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| POWL > SEC Filings for POWL > Form 10-Q on 6-May-2009 | All Recent SEC Filings |
6-May-2009
Quarterly Report
• The U.S. government's proposed plan to address the financial crisis 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. Revenues and costs are primarily related to
engineered-to-order equipment and systems which precludes us from providing
detailed price and volume information.
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 stronger backlog of orders into fiscal
year 2009.
Results of Operations
Revenue and Gross Profit
Consolidated revenues increased $3.8 million to $164.1 million in the second
quarter of fiscal 2009 compared to $160.3 million in the second quarter of
fiscal 2008. For the second quarter of fiscal 2009, domestic revenues increased
by 12.0% to $128.1 million compared to the second quarter of 2008. Total
international revenues decreased to $36.0 million in the second quarter of 2009
compared to $45.9 million in the second quarter of 2008 as a result of the
completion of a large international project at the end of fiscal 2008.
International revenues are primarily related to energy related investments,
principally oil and gas projects. Gross profit for the second quarter of fiscal
2009, as compared to the second quarter of fiscal 2008, increased by
approximately $3.1 million to $33.8 million as a result of improved pricing and
contract execution. Gross profit as a percentage of revenues increased to 20.6%
in the second quarter of fiscal 2009, compared to 19.1% in the second quarter of
fiscal 2008. This increase in gross profit as a percentage of revenues resulted
from an increased production volume and improved pricing, as well as the
favorable impact from the successful completion of certain jobs with margins
that exceeded expectations.
For the six months ended March 31, 2009, consolidated revenues increased
$27.1 million to $334.6 million compared to $307.5 million for the six months
ended March 31, 2008. Revenues increased primarily due to an increased sales
effort and strong market
demand. For the first six months of fiscal 2009, domestic revenues increased by
19.3% to $262.4 million compared to the first six months of fiscal 2008. Total
international revenues decreased to $72.2 million in the first six months of
2009 compared to $87.6 million in the first six months of fiscal 2008 as a
result of the completion of a large international project at the end of fiscal
2008. Gross profit for the first six months of fiscal 2009, as compared to the
first six months of fiscal 2008, increased by approximately $11.0 million, to
$68.3 million, as a result of improved pricing and contract execution. Gross
profit as a percentage of revenues increased to 20.4% for the first six months
of fiscal 2009, compared to 18.7% for the first six months of fiscal 2008. This
increase in gross profit as a percentage of revenues resulted from the increase
in production volume and improved pricing, as well as the favorable impact from
the successful completion of certain jobs with margins that exceeded
expectations.
Electrical Power Products
Our Electrical Power Products business segment recorded revenues of
$158.3 million in the second quarter of fiscal 2009, compared to $154.1 million
for the second quarter of fiscal 2008. In the second quarter of 2009, revenues
from public and private utilities were approximately $29.8 million, compared to
$52.4 million in the second quarter of fiscal 2008. Revenues from industrial and
commercial customers totaled $107.7 million in the second quarter of 2009, an
increase of $6.8 million compared to the second quarter of fiscal 2008.
Municipal and transit projects generated revenues of $20.8 million in the second
quarter of fiscal 2009 compared to $0.8 million in the second quarter of fiscal
2008.
Business segment gross profit, as a percentage of revenues, was 20.2% in the
second quarter of fiscal 2009, compared to 18.5% in the second quarter of fiscal
2008. The increase in gross profit as a percentage of revenues was attributable
to an increase in production volume and improved pricing, along with higher than
anticipated margins being achieved on various jobs.
For the six months ended March 31, 2009, our Electrical Power Products segment
recorded revenues of $322.2 million, compared to $295.2 million for the six
months ended March 31, 2008. In the first six months of fiscal 2009, revenues
from public and private utilities were approximately $68.3 million, compared to
$96.1 million in the first six months of fiscal 2008. Revenues from commercial
and industrial customers totaled $221.8 million in the first six months of
fiscal 2009, an increase of $34.6 million compared to the first six months of
fiscal 2008. Municipal and transit projects generated revenues of $32.1 million
in the first six months of fiscal 2009, compared to $11.9 million in the first
six months of fiscal 2008.
For the six months ended March 31, 2009, gross profit from the Electrical Power
Products business segment, as a percentage of revenues, was 19.9%, compared to
18.1% for the six months ended March 31, 2008. The increase in gross profit as a
percentage of revenues was attributable to an increase in production volume and
improved pricing, along with higher than anticipated margins being achieved on
various jobs.
Process Control Systems
Our Process Control Systems business segment recorded revenues of $5.8 million
in the second quarter of fiscal 2009, a decrease from $6.2 million in the second
quarter of fiscal 2008. Business segment gross profit, as a percentage of
revenues, decreased to 32.4% in the second quarter of fiscal 2009 compared to
35.8% in the second quarter of fiscal 2008. This decrease was primarily
attributable to the substantial completion of certain projects in early 2008.
For the six months ended March 31, 2009, our Process Control Systems business
segment recorded revenues of $12.4 million, up from $12.3 million for the six
months ended March 31, 2008. Business segment gross profit increased, as a
percentage of revenues, to 34.0% for the first six months of fiscal 2009,
compared to 33.3% for the first six months of fiscal 2008. This increase
resulted from a favorable mix of jobs and achieving synergies and increased
efficiencies through regionalization of operations.
