SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
Form 10-K
(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, 2003.
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)
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. X Yes 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. [ X ]
Indicate by "X" whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). X Yes No
The aggregate market value of the voting stock held by non-affiliates of the registrant as of the last business day of the most recently completed second fiscal quarter, April 30, 2003, was approximately $147,578,000.
The number of shares of our Common Stock outstanding as of December 31, 2003 was 10,646,006 shares.
Documents Incorporated By Reference
Portions of the Proxy Statement for the 2004 annual meeting of stockholders to be filed not later than 120 days after October 31, 2003 are incorporated by reference into Part III.
POWELL INDUSTRIES, INC.
TABLE OF CONTENTS
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS; RISK FACTORS
This Annual Report on Form 10-K includes forward-looking statements based on the Company’s current expectations, which are subject to risks and uncertainties. Forward-looking statements include information concerning future results of operations and financial conditions. Statements that contain words such as “believes,” “expects,” “anticipates,” “intends,” “estimates,” “continue,” “should,” “could,” “may,” “plan,” “project,” “predict,” “will” or similar expressions are forward-looking statements. These forward-looking statements are subject to risks and uncertainties, and many factors could affect the future financial results of the Company. Factors that may have a material effect on our revenues, expenses and operating results include adverse business or market conditions, the Company’s ability to secure and satisfy customers, the availability and cost of materials from suppliers, adverse competitive developments and changes in customer requirements. Accordingly, actual results may differ materially from those expressed or implied by the forward-looking statements contained in this Report. Any forward-looking statements made by or on our behalf are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
The forward-looking statements contained in this Annual Report are based on current assumptions that the Company will continue to develop, market, manufacture and ship products and provide services on a competitive and timely basis, that competitive conditions in the Company’s markets will not change in a materially adverse way, that the Company will accurately identify and meet customer needs for products and services, that the Company will be able to retain and hire key employees, that the Company’s capabilities will remain competitive, that risks related to shifts in customer demand are minimized and that there will be no material adverse change in the operations or business of the Company. Assumptions relating to these factors involve judgments that are based on incomplete information and are subject to changes in many factors beyond the control of the Company that can materially affect results.
Because of these and other factors that affect our operating results, past financial performance should not be considered an indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods. The following risks factors may also materially affect results and should be considered:
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PART I
Item 1. Business
Overview
We develop, design, manufacture, and service equipment and systems for the management and control of electrical energy and other critical processes. Headquartered in Houston, TX, we serve the transportation, environmental, industrial, and utility industries.
Powell Industries, Inc. (“we,” “us,” “our,” “Powell,” or the “Company”) was incorporated in the state of Nevada in 1968 and is the successor to a corporation founded by William E. Powell in 1947, which merged into the Company in 1977. Our major subsidiaries, all of which are wholly-owned, include: Powell Electrical Manufacturing Company; Powell Power Electronics Company, Inc.; Powell-ESCO Company; Unibus, Inc.; Delta-Unibus Corporation; and Transdyn Controls, Inc.
Our website address is www.powellind.com. We make available free of charge on or through our website copies of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practical after we electronically file such material with the Securities and Exchange Commission. Paper or electronic copies of such material may also be requested by contacting the Company at our corporate offices.
Products and Segments
We manage our business through operating subsidiaries, which are combined into two reportable business segments: Electrical Power Products and Process Control Systems. Financial information related to these business segments is included in Note M of the Notes to Consolidated Financial Statements.
A brief description of our products and business segments follows:
Customers and Markets
Our principal products are designed for use by and marketed to sophisticated users of large amounts of electrical energy or complex processes. Our markets include oil and gas producers, oil and gas pipelines, refineries, petrochemical plants, electrical power generators, public and private utilities, mining, pulp and paper mills, transportation systems, governmental agencies, and other large industrial customers.
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Electrical Power Products
In this segment of our business, products and services are principally sold directly or through agents to the end-user or to an EPC (engineering, procurement and construction) firm on behalf of the end-user. We market our products and services to a wide variety of customers, markets and geographic regions; as a result, we are not dependent on any one customer or market for sales. Export revenues were $39.1 million, $26.2 million, and $19.1 million in fiscal years 2003, 2002 and 2001, respectively.
During each of the past three fiscal years, we did not have any one customer that accounted for more than 10% of our segment revenues. The loss of any specific customer would not have a material adverse effect on our business; however, we could be adversely impacted by a significant reduction in business volume from a key customer market.
