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                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
 
                                   FORM 10-K
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(MARK ONE)
 
[X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
     SECURITIES EXCHANGE ACT OF 1934
 
                   FOR THE FISCAL YEAR ENDED OCTOBER 31, 19971998
 
                                       OR
 
[ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934
 
        FOR THE TRANSITION PERIOD FROM                TO
 
                         COMMISSION FILE NUMBER 0-6050
 
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                            POWELL INDUSTRIES, INC.
             (Exact name of registrant as specified in its charter)
 
                                               
                     NEVADA                                      88-0106100
        (State or other jurisdiction of                       (I.R.S. Employer
         Identification No.)
         incorporation or organization)                      Identification No.)
 
       8550 MOSLEY DRIVE, HOUSTON, TEXAS                         77075-1180
    (Address of principal executive offices)                     (Zip Code)
Registrant's telephone number, including area code: (713)944-6900 Securities registered pursuant to section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of Act: COMMON STOCK, PAR VALUE $.01 PER SHARE Indicate by "X" whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by "X" if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $97,049,000$77,963,000 as of January 14, 1998.8, 1999. The number of shares of the Company's Common Stock outstanding on that date was 10,645,946 shares10,660,679 shares. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for the 19981999 annual meeting of stockholders to be filed not later than 120 days after October 31, 19971998 are incorporated by reference into Part III. ================================================================================- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PART I ITEM 1. BUSINESS Powell Industries, Inc. ("Powell" or the "Company") was incorporated under the laws of the State of Nevada in December 1968. The Company is the successor to a corporation founded by William E. Powell in 1947, which merged into the Company in 1977. The Company sells, designs, develops, manufactures, packages and services systems and equipment for the distribution, control and management of electrical energy and other dynamic processes. The Company's offices are located in Houston, Texas with plants located in Houston, Greenville and Jacinto Port, Texas; Elyria and North Canton, Ohio; Franklin Park, Illinois; Pleasanton and Watsonville, California; and Norcross, Georgia. Most of the products manufactured by the Company are made pursuant to specifications required for a particular order. PRODUCTS AND SYSTEMS Powell designs, develops, manufactures, sells and services electrical power distribution and control equipment and systems through its subsidiaries: Powell Electrical Manufacturing Company; Powell-ESCO Company; Unibus, Inc.; Delta-Unibus Corp. and Transdyn Controls, Inc. As applicable to the context, the "Company" is also sometimes used herein to refer to Powell and its subsidiaries. The principal products are switchgear and related equipment, bus duct and process control systems. These products and systems are utilized primarily by refineries, petrochemical plants, utilities, paper mills, offshore platforms, commuter railways, vehicular transportation and numerous other industrial, commercial and governmental facilities. A brief description of each of the major products follows: Switchgear and other related Equipment: Free-standingSwitchgear is defined as free-standing metal enclosures containing a selection of electrical components that protect, monitor and control the flow of electricity from its source to motors, transformers and other electrically powered equipment as well as customized portable buildings to house switchgear and related equipment (PCRH)(PCR(R)). Major electrical components include circuit breakers, protective relays, meters, control switches, fuses, motor control centers and both current and potential transformers. During the fiscal years ended October 31, 1998, 1997 1996 and 1995,1996, sales and service of switchgear and other related equipment accounted for 73%77%, 76%73% and 73%76%, respectively, of consolidated revenues of the Company. Bus Duct: Bus duct consists of insulated power conductors housed in a metal enclosure. Individual pieces of bus duct are arranged in whatever physical configuration may be required to distribute electrical power to or from a generator, transformer, switching device or other electrical apparatus. The Company can provide the nonsegregated phase, segregated phase and isolated phase styles of bus duct with numerous amperage and voltage ratings. Sales of bus duct accounted for 17%12%, 15%17% and 15% of consolidated revenues for fiscal years 1998, 1997 1996 and 1995,1996, respectively. Process Control Systems: The process control systems supplied by the Company consist principally of instrumentation, computer control, communications, and data management systems. Demand for process control systems has been for modernization and expansion projects as well as new facilities that mainly serve the Company=s transportation, environmental and utilities industries. During the fiscal years ended October 31, 1998, 1997 1996 and 1995,1996, sales of process control systems accounted for 10%11%, 9%10% and 12%9%, respectively, of consolidated revenues of the Company. 2 3 SUPPLIERS All of the Company's products are manufactured using components and materials that are readily available from numerous domestic suppliers. The Company has three principal suppliers of components and anticipates no difficulty in obtaining its components in sufficient quantities to support its manufacturing and assembly operations. METHODS OF DISTRIBUTION AND CUSTOMERS The Company's products are sold through manufacturers' representatives and its internal sales force. The Company is not dependent on any single customer for sales and the loss of any specific customer would not have a material adverse effect upon the Company. No single customer or export country accounted for more than 10% of consolidated revenues in the fiscal years ended 1998, 1997 1996 or 1995.1996. Export revenues were $85,448,000, $88,107,000 $63,884,000 and $39,491,000$63,884,000 in fiscal years 1998, 1997 1996 and 1995,1996, respectively. See Note HI of the Notes to Consolidated Financial Statements showing the geographic areas in which these revenues were recorded. COMPETITION The Company is engaged in a highly competitive business which is characterized by a small number of much larger companies that dominate the bulk of the market and a large number of smaller companies that compete for a limited share of such market. In the opinion of management, the competitive position of the Company is dependent on the ability of the Company to provide quality products to a customer's specifications, on a timely basis, at a competitive price, utilizing state-of-the-art materials, design and production methods. Some of the Company's principal competitors are larger and have greater capital and management resources. EMPLOYEES At October 31, 1997,1998, the Company employed 1,1631,253 employees on a full-time basis. Management considers its employee relations to be good. BACKLOG The Company's backlog of orders was $137,295,000$143,394,000 and $106,457,000$137,295,000 at October 31, 19971998 and 1996,1997, respectively, and the percentage of its 19971998 year end backlog that it does not expect to fill in fiscal year 19981999 is 15.3%17%. Orders included in the backlog are represented by purchase orders which the Company believes to be firm. The terms on which the Company accepts orders include a penalty for cancellation. Historically, no material amount of orders included in backlog has been canceled. No material portion of the Company's business is seasonal in nature. RESEARCH AND DEVELOPMENT During the fiscal years ended October 31, 1998, 1997 1996 and 1995,1996, the Company spent approximately $2,693,000, $2,649,000 $2,283,000 and $1,843,000$2,283,000 respectively, on research and development programs. 3 4 ITEM 2. PROPERTIES The following table sets forth information about the Company's principal facilities at October 31, 1997.1998.
SQUARE FOOTAGE OF LOCATION ACRES FACILITIES OCCUPANCY -------- ----- ---------- --------- Owned: Franklin Park, IL...........IL.................. 2.0 64,000 Delta-Unibus Corp. (Delta) Greenville, TX..............TX..................... 19.0 109,000 Powell-ESCO Company (Esco) Houston, TX.................TX........................ 26.2 421,000 Powell Electrical Manufacturing Co. (PEMCO) Jacinto Port, TX............TX................... 42.0 9,600 PEMCO-Offshore Division Elyria, OH..................OH......................... 8.6 64,000 Unibus, Inc. (Unibus) Leased: Pleasanton, CA..............CA..................... 39,100 Transdyn Controls, Inc. (Transdyn)and Power Electronics Company, Inc. (PPECO) Watsonville, CA.............CA.................... 9,600 Powell Electrical Manufacturing Co.PPECO Norcross, GA................GA....................... 19,200 Transdyn Controls, Inc. North Canton, OH............OH................... 53,000 PEMCO-North Canton Division
ITEM 3. LEGAL PROCEEDINGS On August 5, 1993, the Company was served with a lawsuit filed by National WestminsterWestminister Bank plcPlc ("NatWest") in the United States District Court, Southern District of New York, alleging that the Company had defaulted on a Construction Guaranty provided to NatWest in 1992 in connection with a project at MacDill Air Force Base. NatWest is seekinghad sought damages in excess of $20,000,000. On September 2, 1998, the Company signed a Settlement Agreement with NatWest to settle this litigation. The settlement closed on September 10, 1998. Under the terms of the Settlement Agreement, the Company paid NatWest $7,000,000 at closing, and delivered a promissory note in the principal amount of $1,000,000, bearing interest at 3% per annum, which will be due on December 31, 1999. The Company has deniedrecorded a charge of approximately $4.8 million (net of income taxes) to discontinued operations in its third quarter ended July 31, 1998 in connection with this settlement. The additional amount payable under the substantive allegationsSettlement Agreement (net of income taxes) was accrued in prior periods. See the complaint and hasSettlement Agreement filed counterclaimsas Exhibit 10.11 to this report for damages against NatWest alleging fraud, bad faith and failure to preserve and protect its collateral and seeking a declaratory judgement that the Company is not in defaultadditional terms of the Construction Guaranty. On May 30, 1997, the United States District Court Southern District of New York issued a memorandum and order denying the Company's motion to dismiss the complaint for lack of subject matter jurisdiction and, alternatively, to stay its prosecution pending disposition by the Armed Services Board of Contract Appeals of an appeal by NatWest's borrower, Empire Energy Management Systems, Inc., from the allegedly wrongful default termination of a contract between Empire and the United States Air Force (the "Air Force Contract"). In reaching its decision on the stay motion, the Court rejected one of the Company's several alleged defenses, in particular, its defense that the Air Force Contract was terminated for the convenience of the government. NatWest has expressed an interest in a prompt trial date on several occasions, but the Court has yet to set a trial date. Two motions remain pending before the Court. The ultimate disposition of the NatWest litigation is not presently determinable. Accordingly, although an unfavorable outcome to the NatWest litigation could have a material adverse effect on the Company's financial position and results of operations, the Company believes it would be unreasonable to conclude that an unfavorable outcome is probable.such settlement. The Company is a party to other disputes arising in the ordinary course of business. Management does not believe that the ultimate outcome of these disputes will materially effectaffect the financial position or results of operations of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters which were submitted to a vote of security holders through proxies, or otherwise, during the fourth quarter of the fiscal year ended October 31, 1997.1998. 4 5 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS As of October 31, 1997,1998, there were approximately 898865 holders of record of Powell Industries, Inc. common stock, which is traded on the over-the-counter market and listed on the NASDAQ National Market System under the symbol POWL. Quarterly stock prices and trading volumes for the last two fiscal years are as follows:
AVERAGE HIGH LOW LAST DAILY VOLUME ------ ------ ------ ------------ 1998 First Quarter................................ $17.56 $12.63 $13.13 10,267 Second Quarter............................... 14.00 10.00 12.63 22,518 Third Quarter................................ 13.50 11.75 12.75 10,933 Fourth Quarter............................... 12.63 7.25 9.25 9,764 1997 First Quarter.............................Quarter................................ $15.25 $ 9.88 $14.13 46,614 Second Quarter............................Quarter............................... 15.00 10.50 14.00 20,30219,637 Third Quarter.............................Quarter................................ 18.25 13.75 16.50 16,49016,233 Fourth Quarter............................Quarter............................... 17.75 14.75 14.75 13,031 1996 First Quarter............................. $ 8.88 $ 6.38 $ 8.50 23,295 Second Quarter............................ 10.63 8.38 9.63 31,914 Third Quarter............................. 12.38 9.13 10.00 29,380 Fourth Quarter............................ 12.25 8.75 10.50 20,617
The Company has paid no dividends on its common stock during the last three years and anticipates that it will not do so in the foreseeable future. ITEM 6. SELECTED FINANCIAL DATA The following data has been derived from consolidated financial statements that have been audited by Arthur Andersen LLP, independent public accountants. The information set forth below is not necessarily 5 6 indicative of the results of future operations and should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this Annual Report on Form 10-K.
