Add
AETI to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| AETI > SEC Filings for AETI > Form 10-Q on 9-Nov-2009 | All Recent SEC Filings |
9-Nov-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, high voltage cable, and data centers. 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, Xian, China and Jakarta, Indonesia.
The Company owns the Texas facilities, which are twelve acres with a 101,000 square foot building; 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.
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 on 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).
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 indirect overhead is apportioned to work in process based on direct cost 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. The Company follows accounting guidance in the Codification for accounting policies relating to our use of the percentage-of-completion method, estimating costs and revenue recognition, including the recognition of profit incentives, combining and segmenting contracts, and unapproved change order/claim recognition. Due to the various estimates inherent in contract accounting, actual results could differ from those estimates. 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 are to recognize revenue once each of the following four
criteria have been met: (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. 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; revenue and expenses are translated at the average exchange rate for the period. Related translation adjustments are reported as comprehensive income (loss) 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 (See Note 13) - 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. Dividends received from the joint ventures, if any, are recorded as reductions to the investment balance.
THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2009 AS COMPARED WITH THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2008
OVERALL RESULTS OF OPERATIONS
Consolidated comparison of the nine months ended September 30, 2009 and 2008 (in thousands of dollars).
Revenue and Gross Profit. Total consolidated net sales decreased $8,258.3 or 17.1%, to $40,119.3 for the nine months ended September 30, 2009 over the comparable period in 2008. The decrease occurred primarily in the E&I Construction segment ("E&I") in the amount of $5,434.4. Sales for the American Access Technologies ("AAT) and Technical Products and Services ("TP&S") segments declined by $1,083.9 and $1,740.1, respectively. The decline in E&I was largely attributable to the departure from the new school construction market but there was weakness across all market segments. The decline in AAT was associated with weakness in the zone cabling and custom fabrication markets.
Consolidated cost of sales for the nine months ended September 30, 2009 was $35,352.7, a $7,088.9 decrease, or 16.7%, over the prior year period. The decrease in cost of sales is primarily due to overall decline in net sales over the prior year period. Cost of sales, as a percentage of revenue was 88.1%, an increase of 0.5%. Cost of sales percentages improved in the TP&S segment due to an increased proportion of variable speed alternating current drive products. The cost of sales percentage was higher in the AAT segment do to higher fixed and indirect costs as a percent of sales. The most significant reason for the higher overall cost of goods sold percentage resulted from unexpected costs in the E&I segment, incurred during the completion of the final school construction project that resulted in a negative gross profit of $1,501.7. An explanation of this loss is explained in Note 13 of the financial statements.
Consolidated gross profit during the nine month period ended September 30, 2009 decreased by $1,169.5 to $4,766.6 as compared to $5,936.1 in 2008. The decline is attributable to the gross profits associated with the decline in sales volumes. The gross margin percentage for the nine month period was 11.9% as compared to 12.3% for the comparable period in 2008. This decrease is primarily due to the E&I contract referenced above. The loss on this remaining contract negatively impacted the overall gross profit percentage by 3.7%. The Company has no remaining backlog in the new school construction market.
Selling, General and Administrative Expenses. Total consolidated selling, general and administrative expenses were $5,119.1 during the nine month period ended September 30, 2009, a decrease of $995.5 or 16.3% from the prior year period. The improvement is attributable to lower selling expenses ($132.4), primarily sales compensation at the E&I and TP&S segments, lower general and administrative salary and benefit costs ($434.2) due to cost reduction measures taken during the latter part of 2008, reduced provisions for stock and cash incentive plans ($117.0), lower corporate salaries and benefits ($137.6) and an overall reduction in general and administrative costs, none individually significant ($174.3).
Other Income and Expense. Consolidated net other income decreased by $166.9 from the prior year period reflecting the net decrease of $125.4 in equity income from joint ventures. The decrease in equity income occurred due to decreased earnings from BOMAY. Interest expense was lower by $113.9 on lower outstanding borrowings on the revolving credit facility and lower short term interest rates.
Provision for Income Taxes. Income tax expense declined by $139.9 as compared to the prior year due to the decrease in earnings before income taxes. The effective tax rate of 35.4% was slightly lower than the earlier year due to higher deemed foreign tax credits in the current period.
