1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 FORM 10-Q (Mark one) [X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended January 31, 2000 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 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) 8550 Mosley Drive, Houston, Texas 77075-1180 - ---------------------------------------- ------------------------------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (713) 944-6900 -------------- 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 --- Common Stock, par value $.01 per share; 10,613,000 shares outstanding on January 31, 2000. 2 Powell Industries, Inc. and Subsidiaries Part I - Financial Information Item 1. Financial Statements................................................................3-8 Item 2. Management's Discussion and Analysis of Financial Condition and Quarterly Results of Operations...........................................................9-10 Item 3. Quantitative and Qualitative Disclosures About Market Risk.................................................................11 Part II - Other Information and Signatures...........................................................12-13 2 3 POWELL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA) JANUARY 31, OCTOBER 31, 2000 1999 ----------- ----------- ASSETS (UNAUDITED) Current Assets: Cash and cash equivalents ............................................... $ 7,600 $ 10,646 Accounts receivable, less allowance for doubtful accounts of $897 and $852, respectively ......................................... 39,961 43,003 Costs and estimated earnings in excess of billings ...................... 21,490 16,191 Inventories ............................................................. 18,772 15,173 Deferred income taxes ................................................... 1,612 1,028 Prepaid expenses and other current assets ............................... 2,332 1,795 ---------- ---------- Total Current Assets ................................................ 91,767 87,836 Property, plant and equipment, net ........................................... 32,772 33,286 Deferred income taxes ........................................................ 337 1,316 Other assets ................................................................. 5,321 5,093 ---------- ---------- Total Assets ........................................................ $ 130,197 $ 127,531 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current maturities of long-term debt .................................... $ 1,429 $ 2,429 Accounts and income taxes payable ....................................... 13,701 9,911 Accrued salaries, bonuses and commissions ............................... 4,897 5,447 Accrued product warranty ................................................ 1,238 1,335 Other accrued expenses .................................................. 4,558 4,727 Billings in excess of costs and estimated earnings ...................... 4,421 4,205 ---------- ---------- Total Current Liabilities ........................................... 30,244 28,054 Long-term debt, net of current maturities .................................... 6,787 7,143 Deferred compensation expense ................................................ 1,186 1,127 Postretirement benefits liability ............................................ 393 435 ---------- ---------- Commitments and contingencies Stockholders' Equity: Preferred stock, par value $.01; 5,000 shares authorized; none issued Common stock, par value $.01; 30,000 shares authorized; 10,694 and 10,675 shares issued ................................................ 107 107 Additional paid-in capital .............................................. 6,074 6,043 Retained earnings ....................................................... 88,666 87,364 Treasury stock (81 shares at cost) ...................................... (574) -- Deferred compensation-ESOP .............................................. (2,686) (2,742) ---------- ---------- Total Stockholders' Equity .......................................... 91,587 90,772 ---------- ---------- Total Liabilities and Stockholders' Equity .......................... $ 130,197 $ 127,531 ========== ========== The accompanying notes are an integral part of these consolidated financial statements. 3 4 POWELL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) THREE MONTHS ENDED JANUARY 31, 2000 1999 -------- -------- Revenues ..................................................................... $ 49,490 $ 54,134 Cost of goods sold ........................................................... 40,449 43,202 -------- -------- Gross profit ................................................................. 9,041 10,932 Selling, general and administrative expenses ................................. 7,126 7,511 -------- -------- Earnings from operations before interest and income taxes .................... 1,915 3,421 Interest expense (income), net ............................................... (57) 136 -------- -------- Earnings from operations before income taxes ................................. 1,972 3,285 Income tax provision ......................................................... 