YEARS ENDED OCTOBER 31, ----------------------------------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 1993 ------------ ------------ ------------ ------------ ----------------------- Statements of operations data: Revenues............................Revenues....................... $212,733,000 $191,651,000 $170,123,000 $139,534,000 $119,453,000 $94,790,000 Earnings from continuing operations........................operations................... 11,465,000 12,629,000 10,758,000 7,080,000 4,559,000 3,555,000 Earnings (loss)Loss from discontinued operations (net of income taxes)................................................... (4,800,000) -- (5,998,000) (1,382,000) (164,000) 964,000 Cumulative effect of change in accounting principles (net of income taxes)..................... -- -- -- -- (1,588,000) ------------ ------------ ------------ ------------ ----------------------- Net earnings..........................earnings..................... $ 6,665,000 $ 12,629,000 $ 4,760,000 $ 5,698,000 $ 4,395,000 $ 2,931,000 ============ ============ ============ ============ ======================= Net earnings per common and common equivalent share: Continuing operations...............operations Basic:....................... $ 1.171.08 $ 1.001.19 $ 1.02 $ .67 $ .43 $ .34Diluted:..................... 1.07 1.17 1.00 .67 .43 Discontinued operations.............operations Basic:....................... (.45) -- (.57) (.13) (.01) Diluted:..................... (.45) -- (.56) (.13) (.01) .09 Cumulative effect of change in accounting principles............. -- -- -- -- (.15) ------------ ------------ ------------ ------------ ----------- Net earnings per common share: Basic:....................... .63 1.19 .45 .54 .42 Diluted:..................... .62 1.17 .44 .54 .42 Weighted average number of common shares outstanding............. 10,644,427 10,622,521 10,566,934 10,534,371 10,505,204 Weighted average number of common and common equivalent share.................... $ 1.17 $ .44 $ .54 $ .42 $ .28 ============ ============ ============ ============ ===========
5 6
YEARS ENDED OCTOBER 31, ----------------------------------------------------------------------- 1997 1996 1995 1994 1993 ------------ ------------ ------------ ------------ ----------- Weighted average shares outstanding...outstanding.................... 10,743,428 10,808,384 10,764,656 10,611,331 10,509,371 10,478,632 Balance Sheet Data: Working capital.....................capital................ $ 58,826,000 $ 51,769,000 $ 46,505,000 $ 32,642,000 $ 30,351,000 $33,153,000 Total assets........................assets................... 127,131,000 122,867,000 99,523,000 90,534,000 84,327,000 76,114,000 Long-term debt......................debt................. 11,571,000 6,000,000 -- 3,750,000 6,563,000 9,375,000 Stockholders' equity................equity........... 83,336,000 76,307,000 63,225,000 57,657,000 51,656,000 46,631,000
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the consolidated financial statements. Any forward-looking statements made by or on behalf of the Company are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Readers are cautioned that such forward-looking statements involve risks and uncertainty in that actual results may differ materially from those projected in the forward-looking statements. These risks and uncertainties include, without limitation, the following: - Difficulties in scheduling which could arise from the inability to obtain materials or components in sufficient quantities as needed for the Company's manufacturing and assembly operations, - Difficulties in scheduling which could arise from significant customer directedcustomer-directed shipment delay, - Significant decrease in the Company's backlog, - Unforeseen political or economic problems in countries to which the Company exports its products, - Unforeseen material employee relations problems, - Problems in the quality, the design, the production methods or pricing of its products, - Unfavorable material litigation or claims made against the Company, and - Changes in general market conditions, competition and pricing. 6 7 RESULTS OF OPERATIONS The following table sets forth, as a percentage of revenues, certain items from the Consolidated Statements of Operations.
YEARS ENDED OCTOBER 31, ----------------------------------------------- 1998 1997 1996 1995 ----- ----- ----------- ------ ------ Revenues.................................................... 100.0% 100.0% 100.0% Gross profit................................................ 22.5 24.5 25.3 22.2 Selling, general and administrative expenses................ 14.5 15.1 15.8 14.5 Interest (income) expense, net.............................. .1 (.2) .1 .5 Earnings from continuing operations......................... 5.4 6.6 6.3 5.1 Losses from discontinued operations......................... (2.3) -- (3.5) (1.0) Net earnings................................................ 3.1 6.6 2.8 4.1
REVENUES The Company reported revenues of $212,733,000, $191,651,000 $170,123,000 and $139,534,000$170,123,000 in fiscal years 1998, 1997 1996 and 1995,1996, respectively. Revenues increased 13%11% in fiscal year 19971998 as compared to fiscal year 1996 and 22% in fiscal year 1996 as compared to fiscal year 19951997 due primarily to the increased volume of shipments of electrical distribution equipment to domestic customers in fiscal 1998 that was partially offset by lower revenues from the bus duct product line. Revenues increased 13% in fiscal year 1997 when compared to fiscal year 1996 due primarily to increased sales to export customers. All product lines reported increased revenue for fiscal year 1997. Export revenues continued to be an important component of the Company's operations, accounting for 46%40%, 38%46% and 28%38% of consolidated revenues in fiscal years 1998, 1997 1996 and 1995,1996, respectively. A schedule is 6 7 provided in Note HI of the Notes to Consolidated Financial Statements showing the geographic areas in which these sales were made. Management anticipates that consolidated revenues will increase in fiscal 19981999 and that export revenues will continue to contribute approximately 35% to 40% of consolidated revenues. GROSS PROFIT Gross profit, as a percentage of revenues, was 22.5%, 24.5%, 25.3% and 22.2%25.3% in fiscal years 1998, 1997 1996 and 1995,1996, respectively. The gross profit percentage decreased slightlyby 2.0% in 1998 from 1997 due primarily to losses at Powell-ESCO Company and revenues shifts to lower gross margin product mix. Gross profit improvedlines. The decrease in fiscal year1997 when compared to 1996 from fiscal year 1995was due to improved prices, higher volumes and higherthe shifts in revenues to lower gross margin contracts and services resulting primarily from a more favorable economy in most of the markets in which the Company competes.product lines. The Company continues to focus on productivity improvements to respond to the competitive markets it serves. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses as a percentage of revenues were 14.5%, 15.1%, 15.8% and 14.5%15.8% for fiscal years 1998, 1997 1996 and 1995,1996, respectively. The increasedecrease in fiscal year 1996,years 1998 and 1997, as a percentage of revenues, was due to higher marketing, incentives and commission expenses.controlling of expenses as volumes increased. INTEREST (INCOME) EXPENSE, NET Interest (income) expense net reflects a net interest income in fiscal year 1997 and a net interest expense in fiscal years 1998 and 1996 and 1995.net interest income in fiscal year 1997. The more favorable amounts werenet interest expense in 1998 was primarily due to a reductionan increase in total debt, partially offset by lower rates. The net interest income in 1997 was due to lower debt and the increased availability ofmore available funds to invest in 1997.invest. INCOME TAX PROVISION The effective income tax rate on earnings from continuing operations before income taxes was 32%, 33%32%, and 30%33% for fiscal years 1998, 1997 1996 and 1995,1996, respectively. The effective income tax rates are lower than the statutory rate due primarily to foreign sales corporation credits. 7 8 EARNINGS FROM CONTINUING OPERATIONS Earnings from continuing operations recorded in fiscal year 1998 were $11,465,000 or $1.07 per diluted share. This represented a 9.2% decrease in earnings compared to fiscal year 1997 earnings. The decrease was primarily due to losses at Powell-ESCO Company and revenue shifts to lower gross margin product lines. Earnings from continuing operations recorded in fiscal year 1997 were $12,629,000 or $1.17 per share. This represented adiluted share, an increase of 17.4% increase in earnings when compared to earnings from continuing operations of $10,758,000 or $1.00 per diluted share in fiscal year 1996 earnings. The1996. This increase was primarily due to the factors discussed above. Earnings from continuing operations recorded in fiscal year 1996 were $10,758,000 or $1.00 per share, an increase of 52.0% compared to net earnings in fiscal year 1995.increased volume and controlled costs. DISCONTINUED OPERATIONS See Note LM to Notes to Consolidated Financial Statements for discussion of the operations that were discontinued in fiscal yearyears 1998 and 1996. NET EARNINGS Net earnings were $6,665,000 or $.62 per diluted share in fiscal year 1998 compared to $12,629,000 or $1.17 per diluted share and $4,760,000 or $.44 per diluted share in fiscal year 1997 compared to $4,760,000 or $.44 per share and $5,688,000 or $.54 per share in fiscal year 1996, and 1995, respectively. The losses from discontinued operations, referred to in the previous paragraph, resulted in lower net earnings in fiscal year 19961998 as compared to 1995.1997. LIQUIDITY AND CAPITAL RESOURCES In August 1997,September 1998, the Company entered intoamended a $20,000,000 revolving line of credit agreement with a major domestic bank. The amendment provided for a $10,000,000 term loan and a revolving line of credit of $15,000,000. The term loan matures in five years with an amortization of seven years. The effective interest rate, after including a interest rate swap negotiated with the trust company of the same domestic bank, is 5.20 percent per annum plus a .75 to 1.25 fees based on financial covenants. The proceeds of the term loan were used to pay the Settlement Agreement discussed in Note M and to pay down the line of credit. As of October 31, 1997,1998, the Company had $6,000,000$2,000,000 in borrowings outstanding under this revolving line of credit. The Company's ability to satisfy its cash requirements is evaluated by analyzing key 7 8 measures of liquidity applicable to the Company. The following table is a summary of the liquidity measures which management believes to be significant.
