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PIKE ELECTRIC CORP - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge)
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our historical consolidated
financial statements and related notes thereto in "Item 8-Financial Statements
and Supplementary Data" The discussion below contains forward-looking statements
that are based upon our current expectations and are subject to uncertainty and
changes in circumstances. Actual results may differ materially from these
expectations due to inaccurate assumptions and known or unknown risks and
uncertainties, including those identified in "Risk Factors."
Overview
Pike Electric Corporation, headquartered in Mount Airy, North Carolina, is one
of the largest providers of energy solutions for investor-owned, municipal and
co-operative electric utilities in the United States. Since our founding in
1945, we have evolved from our roots as a specialty non-unionized contractor for
electric utilities focused on the distribution sector in the Southeastern United
States to a national, leading turnkey energy solutions provider with diverse
capabilities servicing over 300 investor-owned, municipal and co-operative
electric utilities, including American Electric Power Company, Inc., Dominion
Resources, Inc., Duke Energy Corporation, Duquesne Light Company, E.On AG,
Florida Power & Light Company, PacifiCorp, Progress Energy, Inc., South Carolina
Electric & Gas Company, and The Southern Company. Leveraging our core
competencies as a company primarily focused on providing a broad range of
electric infrastructure services principally for utilities customers, we believe
our experienced management team has positioned us to benefit from the
substantial long term growth drivers in our industry.
Services
Over the past four years, we have reshaped our business platform and territory
significantly from being a distribution construction company based primarily in
the Southeastern United States to a national energy solutions provider. We have
done this organically and through strategic acquisitions of companies with
complementary service offerings and geographic footprints. Our comprehensive
suite of energy solutions now includes siting, permitting, engineering, design,
installation, maintenance and repair of power delivery systems, including
renewable energy projects. Our planning and siting process leverages technology
and the collection of environmental, cultural, land use and scientific data to
facilitate successful right-of-way negotiations and permitting for transmission
and distribution construction projects, powerlines, substations and renewable
energy installations. Our engineering and design capabilities include designing,
providing EPC services, owner engineering, project management, multi-entity
coordination, grid integration, electrical BOP and system planning for
individual or turnkey powerline, substation and renewable energy projects. Our
construction and maintenance capabilities include substation, distribution
(underground and overhead) and transmission with voltages up to 345 kV. We are
also a recognized leader in storm restoration due to our ability to rapidly
mobilize thousands of existing employees and equipment within 24 hours, while
maintaining a functional workforce for unaffected customers.
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Our comprehensive suite of energy solutions now includes facilities planning and
siting, permitting, engineering, design, installation, maintenance and repair of
power delivery systems, including renewable energy projects, all as further
described in the table below:
Service Revenue Category Description
Planning & Siting Engineering and Substation Our planning and siting process
leverages technology and the
collection of environmental,
regulatory, economic, cultural,
land use and scientific data to
facilitate successful
right-of-way negotiations,
licensing and permitting for
powerlines, substations and
electrical generation facilities.
We also provide NERC reliability
studies and renewable generation
interconnection studies.
Engineering & Design Engineering and Substation We provide design, EPC, owner
engineer, project management,
material procurement,
multi-entity coordination, grid
integration, BOP, training,
consulting, DOT projects, and
Thermal Rate solutions for
individual or turnkey powerline,
substation and renewable energy
projects. We also provide
engineering and design services
for the communication industry
for wireline and wireless
communication infrastructure with
the acquisition of UCS on July 2,
2012.
Transmission and Overhead Distribution and We provide overhead and
Distribution Other, Underground underground powerline
Construction Distribution and construction, upgrade,
Transmission inspection, and extension
services (predominately
single-pole and H-frame wood,
concrete or steel poles) for
distribution networks and
transmission lines with voltages
up to 345 kV, energized
maintenance work for voltages up
to 500 kV.
Overhead services consist of
construction, repair and
maintenance of wire and
components in energized overhead
electric distribution and
transmission systems.
Underground services range from
simple residential installations,
directional boring, concrete
encased duct and manhole
installation, to the construction
of complete underground
distribution facilities.
Substation Engineering and Substation We provide substation
Construction construction and service up to
500 kV.
Substation services include:
construction of new substations,
existing substation upgrades,
relay testing, transformer
maintenance and hauling,
foundations, commissioning,
emergency outage response and
Smart Grid component
installation. We also specialize
in relay metering and control
solutions.
Renewables Depending on project, can We provide a total energy
be any type of core solution platform, including
revenue preliminary studies, planning,
siting and permitting,
engineering and design,
construction, procurement,
testing and commissioning, and
grid interconnection.
Storm Restoration Storm Restoration Services Storm restoration involves the
Services repair or reconstruction of any
part of a distribution or sub-500
kV transmission network,
including substations, power
lines, utility poles or other
components, damaged during snow,
ice or wind storms, flash floods,
hurricanes, tornadoes or other
natural disasters. We are a
recognized leader in storm
restoration, due to our ability
to rapidly mobilize thousands of
existing employees and equipment
within 24 hours, while
maintaining a functional force
for unaffected customers.