668 1,107 -------- -------- Net earnings ................................................................. $ 1,304 $ 2,178 ======== ======== Net earnings per common share: Basic ..................................................................... $ .12 $ .20 Diluted ................................................................... .12 .20 Weighted average number of common shares outstanding ......................... 10,657 10,659 ======== ======== Weighted average number of common and common equivalent shares outstanding ... 10,715 10,733 ======== ======== The accompanying notes are an integral part of these consolidated financial statements. 4 5 POWELL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (IN THOUSANDS) THREE MONTHS ENDED JANUARY 31, 2000 1999 -------- -------- Operating Activities: Net earnings ...................................................... $ 1,304 $ 2,178 Adjustments to reconcile net earnings to net cash used in operating activities: Depreciation and amortization ................................. 1,212 1,082 Deferred income tax provision ................................. 396 322 Postretirement benefits liability ............................. (42) (12) Changes in operating assets and liabilities: Accounts receivable, net ................................. 3,042 (4,326) Costs and estimated earnings in excess of billings ....... (5,299) 1,584 Inventories .............................................. (3,599) (1,504) Prepaid expenses and other current assets ................ (537) (1,608) Other assets ............................................. (228) (267) Accounts payable and income taxes payable or receivable .. 3,790 (977) Accrued liabilities ...................................... (816) (2,844) Billings in excess of costs and estimated earnings ....... 216 2,533 Deferred compensation expense ............................ 59 42 -------- -------- Net cash used in operating activities ................ (502) (3,797) Investing Activities: Purchases of property, plant and equipment ........................ (643) (850) -------- -------- Net cash used in investing activities ......................... (643) (850) -------- -------- Financing Activities: Borrowings of long-term debt ...................................... -- 10,600 Repayment of long-term debt ....................................... (1,357) (4,386) Payments to reacquire common stock ................................ (574) -- Exercise of stock options ......................................... 30 22 -------- -------- Net cash provided by (used in) financing activities ........... (1,901) 6,236 -------- -------- Net increase (decrease) in cash and cash equivalents ................... (3,046) 1,589 Cash and cash equivalents at beginning of period ....................... 10,646 601 -------- -------- Cash and cash equivalents at end of period ............................. $ 7,600 $ 2,190 ======== ======== Supplemental disclosure of cash flow information (in thousands): Cash paid during the quarter for: Interest ...................................................... $ 157 $ 213 ======== ======== Income taxes .................................................. -- -- ======== ======== The accompanying notes are an integral part of these consolidated financial statements. 5 6 Part I Item 1 POWELL INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, in the opinion of management, reflect all adjustments which are of a normal recurring nature necessary for a fair presentation of financial position, results of operations, and cash flows. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's October 31, 1999 annual report on Form 10-K. In June 1998 the Financial Accounting Standards Board (FASB) issued SFAS No. 133 - Accounting for Derivative Instruments and Hedging Activities". In June 1999, the FASB issued SFAS 137, which amended the effective adoption date of SAFS 133. This statement establishes accounting and reporting standards for derivative instruments, including derivative instruments embedded in other contracts, and for hedging activities. The statement, as amended and which is to be applied prospectively, is effective for the Company's quarter ending January 31, 2001. The Company is currently evaluating the impact of SFAS No. 133 on its future results of operations and financial position. On December 3, 1999 the United States Securities and Exchange Commission staff released Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition, to provide guidance on the recognition, presentation and disclosure of revenue in financial statements. The Company reviewed its revenue recognition procedures and is satisfied that it is in compliance with this SAB. B. INVENTORY January 31, October 31, 2000 1999 ------------ ------------ (unaudited) The components of inventory are summarized below (in thousands): Raw materials and subassemblies ........................................... $ 11,589 $ 9,058 Work-in-process ........................................................... 7,183 6,115 ------------ ------------ Total inventories ......................................................... $ 18,772 $ 15,173 ============ ============ C. PROPERTY, PLANT AND EQUIPMENT January 31, October 31, 2000 1999 ------------ ------------ (unaudited) Property, plant and equipment is summarized below (in thousands): Land ...................................................................... $ 3,193 $ 3,193 Buildings and improvements ................................................ 