1998 1997 1996 1995 --------------------- ----------- ----------- Working capital.............................. 51,769,000capital............................... $58,826,000 $51,769,000 $46,505,000 $32,642,000 Current ratio................................ratio................................. 2.95 to 1 2.36 to 1 2.42 to 1 2.30 to 1 Debt to total capitalization.................capitalization.................. .1 to 1 .1 to 1 .1 to 1
Management believes that the Company continues to maintain a strong liquidity position. The increase in working capital at October 31, 1997,1998, as compared to October 31, 1996,1997, is due mainly to increasesan increase in accounts receivable and costs and estimated earnings in excess of billings and inventories. These increases were partially offset by decreases in accounts receivable and increases in accrued liabilities, and billings in excess of costs and estimated earnings. Operating cash flows decreased $4,600,000 in fiscal 1998 as compared to fiscal 1997 due to payments made for the settlement of the NatWest litigation and decreased levels of billings in excess of costs and earnings, partially offset by increased collections on accounts receivable. Operating cash flows decreased $6,100,000 in fiscal 1997 as compared to fiscal 1996 due to the disposition of net assets of discontinued operations, partially offset by increased net income. Capital expenditures totaled $9,739,000 during fiscal year 1998 compared to $14,773,000 during fiscal year 1997 compared to $3,349,000 during1997. During fiscal year 1996. During fiscal year1998 and 1997 the majority of the capital expenditures was for plant expansions of operating facilities at PEMCO, Delta, and Unibus totaling approximately $12,000,000.PEMCO. Management expects the Company's capital expenditures program to be approximately $5,000,000$7,000,000 in fiscal year 19981999, primarily for additions and replacement of machinery and equipment and the completionpurchase of thea facility at Pemco.in North Canton, Ohio currently being leased. 8 9 The Company's fiscal year 1998 asset management program will continue to focus on the reduction of receivables days outstanding and reduction in inventories. Management believes that the cash and cash equivalents of $2,219,000$601,000 at October 31, 1997,1998, along with funds generated from operating activities and funds available through borrowings from the credit line will be sufficient to meet the capital requirements and operating needs of the Company.Company for at least the next twelve months. EFFECTS OF INFLATION AND RECESSION During the last three years, the Company has not experienced any significant effects of inflation on its operations. Management continues to evaluate the potential impact inflation could have on future growth and minimize the impact by including escalation clauses in long-term contracts. Recent marketing and financial reports indicate that the current economic conditions should improve slightlyremain in 1999 at approximately the same level as 1998 and the Company does not anticipate significant increases in inflation in the immediate future. YEAR 2000 COMPLIANCE The Year 2000 issue results from the historical use in computer software programs and operating systems of a two digit number to represent the year. Certain software and hardware may fail to properly function when confronted with dates that contain "00" as a two digit year. New information about the nuances of the problem seems to become available on almost a daily basis and that is likely to continue as companies around the world focus increased attention and resources on finding solutions to the problem's many manifestations. To address the potential risk for disruption of operations, each subsidiary of the Company has developed a compliance plan. The Company has substantially completed a comprehensive initial assessment of the readiness of its internal systems and manufacturing systems. Many of the readiness issues identified in internal systems during the course of the initial assessment have already been addressed. Numerous tests have been conducted to confirm the resolution of applied solutions. Additional testing will occur throughout 1999. While the Company's initial assessment is substantially complete, the Company intends to continue to update the assessment of its state of readiness based upon new information that may become available from third party vendors, suppliers and manufacturers in the months to come. All components originally manufactured by the Company are inherently compliant in that the components do not manipulate, process, store or record date-related information. However, a few subsidiaries, including the Company's largest subsidiary, Powell Electrical Manufacturing Company, sell engineered systems that include potentially noncompliant components manufactured by third parties. The Company is pursuing a plan to evaluate the compliance status of all components manufactured by third parties and will pass through to its customers any compliance warranties provided by the components' manufacturers. The Company will continue to strongly recommend to its customers that each make certain investmentsan independent evaluation of the readiness of manufactured products that include potentially noncompliant components. The Transdyn Controls, Inc. subsidiary is a systems integrator of primarily third party products. As an integrator, Transdyn must rely on the readiness information provided by the providers of those third party products. Microsoft is the primary provider of software Transdyn utilizes in its softwareintegrated systems. Based on currently available information, Transdyn believes that the versions of third party products currently integrated into systems it develops are either compliant or will be compliant upon application of readily available patches. Earlier versions of third party products integrated in systems delivered by Transdyn in the past are known to be noncompliant, and applicationsTransdyn will continue to ensurework to identify and notify affected customers. Transdyn is offering its services to affected customers to assist in the testing, retrofit or upgrade process. The costs to the Company to achieve Year 2000 readiness is not believed to be material. Most tasks associated with compliance plan implementation have been or will be completed by internal employees. Certain tasks will be performed by external solution providers; however, reliance on external resources will not be significant. 9 10 The most likely worst case Year 2000 scenario for the Company includes the following possibilities. - A limited number of components manufactured by third parties will fail in some respect despite the manufacturers' assurances that such components are compliant. To the extent that this occurs and the Company is yearobligated to do so under a contractual warranties, the Company will make replacement components available to customers. Otherwise, the Company will facilitate the identification of viable compliant components and replacement of the noncompliant components. - A limited number of customers who were notified of possible compliance issues associated with older equipment will fail to timely address the issue and will seek assistance from the Company after roll-over. To the extent sufficient and appropriate resources are available, the Company will facilitate component replacement or upgrades. - Some customers may suffer failures that cause those customers to delay placing additional orders of new equipment during the first quarter of 2000 compliant.or to delay payment for previously ordered products. The financial impactCompany plans to position itself to adjust to any temporary reduction of such investments hasnew orders and to withstand short term cash flow issues. - One or more physical facilities may suffer some degree of infrastructure failure, due in part to the number of geographic locations of the various subsidiaries. The Company plans to carefully manage its contractual obligations to customers during the first month 2000 so as to minimize the effect any infrastructure failure might have on its ability to satisfy those obligations. At this time, the Company does not beenintend to invest in alternative sources of water, power or telecommunications. The Company will prepare further contingency plans to deal with potential infrastructure failure if and is not anticipatedwhen additional information becomes available from current providers as to be material to its financial positiontheir state of readiness. While other scenarios are possible given the interdependent nature of all businesses, the Company believes that the foregoing elements, individually or its resultsany combination of operations in any given year.one or more other element, represent the most likely worst case scenario. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Financial Statements: Report of Independent Public Accountants.................. 911 Consolidated Balance Sheets as of October 31, 19971998 and 1996................................................... 101997................................................... 12 Consolidated Statements of Operations for the three years ended October 31, 1997................................. 111998................................. 13 Consolidated Statements of Stockholders' Equity for the three years ended October 31, 1997..................... 121998..................... 14 Consolidated Statements of Cash Flows for the three years ended October 31, 1997................................. 131998................................. 15 Notes to Consolidated Financial Statements................ 1416
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None 810 911 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To The Board of Directors and Stockholders of Powell Industries, Inc.: We have audited the accompanying consolidated balance sheets of Powell Industries, Inc. (a Nevada corporation) and subsidiaries as of October 31, 19971998 and 1996,1997, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended October 31, 1997.1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Powell Industries, Inc. and subsidiaries as of October 31, 1998 and 1997, and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended October 31, 1997,1998, in conformity with generally accepted accounting principles. Arthur AndersenARTHUR ANDERSEN LLP Houston, Texas December 3, 1997 9November 30, 1998 11 1012 POWELL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) ASSETS
OCTOBER 31, ------------------- 1998 1997 1996 -------- --------------- Current Assets: Cash and cash equivalents................................. $ 2,219601 $ 8,9352,219 Accounts receivable, less allowance for doubtful accounts of $761 and $465, and $777, respectively......................... 44,255 50,391 37,013 Costs and estimated earnings in excess of billings........ 24,783 18,986 13,934 Inventories............................................... 16,284 13,603 14,114 Deferred income taxes..................................... 709 825 2,572 Income taxes receivable................................... 945 1,351 876 Prepaid expenses and other current assets................. 1,441 2,594 1,700 -------- --------------- Total Current Assets.............................. 89,018 89,969 79,144 Property, plant and equipment, net.......................... 32,311 26,374 14,602 Deferred income taxes....................................... 833 1,578 1,164 Other assets................................................ 4,969 4,946 4,613 -------- --------------- Total Assets...................................... $127,131 $122,867 $99,523 ======== =============== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts and income taxes payable......................... $ 11,92912,094 $ 8,54311,929 Accrued salaries, bonuses and commissions................. 6,784 6,737 5,687 Accrued product warranty.................................. 1,388 1,511 1,614 Accrued legal expenses.................................... 1,133 3,785 3,903 Other accrued expenses.................................... 3,519 3,282 3,717 Billings in excess of costs and estimated earnings........ 3,845 10,956 5,425 Current maturities of long-term debt...................... 1,429 -- 3,750 -------- --------------- Total Current Liabilities......................... 30,192 38,200 32,639 Long-term debt, net of current maturities................... 11,571 6,000 -- Deferred compensation expense............................... 1,187 1,128 2,157 Postretirement benefits liability........................... 845 1,232 1,502 Commitments and contingencies Stockholders' Equity: Preferred stock, par value $.01; 5,000,000 shares authorized; none issued Common stock, par value $.01; 30,000,000 shares authorized; 10,642,77910,658,679 and 10,604,64410,642,779 shares issued and outstanding, respectively.............................. 106respectively............ 107 106 Additional paid-in capital................................ 5,919 5,782 5,601 Retained earnings......................................... 80,237 73,572 60,943 Deferred compensation-ESOP................................compensation -- ESOP............................. (2,927) (3,153) (3,425) -------- --------------- Total Stockholders' Equity........................ 83,336 76,307 63,225 -------- --------------- Total Liabilities and Stockholders' Equity........ $127,131 $122,867 $99,523 ======== =======
