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 July 31, 1998 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 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 ----------------- 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; 10,616,203 shares outstanding on July 31, 1998.
2 POWELL INDUSTRIES, INC. <TABLE> <CAPTION> <S> <C> <C> PART I - Financial Information Item 1. Financial Statements ................................................... 3 - 9 Item 2. Management's Discussion and Analysis of Financial Condition and Quarterly Results of Operations................................................ 10 - 11 PART II - Other Information and Signatures ............................................... 12 - 14 </TABLE>
3 Powell Industries, Inc. and Subsidiaries Condensed Consolidated Balance Sheets (In Thousands, Except Share and Per Share Data) <TABLE> <CAPTION> July 31, October 31, Assets 1998 1997 ----------- ----------- (unaudited) <S> <C> <C> Current Assets: Cash and cash equivalents .................................................... $ 606 $ 2,219 Accounts receivable, less allowance for doubtful accounts of $585 and $465, respectively ............................................ 49,171 50,391 Costs and estimated earnings in excess of billings ........................... 14,354 18,986 Inventories .................................................................. 18,355 13,603 Deferred income taxes ........................................................ 1,478 825 Income taxes receivable ...................................................... 916 1,351 Prepaid expenses and other current assets .................................... 2,578 2,594 ----------- ----------- Total Current Assets ....................................................... 87,458 89,969 Property, plant and equipment, net ............................................. 30,212 26,374 Deferred income taxes .......................................................... 1,292 1,578 Other assets ................................................................... 4,920 4,946 ----------- ----------- Total Assets ............................................................... $ 123,882 $ 122,867 =========== =========== Liabilities and Stockholders' Equity Current Liabilities: Accounts and income taxes payable ............................................ $ 11,300 $ 11,929 Accrued salaries, bonuses and commissions .................................... 5,514 6,737 Accrued product warranty ..................................................... 1,141 1,511 Accrued legal expenses and settlement expenses ............................... 9,505 3,785 Other accrued expenses ....................................................... 4,463 3,282 Billings in excess of costs and estimated earnings ........................... 5,568 10,956 ----------- ----------- Total Current Liabilities .................................................. 37,491 38,200 Long-term obligations .......................................................... 3,500 6,000 Deferred compensation expense .................................................. 1,123 1,128 Postretirement benefits liability .............................................. 1,013 1,232 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; 10,616,203 and 10,604,644, shares issued and outstanding ................................. 107 106 Additional paid-in capital ................................................... 5,851 5,782 Retained earnings ............................................................ 77,776 73,572 Deferred compensation-ESOP ................................................... (2,979) (3,153) ----------- ----------- Total Stockholders' Equity ................................................. 80,755 76,307 ----------- ----------- Total Liabilities and Stockholders' Equity ................................. $ 123,882 $ 122,867 =========== =========== </TABLE> 3
4 Powell Industries, Inc. and Subsidiaries Condensed Consolidated Statements of Operations (unaudited) (In Thousands, Except Share and Per Share Data) <TABLE> <CAPTION> Three Months Ended July 31, ------------------------------ 1998 1997 ------------- ------------- <S> <C> <C> Revenues ....................................................................... $ 56,258 $ 46,062 Cost of goods sold ............................................................. 43,888 34,342 ------------- ------------- Gross profit ................................................................... 12,370 11,720 Selling, general and administrative expenses ................................... 7,847 7,027 ------------- ------------- Earnings from operations before interest and income taxes ...................... 4,523 4,693 Interest expense (income), net ................................................. 59 (196) ------------- ------------- Earnings from continuing operations before income taxes ........................ 4,464 4,889 Income tax provision ........................................................... 1,271 1,457 ------------- ------------- Earnings from continuing operations ............................................ 3,193 3,432 Loss from discontinued operations, net of income taxes ......................... (4,700) -- ------------- ------------- Net earnings (loss) ............................................................ $ (1,507) $ 3,432 ============= ============= Earnings (loss) per common share: Continuing operations: Basic .................................................................. $ 0.30 $ 0.32 Diluted ................................................................ 0.30 0.32 Discontinued operations: Basic .................................................................. $ (0.44) -- Diluted ................................................................ (0.44) -- Net earnings (loss) per common share: Basic .................................................................. $ (0.14) $ 0.32 Diluted ................................................................ (0.14) 0.32 Weighted average number of common shares outstanding .......................................................... 10,643,141 10,611,937 ============= ============= Weighted average number of common and common equivalent shares outstanding ............................................... 10,745,109 10,759,693 ============= ============= </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 4
