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| POWL > SEC Filings for POWL > Form 10-Q on 9-Feb-2009 | All Recent SEC Filings |
9-Feb-2009
Quarterly Report
• The U.S. government's proposed plan to address the financial crises may not be effective to stabilize the financial markets or to increase the availability of credit.
• Our industry is highly competitive.
• International and political events may adversely affect our operations.
• Fluctuations in the price and supply of raw materials used to manufacture our products may reduce our profits.
• Our use of percentage-of-completion accounting could result in a reduction or elimination of previously reported profits.
• Our dependence upon fixed-price contracts could result in reduced profits or, in some cases, losses, if costs increase above our estimates.
• Our acquisition strategy involves a number of risks.
• We may not be able to fully realize the revenue value reported in our backlog.
• Our operating results may vary significantly from quarter to quarter.
• We may be unsuccessful at generating internal growth.
• 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.
• Failure to successfully comply with Section 404 of the Sarbanes-Oxley Act of 2002 could negatively impact our business.
• Actual and potential claims, lawsuits and proceedings could ultimately reduce our profitability and liquidity and weaken our financial condition.
• We carry insurance against many potential liabilities, and our risk management program 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.
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, 2008. 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 of matters that are the subject of
our forward-looking statements. 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
and common sense when considering our forward-looking statements.
Overview
We develop, design, manufacture and service custom engineered-to-order equipment
and systems for the management and control of electrical energy and other
critical processes. Headquartered in Houston, Texas, we serve the
transportation, environmental, energy, industrial and utility industries. Our
business operations are consolidated into two business segments: Electrical
Power Products and Process Control Systems. Financial information related to
these business segments is included in Note J of Notes to Condensed Consolidated
Financial Statements.
Throughout fiscal 2008, we experienced strong market demand for our products and
services. New investments in oil and gas infrastructure, as well as new
investments by municipal and transit authorities to expand and improve public
transportation, were key drivers of increased business activity in fiscal 2008.
Customer inquiries, or requests for proposals, strengthened throughout fiscal
years 2007 and 2008. This increase in customer inquiries led to increased orders
in fiscal year 2008, and accordingly, a strong backlog of orders into fiscal
year 2009.
Results of Operations
Revenue and Gross Profit
Consolidated revenues increased $23.4 million to $170.5 million in the first
quarter of fiscal 2009 compared to $147.1 million in the first quarter of fiscal
2008. Revenues increased as the Company has responded to strong market demand by
increasing our capacity and throughput. For the first quarter of fiscal 2009,
domestic revenues increased by 27.3% to $134.3 million compared to the first
quarter of 2008. Total international revenues were $36.2 million in the first
quarter of 2009 compared to $41.6 million in the first quarter of 2008.
International revenues are primarily related to energy related investments,
principally oil and gas projects. Gross profit for the first quarter of fiscal
2009 increased by approximately $7.8 million, to $34.5 million, as a result of
improved pricing and productivity. Gross profit as a percentage of revenues
increased to 20.2% in the first quarter of fiscal 2009, compared to 18.1% in the
first quarter of fiscal 2008.
Electrical Power Products
Our Electrical Power Products business segment recorded revenues of
$163.9 million in the first quarter of fiscal 2009, compared to $141.1 million
for the first quarter of fiscal 2008. In the first quarter of fiscal 2009,
revenues from public and private utilities were approximately $38.5 million,
compared to $43.7 million in the first quarter of fiscal 2008. Revenues from
commercial and industrial customers totaled $114.1 million in the first quarter
of fiscal 2009, an increase of $27.9 million compared to the first quarter of
fiscal 2008. Municipal and transit projects generated revenues of $11.3 million
in the first quarter of fiscal 2009 compared to $11.2 million in the first
quarter of fiscal 2008.
Business segment gross profit, as a percentage of revenues, was 19.6% in the
first quarter of fiscal 2009, compared to 17.6% in the first quarter of fiscal
2008. This increase in gross profit as a percentage of revenues resulted from
increased production volumes and improvements in production of the Power/Vac®
product line.
Process Control Systems
Our Process Control Systems business segment recorded revenues of $6.6 million
in the first quarter of fiscal 2009, an increase from $6.0 million in the first
quarter of fiscal 2008. Business segment gross profit, as a percentage of
revenues, increased to 35.4% in the first quarter of fiscal 2009 compared to
30.7% in the first quarter of fiscal 2008. This increase resulted from a
favorable mix of jobs with increased value-added services.
For additional information related to our business segments, see Note J of Notes
to Condensed Consolidated Financial Statements.
