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| AETI > SEC Filings for AETI > Form 10-Q on 12-May-2009 | All Recent SEC Filings |
12-May-2009
Quarterly Report
The following discussion should be read in conjunction with the financial statements and notes thereto included elsewhere in this Form 10-Q and the financial statements in the 2008 Annual Report on Form 10-K filed on March 27, 2009. Historical results and percentage relationships set forth in the statement of operations, including trends that might appear, are not necessarily indicative of future operations.
FORWARD-LOOKING STATEMENTS
Except for historical and factual information, this document contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements that address activities, events or developments that we expect, believe or anticipate will or may occur in the future, such as predictions of future financial performance. All forward-looking statements are based on assumptions made by us based on our experience and perception of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances.
These statements, including statements regarding our capital needs, business strategy, expectations and intentions, are subject to numerous risks and uncertainties, many of which are beyond our control, including our ability to maintain key products' sales or effectively react to other risks including those discussed in Part I, Item 1A, Risk Factors, of our 2008 Annual Report on Form 10-K filed on March 27, 2009. We urge you to consider that statements that use the terms "believe," "do not believe," "anticipate," "expect," "plan," "estimate," "intend" and similar expressions are intended to identify forward-looking statements. No forward-looking statement can be guaranteed, and actual results may differ materially from those projected. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future events or otherwise.
BUSINESS
American Electric Technologies, Inc. is comprised of three segments: Technical Products and Services ("TP&S"), Electrical and Instrumentation Construction ("E&I") and American Access Technologies ("AAT"). The TP&S segment designs, manufactures, markets and provides products designed to distribute the flow of electricity and protect electrical equipment such as motors, transformers and cables, and also provides variable speed drives to both AC ("alternating current") and DC ("direct current") motors. Products offered by this segment include low and medium voltage switchgear, generator control and distribution switchgear, motor control centers, powerhouses, bus duct, variable frequency AC drives, variable speed DC drives, program logic control ("PLC") based automation systems, human machine interface ("HMI") and specialty panels. The products are built for application voltages from 480 volts to 38,000 volts and are used in a wide variety of industries. Services provided by TP&S include electrical equipment retrofits, upgrades, startups, testing and troubleshooting of substations, switchgear, drives and control systems.
The E&I segment provides a full range of electrical and instrumentation construction and installation services to both land and marine based markets of the oil and gas industry, the water and wastewater facilities industry and other commercial and industrial markets. The E&I segment provides services on both a fixed-price and a time-and-materials basis. The segment's services include electrical and instrumentation turnarounds, maintenance, renovation and new construction. Applications include installation of switchgear, AC and DC motors, drives, motor controls, lighting systems and high voltage cable. Marine based oil and gas services include complete electrical system rig-ups, modifications, start-ups and testing for vessels, drilling rigs, and production modules. These services can be manufactured and installed utilizing NEMA ("National Electrical Manufacturers Association") and ANSI ("American National Standards Institute") or IEC ("International Electrotechnical Commission") equipment to meet ABS ("American Bureau of Shipping"), USCG ("United States Coast Guard"), Lloyd's Register, a provider of marine certification services, and DNV (a leading certification body/registrar for management systems certification services) standards.
The AAT segment manufactures and markets zone cabling enclosures and manufactures formed metals products. The zone cabling product line develops and manufactures patented "zone cabling" and wireless telecommunication enclosures. These enclosures mount in ceilings, walls, raised floors, and certain modular furniture to facilitate the routing of telecommunications network cabling, fiber optics and wireless solutions to the workspace environment. AAT also operates a precision sheet metal fabrication and assembly operation and provides services such as precision "CNC" ("Computer Numerical Controlled") stamping, bending, assembling, painting, powder coating and silk screening to a diverse client base including, but not limited to, engineering, technology and electronics companies, primarily in the Southeast.
The Company has facilities and sales offices in Texas, Mississippi and Florida. We have minority interests in joint ventures which have facilities in Singapore and Xian, China.
The Company owns the Texas manufacturing and service facility, which is comprised of nine acres and 85,000 square feet under roof; the Florida facility, which is eight and one-half acres with two buildings totaling 67,500 square feet; and the Mississippi facility which is three acres with an 11,000 square foot building. The Company also owns the Houston facility which consists of three acres and 26,000 square feet of office, service and storage space.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We have adopted various accounting policies that govern the application of accounting principles generally accepted in the United States of America in the preparation of our financial statements. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Although these estimates are based on management's knowledge of current events and actions it may undertake in the future, they may ultimately differ from actual results.