Net Income. Net income for the nine months ended September 30, 2009 was $530.9, a decrease of $201.0 as compared to $731.9 for the prior year period. The decrease in net income is a reflection of lower income before income taxes and lower income tax expense during the third quarter of 2009. As elaborated on above, the lower income before income taxes is associated with reduced revenue ($8,258.3) and equity income ($125.4) that was partially offset by improved selling, general and administrative expenses of $995.5.
Consolidated comparison of the three months ended September 30, 2009 and 2008 (in thousands of dollars).
Revenue and Gross Profit. Total consolidated net sales decreased $2,860.6 or 19.3%, to $11,967.0 for the three months ended September 30, 2009 over the comparable period in 2008. The decline was occasioned by reduced sales level in the TP&S segment of $2,525.5. This reduction is due to a decline in demand for our traditional products occasioned by the recent volatility in the financial and commodity markets. AAT reported a decrease of 15.9% in revenue to $1,732.0 and E&I was essentially flat at $4,939.0.
Consolidated cost of sales for the three months ended September 30, 2009 was $10,142.2, a $3,220.7 decrease, or 24.1%, over the third quarter of 2008. The decrease in cost of sales is primarily due to the overall reduction in consolidated revenue. Cost of sales, as a percentage of net sales decreased from 90.1% to 84.8%. Cost of goods sold and the percentage of net sales improved primarily as a result of our departure from the new school construction business and the completion of the final new school construction project in the second quarter of this year.
Consolidated gross profit during the three-month period ended September 30, 2009
increased by $360.1. This increase is primarily attributable to the E&I segment
($746.6) and was partially offset by decreases in gross profit for TP&S ($145.7)
and AAT ($240.8). Consolidated gross profit as a percent of net sales was 15.2%
during the three-month period, compared to 9.9% in the prior year. Gross profit
percentages in the E&I segment improved 15.1% due to substantial completion of
the remaining new school construction project in the previous quarter and the
segments focus on traditional industrial, commercial and energy markets. Gross
profit percentages in the TP&S segment improved 2.8% due to favorable product
mix and AAT experienced a 10.0% decline due to a higher proportion of fixed and
indirect manufacturing costs because of the lower than expected sales volumes
from a value added manufacturing customer.
Selling, General and Administrative Expenses. Total consolidated selling, general and administrative expenses were $1,580.3 during the three-month period ended September 30, 2009, a decrease of $340.7 from the prior year period. This improvement is principally attributable to reduced selling expenses ($38.9) as well as reduced management and support staff salaries and benefits ($95.6), reduced provisions for performance-based compensation ($47.6) and lower corporate salaries and benefits ($71.0). Most of the improved costs were associated with cost reduction measures implemented in the latter part of 2008 and early 2009.
Other Income and Expense. Consolidated other income and expense decreased by $459.2, primarily due to the decline of $424.1 in equity in joint venture income which was partially offset by reduced interest expense ($34.0).
Provision for Income Taxes. The consolidated income tax expense was $84.5 higher than the prior year period due to improved earnings before income taxes and partially offset by a slight decrease in the effective tax rate to 35.4%. This rate change is due to a decrease in the estimated deemed foreign tax credits from equity income.
Net Income. Net income for the three months ended September 30, 2009 was $170.3 compared to $13.1 for the prior year period. The increase in net income is attributable to an improved gross profit margin and lower selling, general and administrative expenses, partially offset by increased income tax provision.
SEGMENT COMPARISON:
Technical Products and Services. The TP&S segment revenue decreased $2,525.5 from $7,821.5 for the third quarter of 2008 to $5,296.0 for the third quarter of 2009. The 32.3% decrease in revenue for this segment reflects a reduced demand for the company's products and services, given the current weakness in the domestic traditional energy markets.
Gross profits for the TP&S segment for the third quarter of 2009 were $766.5, a decrease of $145.7 over the prior year level of $912.1 due primarily to the revenue impact noted above and partially offset by a favorable product mix that contributed to a higher gross profit percentage. TP&S income before taxes for the third quarter of 2009 was $330.9, a decrease of $326.7 over 2008's level of $657.6 due to the decreased gross profits and reduced joint venture income ($424.1), partially offset by reduced allocation of selling, general and administrative expenses ($243.1).
