financing Activities: |
|
|
|
|
|
|
|
Payments on industrial development revenue bonds |
|
(400 |
) |
|
|
(400 |
) |
Cash paid for employee taxes in lieu of shares |
|
(557 |
) |
|
|
(499 |
) |
Purchase of treasury shares |
|
(5,759 |
) |
|
|
— |
|
Dividends paid |
|
(6,264 |
) |
|
|
(5,992 |
) |
Payments on short-term and other financing |
|
— |
|
|
|
(16 |
) |
Net cash used in financing activities |
|
(12,980 |
) |
|
|
(6,907 |
) |
Net increase (decrease) in cash and cash equivalents |
|
(45,731 |
) |
|
|
(7,270 |
) |
Effect of exchange rate changes on cash and cash equivalents |
|
(1,715 |
) |
|
|
1,252 |
|
Cash and cash equivalents, beginning of period |
|
103,118 |
|
|
|
107,411 |
|
Cash and cash equivalents, end of period |
$ |
55,672 |
|
|
$ |
101,393 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
POWELL INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
A. OVERVIEW AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Overview
Powell Industries, Inc. (we, us, our, Powell or the Company) was incorporated in the state of Delaware in 2004 as a successor to a Nevada company incorporated in 1968. The Nevada corporation was the successor to a company founded by William E. Powell in 1947, which merged into the Company in 1977. Our major subsidiaries, all of which are wholly owned, include: Powell Electrical Systems, Inc.; Powell (UK) Limited; Powell Canada Inc. and Powell Industries International, B.V.
We develop, design, manufacture and service custom-engineered equipment and systems for the distribution, control and monitoring of electrical energy designed to (1) distribute, monitor and control the flow of electrical energy and (2) provide protection to motors, transformers and other electrically powered equipment. Headquartered in Houston, Texas, we serve the transportation, energy, industrial and utility industries.
Basis of Presentation
These unaudited condensed consolidated financial statements include the accounts of Powell and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
These unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X for interim financial information. Certain information and footnote disclosures, normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP), have been condensed or omitted pursuant to those rules and regulations. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to fairly state the financial position, results of operations and cash flows with respect to the interim consolidated financial statements have been included. The results of operations for the interim periods are not necessarily indicative of the results for the entire fiscal year. We believe that these financial statements contain all adjustments necessary so that they are not misleading. The year-end balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP.
These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto of Powell and its subsidiaries included in Powell’s Annual Report on Form 10-K for the year ended September 30, 2014, which was filed with the Securities and Exchange Commission (SEC) on December 3, 2014.
References to Fiscal 2015, Fiscal 2014 and Fiscal 2013 used throughout this report shall mean our fiscal years ended September 30, 2015, 2014 and 2013, respectively.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying footnotes. The most significant estimates used in our financial statements affect revenue and cost recognition for construction contracts, the allowance for doubtful accounts, provision for excess and obsolete inventory, goodwill and other intangible assets, self-insurance, warranty accruals and income taxes. The amounts recorded for insurance claims, warranties, legal, income taxes and other contingent liabilities require judgments regarding the amount of expenses that will ultimately be incurred. We base our estimates on historical experience and on various other assumptions, as well as the specific circumstances surrounding these contingent liabilities, in evaluating the amount of liability that should be recorded. Additionally, the recognition of deferred tax assets requires estimates related to future income and other assumptions regarding timing and future profitability. Estimates may change as new events occur, additional information becomes available or operating environments change. Actual results may differ from our estimates.
Supplemental Disclosures of Cash Flow Information (in thousands):
|
Six months ended March 31, |
|||||||||
|
2015 |
|
|
|
|
2014 |
|
|||
Non-cash capital expenditures |
$ |
3,351 |
|
|
|
|
$ |
389 |
|
8
New Accounting Standards
In July 2013, the FASB issued accounting guidance on the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The guidance states that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013, which would be our fiscal year ended September 30, 2015. This guidance should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. The adoption of this guidance has not had a significant impact on our consolidated financial position or results of operations.
In April 2014, the FASB issued an amendment to the financial reporting of discontinued operations. The amendments in this update changed the criteria for reporting discontinued operations while enhancing disclosures in this area. It also addresses sources of confusion and inconsistent application related to the financial reporting of discontinued operations guidance in U.S. GAAP. Under the new guidance, only disposals representing a strategic shift in operations that have a major effect on the organization’s operations and financial results should be presented as discontinued operations. Examples include a disposal of a major geographic area, a major line of business, or a major equity method investment. In addition, the new guidance requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations. The new guidance also requires disclosure of the pre-tax income attributable to a disposal of a significant part of an organization that does not qualify for discontinued operations reporting. This disclosure will provide users with information about the ongoing trends in a reporting organization’s results from continuing operations. The amendments in this update are effective in the first quarter of 2015, which would be our fiscal year end September 30, 2016. Early adoption is permitted for disposals that have not been previously reported as discontinued operations.
In May 2014, the FASB issued a new standard on revenue recognition that supersedes previously issued revenue recognition guidance. This standard provides a five-step approach to be applied to all contracts with customers and requires expanded disclosures about the nature, amount, timing and uncertainty of revenue (and the related cash flows) arising from customer contracts, significant judgments and changes in judgments used in applying the revenue model and the assets recognized from costs incurred to obtain or fulfill a contract. This new standard is effective for us beginning in fiscal year 2018. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method therefore we are evaluating the effect that this new guidance will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting.
In June 2014, the FASB issued an amendment to the topic regarding share-based payments and instances where terms of an award provide that a performance target can be achieved after the requisite service period. This guidance has been provided to resolve the diversity in practice concerning employee share-based payments that contain performance targets that could be achieved after the requisite service period. The updated guidance requires that a performance target that affects vesting and that can be achieved after the requisite service period be treated as a performance condition. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and is attributable to the periods for which service has been rendered. If the performance target becomes probable of being achieved before the end of the service period, the remaining unrecognized compensation cost for which requisite service has not yet been rendered is recognized prospectively over the remaining service period. The total amount of compensation cost recognized during and after the service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The updated guidance is effective for annual and interim periods beginning after December 15, 2015, with early adoption permitted. The adoption of this guidance is not expected to have a material impact on our consolidated financial position or results of operations.
Discontinued operations
In January 2014, we sold our wholly owned subsidiary Transdyn Inc. (Transdyn). For the quarter and six months ended March 31, 2014, we have presented the results of these operations as income from discontinued operations, net of tax. See Note J.
9
B. EARNINGS PER SHARE
We compute basic earnings per share by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per common and potential common share includes the weighted average of additional shares associated with the incremental effect of dilutive restricted stock and restrictive stock units, as prescribed by the FASB guidance on earnings per share.
The following table reconciles basic and diluted weighted average shares used in the computation of earnings per share (in thousands, except per share data):
|
Three months ended March 31, |
|
|
Six months ended March 31, |
|
||||||||||
|
2015 |
|
|
2014 |
|
|
2015 |
|
|
2014 |
|
||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
$ |
(3,683 |
) |
|
$ |
6,976 |
|
|
$ |
(3,922 |
) |
|
$ |
14,243 |
|
Income from discontinued operations |
|
— |
|
|
|
8,617 |
|
|
|
— |
|
|
|
9,604 |
|
Net income (loss) |
$ |
(3,683 |
) |
|
$ |
15,593 |
|
|
$ |
(3,922 |
) |
|
$ |
23,847 |
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic shares |
|
12,018 |
|
|
|
12,004 |
|
|
|
12,029 |
|
|
|
11,999 |
|
Dilutive effect of restricted stock units |
|
— |
|
|
|
60 |
|
|
|
— |
|
|
|
58 |
|
Weighted average diluted shares with assumed conversions |
|
12,018 |
|
|
|
12,064 |
|
|
|
12,029 |
|
|
|
12,057 |
|
Net earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
$ |
(0.31 |
) |
|
$ |
0.58 |
|
|
$ |
(0.33 |
) |
|
$ |
1.19 |
|
Discontinued operations |
|
— |
|
|
|
0.72 |
|
|
|
— |
|
|
|
0.80 |
|
Basic earnings (loss) per share |
$ |
(0.31 |
) |
|
$ |
1.30 |
|
|
$ |
(0.33 |
) |
|
$ |
1.99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
$ |
(0.31 |
) |
|
$ |
0.58 |
|
|
$ |
(0.33 |
) |
|
$ |
1.18 |
|
Discontinued operations |
|
— |
|
|
|
0.71 |
|
|
|
— |
|
|
|
0.80 |
|
Diluted earnings (loss) per share |
$ |
(0.31 |
) |
|
$ |
1.29 |
|
|
$ |
(0.33 |
) |
|
$ |
1.98 |
|
For the quarter and six months ended March 31, 2015, we incurred a net loss and therefore all potential common shares were deemed to be anti-dilutive.