Our significant accounting policies are more fully described in the financial statements filed in our 2008 Annual Report on Form 10-K filed with the Securities and Exchange Commission March 27, 2009. Certain accounting policies involve significant judgments and assumptions by us that have a material impact on the carrying value of certain assets and liabilities. Management believes the following critical accounting policies reflect its most significant estimates and assumptions used in the presentation of our financial statements. We do not have off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as "special purpose entities" ("SPE"s), nor do we have any "variable interest entities" ("VIE"s), as defined by FASB's Interpretation No. 46(R), Consolidation of Variable Interest Entities-an interpretation of ARB No. 51.
Inventory Valuation - Inventories are stated at the lower of cost or market, with material value determined using an average cost method. Inventory costs for finished goods and work-in-process include direct material, direct labor, production overhead and outside services. TP&S and E&I indirect overhead is apportioned to work in process based on direct labor incurred. AAT production overhead, including indirect labor, is allocated to finished goods and work-in-process based on material consumption which is an estimate that could be subject to change in the near term as additional information is obtained and as our operating environment changes.
Reserve for Obsolete and Slow-Moving Inventory - We regularly review the value of inventory on hand, using specific aging categories, and record a provision for obsolete and slow-moving inventory based on historical usage and estimated future usage. As actual future demand or market conditions may vary from those projected, adjustments to our inventory reserve may be required.
Allowance for Doubtful Accounts - The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. The estimate is based on management's assessment of the collectability of specific customer accounts and includes consideration for credit worthiness and financial condition of those specific customers. We also will review historical experience with the customer, the general economic environment and the aging of our receivables. We record an allowance to reduce receivables to the amount that we reasonably believe to be collectible. Based on our historical collection experience, we currently feel our allowance for doubtful accounts is adequate.
Revenue Recognition - The Company recognizes earnings from both fixed price and
modified fixed price contracts. Earnings on certain contracts are recognized on
the percentage-of-completion method following the guidelines in the AICPA's
Statement of Position ("SOP") No. 81-1, Accounting for Performance of
Construction Type and Certain Production Type Contracts. The Company recognizes
revenue from product sales at the time the product is shipped and title passes
to the customer. The Company believes that recognizing revenue at time of
shipment is appropriate because the Company's sales policies meet the four
criteria of FASB's Staff Accounting Bulletin No. 104, Revenue Recognition, which
are: (i) persuasive evidence that an arrangement exists, (ii) delivery has
occurred, (iii) the seller's price to the buyer is fixed and determinable, and
(iv) collectability is reasonably assured.
Foreign Currency Gains and Losses - Foreign currency translations are included as a separate component of comprehensive income. We have determined the local currency of our foreign joint ventures to be the functional currency. In accordance with Statement of Financial Accounting Standard No. 52, Foreign Currency Translation, the assets and liabilities of our foreign equity investees, denominated in foreign currency, are translated into United States dollars at exchange rates in effect at the consolidated balance sheet date; revenues and expenses are translated at the average exchange rate for the period. Related translation adjustments are reported as comprehensive income which is a separate component of stockholders' equity, whereas gains and losses resulting from foreign currency transactions are included in results of operations.
Federal Income Taxes - The asset and liability method is used in accounting for federal income taxes (see Note 10). Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The estimated value of deferred tax assets are reviewed annually and a valuation allowance is provided if it is more likely than not that the deferred tax assets will not give rise to future benefits in our tax returns.
Contingencies - In accordance with SFAS No. 5, Accounting for Contingencies, we record an estimated loss from a loss contingency when information indicates that it is probable that an asset has been impaired or a liability has been incurred and the amount of loss can be reasonably estimated. Contingencies are often resolved over long time periods, are based on unique facts and circumstances, and are inherently uncertain. We regularly evaluate current information available to us to determine whether such accruals should be adjusted or other disclosures related to contingencies are required. We are a party to a number of legal proceedings in the normal course of our business for which we have made appropriate provisions where we believe an ultimate loss is probable. The ultimate resolution of these matters, individually or in the aggregate is not likely to have a material impact on the company's financial position.
Equity in Joint Venture Income - The Company accounts for its investments in the joint ventures using the equity method. Under the equity method, the Company records its pro-rata share of joint venture income or losses and adjusts the basis of its investment accordingly.
Consolidated comparison of the three months ended March 31, 2009 and 2008 (in thousands).
Revenues and Gross Profit - Total consolidated net sales decreased $999.6 or 5.9%, to $15,978.2 for the three months ended March 31, 2009 over the comparable period in 2008. The decrease occurred due to a $751.5 decline in E&I Construction sales, primarily due reduced new school construction activity and a $639.1 reduction in AAT's zone cabling sales. These declines were partially offset by a $391.0 net increase in TP&S revenues.