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While storm restoration services can generate significant revenues, their
unpredictability is demonstrated by comparing our revenues from those services
in the last five fiscal years which have ranged from 8.9% to 24.9% of total
revenues. During periods with significant storm restoration work, we generally
see man-hours diverted from core work, which decreases core revenues. The table
below sets forth our revenues by category of service for the periods indicated:
Percentage Storm Percentage
Fiscal Core of Total Restoration of Total Total
Year Revenues Revenues Revenues Revenues Revenues
(in millions) (in millions) (in millions)
2008 $ 502.6 91.1 % $ 49.4 8.9 % $ 552.0
2009 $ 460.6 75.1 % $ 152.9 24.9 % $ 613.5
2010 $ 457.5 90.7 % $ 46.6 9.3 % $ 504.1
2011 $ 529.3 89.1 % $ 64.5 10.9 % $ 593.8
2012 $ 614.6 89.7 % $ 70.6 10.3 % $ 685.2
Seasonality and Fluctuations of Results
Our services are performed outdoors and, as a result, our results of operations
can be subject to seasonal variations due to weather conditions. These seasonal
variations affect both our construction and storm restoration services. Extended
periods of rain can negatively affect the deployment of our construction crews,
particularly with respect to underground work. During the winter months, demand
for construction work is generally lower due to inclement weather. In addition,
demand for construction work generally increases during the spring months due to
improved weather conditions and is typically the highest during the summer
months due to better weather conditions. Due to the unpredictable nature of
storms, the level of our storm restoration revenues fluctuates from period to
period.
Inflation
Due to relatively low levels of inflation experienced in recent years, inflation
has not had a significant effect on our results. However, we have experienced
fuel cost volatility during recent fiscal years.
Basis of Reporting
Revenues. We derive our revenues from one reportable segment through two service
categories - core services and storm restoration services. Our core services
include siting, permitting, engineering, design, installation, maintenance and
repair of power delivery systems, including renewable energy projects. Our storm
restoration services involve the rapid deployment of our highly-trained crews
and related equipment to restore power on transmission and distribution systems
during crisis situations, such as hurricanes, ice storms or wind storms.
Approximately 80% of our services, including the majority of our core services
and a majority of our storm restoration services, are provided under MSAs, which
are based on a price per hour worked or a price per unit of service. Revenues
generated on an hourly basis are determined based on actual labor and equipment
time completed and on materials billed to our customers. Revenue based on hours
worked is recognized as hours are completed. We recognize revenue on unit-based
services as the units are completed. The remaining 20% of our annual revenues
are from fixed-price agreements. The mix of hourly and per unit revenues changes
during periods of high storm restoration services, as these services are all
billed on an hourly basis. Revenues for longer duration fixed-price contracts
are recognized using the percentage-of-completion method, measured by the
percentage of costs incurred to date to total estimated costs for each contract.
Cost of Operations. Our cost of operations consists primarily of compensation
and benefits to employees, insurance, fuel, specialty equipment, rental,
operating and maintenance expenses relating to vehicles and equipment, materials
and tools and supplies. Our cost of operations also includes depreciation,
primarily relating to our vehicles and heavy equipment.
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General and Administrative Expenses. General and administrative expenses include
costs not directly associated with performing work for our customers. These
costs consist primarily of compensation and related benefits of management and
administrative personnel, facilities expenses, professional fees and
administrative overhead.
Interest Expense. In addition to cash interest expense, interest expense
includes amortization of deferred loan costs, deferred compensation accretion
and the write-off of unamortized deferred loan costs resulting from prepayments
of debt.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations
are based on our consolidated financial statements, which have been prepared in
accordance with U.S. GAAP. The preparation of these financial statements
requires management to make certain estimates and assumptions for financial
information that affect the amounts reported in the financial statements and
accompanying notes. On an ongoing basis, we evaluate these estimates and
assumptions, including those related to revenue recognition for work in
progress, allowance for doubtful accounts, self-insured claims liability,
valuation of goodwill and other intangible assets, asset lives and salvage
values used in computing depreciation and amortization, including amortization
of intangibles, accounting for income taxes, contingencies, litigation and
stock-based compensation. Application of these estimates and assumptions
requires the exercise of judgment as to future uncertainties and, as a result,
actual results could differ from these estimates. We believe the following to be
our most important accounting policies, including those that use significant
judgments and estimates in the preparation of our consolidated financial
statements.
Revenue Recognition. Revenues from service arrangements are recognized when
services are performed. We recognize revenue from hourly services based on
actual labor and equipment time completed and on materials when billable to our
customers. We recognize revenue on unit-based services as the units are
completed. We recognize the full amount of any estimated loss on these projects
if estimated costs to complete the remaining units for the project exceed the
revenue to be received from such units.
Revenues for fixed-price contracts are recognized using the
percentage-of-completion method, measured by the percentage of costs incurred to
date to total estimated costs for each contract. Contract costs include all
direct material, labor and subcontract costs, as well as indirect costs related
to contract performance, such as indirect labor, tools, repairs and
depreciation. The cost estimation process is based on the professional knowledge
and experience of our engineers, project managers, field construction
supervisors, operations management and financial professionals. Changes in job
performance, job conditions, estimated profitability and final contract
settlements may result in revisions to costs and income and their effects are
recognized in the period in which the revisions are determined. At the time a
loss on a contract becomes known, the entire amount of the estimated ultimate
loss is accrued.