C. DETAIL OF SELECTED BALANCE SHEET ACCOUNTS
Allowance for Doubtful Accounts
Activity in our allowance for doubtful accounts receivable consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Three months ended March 31, |
|
|
Six months ended March 31, |
|
||||||||||
|
2015 |
|
|
2014 |
|
|
2015 |
|
|
2014 |
|
||||
Balance at beginning of period |
$ |
1,844 |
|
|
$ |
673 |
|
|
$ |
1,577 |
|
|
$ |
572 |
|
Bad debt expense/(recovery) |
|
186 |
|
|
|
(170 |
) |
|
|
469 |
|
|
|
(60 |
) |
Uncollectible accounts written off, net of recoveries |
|
(120 |
) |
|
|
— |
|
|
|
(122 |
) |
|
|
(9 |
) |
Change in foreign currency translation |
|
(29 |
) |
|
|
(2 |
) |
|
|
(43 |
) |
|
|
(2 |
) |
Balance at end of period |
$ |
1,881 |
|
|
$ |
501 |
|
|
$ |
1,881 |
|
|
$ |
501 |
|
Inventories:
The components of inventories are summarized below (in thousands):
|
|
|
|
|
|
|
|
|
March 31, 2015 |
|
|
September 30, 2014 |
|
||
Raw materials, parts and subassemblies |
$ |
39,063 |
|
|
$ |
35,349 |
|
Work-in-progress |
|
1,558 |
|
|
|
2,035 |
|
Provision for excess and obsolete inventory |
|
(4,886 |
) |
|
|
(4,569 |
) |
Total inventories |
$ |
35,735 |
|
|
$ |
32,815 |
|
10
Cost and Estimated Earnings on Uncompleted Contracts
The components of costs and estimated earnings and related amounts billed on uncompleted contracts are summarized below (in thousands):
|
March 31, |
|
|
September 30, |
|
||
|
2015 |
|
|
2014 |
|
||
Costs incurred on uncompleted contracts |
$ |
618,778 |
|
|
$ |
604,939 |
|
Estimated earnings |
|
161,724 |
|
|
|
157,562 |
|
|
|
780,502 |
|
|
|
762,501 |
|
Less: Billings to date |
|
(747,964 |
) |
|
|
(715,233 |
) |
Net underbilled position |
$ |
32,538 |
|
|
$ |
47,268 |
|
|
|
|
|
|
|
|
|
Included in the accompanying balance sheets under the following captions: |
|
|
|
|
|
|
|
Costs and estimated earnings in excess of billings on uncompleted contracts - underbilled |
$ |
96,709 |
|
|
$ |
95,970 |
|
Billings in excess of costs and estimated earnings on uncompleted contracts - overbilled |
|
(64,171 |
) |
|
|
(48,702 |
) |
Net underbilled position |
$ |
32,538 |
|
|
$ |
47,268 |
|
Warranty Accrual
Activity in our product warranty accrual consisted of the following (in thousands):
|
Three months ended March 31, |
|
|
Six months ended March 31, |
|
||||||||||
|
2015 |
|
|
2014 |
|
|
2015 |
|
|
2014 |
|
||||
Balance at beginning of period |
$ |
4,480 |
|
|
$ |
5,010 |
|
|
$ |
4,557 |
|
|
$ |
5,282 |
|
Increase to warranty expense |
|
530 |
|
|
|
1,042 |
|
|
|
1,067 |
|
|
|
1,505 |
|
Deduction for warranty charges |
|
(504 |
) |
|
|
(1,196 |
) |
|
|
(1,028 |
) |
|
|
(1,926 |
) |
Increase (decrease) due to foreign currency translations |
|
(131 |
) |
|
|
(23 |
) |
|
|
(221 |
) |
|
|
(28 |
) |
Balance at end of period |
$ |
4,375 |
|
|
$ |
4,833 |
|
|
$ |
4,375 |
|
|
$ |
4,833 |
|
D. INTANGIBLE ASSETS
Intangible assets balances, subject to amortization, at March 31, 2015 and September 30, 2014 consisted of the following (in thousands):
|
March 31, 2015 |
|
|
September 30, 2014 |
|
||||||||||||||||||
|
Gross |
|
|
|
|
|
|
Net |
|
|
Gross |
|
|
|
|
|
|
Net |
|
||||
|
Carrying |
|
|
Accumulated |
|
|
Carrying |
|
|
Carrying |
|
|
Accumulated |
|
|
Carrying |
|
||||||
|
Value |
|
|
Amortization |
|
|
Value |
|
|
Value |
|
|
Amortization |
|
|
Value |
|
||||||
Purchased technology |
$ |
11,749 |
|
|
$ |
(10,165 |
) |
|
$ |
1,584 |
|
|
$ |
11,749 |
|
|
$ |
(9,918 |
) |
|
$ |
1,831 |
|
Trade name |
|
1,136 |
|
|
|
(1,113 |
) |
|
|
23 |
|
|
|
1,136 |
|
|
|
(1,063 |
) |
|
|
73 |
|
Total |
$ |
12,885 |
|
|
$ |
(11,278 |
) |
|
$ |
1,607 |
|
|
$ |
12,885 |
|
|
$ |
(10,981 |
) |
|
$ |
1,904 |
|
Amortization of intangible assets recorded for the six months ended March 31, 2015 and 2014 was $0.2 million and $0.5 million, respectively.
On August 7, 2006, we purchased certain assets related to the manufacturing of ANSI medium-voltage switchgear and circuit breaker business from General Electric Company (GE). In connection with the acquisition, we entered into a 15 year supply agreement with GE pursuant to which GE would purchase from the Company all of its requirements for ANSI medium-voltage switchgear and circuit breakers and other related equipment and components (the Products). In connection with the acquisition, we recorded an intangible asset related to this supply agreement. On December 30, 2013, the Company and GE amended the supply agreement to allow GE to manufacture similar Products for sale immediately and allow GE to begin purchasing Products from other suppliers beginning December 31, 2014. In return, GE paid us $10 million upon execution of the amended supply agreement in the first quarter of Fiscal 2014 and agreed to pay an additional $7 million over three years. The first payment of $2.3 million was received in March 2015. We wrote off the intangible asset related to the original supply agreement and recorded a deferred credit in the amount of $8.1 million at December 31, 2013, the amount by which the proceeds from GE exceeded the unamortized balance of our intangible asset. This deferred credit is being amortized over the four year life of the agreement.
11
E. LONG-TERM DEBT
Long-term debt consisted of the following (in thousands):
|
March 31, 2015 |
|
|
September 30, 2014 |
|
||
|
|||||||
Industrial development revenue bonds |
$ |
2,800 |
|
|
$ |
3,200 |
|
Less current portion |
|
(400 |
) |
|
|
(400 |
) |
Total long-term debt and capital lease obligations |
$ |
2,400 |
|
|
$ |
2,800 |
|
U.S. Revolver
In December 2013, we amended and restated our existing credit agreement (the Amended Credit Agreement) with a major domestic bank. In December 2014, we entered into the Second Amendment of the Amended Credit Agreement (the Second Amendment). The Second Amendment provides for the expansion of our Canadian manufacturing facility and allows for the repurchase of our common stock pursuant to a share repurchase program announced in December 2014. The Amended Credit Agreement provides for a $75.0 million revolving credit facility (U.S. Revolver). Obligations are collateralized by the stock of certain of our subsidiaries.
The interest rate for amounts outstanding under the Amended Credit Agreement for the U.S. Revolver is a floating rate based upon the higher of the Federal Funds Rate plus 0.5%, the bank’s prime rate, or the Eurocurrency rate plus 1.00%. Once the applicable rate is determined, a margin ranging up to 1.75%, as determined by our consolidated leverage ratio, is added to the applicable rate.
The U.S. Revolver provides for the issuance of letters of credit which reduce the amounts that may be borrowed under this revolver. The amount available under the U.S. Revolver was reduced by $18.0 million for our outstanding letters of credit at March 31, 2015.
There were no borrowings outstanding under the U.S. Revolver as of March 31, 2015. Amounts available under the U.S. Revolver were $57.0 million at March 31, 2015. The U.S. Revolver expires on December 31, 2018.
The Amended Credit Agreement contains certain restrictive and maintenance-type covenants, such as restrictions on the amount of capital expenditures allowed. It also contains financial covenants defining various financial measures and the levels of these measures with which we must comply, as well as a “material adverse change” clause. A “material adverse change” is defined as a material change in our operations, business, properties, liabilities or condition (financial or otherwise) or a material impairment of our ability to perform our obligations under our credit agreements.
The Amended Credit Agreement is collateralized by a pledge of 100% of the voting capital stock of each of our domestic subsidiaries and 65% of the voting capital stock of each non-domestic subsidiary, excluding Powell Canada. The Amended Credit Agreement provides for customary events of default and carries cross-default provisions with other existing debt agreements. If an event of default (as defined in the Amended Credit Agreement) occurs and is continuing, on the terms and subject to the conditions set forth in the Amended Credit Agreement, amounts outstanding under the Amended Credit Agreement may be accelerated and may become immediately due and payable. As of March 31, 2015, we were in compliance with all of the financial covenants of the Amended Credit Agreement.
Canadian Revolver
On April 15, 2015, we completed the renegotiation of a credit agreement with a major international bank in Canada (the Canadian Revolver) to provide working capital support and letters of credit for our operations in Canada to replace our $7.9 million agreement which expired on February 28, 2015. The Canadian Revolver provides for the issuance of letters of credit which reduce the amounts that may be borrowed under this revolver.
The interest rate for amounts outstanding under the Canadian Revolver is a floating interest rate based upon either the Canadian Prime Rate, or the lender’s Bankers’ Acceptance Rate. Once the applicable rate is determined, a margin of 0.50% to 1.75%, as determined by our consolidated leverage ratio, is added to the applicable rate.
The principal financial covenants are consistent with those described in our Amended Credit Agreement. The Canadian Revolver contains a “material adverse effect” clause. A “material adverse effect” is defined as a material change in the operations of Powell or Powell Canada in relation to our financial condition, property, business operations, expected net cash flows, liabilities or capitalization.
The Canadian Revolver is secured by the assets of our Canadian operations and provides for customary events of default and carries cross-default provisions with our existing debt agreements. If an event of default (as defined in the Canadian Revolver) occurs and is continuing, per the terms and subject to the conditions set forth in the Canadian Revolver, amounts outstanding under the Canadian Revolver may be accelerated and may become immediately due and payable.
12
Industrial Development Revenue Bonds
We borrowed $8.0 million in October 2001 through a loan agreement funded with proceeds from tax-exempt industrial development revenue bonds (Bonds). These Bonds were issued by the Illinois Development Finance Authority and were used for the completion of our Northlake, Illinois facility. Pursuant to the Bond issuance, a reimbursement agreement between us and a major domestic bank required an issuance by the bank of an irrevocable direct-pay letter of credit (Bond LC), as collateral, to the Bonds’ trustee to guarantee payment of the Bonds’ principal and interest when due. The Bond LC is subject to both early termination and extension provisions customary to such agreements, as well as various covenants, for which we were in compliance at March 31, 2015. While the Bonds mature in 2021, the reimbursement agreement requires annual redemptions of $0.4 million that commenced on October 25, 2002. A sinking fund is used for the redemption of the Bonds. At March 31, 2015, the balance in the restricted sinking fund was approximately $0.2 million and was recorded in cash and cash equivalents. The Bonds bear interest at a floating rate determined weekly by the Bonds’ remarketing agent, which was the underwriter for the Bonds and is an affiliate of the bank. This interest rate was 0.16% as of March 31, 2015.
F. COMMITMENTS AND CONTINGENCIES
Long-Term Debt
See Note E herein for discussion of our long-term debt.