Consolidated cost of sales for the three months ended March 31, 2009 was $13,750.1, a $997.9 decrease, or 6.8%, over the first quarter of 2008. The decline in cost of sales is primarily due to the reduced overall sales referred to above and declines in labor, material and related costs associated with the sales activity. Cost of sales, as a percentage of net sales declined from 86.9% to 86.1% which primarily relates to higher proportion of higher margin TP&S sales.
Consolidated gross profit during the three-month period ended March 31, 2009 was essentially unchanged at $2,228.1 from the prior year period in spite of the reduced sales. This stability is associated with improved sales mix primarily attributable to reduced lower margin E&I Construction sales and increases in TP&S revenues. Consolidated gross profit as a percent of net sales was 13.9% during the three-month period, compared to 13.1% in the prior year and this improvement is related to the overall percentage cost improvement noted above as well as the favorable revenue mix. Gross profit percentages in the TP&S segment increased and AAT and E&I Construction reported declines.
Selling, General and Administrative Expenses - Total consolidated selling, general and administrative expenses were $1,810.8 during the three-month period ended March 31, 2009, a decline of $341.3 from the prior year period. This improvement is principally attributable to reductions in compensation expense of $153.5, lower Sarbanes Oxley compliance costs of $51.0, less recruiting expense of $21.0, lower bad debt provisions of $32.0 and lower performance based compensation of $22.0.
Other Income and Expense - Consolidated other income and expense increased by $352.8 due to the increase of $376.5 in equity in joint venture income, primarily due to increased earnings in Singapore and China of $184 and $173, respectively. Interest expense was lower by $49 due primarily to lower interest rates and a $1 million reduction in average loans outstanding. The 2009 results were negatively impacted by $29 in additional costs related to the Chinese joint venture and the settlement of several legal claims $25.
Provision for Income Taxes - The consolidated income tax expense was substantially increased because of the $692.4 increase in earnings before income taxes as explained above. The slight decline in the effective tax rate to 35.7% from 36.9% is due to an increase in the estimated credits from deemed foreign income taxes because of higher earnings from the Singapore affiliate.
Net Income - Net income for the three months ended March 31, 2009 was $651.6 compared to $202.2 for the prior year period. The increase in net income is primarily attributable to the lower cost of goods sold, a 15.9% improvement in selling, general and administrative expenses, higher other income partially offset by increased taxes on income.
SEGMENT COMPARISON:
Technical Products and Services - The TP&S segment revenues increased $391.0 from $9,266.4 for the first quarter of 2008 to $9,657.4 for the first quarter of 2009. The 4.2% increase in revenues for this segment reflects consistent demand for the company's products and services. Manufacturing revenues reflected a higher proportion of electrical drive systems than the prior year quarter.
Gross profits for the TP&S segment for the first quarter of 2009 were $2,237.4, an increase of $1,048.8 over the prior year level of $1,188.6 due primarily to the revenue mix impact noted above. The higher proportion of electrical drive system projects caused the gross profit percentage to improve by 10.3% to 23.2%. Gross profits were additionally favorably impacted by a $200.0 recovery of 2008 cost overruns from a marine system project. Technical Products & Services income before taxes for the first quarter of 2009 was $2,128.6, an increase of $1,506.4 over 2008 of $622.2 due to the increased gross profit, improved equity income and reduced corporate overhead allocations.
The backlog for the TP&S segment was approximately $10.1 million as of March 31, 2009, a decline of approximately $4.3 million since December 31, 2008. All of this backlog should be realized in revenues for the remainder of the fiscal year. There is a high degree of uncertainty regarding the demand level for the segment's products and services during the second half of the fiscal year.
Electrical & Instrumentation Construction - The E&I segment reported sales of $4,985.7 in the first quarter of 2009, a decline of $751.5 over the initial quarter of 2008. The primary reason for the reduced sales was the $2,463.0 decline occasioned by the planned withdrawal from the new school contracting business. Reduced wastewater treatment plant sales ($1,253.0) and marine electrical contracting weakness ($467.0) were offset by increased revenues from mobile data center construction ($1,576.0) and power house projects ($567). The moderation in rate of increase from prior quarters was due to working down the backlog in the new school electrical projects. Increases in the waster water treatment plant business were offset by a decline in the marine market.
Gross profits for the E&I segment during the first quarter of 2009 were a negative $88.4, a $638.1 decline from the prior year. The reduced gross profit is attributable to the $511.0 decrease in gross profits from the new school construction market and reductions occasioned by lower revenues in wastewater treatment plants ($442.5) and marine construction ($83.8). These declines were partially offset by the gross profit improvements due to sales increases in the data center business ($292.2) and power house construction ($127.7). The negative gross profit in this segment is largely attributable to additional costs related to the completion of the final new school construction project. The E&I segment's loss before taxes for the first quarter of 2009 was $472.7, a decline of $550.5 from 2008. This occurred primarily due to the reduced gross profits explained above partially offset by lower allocated corporate overheads.