Process Control Systems
In this segment of our business, products and services are principally sold to the transportation, environmental, industrial, utility, and governmental sectors. We may be dependent on one specific contract or customer for a significant percentage of our revenues due to the nature of large, long-term construction projects. During 2003, we received a contract to design and build Intelligent Transportation Systems (ITS) for the Port Authority of New York and New Jersey which accounted for 16% of segment revenues in fiscal 2003. We anticipate revenues from this contract will constitute approximately 55% of our segment revenues in 2004. In each of the past three fiscal years, we had revenues with one or more customers that individually accounted for more than 10% of our segment revenues. Revenues from these customers totaled $4.8 million, $2.9 million and $3.8 million in fiscal 2003, 2002 and 2001, respectively. The loss of any specific customer could have a material adverse effect on segment revenues.
Export revenues were $0.7 million, $1.8 million, and $2.3 million in fiscal years 2003, 2002 and 2001, respectively.
During fiscal years 2003, 2002 and 2001, neither segment had any one export country that accounted for more than 10% of segment revenues. For information on the geographic areas in which our consolidated revenues were recorded in each of the past three years, see Note I of the Notes to Consolidated Financial Statements.
Competition
We operate in an intensely competitive environment. Many of our competitors are significantly larger and have substantially greater resources than we do. However, we believe that we are a significant competitor in each of our principal markets.
Our products and systems are custom designed to meet the specifications of our customers. Each order is designed and manufactured to the unique requirements of the installation. We consider our engineering and manufacturing capabilities vital to the success of our business, and believe our technical and project management strengths, together with our responsiveness and flexibility to the needs of our customers, give us a competitive advantage in our markets.
Ultimately, our competitive position is dependent on the ability to provide quality products and systems, on a timely basis, at a competitive price.
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Backlog
Orders in our backlog at October 31, 2003, totaled $157.5 million, of which we anticipate that approximately $139.2 million will be fulfilled during our fiscal year 2004. Orders included in our backlog are represented by customer purchase orders and contracts, which we believe to be firm. Under certain circumstances, penalties are included as a term of order acceptance to minimize our risk of cancellation.
Electrical Power Products:
At October 31, 2003 the Electrical Power Products segment backlog totaled $97.0 million compared to $151.6 million at the end of the previous fiscal year. We anticipate that approximately $93.6 million of our ending 2003 backlog will be fulfilled during our fiscal year 2004. During 2003, we experienced some customer delays and cancellations which is unusual for our business. Cancellations during the year totaled approximately $6 million. During the previous two years, we did not experience a material amount of cancelled orders.
Process Control Systems:
Orders in our Process Control Systems backlog at October 31, 2003 totaled $60.5 million, of which a contract received in 2003 to design and build Intelligent Transportation Systems (ITS) for the Port Authority of New York and New Jersey represented $33.2 million. We anticipate that approximately $45.6 million of the 2003 ending backlog will be fulfilled in fiscal year 2004. At October 31, 2002, the backlog totaled $37.7 million. We have not experienced a material amount of cancelled orders during the past three fiscal years.
Raw Materials and Suppliers
The principal raw materials used in our operations are generally readily available. We did not experience significant or unusual problems in the purchase of key raw materials and commodities in fiscal year 2003. While we are not dependent on any one supplier for a material amount of our raw materials, we are highly dependent on our suppliers and subcontractors in order to meet commitments to our customers.
We maintain a qualification and performance surveillance process to control risk associated with our components and electrical items that are procured on a sole-source basis. We believe that sources of supply for raw materials and components are generally sufficient and have no reason to believe a shortage of raw materials will cause any material adverse impact during fiscal year 2004.
Employees
We had 1,235 full-time employees at October 31, 2003, located throughout the United States. Of the total number of employees, approximately 3% are represented by trade unions. We believe that our relationship with our employees and trade unions is good.
Research and Development
Our research activities are directed toward the discovery and development of new products and processes as well as improvements in existing products and processes. Research and development expenditures were $3.6 million, $3.4 million and $3.1 million in our fiscal years 2003, 2002 and 2001, respectively.
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Item 2. Properties
We have over 10 locations consisting of manufacturing facilities, sales offices, and repair centers. Our facilities are generally located in areas that are readily accessible to raw materials and labor pools and are maintained in good condition. These facilities, together with recent expansions, are expected to meet our needs for the foreseeable future.
Our principal manufacturing locations by segment as of October 31, 2003, are as follows:
We own one idle facility located in Franklin Park, Illinois which consists of manufacturing and office space. We anticipate that we will sell this property during the coming year. As this property is held for sale, the $1.5 million book value is included in other current assets at October 31, 2003. Prior to the construction of our new facility in Northlake, Franklin Park was used to manufacture our isolated phase bus duct product line.