Letters of Credit and Bonds
Certain customers require us to post bank letter of credit guarantees or performance bonds issued by a surety. These guarantees and performance bonds assure that we will perform under the terms of our contract. In the event of default, the counterparty 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 letters of credit or performance bonds for the periods reported. We were contingently liable for secured and unsecured letters of credit of $18.0 million as of March 31, 2015. We also had performance and maintenance bonds totaling $300.9 million that were outstanding, with additional bonding capacity of $299.1 million available, at March 31, 2015.
We have a $14.8 million facility agreement (Facility Agreement) between Powell (UK) Limited and a large international bank. This Facility Agreement provides Powell (UK) the ability to enter into bank guarantees as well as forward exchange contracts and currency options. At March 31, 2015, we had outstanding guarantees totaling $5.3 million under this Facility Agreement. Amounts available under this Facility Agreement were $9.5 million as of March 31, 2015.
The Facility Agreement provides for financial covenants and customary events of default, and carries cross-default provisions with our Amended Credit Facility. If an event of default (as defined in the Facility Agreement) occurs and is continuing, per the terms and subject to the conditions set forth in the Facility Agreement, obligations outstanding under the Facility Agreement may be accelerated and may become or be declared immediately due and payable. As of March 31, 2015, we were in compliance with all of the financial covenants of the Facility Agreement.
Litigation
We are involved in various legal proceedings, claims and other disputes arising in the ordinary course of business which, in general, are subject to uncertainties and in which the outcomes are not predictable. Although we can give no assurance about the outcome of pending or threatened litigation and the effect such outcomes may have on us, management believes that any ultimate liability resulting from the outcome of such proceedings, to the extent not otherwise provided or covered by insurance, will not have a material adverse effect on our consolidated financial position or results of operations or liquidity.
G. |
STOCK-BASED COMPENSATION |
Refer to our Annual Report on Form 10-K for the fiscal year ended September 30, 2014 for a full description of our existing stock-based compensation plans.
In February 2014, our stockholders approved our 2014 Equity Incentive Plan (the 2014 Plan). Persons eligible to receive awards under the 2014 Plan include certain officers and employees. This Plan authorizes stock options, stock appreciation rights, restricted stock, restricted stock units and performance-based awards, as well as certain other awards.
13
Restricted Stock Units
We issue restricted stock units (RSUs) to certain officers and key employees of the Company. The RSUs typically vest over a three-year period from their date of issuance. The fair value of the RSUs is based on the closing price of our common stock as reported on the NASDAQ Global Market on the grant dates. Sixty-percent of the actual amount of the RSUs earned will be based on the cumulative earnings as reported relative to the three-year performance cycle which begins October 1 of the year granted, and ranges from 0% to 150% of the target RSUs granted. The remaining forty-percent of the RSUs are time-based and vest over a three-year period. At March 31, 2015, there were 161,337 RSUs outstanding. The RSUs do not have voting rights and do not receive dividends on common stock; additionally, the shares of common stock underlying the RSUs are not considered issued and outstanding until actually issued.
RSU activity (number of shares) for the quarter is summarized below:
|
Number of |
|
|
Weighted |
|
||
|
Restricted |
|
|
Average |
|
||
|
Stock |
|
|
Fair Value |
|
||
|
Units |
|
|
Per Share |
|
||
Outstanding at September 30, 2014 |
|
106,845 |
|
|
$ |
51.30 |
|
Granted |
|
88,000 |
|
|
|
41.88 |
|
Vested |
|
(33,508 |
) |
|
|
44.06 |
|
Forfeited |
|
— |
|
|
|
— |
|
Outstanding at March 31, 2015 |
|
161,337 |
|
|
$ |
47.66 |
|
During the six months ended March 31, 2015 and 2014, we recorded compensation expense of $0.9 million and $1.5 million, respectively, related to the RSUs.
Restricted Stock
In February 2014 our stockholders also approved the 2014 Non-Employee Director Equity Incentive Plan (the 2014 Director Plan) for the benefit of members of the Board of Directors of the Company who, at the time of their service are not employees of the Company or any of its affiliates. The 2014 Director Plan authorizes stock options, stock appreciation rights, restricted stock, restricted stock units, as well as certain other awards. In February 2015, 16,000 shares of restricted stock were issued to such directors at a price of $33.37 per share under the 2014 Director Plan. The annual restricted stock grants vest 50% per year over a two-year period on each anniversary of the grant date.
During the six months ended March 31, 2015 and 2015, we recorded compensation expense of $0.7 million and $0.5 million, respectively, related to restricted stock grants.
H. SHARE REPURCHASE PROGRAM
On December 17, 2014, our Board of Directors authorized a repurchase program (the Repurchase Program) under which we may repurchase up to $25 million of our outstanding stock. The purchases may be made from time to time in the open market, through privately negotiated transactions and Rule 10b5-1 trading plans in accordance with applicable laws, rules and regulations. The Repurchase Program will be funded from cash on hand and cash provided by operating activities. The Repurchase Program will expire as of the close of business on December 31, 2015. As of March 31, 2015, we have purchased 171,416 shares at cost of $5.8 million under this Repurchase Program. The average price per share through March 31, 2015 has been $33.60.
I. FAIR VALUE MEASUREMENTS
We measure certain financial assets and liabilities at fair value. Fair value is defined as an “exit price” which represents the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in valuing an asset or liability. The accounting guidance requires the use of valuation techniques to measure fair value that maximize the use of observable inputs and minimize the use of unobservable inputs. As a basis for considering such assumptions and inputs, a fair value hierarchy has been established which identifies and prioritizes three levels of inputs to be used in measuring fair value.
14
The three levels of the fair value hierarchy are as follows:
Level 1 — Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 — Inputs other than the quoted prices in active markets that are observable either directly or indirectly, including: quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active or other inputs that are observable or can be corroborated by observable market data.
Level 3 — Unobservable inputs that are supported by little or no market data and require the reporting entity to develop its own assumptions.
The following table summarizes the fair value of our assets and liabilities that were accounted for at fair value on a recurring basis as of March 31, 2015 (in thousands):
|
Fair Value Measurements at March 31, 2015 |
|
|||||||||||||
|
Quoted Prices in |
|
|
Significant Other |
|
|
Significant |
|
|
|
|
|
|||
|
Active Markets for |
|
|
Observable |
|
|
Unobservable |
|
|
Fair Value at |
|
||||
|
Identical Assets |
|
|
Inputs |
|
|
Inputs |
|
|
March 31, |
|
||||
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
2015 |
|
||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents |
$ |
234 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
234 |
|
Deferred compensation |
|
2,001 |
|
|
|
3,134 |
|
|
|
— |
|
|
|
5,135 |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation |
|
— |
|
|
|
4,947 |
|
|
|
— |
|
|
|
4,947 |
|
The following table summarizes the fair value of our assets and liabilities that were accounted for at fair value on a recurring basis as of September 30, 2014 (in thousands):
|
Fair Value Measurements at September 30, 2014 |
|
|||||||||||||
|
Quoted Prices in |
|
|
Significant Other |
|
|
Significant |
|
|
|
|
|
|||
|
Active Markets for |
|
|
Observable |
|
|
Unobservable |
|
|
Fair Value at |
|
||||
|
Identical Assets |
|
|
Inputs |
|
|
Inputs |
|
|
September 30, |
|
||||
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
2014 |
|
||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents |
$ |
10,535 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
10,535 |
|
Deferred compensation |
|
724 |
|
|
|
2,802 |
|
|
|
— |
|
|
|
3,526 |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation |
|
— |
|
|
|
3,688 |
|
|
|
— |
|
|
|
3,688 |
|
Cash equivalents, primarily funds held in money market savings instruments, are reported at their current carrying value which approximates fair value due to the short-term nature of these instruments and are included in cash and cash equivalents in our Condensed Consolidated Balance Sheets.
Fair Value of Other Financial Instruments
Fair value guidance requires certain fair value disclosures be presented in both interim and annual reports. The estimated fair value amounts of financial instruments have been determined using available market information and valuation methodologies described below.
Deferred Compensation – We hold investments in an irrevocable Rabbi Trust for our deferred compensation plan. These assets include various mutual fund investments and company-owned life insurance policies. Under the plan, participants designate investment options to serve as the basis for measurement of the notional value of their accounts. The fair values of the underlying securities of these funds are based on quoted market prices and are categorized as Level I in the fair value measurement hierarchy. The company-owned life insurance policies are valued at cash surrender value and are therefore categorized as Level 2 in the fair value measurement hierarchy.
Industrial Development Revenue Bond – The fair value of our long-term debt depends primarily on the coupon rate of our industrial development revenue bonds. The carrying value of our long-term debt at March 31, 2015, approximates fair value based on the
15
current coupon rate of the bonds, which is reset weekly, and is classified as a Level 2 input in the fair value measurement hierarchy as there is an active market for the trading of these industrial development revenue bonds.
There were no transfers between levels within the fair value measurement hierarchy during the six months ended March 31, 2015.
J. DISCONTINUED OPERATIONS
On January 15, 2014, we sold our wholly-owned subsidiary Transdyn to a global provider of electronic toll collection systems, headquartered in Vienna, Austria. The purchase price from the sale of this subsidiary totaled $16.0 million, subject to working capital adjustments. We received cash of $14.4 million and the remaining $1.6 million was placed into an escrow account, to be released subject to resolution of certain claims.
We have presented the results of these operations as income from discontinued operations, net of tax, in the condensed consolidated statements of operations as of March 31, 2014.