The accompanying notes are an integral part of these consolidated financial statements. 10 11 POWELL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED OCTOBER 31, ------------------------------ 1997 1996 1995 -------- -------- -------- Revenues.................................................... $191,651 $170,123 $139,534 Cost of goods sold.......................................... 144,645 127,075 108,525 -------- -------- -------- Gross profit................................................ 47,006 43,048 31,009 Selling, general and administrative expenses................ 28,982 26,928 20,286 -------- -------- -------- Earnings from continuing operations before interest and income taxes.............................................. 18,024 16,120 10,723 Interest (income) expense, net.............................. (416) 117 633 -------- -------- -------- Earnings from continuing operations before income taxes..... 18,440 16,003 10,090 Income tax provision........................................ 5,811 5,245 3,010 -------- -------- -------- Earnings from continuing operations......................... 12,629 10,758 7,080 Discontinued operations (net of income taxes): Loss from operations...................................... -- (4,860) (1,382) Loss on disposal of discontinued operations............... -- (1,138) -- -------- -------- -------- Net earnings................................................ $ 12,629 $ 4,760 $ 5,698 ======== ======== ======== Earnings (loss) per common and common equivalent share: Continuing operations..................................... $ 1.17 $ 1.00 $ .67 Discontinued operations................................... -- (.56) (.13) -------- -------- -------- Net earnings per common and common equivalent share......... $ 1.17 $ .44 $ .54 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 11 12 POWELL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK ADDITIONAL DEFERRED -------------------- PAID-IN RETAINED COMPENSATION SHARES AMOUNT CAPITAL EARNINGS ESOP ---------- ------ ---------- -------- ------------ Balance, October 31, 1994........... 10,517,704 $105 $4,906 $50,485 $(3,840) Net earnings...................... 5,698 Amortization of deferred compensation -- ESOP........... 147 Stock grants...................... 25,000 -- 156 ---------- ---- ------ ------- ------- Balance, October 31, 1995........... 10,542,704 105 5,062 56,183 (3,693) Net earnings...................... 4,760 Amortization of deferred compensation -- ESOP........... 268 Exercise of Stock options......... 11,940 -- 52 Stock grants...................... 50,000 1 487 ---------- ---- ------ ------- ------- Balance, October 31, 1996........... 10,604,644 106 5,601 60,943 (3,425) Net earnings...................... 12,629 Amortization of deferred compensation -- ESOP........... 272 Exercise of stock options......... 38,135 -- 181 ---------- ---- ------ ------- ------- Balance, October 31, 1997........... 10,642,779 $106 $5,782 $73,572 $(3,153) ========== ==== ====== ======= =======
The accompanying notes are an integral part of these consolidated financial statements. 12 13 POWELL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED OCTOBER 31, --------------------------------------- 1998 1997 1996 ----------- ----------- ----------- Revenues.............................................. $ 212,733 $ 191,651 $ 170,123 Cost of goods sold.................................... 164,944 144,645 127,075 ----------- ----------- ----------- Gross profit.......................................... 47,789 47,006 43,048 Selling, general & administrative expenses............ 30,805 28,982 26,928 ----------- ----------- ----------- Earnings from continuing operations before interest and income taxes.................................... 16,984 18,024 16,120 Interest expense (income), net........................ 239 (416) 117 ----------- ----------- ----------- Earnings from continuing operations before income taxes............................................... 16,745 18,440 16,003 Income tax provision.................................. 5,280 5,811 5,245 ----------- ----------- ----------- Earnings from continuing operations................... 11,465 12,629 10,758 Loss from discontinued operations, net of income taxes............................................... (4,800) -- (5,998) ----------- ----------- ----------- Net earnings.......................................... $ 6,665 $ 12,629 $ 4,760 =========== =========== =========== Earnings (loss) per common share: Continuing operations: Basic............................................ $ 1.08 $ 1.19 $ 1.02 Diluted.......................................... 1.07 1.17 1.00 Discontinued operations: Basic............................................ $ (.45) $ -- $ (.57) Diluted.......................................... (.45) -- (.56) Net earnings: Basic............................................ $ .63 $ 1.19 $ .45 Diluted.......................................... .62 1.17 .44 Weighted average number of common shares outstanding......................................... 10,644,427 10,622,521 10,566,934 Weighted average number of common and common equivalent shares outstanding....................... 10,743,428 10,808,384 10,764,656
The accompanying notes are an integral part of these consolidated financial statements. 13 14 POWELL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK ADDITIONAL DEFERRED ------------------- PAID-IN RETAINED COMPENSATION SHARES AMOUNT CAPITAL EARNINGS ESOP ---------- ------ ---------- -------- ------------ Balance, October 31, 1995............... 10,542,704 $105 $5,062 $56,183 $(3,693) Net earnings.......................... 4,760 Amortization of deferred compensation -- ESOP............... 268 Exercise of stock options............. 11,940 -- 52 Stock grants.......................... 50,000 1 487 ---------- ---- ------ ------- ------- Balance, October 31, 1996............... 10,604,644 106 5,601 60,943 (3,425) Net earnings.......................... 12,629 Amortization of deferred compensation -- ESOP............... 272 Exercise of stock options............. 38,135 -- 181 ---------- ---- ------ ------- ------- Balance, October 31, 1997............... 10,642,779 106 5,782 73,572 (3,153) Net earnings.......................... 6,665 Amortization of deferred compensation -- ESOP............... 226 Exercise of stock options............. 15,900 1 137 ---------- ---- ------ ------- ------- Balance, October 31, 1998............... 10,658,679 $107 $5,919 $80,237 $(2,927) ========== ==== ====== ======= =======
The accompanying notes are an integral part of these consolidated financial statements. 14 15 POWELL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED OCTOBER 31, ------------------------------------------------------------ 1998 1997 1996 1995------- -------- -------- ------- Operating Activities: Net earnings............................................earnings.............................................. $ 6,665 $ 12,629 $ 4,760 $ 5,698 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Depreciation and amortization........................amortization.......................... 4,070 3,376 3,270 2,800 Deferred income taxestax provision (benefit)...................................... 861 1,333 (2,112) 742 Postretirement benefits liability....................liability...................... (387) (270) (455) (418) Changes in operating assets and liabilities: Accounts receivable................................receivable.................................. 6,136 (13,378) (11,092) (1,290) Costs and estimated earnings in excess of billings........................................billings... (5,797) (5,052) (2,820) (3,876) Inventories........................................Inventories.......................................... (2,681) 511 948 (4,079) Prepaid expenses and other current assets..........assets............ 1,153 (894) (7) (749) Other assets.......................................assets......................................... (291) (708) (205) (273) Accounts payable and income taxes payable or receivable......................................receivable........................................ 571 2,911 (272) 562 Accrued liabilities................................liabilities.................................. (2,491) 394 5,334 (276) Billings in excess of costs and estimated earnings........................................earnings... (7,111) 5,531 1,318 2,314 Deferred compensation expense......................expense........................ 285 (757) 420 266 Changes in net assets of discontinued operations...operations..... -- -- 12,674 109------- -------- -------- ------- Net cash provided by operating activities.................activities......... 983 5,626 11,761 1,530------- -------- -------- ------- Investing Activities: Purchases of property, plant and equipment..............equipment................ (9,739) (14,773) (3,349) (3,378)------- -------- -------- ------- Net cash used in investing activities.....................activities............. (9,739) (14,773) (3,349) (3,378)------- -------- -------- ------- Financing Activities: BorrowingsNet borrowings of long-term debt............................debt.......................... 7,000 6,000 -- -- Payments of long-term debt..............................debt................................ -- (3,750) (2,813) (2,813) Exercise of stock grants and options....................options...................... 138 181 540 156------- -------- -------- ------- Net cash provided by (used in) financing activities.......activities...................................... 7,138 2,431 (2,273) (2,657)------- -------- -------- ------- Net increase (decrease) in cash and cash equivalents......equivalents........ (1,618) (6,716) 6,139 (4,505) Cash and cash equivalents at beginning of year............year.............. 2,219 8,935 2,796 7,301------- -------- -------- ------- Cash and cash equivalents at end of year..................year.................... $ 601 $ 2,219 $ 8,935 $ 2,796======= ======== ======== =======