Item 3. Legal Proceedings
We are involved in various legal proceedings, claims, and other disputes arising in the ordinary course of business which, in general, are subject to uncertainties and the outcomes are not predictable. However, we do not believe that the ultimate conclusion of these disputes will materially affect our financial position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
We did not submit any matter to a vote of our stockholders during the fourth quarter of fiscal year 2003.
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PART II
Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters
Price Range of Common Stock
Our common stock trades on the NASDAQ National Market under the symbol “POWL”. The following table sets forth, for the periods indicated, the high and low sales prices per share as reported on the NASDAQ National Market for our common stock.
As of October 31, 2003, the last reported sales price of our common stock on the NASDAQ National Market was $19.38 per share. As of December 31, 2003, there were 664 stockholders of record of our common stock. All common stock held in broker accounts are included as one shareholder of record.
See Part III, Item 12 for information regarding securities authorized for issuance under our equity compensation plan.
Dividend Policy
To date, we have not paid cash dividends on our common stock, and for the foreseeable future we intend to retain earnings for the development of our business. Future decisions to pay cash dividends will be at the discretion of the Board of Directors and will depend upon our results of operations, financial condition and capital expenditure plans, along with other relevant factors.
Item 6. Selected Financial Data
The selected financial data shown below for the past five years was derived from our audited financial statements. The historical results are not necessarily indicative of the operating results to be expected in the future. The selected financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Market conditions throughout fiscal 2003 were challenging. We experienced a significant reduction in demand for our products. In our Electrical Power Products segment, market price levels deteriorated early in the year as competition for available business volume intensified. Despite weak market conditions, we successfully increased both revenues and earnings in our Process Control Systems business segment. We also successfully expanded system modification and replacement equipment activity in both business segments.
With a depressed economy, we intensified our focus on working capital management. We achieved record levels of cash flow from operating activities during 2003. As of year end, Powell Industries held cash, cash equivalents and marketable securites of $42 million, an increase of $28 million over fiscal 2002.
We believe we are well positioned to take advantage of improving economic and market conditions.
In the course of operations, we are subject to certain risk factors, including but not limited to competition and competitive pressures, sensitivity to general economic and industry conditions, international political and economic risks, availability and price of raw materials and execution of business strategy, as more fully described above in our “Cautionary Statement Regarding Forward-Looking Statements; Risk Factors.” Any forward-looking statements made by or on our behalf 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 uncertainties in that actual results may differ materially from those projected in the forward-looking statements.
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The following discussion should be read in conjunction with the accompanying consolidated financial statements and related notes.
Results of Operations
Year ended October 31, 2003 compared with year ended October 31, 2002
Revenue and Gross Profit
Consolidated revenues decreased 17% to $253.4 million in fiscal 2003 as compared to fiscal year 2002 revenues of $306.4 million. Domestic revenues decreased $64.8 million to $213.6 million in 2003 compared to 2002. Despite weaknesses in domestic markets, new investments in oil and gas production facilities contributed to increased international revenues in fiscal 2003. Revenues outside of the United States accounted for 16% of consolidated revenues in 2003 compared to 9% in 2002.
Our Electrical Power Products segment recorded revenues in fiscal 2003 of $227.0 million compared to $283.6 million in fiscal 2002. Revenues from public and private utilities fell by 55% in fiscal 2003. In particular, there was a significant decline in new investments in electrical power generation facilities. Utility revenues were $79 million in 2003 compared to a record $173 million in 2002. Our municipal customers faced a reduced tax base with which to fund infrastructure projects in 2003. Municipal and transit projects generated revenues of $23 million compared to $29 million in 2002. However, revenues from industrial customers totaled $125 million in fiscal 2003, an increase of $44 million, or 54%, over 2002. This increase in revenue from industrial customers resulted primarily from revenues related to the manufacture and delivery of power control modules for new oil and gas production facilities. These long-term projects to construct new oil and gas production facilities were initiated by our customers during 2001 and 2002.
Gross profit, as a percentage of revenues was 18.8% in fiscal 2003, compared to 22.0% in fiscal year 2002. Gross profit has been adversely impacted by lower production volumes and competitive pricing pressures. Partially offsetting adverse market conditions were the results of our efforts to reduced our costs of production by improving operating efficiencies through the implementation of lean initiatives. In addition, we incurred an impairment loss of $0.4 million to decrease the carrying value of machinery and equipment to their estimated market value. This impairment loss resulted from our decision to discontinue certain product lines. These product lines generated aggregate revenues of less than $1.0 million in fiscal 2003.
Revenues in our Process Control Systems segment increased 16% to $26.4 million compared to $22.8 million in fiscal 2002. Our most significant award during 2003 was a contract to design and build Intelligent Transportation Systems (ITS) for the Holland and Lincoln tunnels from the Port Authority of New York and New Jersey valued at $37.4 million. Revenue attributable to this project totaled $4.2 million during fiscal 2003. Gross profit, as a percentage of revenues, was 24.0% in fiscal 2003, compared to 23.6% in fiscal year 2002.