30,706 30,638 Machinery and equipment ................................................... 30,913 30,409 Furniture & fixtures ...................................................... 3,889 4,464 Construction in process ................................................... 1,011 1,035 ------------ ------------ 69,712 69,739 Less-accumulated depreciation ............................................. (36,940) (36,453) ------------ ------------ Total property, plant and equipment, net .................................. $ 32,772 $ 33,286 ============ ============ 6 7 D. PRODUCTION CONTRACTS For contracts for which the percentage-of-completion method is used, costs and estimated earnings in excess of billings are shown as a current asset and billings in excess of costs and estimated earnings are shown as a current liability. The components of these contracts are as follows (in thousands): January 31, October 31, 2000 1999 ------------ ------------ (unaudited) Costs and estimated earnings .............................................. $ 80,857 $ 79,723 Progress billing .......................................................... (59,347) (63,532) ------------ ------------ Total costs and estimated earnings in excess of billings .................. $ 21,490 $ 16,191 ============ ============ Progress billings ......................................................... $ 71,817 $ 89,146 Costs and estimated earnings .............................................. (67,396) (84,941) ------------ ------------ Total billings in excess of costs and estimated earnings .................. $ 4,421 $ 4,205 ============ ============ E. EARNINGS PER SHARE (unaudited) The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data): Three Months Ended January 31, 2000 1999 -------- -------- Numerator: Numerator for basic and diluted earnings per share-earnings from continuing operations available to common stockholders ................ $ 1,304 $ 2,178 ======== ======== Denominator: Denominator for basic earnings per share-weighted average shares ...... 10,657 10,659 Effect of dilutive securities-employee stock options .................. 58 74 -------- -------- Denominator for diluted earnings per share-adjusted weighted-average shares assumed conversions ............................................ 10,715 10,733 ======== ======== Basic earning per share ................................................... $ 0.12 $ 0.20 ======== ======== Diluted earnings per share ................................................ $ 0.12 $ 0.20 ======== ======== 7 8 F. BUSINESS SEGMENTS (unaudited) The Company has three reportable segments: 1. Switchgear and related equipment and service (Switchgear) for distribution, control and management of electrical energy, 2. Bus duct products (Bus Duct) for distribution of electric power, and 3. Process Control Systems which consists principally of instrumentation, computer control, communications and data management systems for the control of dynamic processes. The tables below reflect certain information relating to the Company's operations by segment. Substantially all revenues represent sales to unaffiliated customers. The accounting policies of the segments are the same as those described in the summary of significant accounting policies as discussed in the Company's annual report on Form 10K for year ended October 31, 1999. For purposes of this presentation, all general corporate expenses have not been allocated between operating segments. In addition, the corporate assets are mainly cash and cash equivalents transferred to the corporate office are based on use of funds. The required disclosures for the business segments are set forth below (in thousands): Three Months Ended January 31, 2000 1999 -------- -------- Revenues Switchgear ............................................................. $ 35,383 $ 41,527 Bus Duct ............................................................... 6,828 6,240 Process Control Systems ................................................ 7,279 6,367 -------- -------- Total Revenues ......................................................... $ 49,490 $ 54,134 ======== ======== Earnings from operations before income taxes Switchgear ............................................................. 791 $ 2,282 Bus Duct ............................................................... 995 1,088 Process Control Systems ................................................ 157 248 Corporate and other .................................................... 28 (333) -------- -------- Total earnings from operations before income taxes ........................ $ 1,972 $ 3,285 ======== ======== January 31, October 31, 2000 1999 ----------- ----------- Assets Switchgear ............................................................. $ 89,104 $ 85,157 Bus Duct ............................................................... 14,808 14,764 Process Control Systems ................................................ 12,808 10,997 Corporate and other .................................................... 