Summary comparative financial results of discontinued operations were as follows (in thousands):
|
Three months ended March 31, |
|
|
Six months ended March 31, |
|
||||||||||
|
2015 |
|
|
2014 |
|
|
2015 |
|
|
2014 |
|
||||
Revenues |
$ |
— |
|
|
$ |
1,557 |
|
|
$ |
— |
|
|
$ |
13,923 |
|
Income from discontinued operations, net of tax of zero, $131, zero and $633, respectively |
|
— |
|
|
|
54 |
|
|
|
— |
|
|
|
1,041 |
|
Gain on sale of discontinued operations, net of tax of $5,218 |
|
— |
|
|
|
8,563 |
|
|
|
— |
|
|
|
8,563 |
|
Net income from discontinued operations, net of tax |
$ |
— |
|
|
$ |
8,617 |
|
|
$ |
— |
|
|
$ |
9,604 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
$ |
— |
|
|
$ |
0.72 |
|
|
$ |
— |
|
|
$ |
0.80 |
|
Diluted |
$ |
— |
|
|
$ |
0.71 |
|
|
$ |
— |
|
|
$ |
0.80 |
|
K. INCOME TAXES
The calculation of the effective tax rate is as follows (in thousands):
|
Three months ended March 31, |
|
|
Six months ended March 31, |
|
||||||||||
|
2015 |
|
|
2014 |
|
|
2015 |
|
|
2014 |
|
||||
Income from continuing operations before income taxes |
$ |
2,696 |
|
|
$ |
11,031 |
|
|
$ |
1,466 |
|
|
$ |
22,235 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision |
|
6,379 |
|
|
|
4,055 |
|
|
|
5,388 |
|
|
|
7,992 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
$ |
(3,683 |
) |
|
$ |
6,976 |
|
|
$ |
(3,922 |
) |
|
$ |
14,243 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate |
|
237 |
% |
|
|
37 |
% |
|
|
368 |
% |
|
|
36 |
% |
A reconciliation of the significant differences between the statutory U. S. income tax rate and the effective income tax rate, as computed on earnings (loss) before income tax provision for the six months ended March 31, 2015 and 2014, is as follows:
|
Six months ended March 31, |
|
|||||||||
|
2015 |
|
|
2014 |
|
||||||
Statutory rate |
|
35 |
% |
|
|
35 |
% |
||||
Canadian valuation allowance |
|
661 |
|
|
|
— |
|
||||
Research and Development Credit |
|
(327 |
) |
|
|
— |
|
||||
State rate |
|
2 |
|
|
|
2 |
|
||||
Domestic production activities deduction |
|
(2 |
) |
|
|
(2 |
) |
||||
Other |
|
(1 |
) |
|
|
1 |
|
||||
Effective rate |
|
368 |
% |
|
|
36 |
% |
We recorded a provision for income taxes from continuing operations of $6.4 million in the second quarter of Fiscal 2015, compared to the provision of $4.1 million recorded in the second quarter of Fiscal 2014. The effective tax rate for the second quarter of Fiscal 2015 was 236.6% compared to an effective tax rate of 36.8% for the second quarter of Fiscal 2014, primarily due to certain discrete
16
items recorded in the second quarter of Fiscal 2015. These discrete items include a valuation allowance recorded against our Canadian deferred tax assets in the amount of $9.0 million, as discussed below, partially offset by the release of a FIN 48 reserve related to the Federal Research and Development Tax Credit (R&D Credit) in the amount of $4.1 million upon closing an Internal Revenue Service (IRS) audit. The effective tax rate for the quarter ended March 31, 2014 approximated the combined U.S. federal and state statutory rates as the majority of our income was attributable to the U.S.
We recorded a provision for income taxes from continuing operations of $5.4 million in the six months ended March 31, 2015, compared to the provision of $8.0 million recorded in the six months ended March 31, 2014. The effective tax rate for the six months ended March 31, 2015 was 367.5% compared to an effective tax rate of 35.9% for the six months ended March 31, 2014 primarily due to a valuation allowance against our Canadian deferred tax assets partially offset by the release of a FIN 48 reserve related to the R&D Credit upon closing an IRS audit as well as the December 19, 2014 retroactive reinstatement of the R&D Credit from January 1, 2014 through December 31, 2014. The effective tax rate for the six months ended March 31, 2014 approximated the combined U.S. federal and state statutory rate as the majority of our income was attributable to the U.S.
At March 31, 2015, we had $32 million of gross foreign net operating loss carryforwards, the benefits of which are recorded as deferred tax assets and are subject to a 20-year carryforward period, the first of which will expire in 2031. During our quarterly assessment of deferred taxes, in the second quarter of Fiscal 2015, we established a valuation allowance in the amount of $9.0 million against Canadian net deferred tax assets. In assessing the realizability of net deferred tax assets, we consider whether it is more-likely-than-not that some portion or all of the net deferred tax assets may not be realized. The ultimate realization of net deferred tax assets is dependent on the generation of future taxable income during the periods in which those temporary differences become deductible. In light of the historical Canadian losses, and recent changes in projected losses in the near term, we are required under the more-likely-than-not accounting standard to record a valuation allowance against the Canadian net deferred assets because we may not be able to realize the benefits of the net operating loss carryforwards and other deductible differences.
We believe that our deferred tax assets in other tax jurisdictions, with the exception of those related to certain foreign withholding taxes and the net operating losses of our Dutch entities, are more-likely-than-not realizable through future reversals of existing taxable temporary differences and our estimate of future taxable income. Estimates may change as new events occur, estimates of future taxable income during the carryforward period are reduced or increased, additional information becomes available or operating environments change, which may result in a full or partial reversal of the valuation allowance.
L. RESTRUCTURING AND SEPARATION COSTS
In the second quarter of Fiscal 2015, we incurred approximately $1.3 million in restructuring and separation costs associated with the departure of our former Chief Operating Officer and severance costs related to our Canadian operations and certain U.S. operations which were negatively impacted by deteriorating market conditions. Of these costs, $0.8 million has been paid as of March 31, 2015 and the remaining $0.5 million will be distributed over the next sixteen months.
17
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
We are including the following discussion to inform our existing and potential shareholders generally of some of the risks and uncertainties that can affect our Company and to take advantage of the “safe harbor” protection for forward-looking statements that applicable federal securities law affords.
From time to time, our management or persons acting on our behalf make forward-looking statements to inform existing and potential shareholders about our Company. These statements may include projections and estimates concerning the timing and success of specific projects and our future backlog, revenues, income, acquisitions and capital spending. Forward-looking statements include information concerning future results of operations and financial condition. Statements that contain words such as “believes,” “expects,” “anticipates,” “intends,” “estimates,” “continue,” “should,” “could,” “may,” “plan,” “project,” “predict,” “will” or similar expressions may be forward-looking statements. In addition, sometimes we will specifically describe a statement as being a forward-looking statement and refer to this cautionary statement.
In addition, various statements in this Quarterly Report on Form 10-Q, including those that express a belief, expectation or intention, as well as those that are not statements of historical fact, are forward-looking statements. These forward-looking statements speak only as of the date of this report; we disclaim any obligation to update these statements unless required by securities law, and we caution you not to rely on them unduly. We have based these forward-looking statements on our current expectations and assumptions about future events. While our management considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties, most of which are difficult to predict and many of which are beyond our control. These risks, contingencies and uncertainties relate to, among other matters, the following:
· |
Economic uncertainty and financial market conditions may impact our customer base, suppliers and backlog. |
· |
Our backlog is subject to unexpected adjustments and cancellations and, therefore, may not be a reliable indicator of our future earnings. |
· |
The use of percentage-of-completion accounting on our fixed-price contracts could result in volatility in our results of operations. |
· |
A portion of our contracts contain terms with penalty provisions. |
· |
Fluctuations in the price and supply of raw materials used to manufacture our products may reduce our profits and could materially impact our ability to meet commitments to our customers. |
· |
Our industry is highly competitive. |
· |
Our operations could be adversely impacted by the effects of government regulations. |
· |
Changes in tax laws and regulations may change our effective tax rate and could have a material effect on our financial results. |
· |
Our international operations expose us to risks that are different from, or possibly greater than, the risks we are exposed to domestically and may adversely affect our operations. |
· |
Acquisitions involve a number of risks. |
· |
Our operating results may vary significantly from quarter to quarter. |
· |
The departure of key personnel could disrupt our business. |
· |
Our business requires skilled labor, and we may be unable to attract and retain qualified employees. |
· |
Actual and potential claims, lawsuits and proceedings could ultimately reduce our profitability and liquidity and weaken our financial condition. |
· |
Unforeseen difficulties with our enterprise resource planning, engineering and manufacturing process systems (Business Systems) could adversely affect our internal controls and our business. |
· |
We carry insurance against many potential liabilities, but our management of risk may leave us exposed to unidentified or unanticipated risks. |
· |
Technological innovations by competitors may make existing products and production methods obsolete. |
· |
Catastrophic events could disrupt our business. |
· |
Unforeseen difficulties with expansions or relocation of our existing facilities could adversely affect our operations. |
18
· |
Due to the cyclical nature of the oil and gas industry, our business may be adversely impacted by extended periods of low oil or natural gas prices or unsuccessful exploration efforts which may decrease our customers’ spending and therefore our results in the future. |
We believe the items we have outlined above are important factors that could cause estimates included in our financial statements to differ materially from actual results and those expressed in a forward-looking statement made in this report or elsewhere by us or on our behalf. We have discussed many of these factors in more detail in our Annual Report on Form 10-K for the year ended September 30, 2014. These factors are not necessarily all of the factors that could affect us. Unpredictable or unanticipated factors we have not discussed in this report could also have material adverse effects on actual results. We do not intend to update our description of important factors each time a potential important factor arises, except as required by applicable securities laws and regulations. We advise our shareholders that they should (1) be aware that factors not referred to above could affect the accuracy of our forward-looking statements and (2) use caution when considering our forward-looking statements.
19
Item 2. Management’s 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 the accompanying condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for the year ended September 30, 2014 which was filed with the Securities and Exchange Commission (SEC) on December 3, 2014 and is available on the SEC’s website at www.sec.gov.
Overview
We develop, design, manufacture and service custom-engineered equipment and systems for the management and control of electrical energy and other critical processes. Headquartered in Houston, Texas, we serve the oil and gas refining, offshore oil and gas production, petrochemical, pipeline, terminal, pulp and paper, mining and metals, light rail traction power, and electric utility markets. Revenues and costs are primarily related to custom engineered-to-order equipment and systems and accounted for under percentage of completion accounting which precludes us from providing detailed price and volume information.
The markets in which we participate are capital intensive and cyclical in nature. Cyclicality is predominantly driven by customer demand, global economic conditions and anticipated environmental or regulatory changes which affect the manner in which our customers proceed with capital investments. Our customers analyze various factors including the demand and price for oil, gas and electrical energy, the overall financial environment, governmental budgets, regulatory actions and environmental concerns. These factors influence the release of new capital projects by our customers, which are traditionally awarded in competitive bid situations. Scheduling is matched to the customer requirements and projects may take a number of months to produce; schedules also may change during the course of any particular project. Our operating results can be impacted by factors outside of our control. For example, many of our projects have contracting arrangements where the customer’s approval of engineering and design specifications may affect the timing of the project execution thus impacting the recognition of revenue and costs.