For additional information related to our business segments, see Note M of the Notes to Consolidated Financial Statements.
Operating Expenses
Selling, general and administrative expenses increased to 13.9% of revenues in fiscal 2003 compared to 12.7% of revenues in fiscal year 2002. Our commitment to continue to develop our customer markets and products resulted in an increase in operating expenses relative to our revenues. Research and development expenditures were $3.6 million in fiscal 2003 compared to $3.4 million in fiscal year 2002. Our research efforts are directed toward the discovery and development of new products and processes as well as improvements in existing products and processes.
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Interest Income and Expense
We incurred $403 thousand in interest expense on our term debt and outstanding industrial development revenue bonds during fiscal 2003 compared to $508 thousand in 2002. As a result of lower levels of debt and decreased interest rates, our interest expense has declined.
Interest income increased by $280 thousand to $578 thousand in 2003 compared to the same period of the previous year. An increase in invested funds during 2003 has been partially offset by the lower interest rate environment.
Provision for Income Taxes
Our provision for income taxes reflects an effective tax rate on earnings before income taxes of 44.9% in fiscal 2003 compared to 37.1% in fiscal 2002. Included in our provision is $1.3 million for state taxes (net of federal tax benefit) of which $0.9 million reflects revised estimates in state tax exposures related to prior years. Over the past several years, our business has expanded and we are now conducting activities in more states. We have accordingly increased our estimates for such state tax exposures. Going forward, we anticipate our effective tax rate to range from 37.6% to 37.9%.
Cumulative Effect of Change in Accounting Principle
As a result of the adoption of Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” we recorded a goodwill impairment loss of $510 thousand, net of $285 thousand taxes, as a cumulative effect of a change in accounting principle during the first quarter of 2003. We recorded an impairment charge of $380 thousand, net of $214 thousand taxes, to write off the full value of goodwill in our Process Control Systems segment. In our Electrical Power Products segment, we recorded an impairment charge of $130 thousand, net of $71 thousand taxes. The goodwill impairment charge accounted for a loss of $0.04 per diluted share
Net Income
Net income was $7.1 million, or $0.67 per diluted share, in fiscal year 2003 compared to $17.9 million, or $1.67 per diluted share in fiscal year 2002. The decrease in net income primarily relates to lower business volume and decreased gross profits in fiscal 2003. Additionally, net income was negatively impacted as a result of an impairment loss of $0.2 million, net of taxes, recorded to decrease the carrying value of machinery and equipment; an increase in estimates for state tax exposures related to prior years of $0.9 million, net of federal tax benefits; and the net effect of a change in accounting principle related to goodwill accounted for $0.5 million. Each of these adjustments to net income are discussed in the Notes to Consolidated Financial Statements.
Year ended October 31, 2002 compared with year ended October 31, 2001
Revenues increased 13% to a record $306.4 million in fiscal 2002 as compared to revenues in fiscal year 2001 of $271.2 million. Our Electrical Power Products segment recorded revenues in fiscal 2002 of $ 283.6 million compared to $244.8 million in fiscal 2001. During fiscal 2002 one aspect of our revenue growth was due to new worldwide investments in oil and gas production facilities. Furthermore, demand for additional electrical power generation capacities in the United States strengthened over the expansion realized in fiscal 2001. Revenues in our Process Control Systems segment were $22.8 million compared to $26.4 million in fiscal 2001. For additional information related to our business segments, see Note M of the Notes to Consolidated Financial Statements.
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International revenues increased in fiscal 2002. Revenues outside of the United States accounted for 9% of consolidated revenues in fiscal 2002 compared to 8% in fiscal 2001.
Gross profit, as a percentage of revenues, improved to 22.1% in fiscal 2002, compared to 20.9% in fiscal year 2001. Higher production volumes, improved operating efficiencies, along with the quality of our backlog have all contributed to the improvement in gross profit. We continued to implement lean manufacturing initiatives to reduce costs and respond to the competitive markets that we serve.
Selling, general and administrative expenses, including research and development expenditures, were $39.0 million (12.7 % of revenues) in fiscal 2002 compared to $35.0 million (12.9% of revenues) in fiscal year 2001. The increase in operating expenses was primarily due to the growth in business volumes during the period.
Research and development expenditures were $3.4 million in fiscal 2002 compared to $3.1 million in fiscal year 2001. Our research efforts were directed toward the discovery and development of new products and processes as well as improvements in existing products and processes.