Consolidated Selling, General and Administrative Expenses
Consolidated selling, general and administrative expenses decreased to 12.7% of
revenues in the first quarter of fiscal 2009 compared to 13.7% of revenues in
the first quarter of fiscal 2008. Selling, general and administrative expenses
were $21.6 million for the first quarter of fiscal 2009 compared to
$20.1 million for the first quarter of fiscal 2008. As a percentage of revenues,
selling, general and administrative expenses decreased primarily because we were
able to leverage our existing infrastructure to support our increased production
volume.
Interest Expense and Income
Interest expense was $0.5 million in the first quarter of 2009, a decrease of
approximately $0.4 million compared to the first quarter of fiscal 2008. The
decrease in interest expense is primarily due to lower interest rates and the
ability to pay down our line of credit during the first quarter of fiscal 2009.
Interest income was $0.1 million in the first quarter of fiscal 2009 compared to
$0.1 million in the first quarter of fiscal 2008.
Provision for Income Taxes
Our provision for income taxes reflects an effective tax rate on earnings before
income taxes of 35.1% in the first quarter of fiscal 2009 compared to 36.5% in
the first quarter of fiscal 2008. Our effective tax rate is impacted by income
generated in the United Kingdom, which has a lower statutory rate than the
United States; as well as a mix of various state income taxes due to the
relative mix of volume in the United States.
In addition, adjustments to accruals for uncertain tax positions are analyzed
and adjusted quarterly as events occur to warrant such change. Adjustments to
these accruals are a component of the effective tax rate.
Net Income
In the first quarter of fiscal 2009, we recorded net income of $7.9 million, or
$0.68 per diluted share, compared to $3.6 million, or $0.32 per diluted share,
in the first quarter of fiscal 2008. As discussed above, we generated higher
revenues and improved gross profits in all of our business segments, while
leveraging our existing infrastructure to support our increased production
volume.
Backlog
The order backlog at December 31, 2008, was $509.4 million, compared to
$518.6 million at September 30, 2008 and $501.7 million at the end of the first
quarter of fiscal 2008. New orders placed during the first quarter of fiscal
2009 totaled $172.2 million compared to $185.1 million in the first quarter of
fiscal 2008.
Liquidity and Capital Resources
Cash flow provided by operations was approximately $38.0 million for the first
quarter of fiscal 2009 primarily as a result of a decrease in working capital to
$131.4 million at December 31, 2008, compared to $150.7 million at September 30,
2008. As of December 31, 2008, current assets exceeded current liabilities by
1.7 times and our debt to total capitalization ratio was 8.9%. This decrease in
working capital resulted from our efforts to manage inventory and billings to
customers. The cash flow generated from operations in the first quarter of
fiscal 2009 was primarily used to repay the $19.0 million outstanding on the US
Revolver at September 30, 2008.
At December 31, 2008, we had cash, cash equivalents and marketable securities of
$25.0 million, compared to $10.1 million at September 30, 2008. We have an
$83.5 million revolving credit facility in the U.S. and an additional
£4.0 million (approximately $5.8 million) revolving credit facility in the
United Kingdom, both of which expire in December 2012. As of December 31, 2008,
there was approximately $2.2 million borrowed under these lines of credit. Total
long-term debt and capital lease obligations, including current maturities,
totaled $20.4 million at December 31, 2008, compared to $41.8 million at
September 30, 2008. Letters of credit outstanding were $17.1 million at
December 31, 2008, compared to $22.2 million at September 30, 2008, which
reduced our availability under our credit facilities. Amounts available under
the U.S. revolving credit facility and the revolving credit facility in the
United Kingdom were approximately $66.4 million and $3.6 million, respectively,
at December 31, 2008. For further information regarding our debt, see Notes F
and G of Notes to Condensed Consolidated Financial Statements.
In December 2008, the Company further amended its Amended Credit Agreement to
provide additional working capital support for the Company for 180 days,
expiring June 1, 2009. The availability under the US Revolver was increased by
$25 million, to $83.5 million, through February 28, 2009 to provide additional
capacity to the Company to support working capital needs due to increased
operations in the second half of fiscal 2008. This additional capacity is then
reduced by $12.5 million through June 1, 2009. On June 1, 2009, the amount
available under the US Revolver will be reduced to its previous limit of
$58.5 million. This amendment also increases the applicable interest rate by 25
to 50 basis points. The amendment also raised the baseline amount for the
minimum tangible net worth covenant to $172.5 million from $120 million.
Additionally, this amendment extends the expiration of the Amended Credit
Agreement by one year, to December 31, 2012.
Operating Activities
During the first quarter of fiscal 2009, cash provided by operating activities
was approximately $38.0 million, and during the first quarter of fiscal 2008,
cash used in operating activities was approximately $14.6 million. Cash flow
from operations is primarily influenced by demand for our products and services
and is negatively impacted as our progress payment terms with our customers
extend beyond the payment terms with our suppliers. The increase in cash flow
from operations resulted from our efforts to manage inventory and billings to
customers.