The backlog for the E&I segment was approximately $4.8 million as of March 31, 2009, a decrease of $2.3 million since the beginning of the year. The predominance of the backlog should be realized in revenues for the remainder of the fiscal year. The substantial decline in backlog is largely attributable to completion of most of the work in the new school construction market that the company plans to finalize in the near future and weakening conditions in many of the segment's markets.
American Access Technologies - The American Access segment sales declined $639.1 from the comparable prior year reporting period for this quarter primarily due to a reduction in sales to the zone cabling and value added manufacturing markets. Sales of custom fabrication products partially offset these declines. Gross profits declined by $412.4 due to the decline in sales and a reduced gross profit percentage due to higher manufacturing overheads. Income before income taxes declined $385.9 due to the reduction in gross profits partially offset by lower overall selling, general and administrative overheads. The segment expects some improvement in the prospective quarterly sales levels based on expected increases in its value added manufacturing markets.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2009, AETI's cash and cash equivalents were $835.4 compared to $148.6 as of December 31, 2008. As of March 31, 2009, AETI had outstanding borrowings of $4,000 under its revolving credit facility, unchanged from the balance as of December 31, 2008. Net current assets were approximately $14,847.4 and $14,768.8 as of March 31, 2009 and December 31, 2008, respectively. As of March 31, 2009, AETI's current ratio and long term debt to total capitalization ratios were 2.54 and 15.9%, respectively. The comparable ratios at December 31, 2008 were 2.3% and 19.1%.
AETI's long term debt as of March 31, 2009 was $4,487.9, on which interest payments are current. This amount includes the long term portion of a capitalized lease obligation described in the financial statement notes. AETI amended its revolving credit facility, effective June 30, 2008 to, amongst other things, increase the line to $10,000 and extend the maturity date to June 30, 2010.
Operating Activities
During the three months ended March 31, 2009, AETI generated cash flows from operations of $914.2 as compared to $881.5 in 2008. Operating cash flow from net income and depreciation was partially offset by the equity income from joint ventures in 2009. Reduced accounts receivable, and inventories and increased income tax payable were partially offset by decreased accounts payable and accrued liabilities and increased prepaid expenses and net milestone billings. The 2008 period can be explained by the same factors except that increased accounts payable and accrued liabilities and prepaid expenses were a source of operating cash flow in the period.
Investing Activities
During the three months ending March 31, 2009, the Company utilized $205.7 in cash from net investing activities compared to utilization of $105.5 in 2008. In 2009, capital expenditures have been $206.3 which is comprised primarily of maintenance capital.
In 2008 the Company invested $110.5 in capital expenditures.
Financing Activities
The Company paid $33.5 in financing costs under a finance lease and received $11.8 in connection with stock purchases under its employee stock purchase plan.
In 2008, AETI did not record any cash flows from financing activities during the first quarter.
The Company believes its existing cash, working capital and unused credit facility combined with operating earnings will be sufficient to meet its working capital needs for the next twelve months.
Outlook for Fiscal 2009
There is a high degree of uncertainty regarding the company's revenue levels for the second half of the fiscal year and as a result, the primary management focus is on increasing our orders for that period and the following year. As previously reported, the company undertook a series of productivity improvement measures which reduced its breakeven levels and reflected itself in improved margins during the most recent fiscal quarter. Management will continue to monitor the company's sales levels and cost structure and take additional actions as appropriate to maintain AETI's strong financial position.
The Company has experienced a pronounced decline in its backlog as a result of market demand occasioned by the recent volatility in the financial and commodity markets. Management cannot predict when demand for its traditional products and services will begin to increase so as a result we will continue to adjust base costs and conserve working capital. The Company believes these actions will sustain its strong financial position. In addition, we will maintain our recent product development activities in alternative energy, value added manufacturing and portable data centers in order to augment the revenues from our traditional markets. Although AAT's sales levels reflected a recent decline due to the zone cabling market decline, its recent efforts to secure additional value-added fabrication customers are likely to restore the unit to break even sales levels during the second quarter of 2009.
Effects of Inflation
AETI has experienced a high degree of volatility in many of its raw materials including copper, steel and aluminum during the last eighteen months. Most recently, these material costs are generally lower than in 2008 and there are no indications that inflationary pressures will be significant in the foreseeable future. We do not believe that this price volatility has had a significant impact on the company's operating margins primarily due to relatively short cycle times of the company's purchasing and project completions.
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