Net interest expense decreased to $210 thousand in fiscal 2002 from $359 thousand in fiscal 2001 due to lower levels of debt. Interest expense was related to our revolving credit facility and long-term debt. This expense was partially offset by interest income from short-term investments.
Our provision for income taxes reflected an effective income tax rate on earnings before income taxes of 37.1% in fiscal 2002 compared to 36.8% in fiscal 2001. The increase in our effective tax rate was primarily a result of higher state taxes and was also partly attributable to increases in non-deductible expenses.
Net income was $17.9 million, or $1.67 per diluted share, in fiscal year 2002 compared to $13.5 million, or $1.28 per diluted share in fiscal year 2001. Growth in business volume and increased gross profits resulted in earnings improvement in fiscal 2002.
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Liquidity and Capital Resources
We have maintained a strong liquidity position. Working capital was $96.9 million at October 31, 2003 compared to $86.5 million at October 31, 2002. As of October 31, 2003, current assets exceeded current liabilities by 3.2 times and our debt to capitalization ratio was less than 0.1 to 1.
At October 31, 2003, we had cash, cash equivalents and marketable securities of $42.3 million, compared to $14.4 million at October 31, 2002. Long-term debt, including current maturities, totaled $7.4 million at October 31, 2003 compared to $12.0 million at October 31, 2002. In addition to our long-term debt, we maintain a revolving credit agreement which at year end provided for a credit facility of $15 million through February 2006. As of October 31, 2003, there were no borrowings under this line of credit. For further information regarding our debt, see Note F of the Notes to Consolidated Financial Statements.
Operating Activities
Net cash provided by operating activities was $36.5 million for fiscal 2003. A net reduction in operating assets and liabilities provided $22.3 million with the remainder of the increase related to net earnings adjusted for depreciation, amortization and other non-cash expenses. During fiscal 2002, operating activities provided net cash of $31.7 million of which $8.7 million resulted from a reduction in operating assets and liabilities.
Investing Activities
Investments in property, plant and equipment during fiscal 2003 totaled $4.5 million compared to $13.9 million in fiscal 2002. The majority of these expenditures were used to complete a project initiated during 2002 to increase our manufacturing capacity available for the manufacture of electrical power control modules. These modules are provided to the oil and gas industry for use on offshore platforms.
During 2003, we purchased $5.8 million of investment-grade corporate bonds. The maturity dates of these bonds vary from five to nine years.
Financing Activities
Financing activities used $3.7 million in fiscal 2003. Approximately $4.8 million was used for repayments on our long-term debt. Other financing activities were limited to the exercise of stock options. During fiscal 2002, net cash used by financing activities was $10.0 million, primarily from payments on long-term debt.
Contractual Obligations
At October 31, 2003 and 2002, our long-term contractual obligations were limited to debt and leases. The tables below detail our commitments by type of obligation and the period that the payment will become due (in thousands).
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Outlook for Fiscal 2004
We expect a continued weakness and depressed price levels in the Electrical Power Product markets we serve, and anticipate a decline in consolidated revenues of 7% to 13% in fiscal 2004. We expect full year revenues to range between $220 million and $235 million. Earnings from continuing operations are expected to range between $0.48 and $0.63 per diluted share.
We anticipate that our cash position will continue to grow during the first three quarters of 2004. Fourth quarter working capital needs are anticipated to increase with growing levels of business activity. We will continue to invest in our manufacturing capabilities and expect capital expenditures during fiscal year 2004 to range between $5.0 million and $8.0 million. We believe that working capital, borrowing capabilities, and funds generated from operations should be sufficient to finance anticipated operational activities, capital improvements, debt repayment and possible future acquisitions for the foreseeable future.
Effects of Inflation and Recession
During each of the past three years, we have not experienced a significant effect of inflation on our operations. We continue to evaluate the potential impact inflation could have on our business and future operations and attempt to minimize inflationary impacts by including escalation clauses in our long-term contracts. Recent economic and industry reports indicate that the current conditions should remain relatively unchanged for the foreseeable future. We do not anticipate a significant impact on operations in 2004 due to inflation.
During 2003, we experienced a significant deterioration in business volume due to the effect of the U.S. economy on the customers we serve. New investments in infrastructure projects were curtailed by both our utility and industrial customers. Our municipal customers faced a reduced tax base with which to fund infrastructure projects in 2003. We anticipate these conditions will persist into 2004.
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and judgments with respect to the selection and application of accounting policies that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosures of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.
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We believe the following critical accounting policies have the greatest impact on the preparation of our consolidated financial statements.