As of March 31, 2015, we have a backlog of unfilled orders of $498.5 million, which is a decrease from our backlog of unfilled orders of $507.1 million as of September 30, 2014. Our backlog includes various projects, some of which are petrochemical, oil and gas construction and transportation infrastructure projects which take a number of months to produce.
We anticipate that demand for our solutions in the western Canadian oil and gas markets will continue to be a contributor to our strategic position in the Canadian market place. We completed the construction of our new Canadian facility and relocated operations in the fall of 2013 and we are nearing the completion of a $26 million expansion of this manufacturing facility, of which approximately $25 million has been incurred as of March 31, 2015. The stabilization of our Canadian operations has presented and continues to present challenges resulting in inefficiencies that have led to extended project delivery times, delayed project revenues, higher operating costs, gross margin deterioration and operating losses. We continue to take actions to mitigate the risks associated with replicating our U.S. project-based integration model which allows for the design, fabrication, integration and testing of our products at a single location. Prior to the construction of our new Canadian facility, we performed only final assembly operations in Canada.
On January 15, 2014, we sold our wholly-owned subsidiary Transdyn to a global provider of electronic toll collection systems, headquartered in Vienna, Austria. The purchase price from the sale of this subsidiary totaled $16.0 million, subject to working capital adjustments. We received cash of $14.4 million and the remaining $1.6 million was placed into an escrow account, to be released subject to resolution of certain claims. We have presented the results of these operations as income from discontinued operations, net of tax, in the condensed consolidated statements of operations for the quarter and six months ended March 31, 2014. Accordingly, we have removed Transdyn from the Results of Operations discussions below.
20
Results of Operations
Quarter Ended March 31, 2015 Compared to the Quarter Ended March 31, 2014 (Unaudited)
Revenue and Gross Profit
Revenues increased 4.9%, or $7.9 million, to $170.2 million in the second quarter of Fiscal 2015, compared to the second quarter of Fiscal 2014, primarily due to an increase in domestic revenues. Domestic revenues increased by 31.0%, or $28.5 million, to $120.4 million in the second quarter of Fiscal 2015, compared to the second quarter of Fiscal 2014, and international revenues decreased by 29.3%, or $20.6 million, to $49.8 million in the second quarter of Fiscal 2015, compared to the second quarter of Fiscal 2014. This decrease in international revenues in the second quarter of Fiscal 2015 was primarily due to the substantial completion of a large international project in Fiscal 2014. Revenues from commercial and industrial customers increased $14.2 million to $128.8 million in the second quarter of Fiscal 2015, compared to the second quarter of Fiscal 2014. Revenues from public and private utilities decreased $12.2 million to $23.2 million in the second quarter of Fiscal 2015, compared to the second quarter of Fiscal 2014. Revenues from municipal and transit projects increased $5.9 million to $18.2 million in the second quarter of Fiscal 2015, compared to the second quarter of Fiscal 2014.
Gross profit for the second quarter of Fiscal 2015 decreased 30.4%, or $10.6 million, to $24.3 million, compared to the second quarter of Fiscal 2014. Gross profit as a percentage of revenues decreased to 14.3% in the second quarter of Fiscal 2015, compared to 21.5% in the second quarter of Fiscal 2014 primarily due to the margins associated with the mix of projects types, the large international project noted above as well as continued inefficiencies and incremental costs to hold customers’ schedules associated with the expansion and stabilization of our Canadian operations.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $2.6 million to $19.5 million during the second quarter of Fiscal 2015 when compared to the second quarter of Fiscal 2014 partially due to a reduction in performance-based compensation, offset by an increase in personnel and administrative costs associated with the expansion of our Canadian operations. Selling, general and administrative expenses, as a percentage of revenues, decreased to 11.4% during the second quarter of Fiscal 2015, compared to 13.6% during the second quarter of Fiscal 2014 due to the factors discussed above.
Restructuring and separation costs
In the second quarter of Fiscal 2015, we incurred approximately $1.3 million in restructuring and separation costs associated with the departure of our former Chief Operating Officer and severance costs related to our Canadian operations and certain U.S. operations which were negatively impacted by deteriorating market conditions.
Other Income
We recorded other income of $0.9 million during the second quarter of Fiscal 2015. This was primarily the amortization of the deferred gain from the amended supply agreement, discussed in Note D of Notes to Condensed Consolidated Financial Statements, as well as death benefits received from our company-owned life insurance policy. Other income was $0.5 million in the second quarter of Fiscal 2014 which was solely the amortization of the deferred gain.
Income Tax Provision
We recorded a provision for income taxes from continuing operations of $6.4 million in the second quarter of Fiscal 2015, compared to the provision of $4.1 million recorded in the second quarter of Fiscal 2014. The effective tax rate for the second quarter of Fiscal 2015 was 236.6% compared to an effective tax rate of 36.8% in the second quarter of Fiscal 2014, primarily due to certain discrete items recorded in the second quarter of Fiscal 2015. These discrete items include a valuation allowance recorded against our Canadian deferred tax assets in the amount of $9.0 million partially offset by the release of a FIN 48 reserve related to the Federal Research and Development Tax Credit (R&D Credit) in the amount of $4.1 million upon closing an Internal Revenue Service (IRS) audit. The effective tax rate for the second quarter of Fiscal 2014 approximated the combined U.S. federal and state statutory rates as the majority of our income was attributable to the U.S.
Income from continuing operations
In the second quarter of Fiscal 2015, we recorded a loss from continuing operations of $3.6 million, or a loss per share of $0.31, compared to income of $7.0 million, or $0.58 per diluted share, in the second quarter of Fiscal 2014. This loss was primarily due to the valuation allowance recorded against our Canadian deferred tax assets mentioned above.
21
Income from discontinued operations
In January 2014, we sold our wholly-owned subsidiary Transdyn to a global provider of electronic toll collection systems, headquartered in Vienna, Austria. We presented the results of these operations as income from discontinued operations, net of tax, for the second quarter of Fiscal 2014. We had no income from discontinued operations in the second quarter of Fiscal 2015, and in the second quarter of Fiscal 2014, we recorded $8.6 million, or $0.71 per diluted share which included the gain on the sale. For additional information about this disposition, see Note J in the Notes to Condensed Consolidated Financial Statements.
Backlog
The order backlog at March 31, 2015 was $498.5 million, compared to $507.1 million at September 30, 2014. New orders placed during the second quarter of Fiscal 2015 totaled $167.1 million compared to $162.6 million in the second quarter of Fiscal 2014.
Six Months Ended March 31, 2015 Compared to the Six Months Ended March 31, 2014 (Unaudited)
Revenue and Gross Profit
Revenues decreased 3.4%, or $11.4 million, to $322.8 million for the six months ended March 31, 2015, compared to the six months ended March 31, 2014. Domestic revenues increased by 20.1%, or $36.4 million, to $217.3 million for the six months ended March 31, 2015, compared to the six months ended March 31, 2014, and international revenues decreased by 31.2%, or $47.8 million, to $105.5 million for the six months ended March 31, 2015, compared to the six months ended March 31, 2014. International revenues decreased in the six months ended March 31, 2015 primarily due the substantial completion of a large international project in Fiscal 2014. Revenues from commercial and industrial customers increased $12.2 million to $251.3 million for the six months ended March 31, 2015, compared to the six months ended March 31, 2014. Revenues from public and private utilities decreased $22.4 million to $47.7 million for the six months ended March 31, 2015, compared to the six months ended March 31, 2014. Revenues from municipal and transit projects decreased $1.2 million to $23.8 million for the six months ended March 31, 2015, compared to the six months ended March 31, 2014.
Gross profit for the six months ended March 31, 2015 decreased 35.3%, or $24.7 million, to $45.4 million, compared to the six months ended March 31, 2014. Gross profit as a percentage of revenues was 14.1% for the six months ended March 31, 2015, compared to 21.0% for the six months ended March 31, 2014. Our gross profit as a percentage of revenues was down in the six months ended March 31, 2015, compared to the six months ended March 31, 2014, primarily due to the costs associated with our Canadian operations, the international project noted above and the overall mix of project types.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased by $3.4 million to $40.3 million during six months ended March 31, 2015, compared to the six months ended March 31, 2014, primarily due to a reduction in performance-based compensation and overall cost cutting efforts. Selling, general and administrative expenses, as a percentage of revenues, decreased slightly to 12.5% during the six months ended March 31, 2015, compared to 13.1% during the six months ended March 31, 2014.
Restructuring and separation costs
In the six months ended March 31, 2015, we incurred approximately $1.3 million in restructuring and separation costs associated with the departure of our former Chief Operating Officer and severance costs related to our Canadian operations and certain U.S. operations which were negatively impacted by deteriorating market conditions.
Other Income
We recorded other income of $1.4 million in the six months ended March 31, 2015 which was the amortization of the deferred gain from the amended supply agreement, discussed in Note D of Notes to Condensed Consolidated Financial Statements, and the death benefit from our company-owned life insurance policy. We recorded other income of $0.5 million in the same period in fiscal year 2014 which was solely the amortization of the deferred gain.
22
Income Tax Provision
We recorded a provision for income taxes from continuing operations of $5.4 million for the six months ended March 31, 2015, compared to the provision of $8.0 million for the six months ended March 31, 2014. The effective tax rate for the six months ended March 31, 2015 was 367.5%, compared to an effective tax rate of 35.9% for the six months ended March 31, 2014 primarily due to a valuation allowance recorded against our Canadian deferred tax assets partially offset by the release of a FIN 48 reserve related to the R&D Credit upon closing an IRS audit as well as the December 19, 2014 retroactive reinstatement of the R&D Credit from January 1, 2014 through December 31, 2014. The effective tax rate for the six months ended March 31, 2014 approximated the combined U.S. federal and state statutory rate as the majority of our income was attributable to the U.S.