The accompanying notes are an integral part of these consolidated financial statements. 1315 1416 POWELL INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. BUSINESS AND ORGANIZATION Powell Industries, Inc. ("Powell" or the "Company") was incorporated under the laws of the state of Nevada in December 1968. The Company is the successor to a corporation founded by William E. Powell in 1947, which merged into the Company in 1977. Powell designs, develops, manufactures, sells and services electrical power distribution and control equipment and systems through its subsidiaries: Powell Electrical Manufacturing Company; Powell-ESCO Company; Unibus, Inc.; Delta-Unibus Corp. and Transdyn Controls, Inc. As applicable to the context, "Company" is also sometimes used herein to refer to Powell and its subsidiaries. B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The accompanying consolidated financial statements include the accounts of Powell Industries, Inc. and its wholly-owned subsidiaries (the Company). All material intercompany accounts and transactions have been eliminated. Cash and Cash Equivalents The Company considers all highly liquid investments purchased with an original maturity of less than three months to be cash equivalents. Accounts Receivable The Company's receivables are generally not collateralized. Management performs ongoing credit analyses of the accounts of its customers and provides allowances as deemed necessary. Accounts receivable at October 31, 1998 and 1997 include $3,931,000 and 1996 include $2,296,000, and $3,603,000, respectively, due from customers in accordance with applicable retainage provisions of engineering and construction contracts, which will become billable upon completion of such contracts. Approximately $533,000$2,384,000 of the retained amount at October 31, 19971998 is expected to be billed subsequent to 1998.1999. Inventories Inventories are stated at the lower of cost (primarily first-in, first-out method) or market and include material, labor and manufacturing overhead. Property, Plant and Equipment Property, plant and equipment is stated at cost and is depreciated using the straight-line method over the estimated useful lives of the assets. Expenditures for repairs and maintenance are charged to expense when incurred. Expenditures for major renewals and betterments which extend the useful lives of existing equipment are capitalized and depreciated. Upon retirement or disposition of property, plant and equipment, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in the statements of operations. Amortization of Intangibles Included in other assets are net intangible assets totaling $2,272,000$2,004,000 and $2,172,000$2,272,000 at October 31, 19971998 and 1996,1997, respectively. Intangible assets primarily include goodwill and patents which are amortized using the straight-line method over periods ranging from five to twenty years. The accumulated amortization of intangible accountsassets totaled $1,476,000$1,744,000 and $1,873,000$1,476,000 at October 31, 19971998 and 1996,1997, respectively. Management 16 17 POWELL INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) continually evaluates whether events or circumstances have occurred that indicate the remaining 14 15 POWELL INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) estimated useful life of intangible assets may warrant revision or that remaining balances may not be recoverable. Revenue Recognition Revenues from product sales are recognized at the time of shipment. Revenues related to multiple unit orders and their associated costs are recorded as identifiable units are delivered. Contract revenues are recognized on a percentage-of-completion basis primarily using labor dollars or hours incurred to date in relation to estimated total labor dollars or hours of the contracts to measure the stage of completion. Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies and depreciation costs. Provisions for total estimated losses on uncompleted contracts are recorded in the period in which they become evident. Warranties The Company provides for estimated warranty costs at the time of sale based upon historical rates applicable to individual product lines. In addition, specific provisions are made when the costs of such warranties are expected to exceed accruals. Research and Development Expense Research and development costs are charged to expense as incurred. Such amounts were $2,693,000, $2,649,000, $2,283,000 and $1,843,000$2,283,000 in fiscal years 1998, 1997 1996 and 1995, respectively. Earnings per Common and Common Equivalent Share Per share data has been computed based on the weighted average number of common and common equivalent shares outstanding of 10,808,384, 10,764,656 and 10,611,331 in fiscal years 1997, 1996, and 1995, respectively. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassification Certain reclassifications of prior year amounts have been made in order to conform with the classifications used in the current year presentation. Income Taxes The Company accounts for income taxes using Statement of Financial Accounting Standards (SFAS) No. 109 "Accounting for Income Taxes". Under SFAS No. 109, deferred tax assets and liabilities are computed based on the difference between the financial statements and income tax bases of assets and liabilities using enacted tax rates. Under this standard, the effect on deferred taxes of a change in tax rates is recognized in income in the period that the tax rate changes. 15 16 POWELL INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) New Accounting Standards The Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of" and SFAS No. 123, "Accounting for Stock Based Compensation" during its fiscal year ending October 31, 1997. Adoption of SFAS No. 121 had no effect on the Company's consolidated financial statements. The fair value of options granted are disclosed in Note J of the Notes to Consolidated Financial Statements, as required by SFAS No. 123. SFAS No. 128, "Earnings per Share", was issued in February 1997. The Company is required to adopt SFAS No. 128 in the first quarter of 1998. SFAS No. 128 revises the methodology to be used in computing earnings per share (EPS) such that the computations required for primary and fully diluted EPS are to be replaced with "basic" and "diluted" EPS. Basic EPS is computed by dividing net income by the weighted average number of shares of common stock outstanding during the year. Diluted EPS is computed in the same manner as fully diluted EPS, except that, among other changes, the average share price for the period is used in all cases when applying the treasury stock method to potentially dilative outstanding options. If the Company had adopted the statement in the current year, earnings per share would have been reported as follows:
1997 1996 1995 ---- ---- ---- Basic....................................................... $1.19 $.45 $.54 Diluted..................................................... 1.17 .44 .54
SFAS No. 130, "Reporting Comprehensive Income", was issued in June 1997. SFAS No. 130 requires the presentation of comprehensive income in an entity's financial statements. Comprehensive income represents all changes in equity of an entity during the reporting period, including net income and charges directly to equity which are excluded from net income. The Company will present the components of Comprehensive Income within its Consolidated Statements of Stockholder's Equity during its fiscal year ending October 31, 1999. The Company expects the adoption will not have a material effect on its consolidated financial position of results of operations. SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", was issued in June 1997. SFAS No. 131 provides revised disclosure guidelines for segments of an enterprise based on a management approach to defining operating segments. The Company will provide reporting disclosures as required by the statement during its fiscal year ending October 31, 1999. 17 18 POWELL INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In June 1998, the Accounting Standards Board issued SFAS No. 133 -- "Accounting for Derivative Instruments and Hedging Activities". This statement establishes accounting and reporting standards for derivative instruments, including derivative instruments embedded in other contracts, and for hedging activities. The statement, which is to be applied prospectively, is effective for the Company's quarter ending January 31, 2000. The Company is currently evaluating the impact of SFAS No. 133 on its future results of operations and financial position. In April 1998, Statement of Position ("SOP") No. 98-5 -- "Reporting on the Costs of Start-Up Activities" was issued by the American Institute of Certified Public Accountants. The statement requires costs of start-up activities and organization costs to be expensed as incurred. Initial application of the statement, which is effective for the Company's fiscal year 2000, is to be reported as a cumulative effect of a change in accounting principle. The Company believes that the future adoption of SOP No. 98-5 will not have a material effect on its results of operations or financial position. C. EARNINGS PER SHARE In February 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share." Statement No. 128 replaced the previously reported primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options. Diluted earnings per share is very similar to the previously reported primary earnings per share. Earnings per share amounts for each period have been presented and restated to conform to the Statement 128 requirements. The following table sets forth the computation of basic and diluted earnings per share (in thousands, except share and per share date):
YEARS ENDED OCTOBER 31, ------------------------------------ 1998 1997 1996 ---------- ---------- ---------- Numerator: Numerator for basic and diluted earnings per share -- earnings from continuing operations available to common shareholders............. $ 11,465 $ 12,629 $ 10,758 ========== ========== ========== Denominator: Denominator for basic earnings per share -- weighted-average shares............. 10,644,427 10,622,521 10,566,934 Effect of dilutive securities -- Employee stock options...................................... 99,001 185,863 197,722 ---------- ---------- ---------- Denominator for diluted earnings per share -- adjusted weighted-average shares assumed conversions.......................... 10,743,428 10,808,384 10,764,656 ========== ========== ========== Basic earnings per share........................ $ 1.08 $ 1.19 $ 1.02 ========== ========== ========== Diluted earnings per share...................... $ 1.07 $ 1.17 $ 1.00 ========== ========== ==========
D. INVENTORIES The components of inventories are summarized below (in thousands):
OCTOBER 31, ----------------------------------- 1998 1997 1996 ------- ------- Raw materials, parts and subassemblies...................... $ 9,795 $ 8,706 $ 8,118 Work-in-process............................................. 6,489 4,897 5,996 ------- ------- Total inventories................................. $16,284 $13,603 $14,114 ======= =======
1618 1719 POWELL INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) D.E. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is summarized below (in thousands):
OCTOBER 31, ------------------- RANGE OF 1998 1997 1996 ASSET LIVES -------- -------- ----------- Land............................................... $ 2,720 $ 2,3622,720 -- Buildings and improvements......................... 27,478 20,662 13,255 3-39 Years Machinery and equipment............................ 28,149 24,912 21,157 3-15 Years Furniture and fixtures............................. 4,039 3,121 2,923 3-10 Years Construction in progress........................... 3,364 4,596 1,869 -- -------- -------- 65,750 56,011 41,566 Less-accumulated depreciation......................Less -- accumulated depreciation................... (33,439) (29,637) (26,964) -------- -------- Total property, plant and equipment, net.................................... $ 26,37432,311 $ 14,60226,374 ======== ========
E.F. EMPLOYEE BENEFIT PLANS The Company has a defined contribution 401K plan (401K) for substantially all of its employees. The Company matches 50% of employee contributions up to six percent of their salary. The Company recognized expense of $934,000, $848,000, $736,000 and $658,000$736,000 in fiscal years 1998, 1997 1996 and 1995,1996, respectively, under this plan. ThreeTwo long service employees are participants in a deferred compensation plan providing payments in accordance with a predetermined plan upon retirement or death. The Company recognizes the cost of this plan over the projected years of service of the participant. The Company has insured the lives of these key employees to assist in the funding of the deferred compensation liability. During January 1992, theThe Company has established an employee stock ownership plan (ESOP) for the benefit of substantially all full-time employees other than employees covered by a collective bargaining agreement to which the ESOP has not been extended by agreement or by action of the Company. The ESOP purchased 793,525 shares of the Company's common stock from a major stockholder. The funding for this plan was provided through a loan from the Company of $4,500,000. This loan will be repaid over a twenty-year period with equal payments of $424,000 per year including interest at 7%.7 percent. The Company recorded deferred compensation as a contra-equity account for the amount loaned to the ESOP in the accompanying consolidated balance sheets. The Company is required to make annual contributions to the ESOP to enable it to repay its loan to the Company. The deferred compensation account is amortized as compensation expense over twenty years as employees earn their shares for services rendered. The loan agreement also provides for prepayment of the loan if the Company elects to make any additional contributions. The compensation expense for fiscal years 1998, 1997 and 1996 was $226,000, $271,000, and 1995 was $271,000, $268,000, and $147,000, respectively. In November 1992, the Company established a plan for each subsidiary to extend to retirees health benefits which are available to active employees under the Company's existing health plans. Participants become eligible for retiree health care benefits when they retire from active service at age 55 with ten years of service. Generally, the health plans pay a stated percentage of medical and dental expenses reduced for any deductible and co-payment. These plans are unfunded. Medical coverage may be continued by the retired employee up to age 65 at the average cost to the Company of active employees. At the age of 65, when the employee becomes eligible for Medicare, the benefits provided by the Company are reduced by the amount provided by Medicare and the cost to the retired employee is reduced to 50 percent of the average cost to the Company of active employees. In January 1994, the Company modified its postretirement benefits to provide retiree healthcare benefits to only current retirees and active employees who will be eligible to retire by December 31, 1999. Participants eligible for such benefits will be required to pay between 20 percent and 100 percent of the Company's average 1719 1820 POWELL INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) cost of benefits based on years of service. In addition, benefits will end upon the employee's attainment of age 65. The effect of these modifications significantly reduced the Company's postretirement benefits cost and accumulated benefits obligation. The following table sets forth the plans' combined status reconciled with the accrued retirement benefits cost included in the Company's Consolidated Balance Sheetsconsolidated balance sheets (in thousands):