Revenue Recognition
Our revenues are generated from the manufacture and delivery of custom-manufactured products. We recognize revenues under both the completed contract method and the percentage-of-completion method depending upon the duration and the scope of the project. At the onset of each project, the size and duration of the contract is reviewed to determine the appropriate revenue recognition method based upon company policy. Due to the nature of the projects in the Process Control Systems segment, all revenues are recorded using percentage-of-completion. However, projects in the Electrical Power Products segment vary widely; thus, both the completed contract and percentage-of-completion methods are used.
Under the completed contract method, revenues are recognized upon the transfer of title, which is generally at the time of shipment or delivery depending upon the terms of the contract, when all significant contractual obligations have been satisfied, the price is fixed or determinable, and collectibility is reasonably assured. We use shipping documents and customer acceptance, when applicable, to verify the transfer of title to the customer. We assess whether the price is fixed or determinable based on the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment. Collectibility is assessed based on the creditworthiness of the customer based on credit verification and the customer’s payment history.
Under the percentage-of-completion method, revenues are recognized as work is performed based upon the ratio of labor dollars or hours incurred to date to total estimated labor dollars or hours to measure the stage of completion. The sales and gross profit recognized in each period are adjusted prospectively for any revisions in the total estimated contract costs, total estimated labor hours to complete the project, or total contract value. Whenever revisions of estimated contract costs and contract values indicate that the contract costs will exceed estimated revenues, thus creating a loss, a provision for the total estimated loss is recorded in that period. Due to the number of estimates used in the percentage-of-completion calculations, conditions such as changes in job performance, job conditions, estimated contract costs and profitability may result in revisions to original assumptions, thus causing actual results to differ from original estimates.
Valuation Accounts
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make certain judgments and estimates regarding uncertainties. Our most significant accounting uncertainty for which a valuation account is set up is in the area of accounts receivable collectibility.
An allowance for doubtful accounts has been established to provide for estimated losses on our accounts receivable. This estimated allowance is based on historical experience of uncollected accounts, the level of past due accounts, the overall level of outstanding accounts receivable, information about specific customers with respect to their inability to make payments and expectations of future conditions that could impact the collectibility of accounts receivable. We continually assess our allowance for doubtful accounts and may increase or decrease our periodic provision as additional information regarding collectibility becomes available.
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Impairment of Long-Lived Assets
We evaluate the recoverability of the carrying amount of long-lived assets whenever events or changes in circumstances indicate that the carrying value of an asset may not be fully recoverable. For long-lived assets to be held and used, the evaluation is based on impairment indicators such as the nature of the assets, the future economic benefit of the assets, any historical or future profitability measurements and other external market conditions or factors that may be present. If such impairment indicators are present or other factors exist that indicate that the carrying amount of the asset may not be recoverable, we determine whether impairment has occurred through the use of an undiscounted cash flows analysis of the asset at the lowest level for which identifiable cash flows exist, or quoted market prices. If an asset is considered to be impaired, a loss is recognized for the amount by which the carrying amount of the asset exceeds its fair value. For assets held for sale or disposal, the fair value of the asset is measured using quoted market prices or an estimation of net realizable value. Assets are classified as held for sale when there is a plan for disposal and those assets meet the held for sale criteria of SFAS No. 144. Assets to be disposed of are reported at the lower of the carrying amount or fair value less cost to sell.
Accruals for Contingent Liabilities
We account for contingencies in accordance with SFAS No. 5, “Accounting for Contingencies”. SFAS No. 5 requires that we record an estimated loss from a loss contingency when information available prior to the issuance of our financial statements indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements and the amount of the loss can be reasonably estimated. The amounts we record for insurance claims, warranties, legal and other contingent liabilities require judgments regarding the amount of expenses that will ultimately be incurred. We use past experience and history, as well as other specific circumstances surrounding these claims in evaluating the amount of liability that should be recorded. Actual results could differ from our estimates.
New Accounting Standards
In June 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” Under SFAS No. 146, companies are required to recognize costs associated with restructurings, discontinued operations, plant closings or other exit or disposal activities in the period in which the liability is incurred rather than at the date of commitment to the plan. We adopted SFAS No. 146 on January 1, 2003 and there has been no impact on our consolidated financial position, results of operations or cash flows.
In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”). FIN 45 requires that upon issuance of a guarantee, a guarantor must recognize a liability for the fair value of the obligation assumed under the guarantee. FIN 45 also requires additional disclosures about guarantees in the interim and annual financial statements. The provisions of FIN 45 related to initial recognition and measurement of guarantee agreements were effective for any guarantees issued or modified after December 31, 2002. The adoption of these recognition and measurement provisions did not have an impact on our consolidated financial position or results of operations. In accordance with the disclosure provisions of FIN 45, we have included in Note D of the Notes to Consolidated Financial Statements a reconciliation of the changes in our product warranty liability for the years ended October 31, 2003 and 2002. We provide for estimated warranty costs at the time of sale based upon historical experience rates. Our products contain warranties for parts and service for the earlier of 18 months from the date of shipment or 12 months from the date of initial operations.