Income from Continuing Operations
For the six months ended March 31, 2015, we recorded a loss from continuing operations of $3.9 million, or $0.33 per share, compared to income from continuing operations of $14.2 million, or $1.18 per diluted share, for the six months ended March 31, 2014. This loss was primarily due to the valuation allowance recorded against our Canadian deferred tax assets mentioned above.
Income from Discontinued Operations
For the six months ended March 31, 2014, we recorded $9.6 million, or $0.80 per diluted share, of income from discontinued operations which included the gain on the sale. For additional information about this disposition, see Note I in the Notes to Condensed Consolidated Financial Statements.
Backlog
The order backlog at March 31, 2015 was $498.5 million, compared to $507.1 million at September 30, 2014. New orders placed during the six months ended March 31, 2015 totaled $321.5 million compared to $354.8 million for the six months ended March 31, 2014. The year over year decrease in new orders was primarily due to the timing of certain complex oil and gas production and petrochemical projects.
Liquidity and Capital Resources
Cash and cash equivalents decreased to $55.7 million at March, 2015, compared to $103.1 million at September 30, 2014. As of March 31, 2015, current assets exceeded current liabilities by 2.2 times and our debt to total capitalization was 0.81%.
We have a $75.0 million revolving credit facility in the U.S., which expires in December 2016. As of March 31, 2015, there were no amounts borrowed under this line of credit. Total long-term debt and capital lease obligations, including current maturities, totaled $2.8 million at March 31, 2015, compared to $3.2 million at September 30, 2014. Total letters of credit outstanding were $18.0 million and $21.5 million at March 31, 2015 and September 30, 2014, respectively, which reduce our availability under our U.S. credit facility. Amounts available at March 31, 2015 under the U.S. revolving credit facility was $57.0 million. For further information regarding our debt, see Notes E and F of Notes to Condensed Consolidated Financial Statements.
Approximately $4.3 million of our cash at March 31, 2015, was held outside of the United States for international operations. It is our intention to indefinitely reinvest all current and future foreign earnings internationally in order to ensure sufficient working capital and support and expand these international operations. In the event that we elect to repatriate some or all of the foreign earnings that were previously deemed to be indefinitely reinvested outside the U.S., under current tax laws we would incur additional tax expense upon such repatriation.
We believe that cash available and borrowing capacity under our existing credit facilities should be sufficient to finance anticipated operating activities, capital improvements and expansions, debt repayments and share repurchases, for the foreseeable future. We continue to monitor the factors that drive our markets and strive to maintain our leadership and competitive advantage in the markets we serve while aligning our cost structures with market conditions.
Operating Activities
Cash used in operating activities was $4.1 million during the first six months of Fiscal 2015, compared to cash provided by operating activities of $6.8 million during the first six months of Fiscal 2014. This decrease was primarily due to the reduction in earnings and an increase in accounts receivable, partially offset by the improvement in our net underbilled position. Cash flow from operations is primarily influenced by demand for our products and services and is impacted as our progress payment terms with our customers are matched with the payment terms with our suppliers.
23
Investing Activities
Purchases of property, plant and equipment during the first six months of Fiscal 2015 totaled $28.7 million compared to $8.5 million during the first six months of Fiscal 2014. This increase results from the expansion of our Canadian facility in Fiscal 2015.
Financing Activities
Net cash used in financing activities was $13.0 million during the first six months of Fiscal 2015 and $6.9 million during the first six months of Fiscal 2014. This increase in the use of cash in the same period in Fiscal 2015 was primarily driven by our share repurchase program discussed below. During the first six months of Fiscal 2015, we have spent $5.8 million to repurchase shares of our common stock.
Share Repurchase Program
On December 17, 2014, our Board of Directors authorized a share repurchase program under which we may repurchase up to $25 million of our outstanding stock. The purchases may be made from time to time in the open market, through privately negotiated transactions and Rule 10b5-1 trading plans in accordance with applicable laws, rules and regulations. The Repurchase Program will be funded from cash on hand and cash provided by operating activities. The Repurchase Program will expire as of the close of business on December 31, 2015. As of March 31, 2015, a total of $5.8 million of our stock (171,416 shares) has been purchased under the Repurchase Program.
New Accounting Standards
See Note A to our condensed consolidated financial statements included in this report for information on new accounting standards.
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 condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities known to exist at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. We evaluate our estimates on an ongoing basis, based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. There can be no assurance that actual results will not differ from those estimates.
There have been no material changes to our critical accounting policies as disclosed in our Annual Report on Form 10-K for the year ended September 30, 2014.
Outlook
The markets in which we participate are capital-intensive and cyclical in nature. Cyclicality is predominantly driven by customer demand, global economic conditions and anticipated environmental or regulatory changes which affect the manner in which our customers proceed with capital investments. Our customers analyze various factors including the demand and price for oil, gas and electrical energy, the overall financial environment, governmental budgets, regulatory actions and environmental concerns. These factors influence the release of new capital projects by our customers, which are traditionally awarded in competitive bid situations. Scheduling is matched to the customer requirements; and projects may take a number of months to produce; schedules also may change during the course of any particular project.
A significant portion of our revenues are derived from the oil and gas market sectors. Due to the decline in oil prices, many of our customers have reduced their capital budgets and cuts costs, and in certain instances have deferred or cancelled projects that we were pursuing. We believe that lower oil prices will impact future orders due to reduced capital spending and project deferrals by our customers. Market price pressures have intensified. This reduction in orders and market price pressures will ultimately negatively impact our revenues, operating results and cash flows from operations. Accordingly, we are reviewing our cost structure in all operating locations as well as our corporate office and are taking actions to align our operating cost structure with expected revenues in the near-term.
Prior to these recent economic challenges, our orders over the past two years have been strong, driven primarily by the oil and gas and petrochemical industries overall, along with the specific demand associated with Canadian projects. Our operating results are frequently impacted by the timing and resolution of change orders and project close-out which could cause gross margins to improve or deteriorate during the period in which these items are approved and finalized with customers. Our operating results are also
24
impacted by other factors, such as projects that have contract arrangements where the customer approval of final engineering and design specifications may delay the timing of the project execution.
We completed the construction of our new Acheson, Alberta facility and relocated operations in the fall of 2013 and are nearing the completion of a $26 million expansion of this facility. The production ramp and stabilization of our Canadian operations has presented and may continue to present challenges resulting in inefficiencies and extended project delivery times. These challenges resulted in delayed project revenues, incremental costs to hold customers’ schedules, gross margin deterioration and operating losses. We continue to take actions to stabilize our Canadian operations and mitigate the risks associated with replicating our U.S. project-based integration model which allows for the design, fabrication, integration and testing of our products at a single location. However, we may continue to incur operating losses in Canada in the near term as we continue to improve our training and execution as well as enhance our engineering and project management competencies. Prior to the construction of our new Canadian facility, we performed only final assembly operations in Canada.
We have funded the construction and expansion of our Canadian facility from our existing cash and cash equivalents and future cash flows from operations. We expect the expansion to be completed in the third quarter of Fiscal 2015.
We believe that cash available and borrowing capacity under our existing credit facilities should be sufficient to finance anticipated operating activities, capital improvements, debt repayments and share repurchases for the foreseeable future. We continue to monitor our markets and will strive to maintain our leadership and competitive advantage in the markets we serve.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to certain market risks arising from transactions we have entered into in the normal course of business. These risks primarily relate to fluctuations in market conditions, commodity prices, foreign exchange rates and interest rates.
Market Risk
We are exposed to general market risk and its potential impact on accounts receivable or costs and estimated earnings in excess of billings on uncompleted contracts. The amounts recorded may be at risk if our customers’ ability to pay these obligations is negatively impacted by economic conditions. Our customers and their industries are typically EPC firms, oil and gas refining, offshore oil and gas production, petrochemical, pipeline, terminal, pulp and paper, mining and metals, light rail traction power, electric utility and other large industrial customers. We maintain ongoing discussions with customers regarding contract status with respect to payment status, change orders and billing terms in an effort to monitor collections of amounts billed
Commodity Price Risk
We are subject to market risk from fluctuating market prices of certain raw materials. While such materials are typically available from numerous suppliers, commodity raw materials are subject to price fluctuations. We attempt to pass along such commodity price increases to our customers on a contract-by-contract basis to avoid a negative effect on profit margin. While we may do so in the future, we have not currently entered into any derivative contracts to hedge our exposure to commodity risk. We continue to experience price volatility with some of our key raw materials and components. Fixed-price contracts may limit our ability to pass cost increases to our customers, thus negatively impacting our earnings. Fluctuations in commodity prices may have a material impact on our future earnings and cash flows.
Foreign Currency Transaction Risk
We have operations that expose us to currency risk in the British Pound Sterling, the Canadian Dollar and to a lesser extent the Euro. Amounts invested in our foreign operations are translated into U.S. Dollars at the exchange rates in effect at the balance sheet date. The resulting translation adjustments are recorded as accumulated other comprehensive income (loss), a component of stockholders’ equity in our consolidated balance sheets. We believe the exposure to the effects that fluctuating foreign currencies have on our consolidated results of operations is limited because the foreign operations primarily invoice customers and collect obligations in their respective currencies or U.S. Dollars. Our international operations are financed utilizing local credit facilities denominated in local currencies. Additionally, expenses associated with these transactions are generally contracted and paid for in the same local currencies.
25
Interest Rate Risk
If we decide to borrow under one of our credit facilities, we will be subject to market risk resulting from changes in interest rates related to our floating rate bank credit facility. If we were to make such borrowings, a hypothetical 100 basis point increase in variable interest rates may result in a material impact to our financial statements. While we do not currently have any derivative contracts to hedge our exposure to interest rate risk, in the past we have entered and may in the future enter into such contracts. During each of the past three years, we have not experienced a significant effect on our business due to changes in interest rates.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We have established and maintain a system of disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports filed with the SEC pursuant to the Securities Exchange Act of 1934, as amended (Exchange Act), is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), as appropriate, to allow timely decisions regarding required disclosures.
Management, with the participation of our CEO and CFO, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our CEO and CFO have each concluded that as of the end of the period, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate, to allow timely decisions regarding required disclosures.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
We are involved in various legal proceedings, claims and other disputes arising in the ordinary course of business which, in general, are subject to uncertainties and the outcomes are not predictable. We do not believe that the ultimate conclusion of these disputes could materially affect our financial position or results of operations.