5 Powell Industries, Inc. and Subsidiaries Condensed Consolidated Statements of Operations (unaudited) (In Thousands, Except Share and Per Share Data) <TABLE> <CAPTION> Nine Months Ended July 31, ------------------------------ 1998 1997 ------------- ------------- <S> <C> <C> Revenues ....................................................................... $ 156,596 $ 137,628 Cost of goods sold ............................................................. 121,315 103,078 ------------- ------------- Gross profit ................................................................... 35,281 34,550 Selling, general and administrative expenses ................................... 22,310 21,449 ------------- ------------- Earnings from operations before interest and income taxes ...................... 12,971 13,101 Interest expense (income), net ................................................. 112 (431) ------------- ------------- Earnings from continuing operations before income taxes ........................ 12,859 13,532 Income tax provision ........................................................... 3,954 4,458 ------------- ------------- Earnings from continuing operations ............................................ 8,905 9,074 Loss from discontinued operations, net of income taxes ......................... (4,700) -- ------------- ------------- Net earnings (loss) ............................................................ $ 4,205 $ 9,074 ============= ============= Earnings (loss) per common share: Continuing operations: Basic .................................................................. $ 0.84 $ 0.86 Diluted ................................................................ 0.83 0.84 Discontinued operations: Basic .................................................................. $ (0.44) -- Diluted ................................................................ (0.44) -- Net earnings (loss) per common share: Basic .................................................................. $ 0.40 $ 0.86 Diluted ................................................................ 0.39 0.84 Weighted average number of common shares outstanding .......................................................... 10,642,220 10,608,864 ============= ============= Weighted average number of common and common equivalent shares outstanding ............................................... 10,750,452 10,748,068 ============= ============= </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 5
6 Powell Industries, Inc. and Subsidiaries Condensed Consolidated Statements of Operations (unaudited) (In Thousands) <TABLE> <CAPTION> Nine Months Ended July 31, --------------------------- 1998 1997 ---------- ---------- <S> <C> <C> Operating Activities: Net earnings ................................................................. $ 4,205 $ 9,074 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Depreciation and amortization .............................................. 2,992 2,475 Deferred income taxes ...................................................... (367) 737 Postretirement benefits liability .......................................... (219) -- Changes in operating assets and liabilities: Accounts receivable ...................................................... 1,220 681 Costs and estimated earnings in excess of billings ....................... 4,632 (3,545) Inventories .............................................................. (4,752) (5,121) Other assets ............................................................. (160) (415) Accounts payable and income taxes payable or receivable .................. (194) 5,413 Accrued liabilities ...................................................... 608 (1,260) Billings in excess of costs and estimated earnings ....................... (5,388) 5,163 Deferred compensation expense ............................................ 169 (803) Changes in net assets of discontinued operations ......................... 4,700 31 ---------- ---------- Net cash provided by operating activities ...................................... 7,446 12,430 ---------- ---------- Investing Activities: Purchases of property, plant, and equipment .................................. (6,628) (11,341) ---------- ---------- Net cash used in investing activities .......................................... (6,628) (11,341) ---------- ---------- Financing Activities: Payments of long-term debt ................................................... (2,500) (3,750) Exercise of stock options and grants ......................................... 69 (35) ---------- ---------- Net cash used in financing activities .......................................... (2,431) (3,785) Net decrease in cash and cash equivalents ...................................... (1,613) (2,696) Cash and cash equivalents at beginning of period ............................... 2,219 8,935 ---------- ---------- Cash and cash equivalents at end of period ..................................... $ 606 $ 6,239 ========== ========== Supplemental disclosure of cash flow information: Cash paid for: Interest .................................................................. $ 297 $ 195 Income taxes .............................................................. $ 1,000 $ 1,500 </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 6