Investing Activities
Investments in property, plant and equipment during the first quarter of fiscal
2009 totaled approximately $2.0 million compared to $0.7 million during the
first quarter of fiscal 2008. The majority of our 2009 capital expenditures were
used for the expansion of one of our operating facilities.
Financing Activities
Net cash used by financing activities was approximately $19.8 million for the
first quarter of fiscal 2009, as the revolving line of credit balance was paid
down, due to lower levels of working capital investment. Net cash provided by
financing activities was approximately $16.7 million in the first quarter of
fiscal 2008, as borrowings on the line of credit were used to fund operations
and capital expenditures.
New Accounting Standards
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business
Combinations ("SFAS No. 141R"). SFAS No. 141R establishes principles and
requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, and
noncontrolling interest in the acquiree and the goodwill acquired. SFAS No. 141R
also establishes disclosure requirements to enable the evaluation of the nature
and financial effects of the business combination. SFAS No. 141R is effective as
of the beginning of an entity's fiscal year that begins after December 15, 2008,
and will be adopted by us in the first quarter of fiscal 2010. We are currently
unable to predict the potential impact, if any, of the adoption of SFAS No. 141R
on future acquisitions.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements - an amendment of Accounting Research Bulletin
51 ("SFAS No. 160"). SFAS No. 160 establishes accounting and reporting standards
for ownership interests in subsidiaries held by parties other than the parent,
the amount of consolidated net income attributable to the parent and to the
noncontrolling interest, changes in a parent's ownership interest and the
valuation of retained noncontrolling equity investments when a subsidiary is
deconsolidated. SFAS No. 160 also establishes disclosure requirements that
clearly identify and distinguish between the interests of the parent and the
interests of the noncontrolling owners. SFAS No. 160 is effective as of the
beginning of an entity's fiscal year that begins after December 15, 2008, and
will be adopted by us in the first quarter of fiscal 2010. We are currently
evaluating the potential impact of the adoption of SFAS No. 160 on our
consolidated results of operations and financial condition.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities - an amendment of FASB Statement No. 133
("SFAS No. 161"). SFAS No. 161 amends and expands the disclosure requirements of
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities
("SFAS No. 133"), and was issued in response to concerns and criticisms about
the lack of adequate disclosure of derivative instruments and hedging
activities. SFAS No. 161 is focused on requiring enhanced disclosure on 1) how
and why an entity uses derivative instruments and hedging activities; 2) how
derivative instruments and related hedging activities are accounted for under
SFAS No. 133 and 3) how derivative instruments and related hedging activities
affect an entity's cash flows, financial position and performance.
To accomplish the three objectives listed above, SFAS No. 161 requires: 1)
qualitative disclosures regarding the objectives and strategies for using
derivative instruments and engaging in hedging activities in the context of an
entity's overall risk exposure; 2) quantitative disclosures in tabular format of
the fair values of derivative instruments and their gains and losses and 3)
disclosures about credit-risk related contingent features in derivative
instruments.
SFAS No. 161 is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008, and will be adopted by us in
the first quarter of fiscal 2010. The adoption of SFAS No. 161 is not expected
to have a material impact on our condensed consolidated financial statements.
In April 2008, the FASB issued FSP No. FAS 142-3, Determination of the Useful
Life of Intangible Assets ("FSP FAS 142-3"). FSP FAS 142-3 amends the factors
that should be considered in developing renewal or extension assumptions used
for purposes of determining the useful life of a recognized intangible asset
under SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS No. 142"). FSP
FAS 142-3 is intended to improve the consistency between the useful life of a
recognized intangible asset under SFAS No. 142 and the period of expected cash
flows used to measure the fair value of the asset under SFAS No. 141R and other
accounting principles generally accepted in the United States. FSP FAS 142-3 is
effective for fiscal years beginning after December 15, 2008, and will be
adopted by us in the first quarter of fiscal 2010. Earlier application is not
permitted. We are currently evaluating the potential impact, if any, of the
adoption of FSP FAS 142-3 on our consolidated results of operations and
financial condition.
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles ("SFAS No. 162"). SFAS No. 162 is intended to improve
financial reporting by identifying a consistent framework, or hierarchy, for
selecting accounting principles to be used in preparing financial statements of
nongovernmental entities that are presented in conformity with generally
accepted accounting principles in the United States. SFAS No. 162 will be
effective 60 days following the SEC's approval of the Public Company Accounting
Oversight Board Auditing amendments to AU Section 411, The Meaning of Present
Fairly in Conformity with Generally Accepted Accounting Principles. The Company
does not expect the adoption of SFAS No. 162 to have a material impact on our
consolidated financial statements.