OCTOBER 31, ----------------------------- 1998 1997 1996 ---------- ------ Accumulated postretirement benefits obligation: Retirees.................................................. $228 $ 242 $ 364 Fully eligible active participants........................ 316 353 343 Other active participants................................. 25 62 93 ---------- ------ Total accumulated postretirement benefits obligation...................................... 569 657 800 Unrecognized prior service credits.......................... 370 688 1,006 Unrecognized net loss....................................... (94) (113) (304) ---------- ------ Postretirement benefits liability................. $845 $1,232 $1,502 ========== ======
Net periodic postretirement benefits expense (income) includes the following components (in thousands):
YEARS ENDED OCTOBER 31, --------------------------- 1998 1997 1996 ----- ----- Service cost of benefits earned during the period........... $ 54 $ 105 Interest cost on accumulated postretirement benefit obligation................................................ 36 45 54 Amortization of unrecognized prior service credits.......... (318) (310) (318) Amortization of net loss and transition obligation.......... (7) 33 32 ----- ----- Net periodic postretirement benefits expense (income)........................................ $(285) $(227) $(222) ===== =====
The assumed health care cost trend rate in measuring the accumulated postretirement benefits obligation was nine8 percent in fiscal year 19971998 decreasing to six percent by fiscal year 2000. If the health care trend rate assumptions were increased by one percent, the accumulated postretirement benefits obligation, as of October 31, 1997,1998, would be increased by 7.87.7 percent. The effect of this change on the net postretirement benefit cost for 19971998 would be an increase of 7.26.9 percent. The weighted average discount rate used in determining the accumulated postretirement benefits obligation was 6.56.0 and 7.06.5 percent for fiscal years 1998 and 1997, and 1996, respectively. F.G. DEBT In August 1997,September 1998, the Company entered intoamended an existing agreement for a $20,000,000 unsecured revolving line of credit with a major U.S. bank that replaced an existingbank. The amendment provides for a $10,000,000 term loan and a revolving line of credit.credit of $15,000,000. The term loan matures in five years with nineteen equal quarterly payments of $357,143 and a final payment of the remaining principal balance on September 30, 2003. The effective interest rate, after including the results of an interest rate swap negotiated with the trust company of the same domestic bank, is 5.20 percent per annum plus a .75 to 1.25 percent fee based on financial covenants. The notional amount of the swap agreement is $10,000,000 and follows the same reduction schedule as the term-loan. The Company considers the risk of non-performance by its swap partner to be minimal. The revolving line of credit provides for the Company to elect an interest rate on amounts borrowed of (1) the bank's prime rate less .5 percent (on the first $5,000,000) and prime rate on additional borrowings, or (2) the bank's IBOR rate plus an additional 20 21 POWELL INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) percentage of .75% to 1.25% based on the Company's performance. Also, a fee of .20 to .25 percent is charged on the unused balance of the line. The agreement contains customary affirmative and negative covenants and requirements to maintain a minimum level of tangible net worth and profitability. As of October 31, 1997, $6,000,0001998, $2,000,000 was borrowed against this line of credit. The agreement expires on August 15,February 28, 2000. 18 19 POWELL INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Long-term debt is summarized below (in thousands):
OCTOBER 31, --------------------------------- 1998 1997 1996------- ------ ------- Long-term debt.............................................. $6,0005 year term note............................................ $10,000 $ 3,750 Less-current maturities.....................................Revolving line of credit.................................... 2,000 6,000 NatWest promissory note (see Note J below).................. 1,000 ------- ------ Total debt.................................................. 13,000 6,000 Less -- (3,750)current maturities.................................. (1,429) -- ------- ------ ------- Total long-term debt.............................. $11,571 $6,000 $ --======= ====== =======
Interest paid during the year was $502,000, $529,000 and $683,000 in fiscal years 1998, 1997 and $1,157,000 in 1997, 1996, and 1995, respectively. The interest expense recorded during the year was $558,000, $381,000 and $637,000 in 1998, 1997 and $1,047,000 in 1997, 1996, respectively. The annual maturities of long-term debt for the years 1999 through 2003 are as follows: $1,429,000, $4,429,000, $1,429,000, $1,428,000 and 1995,$4,285,000, respectively. G.Management estimates that the fair value of its debt obligations approximates the historical value of $13,000,000 at October 31, 1998. H. INCOME TAXES The net deferred income tax asset is comprised of the following (in thousands):
OCTOBER 31, ----------------- 1998 1997 1996 ------- ------------- Current deferred income taxes: Gross assets.............................................. $ 2,075 $ 2,469 $2,909 Gross liabilities......................................... (1,366) (1,644) (337) ------- ------------- Net current deferred income tax asset..................... 709 825 2,572 ------- ------------- Noncurrent deferred income taxes Gross assets.............................................. 1,593 2,122 1,673 Gross liabilities......................................... (760) (544) (509) ------- ------------- Net noncurrent deferred income tax asset.................... 833 1,578 1,164 ------- ------------- Net deferred income tax asset..................... $ 1,542 $ 2,403 $3,736 ======= =============
21 22 POWELL INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The tax effect of significant temporary differences representing deferred tax assets and liabilities are as follows (in thousands):
OCTOBER 31, ----------------- 1998 1997 1996 ------- ------------- Allowance for doubtful accounts............................. $ 158259 $ 264158 Reserve for accrued employee benefits....................... 907 681 397 Warranty reserves........................................... 471 513 549 Uncompleted long-term contracts............................. (1,262) (1,644) (337) Depreciation and amortization............................... 92 (132) (432) Deferred compensation....................................... 404 384 733 Postretirement benefits liability........................... 287 419 510 Accrued legal expenses...................................... 385 1,287 1,327 Other....................................................... (1) 737 725 ------- ------------- Net deferred income tax asset..................... $ 1,542 $ 2,403 $3,736 ======= =============
19 20 POWELL INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The components of the income tax provision (benefit) consist of the following (in thousands):
YEARS ENDED OCTOBER 31, -------------------------- 1998 1997 1996 1995------- ------ ------ ------------- Continuing Operations: Current: Federal................................................Federal............................................. $ 4,198 $4,237 $7,135 $2,154 State..................................................$ 7,135 State............................................... 221 241 222 114 Deferred: Federal................................................Federal............................................. 861 1,333 (2,112) 742------- ------ ------- Income tax provision continuing operations............. 5,280 5,811 5,245 ------- ------ ------- Discontinuing Operations: Current................................................ (3,821) -- (1,435) Deferred............................................... 1,371 -- (1,756) ------- ------ ------- Income tax provision discontinued operations........... (2,450) -- (3,191) ------- ------ ------- Total income tax provision..................... $ 2,830 $5,811 $5,245 $3,010$ 2,054 ======= ====== ====== =============
A reconciliation of the statutory U.S. income tax rate and the effective income tax rate, as computed on earnings from continuing operations before income taxes reflected in each of the three years presented in the Consolidated Statements of Operations is as follows:
YEARS ENDED OCTOBER 31, ----------------------- 1998 1997 1996 1995 ----- ----- ----- Statutory rate............................................rate.............................................. 34% 34% 34% Foreign sales corporation credits.........................credits........................... (3) (4) (3) Revision of previous estimates of income taxes payable.... -- -- (3)(4) State income taxes, net of federal benefit................benefit.................. 1 1 1 Other.....................................................Other....................................................... -- -- 2 1 --- --- ----- -- -- Effective rate............................................rate.............................................. 32% 32% 33% 30% === === ===== == ==
Total cash payments for income taxes during the year were $2,039,000, $4,799,000, $3,211,000 and $2,062,000$3,211,000 in fiscal years 1998, 1997 and 1996, and 1995, respectively. H.22 23 POWELL INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) I. SIGNIFICANT SALES DATA No single customer or export country accounted for more than 10 percent of consolidated revenues in fiscal years 1998, 1997 1996 and 1995.1996. Export sales are as follows (in thousands):
YEARS ENDED OCTOBER 31, -------------------------------------------------------- 1998 1997 1996 1995 ------- ------- ------- Europe (including former Soviet Union).................................. $ 500 $ 4,781 $ 5,680 $ 2,908 Far East..............................................East................................................ 27,502 29,343 24,948 16,778 Middle East and Africa................................Africa.................................. 31,694 27,035 12,928 5,997 North, Central and South America (Excluding(excluding U.S.)............ 25,752 26,948 20,328 13,808 ------- ------- ------- Total export sales..........................sales............................ $85,448 $88,107 $63,884 $39,491 ======= ======= =======
20 21 POWELL INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) I.J. COMMITMENTS AND CONTINGENCIES Leases The Company leases certain offices, facilities and equipment under operating leases expiring at various dates through 2003. At October 31, 1997,1998, the minimum annual rental commitments under leases having terms in excess of one year are as follows (in thousands):