The backlog for the TP&S segment was approximately $8.3 million as of September 30, 2009, a decrease of approximately $6.2 million since the beginning of the fiscal year. Approximately 30% of this backlog should be realized as revenue during the remainder of the fiscal year. The reduction in backlog is attributable to the decline in the North American drilling market and the reduced global economic activity.
Electrical & Instrumentation Construction. The E&I segment reported sales of $4,939.0 in the third quarter of 2009, a decline of $6.3 or 0.1 %, over the third quarter of 2008.
Gross profit for the E&I segment during the third quarter of 2009 was $873.8, compared to $127.2 in the prior year. Gross profit as a percentage of sales improved from 2.6% for the third quarter of 2008 to 17.7% for the same period in 2009. This improvement coincides with the segment's focus on traditional industrial, commercial energy and data center markets. The E&I segment's income before taxes for the third quarter of 2009 was $464.1, compared to a loss of $261.3 in 2008. The improvement in income before taxes is attributable to the higher gross profit realized on traditional construction projects for the segment as compared to 2008, when the segment was engaged in several new school construction projects which yielded significantly lower margins.
The backlog for the E&I segment was approximately $9.9 million as of September 30, 2009, an increase $2.8 million over the previous year. Approximately 20% of this backlog should be realized in revenue for the remainder of the fiscal year. The increase in backlog is attributable to the recent contract signings in the wastewater market.
American Access Technologies. The American Access segment sales declined $328.7 from the comparable prior year reporting period or 15.6%. Lower demand for the unit's zone cabling products and lower than expected value-add manufacturing revenues contributed to the decline. Gross profits and gross profit percentage declined by $240.8 and 10.0%, respectively. The deterioration in gross profit percentage was due primarily to a higher proportion of fixed and indirect manufacturing costs resulting from the reduced sales volumes. Income before income taxes declined $269.7 due to the decreased gross profits.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2009, AETI's cash and cash equivalents were $1,000.6 compared to $148.6 as of December 31, 2008. As of September 30, 2009, AETI had outstanding borrowings of $3,000.0 under its revolving credit facility, a $1,000.0 reduction from the balance as of December 31, 2008. Working capital was approximately $15,259.9 and $14,768.8 as of September 30, 2009 and December 31, 2008, respectively. As of September 30, 2009, AETI's current ratio and long-term debt to total capitalization ratios were 3.4 and 12.6%, respectively. The comparable ratios at December 31, 2008 were 2.3 and 16.5%.
AETI's long-term debt as of September 30, 2009 was $3,419.4 on which interest payments are current. This amount includes the long-term portion of a capitalized lease obligation described in the financial statement notes.
Operating Activities
During the nine months ended September 30, 2009, AETI generated cash flows from operations of $905.4 as compared to $573.6 for the same period 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 net milestone billings. The 2008 period can be explained by the same factors except that increased accounts payable and accrued liabilities were a source and inventories were a use of operating cash flow in the period.
Investing Activities
During the nine months ending September 30, 2009, the Company generated $1,013.9 in cash from net investing activities compared to $668.1 in 2008. In 2009, capital expenditures have been $552.4 which is comprised of maintenance capital, enhancements to our enterprise resource planning software system and a renewable energy test unit. The Company received $1,557.2 in dividends from BOMAY and MIEFE.
In 2008 the Company invested $533.2 in capital expenditures and received $1,193.8 in dividends from its joint venture investments.
Financing Activities
The Company paid $102.1 in financing costs under a finance lease, received $34.9 in connection with stock purchases under its employee stock purchase plan and repaid $1,000.0 of its long-term debt.
In 2008 the Company paid $46.2 in financing costs under a financing lease, received $10.4 in connection with stock purchases under its stock purchase plan and repaid $1,000.0 of its long-term debt.
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.
Near Term Strategy
There is a high degree of uncertainty regarding the company's revenue levels for the last quarter 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 . . .
|
|