In June 2008, the FASB issued FSP No. EITF 03-6-1, Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities ("FSP EITF 03-6-1"). FSP EITF 03-6-1 addresses whether instruments
granted in share-based payment transactions are participating securities prior
to vesting and therefore need to be included in the earnings allocation in
calculating earnings per share under the two-class method described in SFAS
No. 138, Earnings per Share. FSP EITF 03-6-1 requires companies to treat
unvested share-based payment awards that have non-forfeitable rights to
dividends or dividend equivalents as a separate class of securities in
calculating earnings per share. FSP EITF 03-6-1 is effective for fiscal years
beginning after December 15, 2008, and will be adopted by us in the first
quarter of fiscal 2010. Earlier application is not permitted. The Company does
not expect adoption of FSP EITF 03-6-1 to have a material effect on its earnings
per share.
In October 2008, as a result of the recent credit crisis, the FASB issued FSP
No. FAS 157-3, Determining the Fair Value of a Financial Asset in a Market That
is Not Active ("FSP FAS 157-3"). FSP FAS 157-3 clarifies the application of SFAS
No. 157 in a market that is not active. FSP FAS 157-3 addresses how management
should consider measuring fair value when relevant observable data does not
exist. FSP FAS 157-3 also provides guidance on how observable market information
in a market that is not active should be considered when measuring fair value,
as well as how the use of market quotes should be considered when assessing the
relevance of observable and unobservable data available to measure fair value.
FSP FAS 157-3 is effective upon issuance, for companies that have adopted SFAS
No. 157. Revisions resulting from a change in the valuation technique or its
application shall be accounted for as a change in accounting estimate in
accordance with SFAS No. 154, Accounting Change and Error Corrections. FSP FAS
157-3 was adopted October 1, 2008, but currently has no effect on the Company's
results of operations, cash flows or financial position.
In November 2008, the Emerging Issues Tack Force ("EITF") reached a consensus on
EITF Issue No. 08-06, Equity Method Investment Considerations ("EITF 08-06").
The objective of EITF 08-06 is to clarify how to account for certain
transactions involving equity method investments. EITF 08-06 is effective for
financial statements issued for fiscal years beginning on or after December 15,
2008 and interim periods within those years. The Company will adopt EITF 08-06
as of the beginning of fiscal 2010, and is currently assessing the potential
impact upon adoption.
In December 2008, the FASB issued FSP No. FAS 132(R)-1, Employers' Disclosures
about Postretirement Benefit Plan Assets ("FSP FAS 132(R)-1"). FSP FAS 132(R)-1
amends SFAS No. 132(R), Employers' Disclosures about Pensions and Other
Postretirement Benefits, ("SFAS No. 132(R)") to provide guidance on an
employer's disclosures about plan assets of a defined benefit pension or
other postretirement plan. The disclosures about plan assets required by FSP FAS
132(R)-1 shall be provided for fiscal years ending after December 15, 2009, and
will be adopted by us in the first quarter of fiscal 2011. The Company does not
expect FSP FAS 132(R)-1 will have a material impact on its condensed
consolidated financial statements.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations
are based on our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these 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 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 the Company's critical accounting
policies as disclosed in our Annual Report on Form 10-K for the year ended
September 30, 2008.
Outlook for Fiscal 2009
Our backlog of orders was approximately $509.4 million at December 31, 2008, a
$7.7 million increase over the backlog of orders at December 31, 2007. Backlog
growth has been driven by strong market demand in petrochemical, utility and
transportation markets. Additionally, our acquisitions have strengthened our
strategic position in the electrical power products market and expanded our
product offering in the utility, industrial and commercial markets. We have
enhanced our capabilities with the addition of medium and low voltage IEC
switchgear, intelligent motor control systems and power distribution solutions.
The acquired Power/Vac® switchgear product line has a large installed base and a
broad customer support across utility, industrial and commercial markets. These
acquisitions provide us with a significantly broader product portfolio and have
enhanced our capabilities to meet market demands around the world. We believe
that our expanded product portfolio and new channels to new markets have
strengthened us in our Electrical Power Products business and positioned us in
our key markets.
Growth in demand for energy is expected to continue over the long term. New
infrastructure investments will be needed to ensure the available supply of
petroleum products. New power generation and distribution infrastructure will
also be needed to meet the growing demand for electrical energy. New power
generation plants will also be needed to replace the aging facilities across the
United States, as those plants reach the end of their life cycle. A heightened
concern for environmental damage, together with the uncertainty of gasoline
prices, has expanded the popularity of urban transit systems and pushed
ridership to an all-time high, which will drive new investment in transit
infrastructure. Opportunities for future projects continue; however, the timing
of many of these projects is difficult to predict. The current worldwide
financial crises have reduced the availability of liquidity and credit to fund
. . .
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