The current asset "Costs and estimated earnings in excess of billings on
uncompleted contracts" represents revenues recognized in excess of amounts
billed. The current liability "Billings in excess of costs and estimated
earnings on uncompleted contracts" represents billings in excess of revenues
recognized.
Allowance for Doubtful Accounts. We provide an allowance for doubtful accounts
that represents an estimate of uncollectible accounts receivable. The
determination of the allowance includes certain judgments and estimates
including our customers' willingness or ability to pay and our ongoing
relationship with the customer. In certain instances, primarily relating to
storm restoration work and other high-volume billing situations, billed amounts
may differ from ultimately collected amounts. We incorporate our historical
experience with our customers into the estimation of the allowance for doubtful
accounts. These amounts are continuously monitored as additional information is
obtained. Accounts receivable are primarily due from customers located within
the United States. Any material change in our customers' business or cash flows
would affect our ability to collect amounts due.
Property and Equipment. We capitalize property and equipment as permitted or
required by applicable accounting standards, including replacements and
improvements when costs incurred for those purposes extend the useful life of
the asset. We charge maintenance and repairs to expense as incurred.
Depreciation on capital assets is computed using the straight-line method based
on the useful lives of the assets, which range from 3 to 39 years. Our
management makes assumptions regarding future conditions in determining
estimated useful lives and potential salvage values. These assumptions impact
the amount of depreciation expense recognized in the period and any gain or loss
once the asset is disposed.
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We review our property and equipment for impairment when events or changes in
business conditions indicate the carrying value of the assets may not be
recoverable, as required by U.S. GAAP. An impairment of assets classified as
"held and used" exists if the sum of the undiscounted estimated future cash
flows expected is less than the carrying value of the assets. If this
measurement indicates a possible impairment, we compare the estimated fair value
of the asset to the net book value to measure the impairment charge, if any. If
the criteria for classifying an asset as "held for sale" have been met, we
record the asset at the lower of carrying value or fair value, less estimated
selling costs. We continually evaluate the depreciable lives and salvage values
of our equipment.
Valuation of Goodwill and Other Intangible Assets. We test our goodwill for
impairment annually or more frequently if events or circumstances indicate
impairment may exist. Examples of such events or circumstances could include a
significant change in business climate or a loss of significant customers. We
complete our annual analysis of our reporting units as of the first day of our
fourth fiscal quarter. For purposes of our fiscal 2012 analysis, we had three
reporting units - non-union construction, union construction, and engineering.
In evaluating reporting units, we first consider our operating segment and
related components in accordance with U.S. GAAP. We allocate goodwill to the
reporting units that are expected to benefit from the synergies of the business
combinations generating the goodwill. We apply a two-step fair value-based test
to assess goodwill for impairment. The first step compares the fair values of
the reporting units to their carrying amounts, including goodwill. If the
carrying amount of any reporting unit exceeds its fair value, the second step is
then performed. The second step compares the carrying amount of the reporting
unit's goodwill to the implied fair value of the goodwill. If the implied fair
value of the goodwill is less than the carrying amount, an impairment loss would
be recorded.
We determine the fair value of our reporting units based on a combination of the
income approach, using a discounted cash flow model, and a market approach,
which considers comparable companies and transactions. Under the income
approach, the discounted cash flow model determines fair value based on the
present value of projected cash flows over a specific projection period and a
residual value related to future cash flows beyond the projection period. Both
values are discounted using a rate which reflects our best estimate of the
weighted average cost of capital of a market participant, and is adjusted for
appropriate risk factors. We perform sensitivity tests with respect to growth
rates and discount rates used in the income approach. Under the market approach,
valuation multiples are derived based on a selection of comparable companies and
acquisition transactions, and applied to projected operating data for each
reporting unit to arrive at an indication of fair value.
For our fiscal 2012 annual impairment analysis, we weighted the income and
market approaches 70% and 30%, respectively. The income approach was given a
higher weight because it has a more direct correlation to the specific economics
of the reporting units than the market approach which is based on multiples of
companies that, although comparable, may not have the exact same risk factors as
our reporting units. The analysis indicated that, as of the first day of our
fourth fiscal quarter, the fair values of each of our reporting units exceeded
their respective carrying values in excess of 10%. For our analysis, we also
considered various elements of an implied control premium in assessing the
reasonableness of the reconciliation of the summation of the fair values of the
invested capital of our three reporting units (with appropriate consideration of
the interest bearing debt) to our overall market capitalization and our net book
value. This analysis included (i) the current control premium being paid for
companies with a similar market capitalization and within similar industries and
(ii) certain synergies that a market participant buyer could realize, such as
the elimination of potentially redundant costs. Based on these analyses,
management determined that the resulting control premium implied in the annual
impairment analysis was between 15% and 25% which was within a reasonable range
of current market conditions.
In addition to goodwill, we identify and value other intangible assets that we
acquire in business combinations, such as customer arrangements, customer
relationships and non-compete agreements, that arise from contractual or other
legal rights or that are capable of being separated or divided from the acquired
entity and sold, transferred, licensed, rented or exchanged. The fair value of
identified intangible assets is based upon an estimate of the future economic
benefits expected to result from ownership, which represents the amount at which
the assets could be bought or sold in a current transaction between willing
parties, that is, other than in a forced or liquidation sale. For customers with
whom we have an existing relationship prior to the date of the transaction, we
utilize assumptions that a marketplace participant would consider in estimating
the fair value of customer relationships that an acquired entity had with our
pre-existing customers in accordance with U.S. GAAP.