13,477 16,613 -------- -------- Total Assets .............................................................. $130,197 $127,531 ======== ======== 8 9 Part I Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND QUARTERLY RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following table sets forth, as a percentage of revenues, certain items from the Consolidated Statements of Operations. Quarters ended January 31 2000 1999 - --------------------------------------------------------------------------------------------------- Revenues 100.0% 100.0% Gross Profit 18.3 20.2 Selling, general and administrative expenses 14.4 13.9 Interest expense (income), net (0.1) 0.2 Earnings from operations before income taxes 4.0 6.1 Income tax provision 1.4 2.1 Net earnings 2.6 4.0 Revenues for the quarter ended January 31, 2000 were down 8.6 percent to $49,490,000 from $54,134,000 in the first quarter of last year. The decrease in revenues was mainly in the international markets, primarily consisting of sales decreases from the Switchgear business segment, offset by increases in the Process Control Systems and Bus Duct business segments. Export revenues continue to be an important component of the Company's operations, accounting for $13,789,000 for the three months ending January 31, 2000, although down when compared to $23,581,000 for the same period of 1999. Lower shipments to the middle east mainly accounted for this reduction of export revenues in 2000. Gross profit, as a percentage of revenues, was 18.3 percent and 20.2 percent for the quarter ended January 31, 2000 and 1999, respectively. The lower percentages in 2000 were mainly due to the decline volume of the Switchgear business segment and lower prices from the domestic markets. Selling, general and administrative expenses as a percentage of revenues were 14.4 percent and 13.9 percent for the quarter ended January 31, 2000 and 1999, respectively. The increase in percentages reflects the decreased volume of revenues. Interest expense (income), net The following schedule shows the amounts for interest expense and income: Three months ended Three months ended January 31, 2000 January 31, 1999 --------------------------------------------- Expense $ 157 $ 213 Income (214) (77) ------ ------ Net $ (57) $ 136 ====== ====== Sources of interest expense in fiscal year 1999 and 1998 were primarily related to bank notes payable at rates between 6 and 8%. Sources of the interest income were related to notes receivable and short-term investment of available funds at various rates between 4 and 7%. Income tax provision The effective increase tax rate on earnings was 33.9 percent and 33.7 percent for the quarter ended January 31, 2000 and 1999, respectively. The small increase was primarily due to lower estimated foreign sales corporation credits compared to the prior year. This effective tax rate difference should be a timing difference and the effective rate should finish the year at approximately 32 to 33 percent which is more consistent with past years. Net Earnings were $1,304,000 or $.12 per share for the first quarter of fiscal 2000, a decrease from $2,178,000 or $.20 per share for the same period last year. The decrease was mainly due to lower gross margins in the Switchgear business segment. 9 10 Backlog the order backlog at January 31, 2000 was $165,273,000 million, compared to $156,143,000 million at October 31, 1999. The increase in backlog was in all business segments. LIQUIDITY AND CAPITAL RESOURCES In September 1998, the Company amended a 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 $20,000,000. In December 1999 the revolving line of credit was amended to reduce the line to $15,000,000 and to extend the maturity date to February 2002. The term of the loan was five years with four years remaining. The effective interest rate, after including 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. As of January 31, 2000, the Company had no borrowings outstanding under this revolving line of credit. The Company's ability to satisfy its cash requirements is evaluated by analyzing key measures of liquidity applicable to the Company. The following table is a summary of the measures which are significant to management: January 31, October 31, 2000 1999 -------------------------------- Working Capital $61,523,000 $59,782,000 Current Ratio 3.03 to 1 3.13 to 1 Long-term Debt to Capitalization .1 to 1 .1 to 1 Management believes that the Company continues to maintain a strong liquidity position. The increase in working capital at January 31, 2000, as compared to October 31, 1999, is due mainly to an increases in costs and estimated earnings in excess of billings and inventories. Cash and cash equivalents decreased by $3,046,000 during the three months ended January 31, 2000. The primary use of cash during this period was for the increase of costs and estimated earnings in excess of billings and inventories. The decrease in net borrowings for the quarter was the results of payments of a term note and a quarter payment on the bank note. The Company has a stock repurchase plan under which the Company is authorized to spend up to $5,000,000 million for purchases of its common stock. Pursuant to this plan, the Company repurchased 81,000 shares of its common stock at an aggregate cost of approximately $574,000 at January 31, 2000. Repurchased shares are added to treasury stock and are available for general corporate purposes including the funding of the Company's employee stock option plan. The