7 Part I Item 1 POWELL INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED 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, 1997 annual report on Form 10K. B. INVENTORY <TABLE> <CAPTION> July 31, October 31, 1998 1997 ---------- ---------- (unaudited) <S> <C> <C> The components of inventory are summarized below (in thousands): Raw materials and subassemblies ................................................ $ 11,189 $ 8,706 Work-in-process ................................................................ 7,166 4,897 ---------- ---------- Total inventories .............................................................. $ 18,355 $ 13,603 ========== ========== </TABLE> C. PROPERTY, PLANT AND EQUIPMENT <TABLE> <CAPTION July 31, October 31, 1998 1997 ---------- ---------- (unaudited) <S> <C> <C> Property, plant and equipment are summarized below (in thousands): Land ........................................................................... $ 2,720 $ 2,720 Buildings and improvements ..................................................... 27,387 20,662 Machinery and equipment ........................................................ 27,303 24,912 Furniture & fixtures ........................................................... 3,312 3,121 Construction in process ........................................................ 1,917 4,596 ---------- ---------- 62,639 56,011 Less-accumulated depreciation .................................................. (32,427) (29,637) ---------- ---------- Total property, plant and equipment, net ....................................... $ 30,212 $ 26,374 ========== ========== </TABLE> 7
8 Part 1 Item 1 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): <TABLE> <CAPTION> July 31, October 31, 1998 1997 --------- --------- <S> <C> <C> (unaudited) Costs and estimated earnings ......................................... $ 67,955 $ 85,126 Progress billings .................................................... (53,601) (66,140) --------- --------- Total costs and estimated earnings in excess of billings ............. $ 14,354 $ 18,986 ========= ========= Progress billings .................................................... $ 79,832 $ 69,213 Costs and estimated earnings ......................................... (74,264) (58,257) --------- --------- Total billings in excess of costs and estimated earnings ............. $ 5,568 $ 10,956 ========= ========= </TABLE> E. EARNINGS PER SHARE In February 1997, 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 238 requirements. The following table sets forth the computation of basic and diluted earnings per share (in thousands, except share and per share date): <TABLE> <CAPTION> Three months ended July 31, Nine months ended July 31, ========================== ========================= 1998 1997 1998 1997 ----------- ----------- ----------- ----------- (unaudited) (unaudited) <S> <C> <C> <C> <C> Numerator: Numerator for basic and diluted earnings per share- earnings from continuing operations available to common shareholders .................................. $ 3,193 $ 3,432 $ 8,905 $ 9,074 =========== =========== =========== =========== Denominator: Denominator for basic earnings per share- weighted-average shares .............................. 10,643,141 10,611,937 10,642,220 10,608,864 Effect of dilutive securities- Employee inventive stock options ..................... 102,733 147,756 108,232 140,804 ----------- ----------- ----------- ----------- Denominator for diluted earnings per share-adjusted weighted-average shares assumed conversions .......... 10,745,109 10,759,693 10,750,452 10,748,068 =========== =========== =========== =========== </TABLE> 8
9 Part I Item 1 F. LEGAL PROCEEDINGS As previously reported on Form 8-K filed September 4, 1998, the Company entered into a Settlement Agreement with National Westminister Bank, plc ("NatWest") to settle all litigation between them regarding completion of a project at McDill Air Force Base. The settlement provided for in such Settlement Agreement closed on September 11, 1998. Under the terms of such Settlement Agreement, the Company paid to 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. 9
10 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. <TABLE> <CAPTION> July 31, 1998 July 31, 1997 ----------------------------------------------------- three months nine months three months nine months ended ended ended ended --------- --------- --------- --------- <S> <C> <C> <C> <C> Revenues 100.0% 100.0% 100.0% 100.0% Gross Profit 22.0 22.5 25.4 25.1 Selling, general and administrative expenses 14.0 14.3 15.3 15.6 Earnings from continuing operations before income taxes 7.9 8.2 10.6 9.8 Earnings from continuing operations 5.7 5.7 7.4 6.6 Loss from discontinued operations (8.3) (3.0) -- -- Net earnings (loss) (2.6) 2.7 7.4 6.6 </TABLE> Revenues for the quarter ended July 31, 1998 were up 22.1 percent to $56,258,000 from $46,062,000 in the third quarter of last year. Revenues for the nine months ended July 31, 1998 were up 13.8 percent to $156,596,000 from $137,628,000 in the first nine months of last year. The increases in revenues were mainly in the domestic markets consisting of sales of core business products from the Company's largest subsidiary. The Asian monetary problems contributed to lower revenues at two of the Company's subsidiaries. Export revenues continued to be an important component of the Company's operations, accounting for $64,414,000 for the nine months ending July 31, 1998 compared to $62,407,000 for the same period of 1997. Gross profit, as a percentage of revenues, was 22.0 percent and 25.4 percent for the quarters ended July 31, 1998 and 1997. The gross profit percentage for the nine months ended July 31, 1998 and 1997 was 22.5 percent and 25.1 percent, respectively. The lower percentages in 1998 were mainly due to changes in product mix shipped during 1998 and losses at Powell-Esco Company, a wholly owned subsidiary of the Company. Selling, general and administrative expenses as a percentage of revenues were 14.0 percent and 15.3 percent for the quarters ended July 31, 1998 and 1997. These percentages for the nine months ended July 31, 1998 and 1997 were 14.3 percent and 15.6 percent. The decrease in percentages reflects the increased volume of revenues. Income tax provision The effective tax rates on continuing operations earnings were 28.5 percent and 29.8 percent for the quarters ended July 31, 1998 and 1997, respectively. For the nine months ended July 31, 1998 and 1997 the effective tax rate was 30.7 percent and 32.9 percent respectively. The decrease was primarily due to lower projected tax rates for 1998 due to the higher estimated foreign sales corporation credits. Earnings from continuing operations were $3,193,000 or $.30 per share for the third quarter of fiscal 1998, a decrease from $3,432,000 or $.32 per share for the same period last year. The decrease was mainly due to losses at Powell-Esco Company. For the nine months ended July 31, 1998, net earnings were $8,905,000 or $.83 per share, compared with $9,074,000 or $.84 per share for the first nine months of fiscal 1997. The per share data has been calculated on a fully diluted basis per FASB 128 for all periods reported. 10