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Intangible assets with definite lives are amortized over their estimated useful
lives and are also reviewed for impairment if events or changes in circumstances
indicate that their carrying amount may not be realizable. We have no
intangibles with indefinite lives other than goodwill.
Inherent in valuation determinations related to goodwill and other intangible
assets are significant judgments and estimates, including assumptions about our
future revenue, profitability and cash flows, our operational plans, current
economic indicators and market valuations. To the extent these assumptions are
incorrect or there are declines in our business outlook, impairment charges may
be recorded in future periods.
Insurance and Claims Accruals. In the ordinary course of our business, we are
subject to individual workers' compensation, vehicle, general liability and
health insurance claims for which we are partially self-insured. We maintain
commercial insurance for individual workers' compensation and vehicle and
general liability claims exceeding $1.0 million. We also maintain commercial
insurance for health insurance claims exceeding $500,000 per person on an annual
basis. We determine the amount of our loss reserves and loss adjustment expenses
for self-insured claims based on analyses prepared quarterly that use both
company-specific and industry data, as well as general economic information. Our
estimates for insurance loss exposures require us to monitor and evaluate our
insurance claims throughout their life cycles. Using this data and our
assumptions about the emerging trends, we estimate the size of ultimate claims.
Our most significant assumptions in forming our estimates include the trend in
loss costs; the expected consistency with prior year claims of the frequency and
severity of claims incurred but not yet reported, changes in the timing of the
reporting of losses from the loss date to the notification date, and expected
costs to settle unpaid claims. We also monitor the reasonableness of the
judgments made in the prior year's estimates and adjust current year assumptions
based on that analysis.
While the final outcome of claims may vary from estimates due to the type and
severity of the injury, costs of medical claims and uncertainties surrounding
the litigation process, we believe that none of these items, when finally
resolved, will have a material adverse effect on our financial condition or
liquidity. However, should a number of these items occur in the same period, it
could have a material adverse effect on the results of operations in a
particular quarter or fiscal year.
Stock-Based Compensation. In accordance with U.S. GAAP, we recognize the cost of
employee services received in exchange for an award of equity instruments in the
financial statements over the period the employee is required to perform the
services in exchange for the award (presumptively the vesting period). We
measure the cost of employee services received in exchange for an award based on
the grant-date fair value of the award.
The fair value of each option award is estimated on the date of grant using the
Black-Scholes option pricing model. The risk-free interest rate is based on the
U.S. Treasury rate for the expected term of the option at the time of grant. As
of July 1, 2010, we began to use our historical volatility as a basis for our
expected volatility. Prior to that, we had limited trading history beginning
July 27, 2005 and had based our expected volatility on the average long-term
historical volatilities of peer companies. We are using the "simplified method"
to calculate the expected terms of the options as allowed under U.S. GAAP, which
represents the period of time that options granted are expected to be
outstanding. Forfeitures are estimated based on certain historical data. We will
continue to use this method until we have sufficient historical exercise
experience to give us confidence that our calculations based on such experience
will be reliable. It is our current intent not to issue dividends and none are
contemplated when estimating fair value for our option awards.
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Results of Operations
The following table sets forth selected statement of operations data as
percentages of revenues for the periods indicated (dollars in millions):
Year Ended June 30,
2012 2011 2010
Revenues:
Core revenues $ 614.6 89.7 % $ 529.3 89.1 % $ 457.5 90.7 %
Storm restoration revenues 70.6 10.3 % 64.5 10.9 % 46.6 9.3 %
Total revenues 685.2 100.0 % 593.8 100.0 % 504.1 100.0 %
Cost of operations 593.5 86.6 % 525.9 88.6 % 456.3 90.5 %
Gross profit 91.7 13.4 % 67.9 11.4 % 47.8 9.5 %
General and administrative expenses 66.2 9.7 % 57.6 9.7 % 52.0 10.3 %
(Gain) loss on sale and impairment of
property and equipment (0.6 ) -0.1 % 0.8 0.1 % 1.3 0.3 %
Restructuring expenses - - - - 8.9 1.8 %
Income (loss) from operations 26.1 3.8 % 9.5 1.6 % (14.4 ) -2.9 %
Interest expense and other 7.2 1.0 % 6.6 1.1 % 7.6 1.5 %
Income (loss) before income tax 18.9 2.8 % 2.9 0.5 % (22.0 ) -4.4 %
Income tax expense (benefit) 8.0 1.2 % 1.5 0.3 % (8.5 ) -1.7 %
Net income (loss) $ 10.9 1.6 % $ 1.4 0.2 % $ (13.5 ) -2.7 %
Year Ended June 30, 2012 Compared to Year Ended June 30, 2011
Revenues. Revenues increased 15.4%, or $91.4 million, to $685.2 million for the
year ended June 30, 2012 from $593.8 million for the year ended June 30, 2011.
Our core revenues increased 16.1% to $614.6 million for the year ended June 30,
2012 from $529.3 million in the prior year. Our acquisition of Pine Valley on
August 1, 2011 provided $18.9 million in core revenues for the year ended
June 30, 2012. Our project in Tanzania, which began construction in July 2011,
provided $10.1 million in core revenue for the year ended June 30, 2012.