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 12.4% of
revenues in the second quarter of fiscal 2009 compared to 13.1% of revenues in
the second quarter of fiscal 2008. Selling, general and administrative expenses
were $20.3 million for the second quarter of fiscal 2009 compared to
$21.0 million for the second quarter of fiscal 2008. This decrease was primarily
related to the timing of incentive compensation expense in the current year.
Selling, general and administrative expenses decreased as a percentage of
revenues primarily due our ability to leverage our existing infrastructure to
support our increased production volume.
For the six months ended March 31, 2009, consolidated selling, general and
administrative expenses decreased to 12.5% of revenues, compared to 13.4% of
revenues for the six months ended March 31, 2008. Selling, general and
administrative expenses were $41.9 million for the first six months of fiscal
2009 compared to $41.1 million for the first six months 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 $0.3 million and $0.7 million for the three and six months
ended March 31, 2009, respectively, a decrease of approximately $0.5 million and
$0.9 million compared to the three and six months ended March 31, 2008,
respectively. The decrease in interest expense was primarily due to lower
interest rates and the lower amounts outstanding under our credit facility
during the first half of fiscal 2009.
Interest income was approximately $3,000 and $60,000 for the three and six
months ended March 31, 2009, respectively, compared to approximately $86,000 and
$201,000 for the three and six months ended March 31, 2008, respectively. This
decrease resulted from lower interest rates being earned on amounts invested.
Provision for Income Taxes
Our provision for income taxes reflects an effective tax rate on earnings before
income taxes of 35.1% in the second quarter of fiscal 2009 compared to 35.8% in
the second quarter of fiscal 2008. For the first six months of fiscal 2009, our
effective tax rate was 35.1% compared to 36.1% for the first six months of
fiscal 2008. The decrease in the effective tax rate resulted from our increased
domestic taxable income and the benefit derived from the Domestic Production
Activities Deduction. Our effective tax rate was also 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
tax accruals are a component of the effective tax rate.
Net Income
In the second quarter of fiscal 2009, we generated net income of $8.9 million,
or $0.77 per diluted share, compared to $6.0 million, or $0.53 per diluted
share, in the second quarter of fiscal 2008. For the six months ended March 31,
2009, we recorded net income of $16.7 million, or $1.45 per diluted share,
compared to $9.6 million, or $0.84 per diluted share, for the six months ended
March 31, 2008. We generated higher revenues and improved gross profits for the
Company as a whole, while leveraging our existing infrastructure to support our
increased production volume.
Backlog
The order backlog at March 31, 2009 was $486.5 million, compared to
$518.6 million at September 30, 2008 and $536.5 million at the end of the second
quarter of fiscal 2008. New orders placed during the second quarter of fiscal
2009 totaled $154.3 million compared to $196.2 million in the second quarter of
fiscal 2008.
Liquidity and Capital Resources
Cash and cash equivalents increased to approximately $60.1 million at March 31,
2009, as a result of cash flow provided by operations of approximately
$79.8 million for the first six months of fiscal 2009. As of March 31, 2009,
current assets exceeded current liabilities by 1.9 times and our debt to total
capitalization ratio was 6.3%. The approximately $79.8 million of cash flow from
operations resulted from our increased efforts to manage inventory and billings
to customers. The cash flow generated from operations in the first six months of
fiscal 2009 was used to repay the $19.0 million outstanding on the US Revolver
at September 30, 2008 and to finance our operational activities.
At March 31, 2009, we had cash and cash equivalents of $60.1 million, compared
to $10.1 million at September 30, 2008. We have a $71.0 million revolving credit
facility in the U.S. and an additional £4.0 million (approximately $5.7 million)
revolving credit facility in the United Kingdom, both of which expire in
December 2012. As of March 31, 2009, there was approximately $2.1 million
borrowed under these lines of credit. Total long-term debt and capital lease
obligations, including current maturities, totaled $14.6 million at March 31,
2009, compared to $41.8 million at September 30, 2008. Letters of credit
outstanding were $15.9 million at
March 31, 2009, 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 $55.1 million and $3.6 million, respectively, at
March 31, 2009. 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. On March 1, 2009, this
additional capacity was reduced by $12.5. 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 increased 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 extended the expiration of the Amended Credit Agreement by one year,
to December 31, 2012.
Operating Activities
During the first six months of fiscal 2009, cash provided by operating
activities was approximately $79.8 million, and during the first six months of
fiscal 2008, cash used in operating activities was approximately $9.6 million.
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. The increase in cash flow
from operations resulted from our increased efforts to manage inventory and
billings to customers.
Investing Activities
Investments in property, plant and equipment during the first six months of
fiscal 2009 totaled approximately $3.0 million compared to $1.5 million during
the first six months 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 $25.4 million for the
first six months of fiscal 2009, as the revolving line of credit balance was
paid down, due to lower levels of working capital investments. Net cash provided
by financing activities was approximately $13.7 million for the first six months
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, any
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. The Company does not
expect the adoption of SFAS No. 160 to have a material effect on our
consolidated results of operations and financial condition.
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 by us effective 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 Task 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.
. . .
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