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In November 2002, the FASB Emerging Issues Task Force (“EITF”) reached a consensus opinion of EITF 00-21, “Revenue Arrangements with Multiple Deliverables.” EITF 00-21 addresses the proper accounting treatment for goods or services, or both, that are to be delivered separately in a bundled sales arrangement. The guidance in this issue is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. We adopted EITF 00-21 on August 1, 2003 and it did not have an impact on our consolidated financial position, results of operations or cash flows.
In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of FASB Statement No. 123.” This statement provides alternative methods of transition for a voluntary change in the method of accounting for stock-based employee compensation to the fair value method. The statement also amends the disclosure requirements of SFAS No. 123, “Accounting for Stock-Based Compensation.” Under SFAS No. 148, annual and interim financial statements are required to have prominent disclosures about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. This statement was effective for fiscal years ending after December 15, 2002. This statement did not have an impact on our consolidated financial statements as we have adopted only the disclosure provisions of SFAS No. 123. The additional disclosure requirements are included in Note K of these Notes to Consolidated Financial Statements.
In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities,” (“FIN 46”). FIN 46 addresses the consolidation requirements of companies that have variable interest entities. This Interpretation requires the consolidation of any variable interest entities in which a company has a controlling financial interest and requires disclosure of those that are not consolidated but in which the company has a significant variable interest. The requirements of FIN 46 will be effective for our first quarter 2004. We do not expect this Interpretation to have a material impact on our financial position, results of operations or cash flows.
In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149, which amends and clarifies existing accounting pronouncements, addresses financial accounting and reporting for derivative or other hybrid instruments to require similar accounting treatment for contracts with comparable characteristics. This statement was effective for contracts entered into or modified after June 30, 2003 and for hedging activities designated after June 30, 2003. This statement did not have an impact on our consolidated financial position, results of operations or cash flows.
In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This statement establishes standards for classifying and measuring as liabilities certain financial instruments that have characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument within its scope as a liability, or asset as appropriate, to represent obligations of the issuer. Many of the instruments covered by this statement have previously been classified as equity. SFAS No. 150 was effective for all financial instruments created or modified after May 31, 2003, and to other instruments as of September 1, 2003. This statement did not have an impact on our consolidated financial position, results of operations or cash flows.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to certain market risks arising from transactions we have entered into in the normal course of business. These risks primarily relate to fluctuations in interest rates, foreign exchange rates and commodity prices.
We manage our exposure to changes in interest rates by optimizing the use of variable rate debt. A 1.0% increase in interest rates would result in an annual increase in interest expense of less than $75 thousand. In addition to variable rate debt, we also invest in marketable debt securities that are carried at fair value on the consolidated balance sheet, with unrealized gains and losses reported in other comprehensive income. Changes in interest rates will affect the fair value of the marketable securities as reported. However, we believe that changes in interest rates will not have a material near-term impact on our future earnings or cash flows. During each of the past three years, we have not experienced a significant effect on our business due to changes in interest rates.
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We manage our exposure to changes in foreign exchange rates primarily through arranging compensation in U.S. dollars. Risks associated with changes in commodity prices are primarily managed through utilizing contracts with suppliers. Risks related to foreign exchange rates and commodity prices are monitored and actions could be taken to hedge these risks in the future. We believe that fluctuations in foreign exchange rates and commodity prices will not have a material near-term effect on our future earnings and cash flows. During each of the past three years, we have not experienced a significant effect on our business due to fluctuations in foreign exchange rates or commodity prices.
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Item 8. Financial Statements and Supplementary Data
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INDEPENDENT AUDITORS’ REPORT
To the Board of Directors and Stockholders of Powell Industries, Inc.:
We have audited the accompanying consolidated balance sheets of Powell Industries, Inc. and subsidiaries (the “Company”) as of October 31, 2003 and 2002, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the two years in the period ended October 31, 2003. 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. The consolidated financial statements of the Company for the year ended October 31, 2001 were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those financial statements in their report dated November 29, 2001.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the 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, such 2003 and 2002 consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of October 31, 2003 and 2002, and the consolidated results of its operations and its cash flows for each of the two years in the period ended October 31, 2003, in conformity with accounting principles generally accepted in the United States of America.