There are no material changes from the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2014.
26
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The table below summarizes information about our purchases of common stock, based on settlement date, during the quarter ended March 31, 2015:
|
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|
|
|
|
Total Number |
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|
Maximum |
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|||
|
|
|
|
|
|
|
|
|
of Shares |
|
|
Dollar Value of |
|
||
|
|
|
|
|
|
|
|
|
Purchased as |
|
|
Shares that May |
|
||
|
Total Number |
|
|
Average Price |
|
|
Part of Publicly |
|
|
Yet Be Purchased |
|
||||
|
of Shares |
|
|
Paid per |
|
|
Announced Plans |
|
|
Under the Plans |
|
||||
|
Purchased |
|
|
Share (1) |
|
|
or Programs(2) |
|
|
or Programs |
|
||||
January 1 - January 31 |
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
25,000,000 |
|
February 1 - February 28 |
|
69,495 |
|
|
|
33.73 |
|
|
|
69,495 |
|
|
|
22,655,689 |
|
March 1 - March 31 |
|
101,921 |
|
|
|
33.51 |
|
|
|
101,921 |
|
|
|
19,240,556 |
|
Total activity for the quarter ended March 31, 2015 |
|
171,416 |
|
|
$ |
33.60 |
|
|
|
171,416 |
|
|
$ |
19,240,556 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)Includes commissions. (2)On December 18, 2014, we announced that on December 17, 2014 our Board of Directors authorized a repurchase program (the Repurchase Program) under which we may repurchase up to $25 million of our outstanding stock. The Repurchase Program will expire as of the close of business on December 31, 2015. |
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27
Number |
|
|
|
Description of Exhibits |
3.1 |
|
— |
|
Certificate of Incorporation of Powell Industries, Inc. filed with the Secretary of State of the State of Delaware on February 11, 2004 (filed as Exhibit 3.1 to our Form 8-A/A filed November 1, 2004, and incorporated herein by reference). |
|
|
|
|
|
3.2 |
|
— |
|
Amended and Restated Bylaws of Powell Industries, Inc. (filed as Exhibit 3.1 to our Form 8-K filed October 12, 2012, and incorporated herein by reference). |
|
|
|
|
|
*10.1 |
|
— |
|
Amending Agreement to Amended and Restated Credit Agreement, effective as of March 31, 2015, between Powell Canada Inc., Powell Industries, Inc., Nextron Limited, PCG Northern Services Inc. and HSBC Bank Canada. |
|
|
|
|
|
*31.1 |
|
— |
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a). |
|
|
|
|
|
*31.2 |
|
— |
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a). |
|
|
|
|
|
*32.1 |
|
— |
|
Certification of Chief Executive Officer Pursuant to Section 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
*32.2 |
|
— |
|
Certification of Chief Financial Officer Pursuant to Section 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
*101.INS |
|
— |
|
XBRL Instance Document |
|
|
|
|
|
*101.SCH |
|
— |
|
XBRL Taxonomy Extension Schema Document |
|
|
|
|
|
*101.CAL |
|
— |
|
XBRL Taxonomy Extension Calculation Linkbase Document |
|
|
|
|
|
*101.DEF |
|
— |
|
XBRL Taxonomy Extension Definition Linkbase Document |
|
|
|
|
|
*101.LAB |
|
— |
|
XBRL Taxonomy Extension Label Linkbase Document |
|
|
|
|
|
*101.PRE |
|
— |
|
XBRL Taxonomy Extension Presentation Linkbase Document |
|
* |
Filed herewith |
28
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) |
|
|
|
|
Date: May 6, 2015 |
By: |
/s/ Michael A. Lucas |
|
|
Michael A. Lucas |
|
|
President and Chief Executive Officer |
|
|
(Principal Executive Officer) |
|
|
|
|
By: |
/s/ Don R. Madison |
|
|
Don R. Madison |
|
|
Executive Vice President |
|
|
Chief Financial and Administrative Officer |
|
|
(Principal Financial Officer) |
29
EXHIBIT INDEX
Number |
|
|
|
Exhibit Title |
3.1 |
|
— |
|
Certificate of Incorporation of Powell Industries, Inc. filed with the Secretary of State of the State of Delaware on February 11, 2004 (filed as Exhibit 3.1 to our Form 8-A/A filed November 1, 2004, and incorporated herein by reference). |
|
|
|
|
|
3.2 |
|
— |
|
Amended and Restated Bylaws of Powell Industries, Inc. (filed as Exhibit 3.1 to our Form 8-K filed October 12, 2012, and incorporated herein by reference). |
|
|
|
|
|
*10.1 |
|
— |
|
Amending Agreement to Amended and Restated Credit Agreement, effective as of March 31, 2015, between Powell Canada Inc., Powell Industries, Inc., Nextron Limited, PCG Northern Services Inc. and HSBC Bank Canada. |
|
|
|
|
|
*31.1 |
|
— |
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a). |
|
|
|
|
|
*31.2 |
|
— |
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a). |
|
|
|
|
|
*32.1 |
|
— |
|
Certification of Chief Executive Officer Pursuant to Section 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
*32.2 |
|
— |
|
Certification of Chief Financial Officer Pursuant to Section 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
*101.INS |
|
— |
|
XBRL Instance Document |
|
|
|
|
|
*101.SCH |
|
— |
|
XBRL Taxonomy Extension Schema Document |
|
|
|
|
|
*101.CAL |
|
— |
|
XBRL Taxonomy Extension Calculation Linkbase Document |
|
|
|
|
|
*101.DEF |
|
— |
|
XBRL Taxonomy Extension Definition Linkbase Document |
|
|
|
|
|
*101.LAB |
|
— |
|
XBRL Taxonomy Extension Label Linkbase Document |
|
|
|
|
|
*101.PRE |
|
— |
|
XBRL Taxonomy Extension Presentation Linkbase Document |
|
* |
Filed herewith |
30
Exhibit 10.1
AMENDING AGREEMENT
to the AMENDED AND RESTATED CREDIT AGREEMENT dated April 26, 2012
This Agreement is made effective as of March 31, 2015
BETWEEN:
POWELL CANADA INC., a Canada Corporation
OF THE FIRST PART
POWELL INDUSTRIES, INC., a Delaware Corporation
OF THE SECOND PART
NEXTRON LIMITED, a Canada Corporation
OF THE THIRD PART
PCG NORTHERN SERVICES INC., a Canada Corporation
OF THE FOURTH PART
HSBC BANK CANADA, a Canadian Chartered Bank
OF THE FIFTH PART
WHEREAS the parties hereto wish to extend and renew those certain credit facilities set out in the Amended and Restated Credit Agreement dated April 26, 2012 (the "Agreement");
AND WHEREAS the parties hereto wish to amend certain terms of the Agreement to reflect the extension and renewal of the credit facilities contained therein;
NOW THEREFORE THIS AGREEMENT WITNESSES that in consideration of the covenants and agreements contained in the Agreement and herein contained, and other good and valuable consideration, the receipt and sufficiency of which is hereby conclusively acknowledged by each of the parties hereto, the parties hereto covenant and agree as follows:
1. |
PPC Technical Services Inc. is removed as a party to the Agreement. |
2. |
PCG Northern Services Inc. is added as a party to the Agreement. |
3. |
The words "NEXTRON LIMITED, a Canada Corporation, and PPC TECHNICAL SERVICES INC. a Canada Corporation (hereinafter sometimes referred to as "Nextron" and "PPC Technical" respectively, and sometimes referred to as the "Subsidiaries")" in the third part of the style and cause, located on Page 4 of the Agreement are hereby deleted in their entirety and replaced with: |
""NEXTRON LIMITED, a Canada Corporation, and PCG Northern Services Inc., a Canada Corporation (hereinafter sometimes referred to as "Nextron" and "PCG" respectively and sometimes referred to as the "Subsidiaries")"
4. |
The definition of "Canadian Prime Rate" as set out on page 7 of the Agreement is deleted in its entirety and replaced with: |
""Canadian Prime Rate" means, for any day, the variable annual rate of interest per annum established from time to time by the Lender as the reference rate of interest for the determination of interest rates that the Lender will charge to customers in Canada for Canadian Dollar prime rate loans and which was 2.85%pa on March 24, 2015."
5. |
The definition of "Closing Date" as set out on page 7 of the Agreement is deleted in its entirety and replaced with: |
""Closing Date" means March 31, 2015."
- 2 –
6. |
The definition of "DSL Facility" as set out on pages 10 and 11 of the Agreement is deleted in its entirety and replaced with: |
""DSL Facility" means the foreign exchange daily settlement facility in the maximum principal amount of U.S. $5,000,000.00 to be made available to the Borrower by the Lender in accordance with the provisions hereof, subject to any reduction in accordance with the provisions hereof."
7. |
The definition of "DSL Facility Commitment" as set out on page 11 of the Agreement is deleted in its entirety and replaced with: |
""DSL-Facility Commitment" means-the maximum principal amount the Lender has agreed to make available to the Borrower under the DSL Facility, being U.S. $5,000,000.00, subject to reductions or adjustments pursuant to the terms hereof."
8. |
The definition of "F/X Facility" as set out on page 13 of the Agreement is deleted in its entirety and replaced with: |
""F/X Facility" means the foreign exchange forward contract facility in the maximum principal amount of U.S. $5,000,000.00 to be made available to the Borrower by the Lender in accordance with the provisions hereof, subject to any reduction in accordance with the provisions hereof, and to be governed by the terms of the Lender's Agreement for Foreign Exchange Contracts."
9. |
The definition of "F/X Facility Commitment" as set out on page 14 of the Agreement is deleted in its entirety and replaced with: |
""F/X Facility Commitment" means the maximum principal amount the Lender has agreed to make available to the Borrower under the F/X Facility, being U.S. $5,000,000.00, subject to reductions or adjustments pursuant to the terms hereof."
10. |
The definition of "Maturity Date" as set out on page 16 of the Agreement is deleted in its entirety and replaced with: |
""Maturity Date" means March 31, 2018."