The following table contains supplemental information on core revenue and
percentage changes by category for the periods indicated:
Year Ended
June 30,
Category of Core Revenue 2012 2011 % Change
Distribution and other $ 418.8 $ 333.3 25.7 %
Transmission 72.5 78.2 -7.3 %
Engineering and substation 123.3 117.8 4.7 %
Total $ 614.6 $ 529.3 16.1 %
• Distribution and Other Revenues. Our combined revenues for overhead and
underground distribution services increased 25.7% from the prior year
period, primarily due to a general increase in demand for overhead
distribution maintenance, the addition of Pine Valley ($14.4 million), and
our Tanzania project ($10.1 million). This growth rate was affected by our
decision to divert distribution crews to respond to increased storm
activity from Hurricane Irene and a large Northeast snow storm that
occurred during the year ended June 30, 2012. The majority of our
distribution services are provided to investor-owned, municipal and
co-operative utilities under MSAs. Services provided under these MSAs include both overhead and underground powerline distribution services. Our
underground distribution services continue to be adversely affected by a
weak market for new residential housing. Our MSAs do not guarantee a
minimum volume of work. The MSAs provide a framework for core and storm restoration pricing and provide an outline of the service territory in
which we will work or the percentage of overall outsourced distribution
work we will provide for the customer. Our MSAs also provide a platform
for multi-year relationships with our customers. MSAs enable us to easily
increase or decrease staffing for a customer without exhaustive contract
negotiations.
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• Transmission Revenues. Transmission revenues decreased 7.3% from the prior
year period. Our transmission project pipeline remains strong but the
timing of certain projects negatively impacted the year over year
comparison. In addition, we had reductions in material procurement service
revenues totaling $2.7 million during the year ended June 30, 2012. We did
start construction activity on the SCE&G EPC project during 2012 and
expect this project will continue through 2018. The addition of Pine Valley contributed $0.3 million in transmission revenues during the year
ended June 30, 2012.
• Engineering and Substation Revenues. Engineering and substation revenues increased 4.7% from the prior year, primarily due to the started
engineering activity on the SCE&G EPC project and the addition of Pine
Valley ($4.2 million). This increase was partially offset by a decrease in
material procurement service revenues which decreased from $50.0 million
in the prior year, primarily for the VC Summer nuclear substation project,
to $37.5 million for the year ended June 30, 2012. Engineering and
substation revenues may fluctuate, especially on a quarterly basis, due to
the timing of material procurement service revenues. Also, revenues from
the year ended June 30, 2011 were negatively impacted by a $2.0 million
reduction of costs and estimated earnings in excess of billings on
uncompleted contracts that related to prior periods (see Note 2 of the
Notes to Consolidated Financial Statements).
Our storm restoration revenues are highly volatile and unpredictable. For the
year ended June 30, 2012, storm restoration revenues totaled $70.6 million
compared to $64.5 million for the year ended June 30, 2011. The increase was
primarily attributable to more severe damages caused by Hurricane Irene, which
occurred along the East coast during August 2011, and a large snow storm that
occurred in the Northeast during November 2011.
Gross Profit. Gross profit increased 35.1% to $91.7 million for the year ended
June 30, 2012 from $67.9 million for the year ended June 30, 2011. Gross profit
as a percentage of revenues increased to 13.4% for the year ended June 30, 2012
from 11.4% for the prior year. Greater volume of core services and the increase
in storm restoration revenues favorably contributed to our increased gross
profit in the current year. The increased gross profit percentage also reflects
the positive impact from a decrease of $11.1 million in material procurement
service revenues during the year ended June 30, 2012. The gross profit on
material procurement services, in the current market, are generally lower than
our other services and currently range from 0% to 5% as a percentage of
revenues.
We experienced volatility in our mark-to-market adjustment on our diesel hedging
program that caused a $2.5 million increase in our cost of operations during the
year ended June 30, 2012. As a percentage of revenues, fuel costs increased to
4.9% for the year ended June 30, 2012 from 4.3% in the prior year. Gross profit
for the year ended June 30, 2011 was negatively impacted by a $2.0 million
reduction of costs and estimated earnings in excess of billings on uncompleted
contracts that related to prior periods (see Note 2 of the Notes to Consolidated
Financial Statements).
General and Administrative Expenses. General and administrative expenses
increased 14.9% to $66.2 million for the year ended June 30, 2012 from
$57.6 million for the year ended June 30, 2011. As a percentage of revenues,
general and administrative expenses remained unchanged at 9.7% for the years
ended June 30, 2012 and 2011. The increase in general and administrative
expenses was primarily due to approximately $2.0 million of overhead costs
related to Pine Valley, which was acquired on August 1, 2011, $0.3 million
related to the Tanzania project, which began construction in July 2011, $1.5
million in compensation, benefits, recruiting and travel to support Klondyke's
geographic expansion and revenue growth, $0.6 million in professional fees
related to the UCS acquisition process, $1.1 million related to increased
professional fees for accounting and project consulting as we continue to
integrate acquired companies, including the system conversion for Pine Valley,
$0.7 million for intangible asset amortization and IT related system
depreciation and $1.0 million for accrued incentive and other bonuses.