As discussed above, the financial statements of the Company for the year ended October 31, 2001 were audited by other auditors who have ceased operations. As described in Note M, the Company changed the composition of its reportable segments during the year ended October 31, 2003, and the amounts in the financial statements relating to reportable segments for the year ended October 31, 2001 have been restated to conform to the revised composition of reportable segments. We audited the adjustments that were applied to restate the disclosures for reportable segments reflected in the financial statements for the year ended October 31, 2001. Our procedures included (i) agreeing the previously reported segment revenues, operating income and assets to the previously issued financial statements and related notes, (ii) combining the previously reported segment revenues, operating income and assets of the switchgear and related equipment and bus duct segments, the sum of which represents the restated reportable segment amounts and (iii) testing the mathematical accuracy of the combination of the previously reported segment amounts resulting in the restated reportable segment amounts. In our opinion, such adjustments are appropriate and have been properly applied.
As discussed in Note H, these consolidated financial statements have been revised to include the transitional disclosures required by Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”, which was adopted by the Company on November 1, 2002. Our procedures with respect to the earnings per share amounts reported in the consolidated statement of operations for 2001 included (i) agreeing the previously reported net income to the previously issued financial statements, (ii) agreeing the amounts of the adjustments to recorded net income representing amortization expense (including any related tax effects) recognized in 2001 related to goodwill to the Company’s underlying records obtained from management, and (iii) testing the mathematical accuracy of the reconciliation of adjusted net income to reported net income and the related earnings per share amounts.
With respect to the preceding two paragraphs, we were not engaged to audit, review, or apply any procedures to the financial statements of the Company for the year ended October 31, 2001 other than with respect to such adjustments and, accordingly, we do not express an opinion or any other form of assurance on the financial statements for the year ended October 31, 2001 taken as a whole.
DELOITTE & TOUCHE LLP
Houston, TexasDecember 19, 2003
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have audited the accompanying consolidated balance sheets of Powell Industries, Inc. (a Nevada corporation) and subsidiaries as of October 31, 2001 and 2000, and the related consolidated statements of operations, stockholders’ equity and cash flows for the three years in the period ended October 31, 2001. 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 auditing standards generally accepted in the United States. 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 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, 2001 and 2000, and the consolidated results of operations and their cash flows for each of the three years in the period ended October 31, 2001, in conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Houston, TexasNovember 29, 2001
This is a copy of the audit report previously issued by Arthur Andersen LLP in connection with our filing on Form 10-K for the year ended October 31, 2001. This audit report has not been reissued by Arthur Andersen LLP in connection with this filing on Form 10-K.
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POWELL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
The accompanying notes are an integral part of these consolidated financial statements.
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POWELL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)
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POWELL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (In thousands)
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POWELL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
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POWELL INDUSTRIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Business and Organization
B. Summary of Significant Accounting Policies
Principles of Consolidation
Use of Estimates
Cash and Cash Equivalents
Marketable Securities
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POWELL INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Accounts Receivable and Market Risk
Costs and Estimated Earnings in Excess of Billings
Inventories
Property, Plant and Equipment
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Intangible Assets
Income Taxes
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Warranties
Research and Development Expense
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C. Earnings per Share
The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):
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D. Detail of Certain Balance Sheet Accounts
Activity in our allowance for doubtful accounts receivable consists of the following (in thousands):
Activity in our accrued product warranty account consists of the following (in thousands):
The components of inventories are summarized below (in thousands):
The components of costs and estimated earnings in excess of billings (in thousands):
The components of billings in excess of costs and estimated earnings (in thousands):
Property, plant and equipment are summarized below (in thousands):
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E. Employee Benefit Plans
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F. Long-Term Debt
Long-term debt consists of the following (in thousands):
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See Footnote L for discussion of the fair market value of the debt instruments.
G. Income Taxes
The net deferred income tax asset (liability) is comprised of the following (in thousands):
The above current and noncurrent deferred income tax liabilities are included in other accrued expenses and other liabilities, respectively, on the consolidated balance sheet.
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H. Goodwill and Other Intangible Assets
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I. Significant Sales Data
J. Commitments and Contingencies
Leases
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Letters of Credit and Bonds
Litigation
Other Contingencies
K. Stock-Based Compensation
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L. Fair Value of Financial Instruments
M. Business Segments
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N. Quarterly Results of Operations (unaudited)
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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
PART III
Items 10, 11, 12, 13, and 14. Directors and Executive Officers of the Registrant; Executive Compensation; Security Ownership of Certain Beneficial Owners and Management; Certain Relationships and Related Transactions; and Principal Accountant Fees and Services
The information required by these items is incorporated in this Annual Report by reference to our definitive proxy statement pursuant to Regulation 14A, to be filed with the Securities and Exchange Commission not later than 120 days after the close of our fiscal year ended October 31, 2003, under the headings set forth above.
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
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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, there unto duly authorized.
Pursuant to the requirements of the Securities Exchange 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:
Date: December 31, 2003
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