11. |
The definition of "Subsidiary" as set out on pages 23 and 24 of the Agreement is deleted in its entirety and replaced with: |
""Subsidiary" means, with respect to any person ("X"):
a) |
any corporation of which at least a majority of the outstanding shares having by the terms thereof ordinary voting power to elect a majority of the board of directors of such corporation (irrespective of whether at the time shares of any other class or classes of such corporation might have voting power by reason of the happening of any contingency, unless the contingency has occurred and then only for as long as it continues) is at the time directly, indirectly or beneficially owned or controlled by X or one or more of its Subsidiaries, or X and one or more of its Subsidiaries; |
b) |
any partnership of which, at the time, X, or one or more of its Subsidiaries, or X and one or more of its Subsidiaries: (i) directly, indirectly or beneficially own or control more than 50% of the income, capital, beneficial or ownership Interests (however designated) thereof; and (ii) is a general partner, in the case of limited partnerships, or is a partner or has authority to bind the partnership, in all other cases; or |
c) |
any other person of which at least a majority of the income, capital, beneficial or ownership interests (however designated) are at the time directly, indirectly or beneficially owned or controlled by X, or one or more of its Subsidiaries, or X and one or more of its Subsidiaries, |
provided that, unless otherwise expressly provided or the context otherwise requires, references herein to "Subsidiary" or Subsidiaries" shall be and shall be deemed to be references to Subsidiaries of the Borrower, and shall include Nextron and PCG."
12. |
The definition of "U.S. Base Rate" as set out page 24 of the Agreement is deleted in its entirety and replaced with: ""U.S. Base Rate" means the variable annual rate of interest per annum established from time to time by the Lender as the reference rate of Interest for the determination of interest rates that the Lender will charge to customers in Canada for United States Dollar base rate loans in Canada and which was 3.75%pa on March 24, 2015." |
13. |
Section 2.15, found on pages 30 and 31 of the Agreement is deleted in its entirety and replaced with: |
"2.15 |
Commitment and Renewal Fees |
The Borrower will pay to the Lender, on or before the Closing Date, an up-front commitment fee equal to 0.30% of the Revolving Facility Commitment. Fees collected by the Lender shall be its property as consideration for the time, effort and expense incurred by it in the review and administration of documents and financial statements, and
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the Borrower acknowledges and agrees that the determination of these costs is not feasible and that the fees set out herein represent a reasonable estimate of such costs."
14. |
Subsection 3.2(q), found on page 32 of the Agreement is deleted in its entirety and replaced with: |
"(q) |
as at the date of such Drawdown, no material adverse change in the business, affairs, assets, properties, operations, or condition, financial or otherwise, of Powell or of the Borrower and its Subsidiaries taken as a whole, shall have occurred since December 31, 2014;" |
15. |
Subsection 3.2(u), found on page 32 of the Agreement is deleted in its entirety. |
16. |
Sub-subsection 10.1(j)(v), found on page 54 of the Agreement is deleted in its entirety and replaced with: |
"(v) |
any of the Borrower or Subsidiary acquiring (whether by purchase, lease or otherwise) an interest in real property where such property has a fair market value in excess of Cdn. $2,000,000 (or the Equivalent Amount thereof in any other currency)." |
17. |
Subsection 10.2(e), found on page 57 of the Agreement is deleted in its entirety and replaced with: |
"(e) |
Limit on Purchase or Sale of Assets |
Except for Permitted Dispositions, the Borrower shall not, and shall not permit its Subsidiaries to:
i) |
sell, transfer or otherwise dispose of any of their respective property or assets during the continuance of a Default or Event of Default; or |
ii) |
purchase, sell, transfer or otherwise dispose of property or assets in any period of twelve consecutive months, whether in one or a series of transactions, having an aggregate fair market value in excess of Cdn. $2,000,000.00 (or the Equivalent Amount thereof in any other currency), other than in the ordinary course of its business. |
Notwithstanding this Section 10.2(e), it is understood and agreed that the Borrower's previous purchase of land and buildings was not a violation of Section 10.2 and the subsequent purchase of property and equipment for the purposes of expanding its Canadian headquarters will not be a violation of this Section 10.2."
18. |
Subsection 10.3(c), found on page 59 of the Agreement is deleted in its entirety and replaced with: |
"(c) |
Consolidated Tangible Net Worth |
As at each Quarter End, commencing with the Quarter ending March 31, 2015, the Consolidated Tangible Net Worth of Powell shall be equal or greater than the sum of:
i) |
U.S. $172,500,000, plus |
ii) |
an amount equal to 50% of the Net Income for each fiscal Quarter commencing with the fiscal quarter ended March 31, 2015, and for each fiscal quarter thereafter (with no deduction for any net loss in any fiscal quarter), plus |
iii) |
an amount equal to 100% of the aggregate increase in Shareholders' Equity of Powell and its Subsidiaries after the date hereof by reason of the issuance and sale of any Equity Interests of Powell or any of its Subsidiaries (other than issuances to Powell or a Wholly-Owned Subsidiary), including upon any conversion of any debt securities of Powell into capital stock or other equity interests." |
19. |
Subsection 11.1(d), found on page 60 of the Agreement is deleted in its entirety and replaced with: |
"(d) |
unlimited guarantee of the indebtedness of the Borrower to the Lender executed by each of the Subsidiaries of the Borrower from time to time, including Nextron and PCG supported by a general security agreement creating a first priority security interest in all present and after acquired personal property of each such Subsidiary and a floating charge over all of each such Subsidiary's present and after acquired real property;" |
20. |
Subsection 15.2(a), found on page 73 of the Agreement is deleted in its entirety and replaced with: |
"(a) Notices Generally. Except in the case of notices and other communications expressly permitted to be given by telephone, all notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by registered mail or sent by telecopier to the addresses or telecopier numbers specified below or, if to a Subsidiary, in care of the Borrower. Notices sent by hand or overnight courier service, or mailed by registered mail, shall be deemed to have been given when received, notices sent by telecopier shall be deemed to have been given when sent (except that, if not given on a business day between 9:00 a.m. and
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5:00 p.m. local time where the recipient is located, shall be deemed to have been given at 9:00 a.m. on the next business day for the recipient). The respective parties' addresses and contact information shall be as follows:
To the Borrower, Nextron and PCG:
Powell Canada Inc.
Acheson Range Road Facility- Head Office
53032 Range Road 263A, Acheson, Alberta T7X 5A5
Attention: Don Madison
Facsimile: _____________
To Powell:
Powell Industries Inc.
8550 Mosley Drive
Post Office Box 12818
Houston, Texas, USA 77075
Attention: Don Madison
Facsimile: _____________
To the Lender:
HSBC Bank Canada
9th Floor, 10250-101 Street NW
Edmonton, Alberta, Canada T5J 3P4
Attention: Keith Peters
Fax: (780) 426-2660
21. |
HSBC hereby acknowledges, that as of the effective date of this Amending Agreement all conditions precedent to Closing (as defined in the Agreement) set out in Section 3.2 of the Agreement are currently satisfied. |
22. |
This Amending Agreement shall enure to the benefit of and be binding upon the successors and assigns of the parties hereto. |
23. |
Save and except as amended herein, all terms, representations, warranties, conditions and provisions of the Agreement shall continue in full force and effect unabated. |
24. |
This Amending Agreement shall be construed, enforced and governed by the laws of the Province of Alberta. |
25. |
This Amending Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which taken together shall be deemed to constitute one and the same instrument, and it shall not be necessary in making proof of this Amending Agreement to produce or account for more than one such counterpart. Delivery of an executed counterpart of a signature page of this Amending Agreement by telecopy or by sending a scanned copy by electronic mail shall be effective as delivery of a manually executed counterpart of this Agreement |
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IN WITNESS WHEREOF the parties hereto have executed this Agreement.
POWELL CANADA INC. |
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POWELL INDUSTRIES, INC. |
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Per: |
/s/ Don R. Madison |
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Per: |
/s/ Don R. Madison |
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Name: Don R. Madison Title: Director |
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Name: Don R. Madison Title: Chief Financial and |
NEXTRON LIMITED |
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PCG NORTHERN SERVICES INC. |
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Per: |
/s/ Don R. Madison |
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Per: |
/s/ Don R. Madison |
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Name: Don R. Madison Title: Director |
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Name: Don R. Madison Title: Director |
HSBC BANK CANADA |
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Per: |
/s/ Keith Peters |
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Name: Keith Peters Title: Asst. Vice President, |
Per: |
/s/ Marissa Adams |
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Name: Marissa Adams Title: Asst. Vice President, Commercial Banking |
EXHIBIT 31.1
CERTIFICATION
I, Michael A. Lucas, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Powell Industries, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
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/s/ Michael A. Lucas |
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Michael A. Lucas |
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President and Chief Executive Officer |
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(Principal Executive Officer) |
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Date: May 6, 2015
EXHIBIT 31.2
CERTIFICATION
I, Don R. Madison, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Powell Industries, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
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/s/ Don R. Madison |
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Don R. Madison |
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Executive Vice President |
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Chief Financial and Administrative Officer |
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(Principal Financial Officer) |
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Date: May 6, 2015
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with this Quarterly Report (the “Report”) on Form 10-Q of Powell Industries, Inc. (the “Company”) for the quarter ended March 31, 2015, as filed with the Securities and Exchange Commission on the date hereof, I, Michael A. Lucas, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly represents, in all material respects, the financial condition and results of operations of the Company.
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/s/ Michael A. Lucas |
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Michael A. Lucas |
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President and Chief Executive Officer |
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Date: May 6, 2015
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with this Quarterly Report (the “Report”) on Form 10-Q of Powell Industries, Inc. (the “Company”) for the quarter ended March 31, 2015, as filed with the Securities and Exchange Commission on the date hereof, I, Don R. Madison, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly represents, in all material respects, the financial condition and results of operations of the Company.
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/s/ Don R. Madison |
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Don R. Madison |
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Executive Vice President |
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Chief Financial and Administrative Officer |
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Date: May 6, 2015
Discontinued Operations (Schedule of Operating Results) (Parenthetical) (Details) (USD $)
In Thousands, unless otherwise specified |
3 Months Ended | 6 Months Ended | ||
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Mar. 31, 2015
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Mar. 31, 2014
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Mar. 31, 2015
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Mar. 31, 2014
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Discontinued Operations And Disposal Groups [Abstract] | ||||
Income from discontinued operations, tax | $ 0 | $ 131 | $ 0 | $ 633 |
Gain on sale of discontinued operations, tax | $ 5,218 |
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