Interest Expense and Other, Net. Interest expense and other, net increased 9.1%
to $7.2 million for the year ended June 30, 2012 from $6.6 million for the year
ended June 30, 2011. This increase was primarily due to the write-off of $1.7
million of unamortized deferred loan costs as additional interest expense
related to the prior credit facility. The increase was partially offset by lower
deferred loan cost amortization under the existing revolving credit facility. On
August 24, 2011, we entered into a $200.0 million revolving credit facility that
replaced our prior credit facility. See Note 7 of the Notes to Consolidated
Financial Statements for additional details of the existing revolving credit
facility.
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Income Tax Expense. Income tax expense was $8.0 million and $1.5 million for the
years ended June 30, 2012 and June 30, 2011, respectively. Effective income tax
rates of 42.3% and 52.8% for the years ended June 30, 2012 and June 30, 2011,
respectively, varied from the statutory federal income tax rate of 35% due to
several factors, including state income and gross margin taxes, changes in
permanent differences primarily related to acquisition costs from the UCS
acquisition and Internal Revenue Code Section 199 deduction for 2012, Internal
Revenue Code Section 162(m) deduction limitations for compensation and meals and
entertainment, and the relative size of our consolidated income before income
taxes.
Year Ended June 30, 2011 Compared to Year Ended June 30, 2010
Revenues. Revenues increased 17.8%, or $89.7 million, to $593.8 million for the
fiscal year ended June 30, 2011 from $504.1 million for the fiscal year ended
June 30, 2010. The increase was attributable to a $17.9 million increase in
storm restoration revenues and a $71.8 million increase in core revenues.
For the fiscal year ended June 30, 2011, storm restoration revenues totaled
$64.5 million compared to $46.6 million for the year ended June 30, 2010. The
increase was attributable to significant tornadoes in the Southeast during April
2011. Our storm restoration revenues are highly volatile and unpredictable.
Our core revenues increased to $529.3 million for fiscal 2011 from $457.5
million for fiscal 2010. Our acquisition of Klondyke on June 30, 2010 provided
$28.1 million in core revenues for fiscal 2011. We recognized approximately
$56.4 million in material procurement revenues for fiscal 2011 compared to
approximately $19.3 million in the prior year. The material revenues above
require estimates, as certain material procurement services are provided as a
portion of larger fixed-price projects, in which we recognize project revenues
using the percentage-of-completion method.
Year Ended
June 30,
Category of Core Revenue 2011 2010 % Change
Distribution and other $ 333.3 $ 312.3 6.7 %
Transmission 78.2 68.8 13.7 %
Engineering and substation 117.8 76.4 54.2 %
Total $ 529.3 $ 457.5 15.7 %
Distribution and other revenues increased 6.7% from prior year. Since our low
point of demand distribution in February 2010, we have experienced a gradual
increase in work from our investor-owned utilities. Some of this growth was
diverted as we used our distribution crews to respond to increased storm
activity primarily during our fourth quarter of 2011. The majority of our
distribution services are provided to investor-owned, municipal and co-operative
utilities under MSAs. Services provided under these MSAs include both overhead
and underground powerline distribution services. Our MSAs do not guarantee a
minimum volume of work. The MSAs provide a framework for core and storm
restoration pricing and provide an outline of the service territory in which we
will work or the percentage of overall outsourced distribution work we will
provide for the customer. Our MSAs also provide a platform for multi-year
relationships with our customers. We can easily increase staffing for a customer
without exhaustive contract negotiations and the MSAs also allow our customers
to reduce staffing needs. Our underground distribution services continue to be
impacted by a weak market for new residential housing. We remain well-positioned
to benefit from a reacceleration in maintenance spending, which will remain
dependent to a large extent on the health of the economy. Our Klondyke
acquisition also contributed to the growth in this distribution and other
revenue ($10.9 million).
Transmission revenues increased 13.7% from the prior year, primarily due to the
timing of certain projects that have started in the southeast United States,
increased material procurement revenues ($5.2 million) and the addition of
Klondyke ($4.7 million).
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Engineering and substation revenues increased 54.2% from the prior year,
primarily due to material procurement services ($50.0 million), including the VC
Summer switchyard project, along with the acquisition of Klondyke ($12.5
million).
Gross Profit. Gross profit increased 42.1% to $67.9 million for the fiscal year
ended June 30, 2011 from $47.8 million for the fiscal year ended June 30, 2010.
Gross profit as a percentage of revenues increased to 11.4% for the fiscal year
ended June 30, 2011 from 9.5% for the fiscal year ended June 30, 2010. Gross
profit increased for the fiscal year ended June 30, 2011 due to significant
storm work in the fourth quarter that provided higher margins and more business
volume, including the overhead distribution business, which provided improved
leverage to fixed costs. In addition, gross profit for fiscal 2010 was
negatively impacted by $3.3 million in environmental charges.
General and Administrative Expenses. General and administrative expenses
increased 10.8% to $57.6 million for the fiscal year ended June 30, 2011 from
$52.0 million for the fiscal year ended June 30, 2010. As a percentage of
revenues, general and administrative expenses decreased to 9.7% from 10.3%. The
increase in general and administrative expenses was primarily due to the
approximately $3.6 million of general and administrative costs related to
Klondyke, which was acquired on June 30, 2010 and incentive bonuses totaling
approximately $3.1 million for the fiscal year ended June 30, 2011.