Company's fiscal 2000 asset management program will continue to focus on the collection of receivables and reduction in inventories. The Company plans to satisfy its fiscal 2000 capital requirements and operating needs primarily with funds available in cash and cash equivalents of $7,600,000 funds generated from operating activities and funds available under its existing revolving credit line. The previous discussion should be read in conjunction with the consolidated financial statements. Year 2000 Readiness The Year 2000 readiness issue results from the historical use in computer software programs and operating systems of a two digit number to represent the year. Concerns arose as to whether certain software and hardware would fail to properly function when confronted with dates that contain "00" as a two-digit year. To address the potential risk for disruption of operations, each subsidiary of the Company developed a compliance plan and conducted numerous tests as to the effectiveness of applied solutions. The costs to the Company to achieve Year 2000 readiness were approximately $150,000. To date, the Company has not experienced any material problems relating to the Year 2000 readiness issue. However, the Company may not have yet experienced all factors that might have Year 2000 readiness implications. Any forward looking statements in the preceding paragraphs of this Form 10-Q are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors 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, difficulties which could arise in obtaining materials or components in sufficient quantities as needed for the Company's manufacturing and assembly operations, unforeseen political or economic problems in countries to which the Company exports its products in relation to the Company's principal competitors, any significant decrease in the Company's backlog of orders, any material employee relations problems, or any material litigation or claims made against the Company, as well as general market conditions, competition and pricing. 10 11 Part 1 Item 3 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company's financial instruments include cash and equivalents, accounts receivable, accounts payable, debt obligations and interest rate swaps. The book value of cash and cash equivalents, accounts receivable, the short-term note payable and accounts payable are considered to be representative of fair value because of the short maturity of these instruments. The Company believes that the carrying value of its borrowings under the credit agreement approximate their fair value as they bear interest at rates indexed to the Bank's IBOR. The Company's accounts receivable are not concentrated in one customer or one industry and are not viewed as an unusual credit risk. The Company had recorded an allowance for doubtful accounts of $897,000 at January 31, 2000 and $852,000 at October 31, 1999, respectively. The interest rate swap agreement, which is used by the Company in the management of interest rate exposure is accounted for on the accrual basis. Income and expense resulting from this agreement is recorded in the same category as interest expense accrued on the related term note. Amounts to be paid or received under the interest rate swap agreement is recognized as an adjustment to expense in the periods in which they occur. At January 31, 2000 the Company had $8,216,000 in borrowings subject to the interest rate swap at a rate of 5.20% through September 30, 2003. The 5.20% rate is currently approximately .8% below market and should represent approximately $85,000 of reduced interest expense for fiscal year 2000 assuming the current market interest rates do not change. The approximate fair value of the swap agreement at January 31, 2000 is $365,000. The fair value is the estimated amount the Company would receive to terminate the contract. The agreements require that the Company pay the counterparty at the above fixed swap rate and requires the counterparty to pay the Company interest at the 90 day LIBOR rate. The closing 90 day LIBOR rate on January 31, 2000 was 6.04%. 11 12 Part II OTHER INFORMATION ITEM 1. Legal Proceedings The Company is a party to disputes arising in the ordinary course of business. Management does not believe that the ultimate outcome of these disputes will materially affect the financial position of results of operations of the Company. ITEM 2. Changes in Securities and Use of Proceeds None ITEM 3. Defaults Upon Senior Securities Not applicable ITEM 4. Submission of Matters to a Vote of Security Holders None ITEM 5. Other Information None ITEM 6. Exhibits and Reports on Form 8-K a. Exhibits None 27.0 Financial Data Schedule b. Reports on Form 8-K None 12 13 SIGNATURES Pursuant to the requirements 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. Registrant March 16, 2000 /s/ THOMAS W. POWELL - -------------- ---------------------------- Date Thomas W. Powell President and Chief Executive Officer (Principal Executive Officer) March 16, 2000 /s/ J.F. AHART - -------------- ---------------------------- Date J.F. Ahart Vice President, Secretary-Treasurer Chief Financial Officer (Principal Financial and Accounting Officer) 13 14 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION - ------- ----------- 27 Financial Data Schedule