11 Loss from discontinued operations for the quarter and nine months ended on July 31, 1998 was ($4,700,000) or ($.44) per diluted common share. The $4,700,000 charge was the result of settlement of litigation discussed in Form 8-K filed September 4, 1998 and in Part II, Item I of this Form 10-Q. Backlog The order backlog at July 31, 1998 was $162.3 million, compared to $137.3 million at October 31, 1997. LIQUIDITY AND CAPITAL RESOURCES In August 1997, the Company entered into a $20,000,000 revolving line of credit agreement with a major domestic bank. The Company had borrowings outstanding of $3,500,000 under this line on July 31, 1998. 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: <TABLE> <CAPTION> July 31, October 31, July 31, 1998 1997 1997 ----------- ----------- ----------- <S> <C> <C> <C> Working Capital $49,967,000 $51,769,000 $45,063,000 Current Ratio 2.33 to 1 2.36 to 1 2.20 to 1 Debt to Capitalization .1to 1 .1 to 1 no debt </TABLE> Management believes that the Company continues to maintain a strong liquidity position. The decrease in working capital at July 31, 1998, as compared to October 31, 1997, is due mainly to a decrease in current assets (the increase in inventories was more than offset by the decrease in cash and costs and estimated earnings in excess of billings) and a decrease in current liabilities (the legal and settlement accrual increase was off-set by billings in excess of cost and estimated earnings, and other current liabilities). The accrual for settlement and legal expenses was paid by a draw down under the Company's revolving credit agreement. Cash and cash equivalents decreased by $1,613,000 during the nine months ended July 31, 1998. The primary use of cash during this period was for capital expenditures mainly related to the continuing expansion of the facilities of Powell Electrical Manufacturing Company, reduction of long-term debt and decreased current liabilities. The Company's fiscal 1998 asset management program will continue to focus on the collection of receivables and reduction in inventories. The Company plans to satisfy its fiscal 1998 capital requirements and operating needs primarily with funds available in cash and cash equivalents of $606,000, funds generated from operating activities and funds available under its existing revolving credit line and term loan. The previous discussion should be read in conjunction with the consolidated financial statements. Year 2000 Compliance The Company has and will continue to make certain investments in its software systems and applications to ensure the Company is year 2000 compliant. The financial impact of such investments has not been and is not anticipated to be material to its financial position or its results of operations in any given year. 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. 11
12 Part II OTHER INFORMATION ITEM 1. Legal Proceedings As previously reported on Form 8-K filed on September 4, 1998, the Company entered into a Settlement Agreement with National Westminister Bank plc ("NatWest") to settle all litigation between them regarding completion of a project at MacDill Air Force Base. The settlement provided for in such Settlement Agreement closed on September 11, 1998. Under the terms of such Settlement Agreement, the Company paid NatWest $7,000,000 at the closing, and delivered a promissory note in the principal amount $1,000,000 bearing interest at the rate of 3% per annum, which will be due on December 31, 1999; accordingly, the Company has recorded a loss from discontinued operations of $4,700,000 (net of income taxes) to reflect additional accruals related to this settlement. ITEM 2. Changes in Securities and Use of Proceeds None ITEM 3. Defaults Upon Senior Securities Not applicable ITEM 4. None ITEM 5. Other Information None ITEM 6. Exhibits and Reports on Form 8-K a. Exhibits 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 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 (filed as Exhibit 10.1 to the Company's Form 10-K for the fiscal year ended October 31, 1997 and incorporated herein by reference). 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. (filed as an Exhibit to the Company's Form 10-Q for the quarter ended July 31, 1997 and incorporated herein by reference). 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). 12
13 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 exhibit 10.7 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 exhibit 10.8 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 herewith) 27.0 Financial Data Schedule b. Reports on Form 8K None 13
14 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 September 11, 1998 - ------------------ -------------------------- Date Thomas W. Powell President and Chief Executive Officer (Principal Executive Officer) September 11, 1998 - ------------------ -------------------------- Date J. F. Ahart Vice President, Secretary-Treasurer Chief Financial Officer (Principal Financial and Accounting Officer)
15 EXHIBIT INDEX <TABLE> <CAPTION> EXHIBIT NO. DESCRIPTION - ---------- ----------- <S> <C> 10.11 Settlement Agreement effective September 8, 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 herewith) EX. 27 FINANCIAL DATA SCHEDULE </TABLE>