International and domestic business development activities also contributed to
the increase in general and administrative expenses.
Loss on Sale and Impairment of Property and Equipment. Loss on sale and
impairment of property and equipment was $0.8 million for the fiscal year ended
June 30, 2011 compared to $1.3 million for the fiscal year ended June 30, 2010.
The level of losses was affected by several factors, including the timing of the
continued replenishment of aging, damaged or excess fleet equipment, and
conditions in the market for used equipment. We continually evaluate the
depreciable lives and salvage values of our equipment.
Interest Expense and Other, Net. Interest expense and other, net decreased 13.2%
to $6.6 million for the fiscal year ended June 30, 2011 from $7.6 million for
the fiscal year ended June 30, 2010. This decrease was primarily due to reduced
settlement costs related to interest rate swaps and reduced debt balances,
partially offset by increased write-offs of deferred loan costs. See Note 8 of
the Notes to Consolidated Financial Statements for full details of derivative
instruments, including interest rate swaps.
Income Tax Benefit or Expense. The income tax expense was $1.5 million for the
fiscal year ended June 30, 2011 compared to income tax benefit of $8.6 million
for the fiscal year ended June 30, 2010. The effective tax rate was 52.7% and
38.9% for the fiscal years ended June 30, 2011 and June 30, 2010, respectively.
The income tax expense (benefit) recorded in the consolidated financial
statements fluctuates between years due to a variety of factors, including state
income taxes, changes in permanent differences primarily related to Internal
Revenue Code Section 162(m) deduction limitations for compensation and meals and
entertainment, and the relative size of our consolidated income (loss) before
income taxes.
Liquidity and Capital Resources
Our primary cash needs have been working capital, capital expenditures, payments
under our credit facility and acquisitions. Our primary source of cash for
fiscal 2012, 2011 and 2010 was cash provided by operations.
We need working capital to support seasonal variations in our business,
primarily due to the impact of weather conditions on the electric infrastructure
and the corresponding spending by our customers on electric service and repairs.
The increased service activity during storm restoration events temporarily
causes an excess of customer billings over customer collections, leading to
increased accounts receivable during those periods. In the past, we have
utilized borrowings under the revolving portion of our credit facility and cash
on hand to satisfy normal cash needs during these periods.
On August 24, 2011, we replaced our prior credit facility with a new $200.0
million revolving credit facility. As of such date, we had $115.0 million in
borrowings and $61.9 million of availability under this facility (after giving
effect to outstanding standby letters of credit of $23.1 million).
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On June 27, 2012, we exercised the accordion feature of the new revolving credit
facility and entered into a commitment increase agreement with our lenders
thereby increasing the lenders' commitments by $75.0 million, from $200.0
million to $275.0 million. The increased commitments will be used to support our
general corporate purposes, including funding the UCS acquisition completed on
July 2, 2012.
As of June 30, 2012, our cash totaled $1.6 million, we had $123.0 million of
borrowings outstanding and $139.2 million of availability under our
$275.0 million revolving credit facility (after giving effect to outstanding
standby letters of credit of $12.8 million). Our borrowing availability is
subject to, and potentially limited by, our compliance with the covenants of our
credit facility, which are discussed below.
Our revolving credit facility requires us to maintain: (i) a leverage ratio,
which is the ratio of total debt to adjusted EBITDA (as defined in our revolving
credit facility; measured on a trailing four-quarter basis), of no more than
3.75 to 1.0 as of the last day of each fiscal quarter, declining to 3.50 on
June 30, 2012 and declining to 3.00 on June 30, 2013 and thereafter, and (ii) a
consolidated fixed charge coverage ratio (as defined in the revolving credit
facility) of at least 1.25 to 1. At June 30, 2012, we were in compliance with
such covenants with a fixed charge coverage and leverage ratio of 2.55 and 1.79,
respectively.
We consider our cash investment policies to be conservative in that we maintain
a diverse portfolio of what we believe to be high-quality cash investments with
short-term maturities. Accordingly, we do not anticipate that the current
volatility in the capital markets will have a material impact on the principal
amounts of our cash investments.
We believe that our cash flow from operations, available cash and cash
equivalents, and borrowings available under our revolving credit facility will
be adequate to meet our ordinary course liquidity needs for the foreseeable
future. However, our ability to satisfy our obligations or to fund planned
capital expenditures will depend on our future performance, which to a certain
extent is subject to general economic, financial, competitive, legislative,
regulatory and other factors beyond our control. In addition, if we fail to
comply with the covenants contained in our revolving credit facility, we may be
unable to access funds upon which we depend for letters of credit and other
short-term borrowings. This would have a negative impact on our liquidity and
require us to obtain alternative short-term financing. We also believe that if
we pursue any material acquisitions in the foreseeable future we may need to
finance this activity through additional equity or debt financing.