YEAR ENDING OPERATING OCTOBER 31 LEASES - ----------- --------- 1998....................................................... $ 876 1999....................................................... 756 2000....................................................... 611 2001....................................................... 533 2002....................................................... 408 Thereafter.................................................1999...................................................... $1,255 2000...................................................... 945 2001...................................................... 678 2002...................................................... 459 2003...................................................... 4 Thereafter................................................ -- ------ Total lease commitments.................................... $3,184commitments................................... $3,341 ======
Lease expense for all operating leases, excluding leases with terms of less than one year, was $1,259,000, $1,067,000 $908,000 and $623,000$908,000 for fiscal years 1998, 1997 1996 and 1995,1996, respectively. Letters of Credit and Bonds The Company is contingently liable for secured and unsecured letters of credit and performance bonds totaling approximately $8,733,000$4,997,000 and $67,008,000 respectively that were outstanding at October 31, 1997.1998. Litigation On August 5, 1993, the Company was served with a lawsuit filed by National WestminsterWestminister Bank plcPlc ("NatWest") in the United States District Court, Southern District of New York, alleging that the Company had defaulted on a Construction Guaranty provided to NatWest in 1992 in connection with a project at MacDill Air Force Base. NatWest is seekinghad sought damages in excess of $20,000,000. On September 2, 1998, the Company signed a Settlement Agreement with NatWest to settle this litigation. The Company has deniedsettlement closed on September 10, 1998. Under the substantive allegationsterms of the complaint and has filed counterclaims for damages against NatWest alleging fraud, bad faith and failure to preserve and protect its collateral and seeking a declaratory judgement thatSettlement Agreement, the Company is notpaid NatWest $7,000,000 at closing, and delivered a promissory note in defaultthe principal amount of the Construction Guaranty. On May 30, 1997, the Court issued a memorandum and order denying the Company's motion to dismiss the complaint for lack of subject matter jurisdiction and, alternatively, to stay its prosecution pending disposition by the Armed Services Board of Contract Appeals of an appeal by NatWest's borrower, Empire Energy Management Systems, Inc., from the allegedly wrongful default termination of a contract between Empire and the United States Air Force (the "Air Force Contract"). In reaching its decision$1,000,000, bearing interest at 3% per annum, which will be due on the stay motion, the Court rejected one of the Company's several alleged defenses, in particular, its defense that the Air Force Contract was terminated for the convenience of the government. NatWest has expressed an interest in a prompt trial date on several occasions, but the Court has yet to set a trial date. Two motions remain pending before the Court. The ultimate disposition of the NatWest litigation is not presently determinable. Accordingly, although an unfavorable outcome to the NatWest litigation could have a material effect on the Company's financial position and results of operations, the Company believes it would be unreasonable to conclude that an unfavorable outcome is probable. 21December 31, 1999. 23 2224 POWELL INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company recorded a charge of approximately $4.8 million (net of income taxes) to discontinued operations in its third quarter ended July 31, 1998, in connection with this settlement. The additional amount payable under the Settlement Agreement (net of income taxes) was accrued in prior periods. The Company is a party to other disputes arising in the ordinary course of business. Management does not believe that the ultimate outcome of these disputes will materially effectaffect the financial position or results of operations of the Company. J.K. STOCK OPTIONS AND GRANTS In March 1992, the stockholders approved an amendment to a plan that was adopted in March 1989, in which 750,000 shares of common stock would be made available through an incentive program for certain employees of the Company. In March 1996, the stockholders approved an amendment to increase the maximum shares available under the plan from 750,000 shares to 1,500,000 shares of common stock. The awards available under the plan include both stock options and stock grants and are subject to certain conditions and restrictions as determined by the Compensation Committee of the Board of Directors. "Stock options" -- Options granted under the plan are non-qualified and are granted at a price equal to the fair market value of the common stock at the date of grant. Generally, options granted have a term of ten years from the date of grant and will vest in increments of 20 percent per year over a five year period on the yearly anniversary of the grant date. The plan provides for additional stock to be awarded equal to 20 percent of all options which are exercised and then held for a period of five years. "Stock grants" -- The fair market value of shares awarded as stock grants has been deferred and amortized to compensation expense ratably as such shares are vested. The Company recognized compensation expense related to stock grants pursuant to this plan of $0, $487,000$0, and $156,000$487,000 in fiscal years 1998, 1997, and 1996, and 1995, respectively. At October 31, 1997, there were no stock grants awarded under this plan which had not been exercised. There were 595,073628,673 shares available under the plan to be granted as of October 31, 1997.1998. Stock option and grant activity (number of shares) for the Company during fiscal years 1998, 1997 1996 and 19951996 was as follows:
1998 1997 1996 1995 ---------------- --------------------------------- ----------------- OPTIONS GRANTS OPTIONS GRANTS OPTIONS GRANTS ------- ------ ------- ------------- ------- ------- Outstanding, beginning of year......year.......... 575,060 429,510 -- 441,450 50,000 175,800 75,000 Granted: Stock options $6.25 per share........................ 265,650share...... Stock options $15.81 per share........................share..... 250,500 Exercised: Stock grants...................grants....................... (50,000) (25,000) Stock options $6.25 per share........................share...... (7,800) (31,760) (7,500) Stock options $6.75 per share........................share...... (8,100) (47,700) (4,440) Forfeited: Stock options $6.25 per share........................share...... (13,800) (16,400) Stock options $6.75 per share........................share...... (1,800) (4,090) Stock options $15.81 per share........................share..... (18,000) (5,000) ------- -------- ------- --------- ------- ------- Outstanding, ranging from $6.25 to $15.81 per share, at the end of year..............................year.................................. 525,560 -- 575,060 -- 429,510 -- 441,450 50,000 ======= ======== ======= ========= ======= =======
22 23 POWELL INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", in accounting for employees stock options whereby no compensation expense is recorded related to the options granted equal to the market value of the stock on the date of grant. If compensation expense had been determined based on the Black-Scholes option pricing model value at the grant date for awards in 1998, 24 25 POWELL INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 1997 and 1996 consistent with the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation", the Company's net income and earnings per share would have been as follows:
1998 1997 1996 ------ ------- ------ Net income: As reported...............................................reported............................................. $6,665 $12,629 $4,760 Pro forma.................................................forma............................................... 6,108 12,072 4,571 Earnings per share: As reported...............................................reported............................................. $ .62 $ 1.17 $ .44 Pro forma.................................................forma............................................... .57 1.12 .43
The SFAS No. 123 method of accounting has not been applied to options granted prior to October 31, 1995, and the resulting pro forma compensation expense may not be indicative of pro forma expense in future years. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: Expected life of options........................options.......................... 10 years Risk-free interest rate.........................rate........................... 6.07% -- 6.49% Expected dividend yield.........................yield........................... 0.00% Expected stock price volatility.................volatility................... 55.22% -- 56.31%
K.L. PRODUCTION CONTRACTS For contracts in which the percentage-of-completion method is used, costs and estimated earnings in excess of billings are reported as a current asset and billings in excess of costs and estimated earnings are reported as a current liability. The components of these contracts are as follows (in thousands):
OCTOBER 31, --------------------------------------- 1998 1997 1996 -------- -------- Costs and estimated earnings................................ $114,127 $ 85,126 $ 45,559 Progress billings........................................... (89,344) (66,140) (31,625) -------- -------- Total costs and estimated earnings in excess of billings........................................ $ 18,98624,783 $ 13,93418,986 ======== ======== Progress billings........................................... $ 69,21367,471 $ 50,66769,213 Costs and estimated earnings................................ (63,626) (58,257) (45,242) -------- -------- Total billings in excess of costs and estimated earnings........................................ $ 10,9563,845 $ 5,42510,956 ======== ========
23 24 POWELL INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) L.M. DISCONTINUED OPERATIONS On July 26, 1996, the Company completed the sale of its power generation set packaging business to Rolls-Royce Acquisition Corporation. This business was operated by U.S. Turbine Corp. (USTC), the Company's subsidiary based in Maineville, Ohio. Total consideration received by the Company, as adjusted, was $12,889,000, including $3,660,000 of cash, a $500,000 note receivable bearing interest at the prime rate due July 1997 and the assumption of liabilities of $8,729,000. The Company recognized a gain on the sale of $89,000, net of taxes. The Company recognized a net lossesloss from USTC operations of $3,173,000 and $799,000 for the fiscal years 1996 and 1995, respectively.year 1996. On August 1, 1996 the Company announced the discontinuance of its operations in the microprocessor -- basedmicroprocessor-based equipment manufacturing business segment effective July 31, 1996. This business was operated by Powell-Process Systems, Inc. (PSI), a subsidiary of the Company based in Houston. On October 31, 1996, 25 26 POWELL INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) the Company completed the sale of these assets and the related business to Micon Systems LLC for approximately $874,000, including $650,000 cash and a $224,000 non-interest bearing note receivable due February 13, 1997. The Company recognized a loss on the sale of $1,227,000, net of taxes. The Company recognized net losses from PSI operations of $1,687,000 for fiscal year 1996. As previously reported on Form 8-K in September 1998, and $583,000as discussed in Note J above, the Company entered into a Settlement Agreement with National Westminister Bank plc ("NatWest") to settle all litigation between them regarding completion of a project of USTC at MacDill Air Force Base (the responsibility for this project was not assumed by Rolls-Royce in the fiscal years 1996acquisition of USTC). Under the terms of such Settlement Agreement, the Company paid NatWest $7,000,000 at the closing (September 10, 1998) and 1995, respectively.delivered a promissory note in the principal amount of $1,000,000 bearing interest at the rate of 3 percent per annum, which will be due on December 31, 1999; accordingly, the Company has recorded a loss from discontinued operations of $4,800,000 (net of income taxes) or $.45 per diluted share, to reflect additional expense accruals related to this settlement. The following summarizes the results of operations and consolidated balance sheets of the discontinued operations:
YEARS ENDED OCTOBER 31, ----------------------------------------- 1998 1996 1995 ------- ---------------- --------- Revenues.................................................... -- $29,182 $30,309 ======= ======= Loss from operations before income taxes.................... $(7,250) $(7,464) $(2,085) Benefit for income taxes.................................... 2,450 2,604 703 Loss on disposal before income taxes........................ (1,725) -- Benefit for income taxes.................................... 587 -- ------- ------- Net loss from discontinued operations............. $(4,800) $(5,998) $(1,382) ======= =======
2426 2527 POWELL INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) M.N. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The table below sets forth the unaudited consolidated operating results by fiscal quarter for the years ended October 31, 19971998 and 19961997 (in thousands, except per share data):
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- 1998 -- Revenues............................................. $46,350 $53,989 $56,258 $56,136 Gross profit......................................... 10,631 12,281 12,370 12,507 Net Earnings: Earnings from continuing operations............... 2,398 3,314 3,193 2,560 Loss from discontinued operations................. -- -- (4,700) (100) ------- ------- ------- ------- Net earnings (loss).................................. 2,398 3,314 (1,507) 2,460 Net earnings (loss) per common share: Continuing operations: Basic........................................... .23 .31 .30 .24 Diluted......................................... .22 .31 .30 .24 Discontinued operations: Basic........................................... -- -- (.44) (.01) Diluted......................................... -- -- (.44) (.01) Net earnings (loss): Basic........................................... .23 .31 (.14) .23 Diluted......................................... .22 .31 (.14) .23 1997 -- Revenues..........................................Revenues............................................. $43,128 $48,439 $46,061 $54,023 Gross profit......................................profit......................................... 10,288 12,542 11,720 12,456 Net earnings......................................earnings......................................... 2,369 3,273 3,432 3,555 Net earnings per common and common equivalent share.......................................... $share: Basic........................................... .22 $.31 .32 .33 Diluted......................................... .22 .30 $ .32 $ .33 1996 -- Revenues.......................................... $39,861 $43,127 $45,903 $41,232 Gross profit...................................... 8,860 11,123 12,212 10,853 Net earnings: Earnings from continuing operations............ 1,862 2,911 3,046 2,939 Losses from discontinued operations............ (178) (268) (5,506) (46) Net earnings................................... 1,684 2,643 (2,460) 2,893 Net earnings per common and common equivalent share: Continuing operations.......................... $ .18 $ .27 $ .28 $ .27 Discontinued operations........................ (.02) (.03) (.51) -- Net earnings................................... $ .16 $ .24 $ (.23) $ .27
2527 2628 PART III ITEMS 10, 11, 12 AND 13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; EXECUTIVE COMPENSATION; SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT; AND CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by these items is omitted because the Company will file, within 120 days after the end of the fiscal year ended October 31, 1996,1998, a definitive proxy statement pursuant to Regulation 14A, which information is herein incorporated by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: Financial Statements -- See Index to Consolidated Financial Statements at Item 8 of this report
EXHIBITS -------- 2.1 -- Asset Purchase Agreement dated as of June 20, 1996 by and between Rolls-Royce North America, Inc. and Rolls-Royce Acquisition Corp. and U. S.U.S. Turbine Corp. and the Company (filed as Exhibit 2.1 to the Company's Current Report on Form 8-K dated August 8, 1996 and incorporated herein by reference). 2.2 -- First Amendment to Asset Purchase Agreement dated July 26, 1996 by and between Rolls-Royce North America, Inc. and Rolls-Royce Acquisition Corp. and U.S. Turbine Corp. and the Company (filed as Exhibit 2.2 to the Company's Current Report on Form 8-K dated August 8, 1996 and incorporated herein by reference). 3.1 -- Articles of Incorporation and Certificates of Amendment of Powell Industries, Inc. dated July 20, 1987 and March 13, 1992 (filed as Exhibit 3 to the Company's Form 10-K for the fiscal year ended October 31, 1982, Form 10-Q for the quarter ended July 31, 1987, and Form 10-Q for quarter ended April 30, 1992, respectively, and incorporated herein by reference). 3.2 -- By-laws of Powell Industries, Inc. (filed as Exhibit 3(ii) to the Company's Form 10-Q for the quarter ended April 30, 1995 and incorporated herein by reference). 10.1 -- Powell Industries, Inc., Incentive Compensation Plan for 1997.1998. 10.2 -- Salary Continuation Agreement with William E. Powell, dated July 17, 1984 (filed as Exhibit 10 to the Company's Form 10-K for the fiscal year ended October 31, 1984, and incorporated herein by reference). 10.3 -- Description of Supplemental Executive Benefit Plan (filed as Exhibit 10 to the Company's Form 10-K for the fiscal year ended October 31, 1984, and incorporated herein by reference). 10.5 -- Credit Agreement dated August 15, 1997 between Powell Industries, Inc. and Bank of America Texas, N. A.N.A. (Filed as an Exhibit to the Company's Form 10-Q for the quarter ended July 31, 1997 and incorporated herein by reference.)reference). 10.6 -- Amendments dated September 16, 1998, September 25, 1998 and October 15, 1998 to credit agreement between Powell Industries, Inc., and Bank of America Texas, N.A.
28 29
EXHIBITS -------- 10.7 -- 1992 Powell Industries, Inc. Stock Option Plan (filed as Exhibit 4.2 to the Company's registration statement on Form S-8 dated July 26, 1994 (File No. 33-81998) and incorporated herein by reference).
26 27
EXHIBITS -------- 10.8 -- The Powell Industries, Inc. Directors' Fees Program (filed as Exhibit 10.7 to the Company's Form 10-K for the fiscal year ended October 31, 1992, and incorporated herein by reference). 10.9 -- The Powell Industries, Inc. Executive Severance Protection Plan (filed as an exhibit to the Company's Form 10-Q for the quarter ended April 30, 1996, and incorporated herein by reference). 10.10 -- Amendment to Powell Industries, Inc. Stock Option Plan (filed as an exhibit to the Company's Form 10-Q for the quarter ended April 30, 1996 and incorporated herein by reference). 10.11 -- Settlement Agreement effective September 3, 1998 by and among National Westminister Bank, plc, Powell Industries, Inc., Powell Energy Systems, Inc., Empire Energy Management Systems, Inc., Empire Cogen and Brian Travis (filed as Exhibit 10.11 to the Company's Form 10-Q for quarter ended July 31, 1998 and incorporated herein by reference). 21.1 -- Subsidiaries of the Company. 23.1 -- Consent of Independent Public Accountants. 27.0 -- Financial data schedule.
(b) Reports on Form 8-K. No reports onThe Registrant filed a Form 8-K have been filed during the last quarter of the fiscal year covered by this report. 27report, reporting the settlement of litigation discussed in Item 3 of Part I above. 29 2830 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. POWELL INDUSTRIES, INC. By /s/ THOMAS W. POWELL ----------------------------------- Thomas W. Powell President and Chief Executive Officer (Principal Executive Officer) By /s/ J.F. AHART ----------------------------------- J.F. Ahart Vice President Secretary and Treasurer (Principal Financial and Accounting Officer) Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the date indicated:
SIGNATURE TITLE --------- ----- /s/ THOMAS W. POWELL Chairman of the Board - ----------------------------------------------------- Thomas W. Powell /s/ J. F. AHART Director - ----------------------------------------------------- J. F. Ahart /s/ JOSEPH L. BECHERER Director - ----------------------------------------------------- Joseph L. Becherer /s/ EUGENE L. BUTLER Director - ----------------------------------------------------- Eugene L. Butler /s/ BONNIE L. POWELL Director - ----------------------------------------------------- Bonnie L. Powell /s/ STEPHEN W. SEALE, JR. Director - ----------------------------------------------------- Stephen W. Seale, Jr. /s/ D.D. SYKORALAWRENCE R. TANNER Director - ----------------------------------------------------- D.D. Sykora /s/ LAWRENCE R. TANNER Director - ----------------------------------------------------- Lawrence R. Tanner /s/ RONALD J. WOLNY Director - ----------------------------------------------------- Ronald J. Wolny
Date: January 9, 1998 288, 1999 30 2931 INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION ------- ----------- 2.1 -- Asset Purchase Agreement dated as of June 20, 1996 by and between Rolls-Royce North America, Inc. and Rolls-Royce Acquisition Corp. and U. S.U.S. Turbine Corp. and the Company (filed as Exhibit 2.1 to the Company's Current Report on Form 8-K dated August 8, 1996 and incorporated herein by reference). 2.2 -- First Amendment to Asset Purchase Agreement dated July 26, 1996 by and between Rolls-Royce North America, Inc. and Rolls-Royce Acquisition Corp. and U.S. Turbine Corp. and the Company (filed as Exhibit 2.2 to the Company's Current Report on Form 8-K dated August 8, 1996 and incorporated herein by reference). 3.1 -- Articles of Incorporation and Certificates of Amendment of Powell Industries, Inc. dated July 20, 1987 and March 13, 1992 (filed as Exhibit 3 to the Company's Form 10-K for the fiscal year ended October 31, 1982, Form 10-Q for the quarter ended July 31, 1987, and Form 10-Q for quarter ended April 30, 1992, respectively, and incorporated herein by reference). 3.2 -- By-laws of Powell Industries, Inc. (filed as Exhibit 3(ii) to the Company's Form 10-Q for the quarter ended April 30, 1995 and incorporated herein by reference). 10.1 -- Powell Industries, Inc., Incentive Compensation Plan for 1997.1998. 10.2 -- Salary Continuation Agreement with William E. Powell, dated July 17, 1984 (filed as Exhibit 10 to the Company's Form 10-K for the fiscal year ended October 31, 1984, and incorporated herein by reference). 10.3 -- Description of Supplemental Executive Benefit Plan (filed as Exhibit 10 to the Company's Form 10-K for the fiscal year ended October 31, 1984, and incorporated herein by reference). 10.5 -- Credit Agreement dated August 15, 1997 between Powell Industries, Inc. and Bank of America Texas, N. A.N.A. (Filed as an Exhibit to the Company's Form 10-Q for the quarter ended July 31, 1997 and incorporated herein by reference.)reference). 10.6 -- Amendments dated September 16, 1998, September 25, 1998 and October 15, 1998 to credit agreement between Powell Industries, Inc., and Bank of America Texas, N.A. 10.7 -- 1992 Powell Industries, Inc. Stock Option Plan (filed as Exhibit 4.2 to the Company's registration statement on Form S-8 dated July 26, 1994 (File No. 33-81998) and incorporated herein by reference). 10.8 -- The Powell Industries, Inc. Directors' Fees Program (filed as Exhibit 10.7 to the Company's Form 10-K for the fiscal year ended October 31, 1992, and incorporated herein by reference). 10.9 -- The Powell Industries, Inc. Executive Severance Protection Plan (filed as an exhibit to the Company's Form 10-Q for the quarter ended April 30, 1996, and incorporated herein by reference). 10.10 -- Amendment to Powell Industries, Inc. Stock Option Plan (filed as an exhibit to the Company's Form 10-Q for the quarter ended April 30, 1996 and incorporated herein by reference).
31 32
EXHIBIT NO. DESCRIPTION ------- ----------- 10.11 -- Settlement Agreement effective September 3, 1998 by and among National Westminister Bank, plc, Powell Industries, Inc., Powell Energy Systems, Inc., Empire Energy Management Systems, Inc., Empire Cogen and Brian Travis (filed as Exhibit 10.11 to the Company's Form 10-Q for quarter ended July 31, 1998 and incorporated herein by reference). 21.1 -- Subsidiaries of the Company. 23.1 -- Consent of Independent Public Accountants. 27.0 -- Financial data schedule.
32