Changes in Cash Flows: 2012 Compared to 2011
Year Ended June 30,
2012 2011
(in millions)
Net cash provided by operating activities $ 25.7 $ 22.2
Net cash used in investing activities $ (45.5 ) $ (16.5 )
Net cash provided by (used in) financing activities $ 21.1 $ (16.5 )
Net cash provided by operating activities increased to $25.7 million for the
fiscal year ended June 30, 2012 from $22.2 million for the fiscal year ended
June 30, 2011. We had net income of $10.9 million for the fiscal year ended
June 30, 2012 compared to a net income of $1.4 million for the fiscal year ended
June 30, 2011 and a decrease of $18.6 million in accounts receivable related to
storm work. This was partially offset by upward trends for core accounts
receivable and costs and estimated earnings in excess of billings on uncompleted
contracts primarily related to started construction and engineering activity on
the SCE&G EPC project and system and procedural issues on the side of two of our
investor owned utility customers.
We received a refund from the commercial insurance carrier that administers our
partially self-insured individual workers' compensation, vehicle and general
liability insurance programs for retrospective premium payment adjustments of
$3.5 million in August 2011, which is included in net cash provided by operating
activities for the year ended June 30, 2012. The refund is included in changes
in insurance and claims accruals. Retrospective adjustments have historically
been prepared annually on a "paid-loss" basis by our commercial insurance
carrier. The last retrospective premium payment adjustment from our commercial
insurance carrier required us to make payments totaling approximately $5.2
million that were paid from February 2011 through May 2011.
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Net cash used in investing activities increased to $45.5 million for the fiscal
year ended June 30, 2012 from $16.5 million for the fiscal year ended June 30,
2011. This increase is primarily due to cash used for the acquisition of Pine
Valley in August 2011 totaling $16.8 million (net of cash acquired totaling $0.5
million), and increased capital expenditures. Capital expenditures for both
periods consisted primarily of purchases of vehicles and equipment used to
service our customers.
Net cash provided by financing activities was $21.1 million for the fiscal year
ended June 30, 2012 compared to net cash used in financing activities of $16.5
million for the fiscal year ended June 30, 2011. On August 24, 2011, we entered
into a $200.0 million revolving credit facility that replaced our prior credit
facility of which $113.0 million was outstanding under our prior credit facility
and accrued interest totaling $0.3 million was paid off at that time. Total
costs associated with the existing revolving credit facility were approximately
$1.8 million which are being capitalized and amortized over the term of the
agreement using the effective interest method. Prior to the replacement of our
prior credit facility, we had borrowed $14.0 million, including $10.0 million
used to finance the Pine Valley acquisition during the fiscal year ended
June 30, 2012. We also had additional borrowings under our existing revolving
credit facility totaling $10.0 million related to the increases in accounts
receivable and costs and estimated in excess of billings during fiscal 2012. In
addition, we incurred $0.8 million of costs associated with the exercise of the
accordion feature of our revolving credit facility on June 27, 2012. These costs
are also being capitalized and amortized over the term of the agreement using
the effective interest method.
Changes in Cash Flows: 2011 Compared to 2010
Year Ended June 30,
2011 2010
(in millions) Net cash provided by operating activities $ 22.2 $ 21.0
Net cash used in investing activities $ (16.5 ) $ (25.1 )
Net cash used in financing activities $ (16.5 ) $ (28.6 )
Net cash provided by operating activities increased to $22.2 million for the
fiscal year ended June 30, 2011 from $21.0 million for the fiscal year ended
June 30, 2010. We had net income of $1.4 million for the fiscal year ended
June 30, 2011 compared to a net loss of $13.5 million for the fiscal year ended
June 30, 2010. This was partially offset by a large increase in accounts
receivable for the fiscal year ended June 30, 2011 related to additional storm
work of approximately $19.0 million and non-cash restructuring charges totaling
approximately $7.9 million recorded for the fiscal year ended June 30, 2010.
We paid the commercial insurance carrier that administers our partially
self-insured individual workers' compensation, vehicle and general liability
insurance programs retrospective premium payment adjustments of $5.2 million in
four equal, monthly installments that began in February 2011. Net cash provided
by operating activities includes payments of $5.2million of retrospective
insurance premium payments to the commercial insurance carrier for the year
ended June 30, 2011. These payments are included in changes in insurance and
claims accruals. Retrospective adjustments have historically been prepared
annually on a "paid-loss" basis by our commercial insurance carrier. The last
retrospective premium payment adjustment from our commercial insurance carrier
resulted in a refund to Pike of approximately $0.2 million that was received
during December 2009.
Net cash used in investing activities decreased to $16.5 million for the fiscal
year ended June 30, 2011 from $25.1 million for the fiscal year ended June 30,
2010. This decrease was primarily due to the acquisition of Klondyke during
fiscal 2010. Our cash used for acquisitions during fiscal 2011 and 2010 was $0.1
million and $15.2 million, respectively. This decrease was partially offset by
less equipment sales and increased capital expenditures during fiscal 2011.
Capital expenditures for both years consisted primarily of purchases of vehicles
and equipment used to service our customers.
Net cash used in financing activities was $16.5 million for the fiscal year
ended June 30, 2011 compared to net cash provided by financing activities of
$28.6 million for the fiscal year ended June 30, 2010. Financing activities for
the fiscal year ended June 30, 2011 included $15.5 million of term loan payments
and $1.0 million of fees associated with an amendment to our senior credit
facility. Our cash used in financing activities during the fiscal year ended
June 30, 2010 included $26.0 million of term loan payments and $2.8 million of
fees associated with the July 29, 2009 closing of our senior credit facility.
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Capital Expenditures
We routinely invest in vehicles, equipment and technology. The timing and volume
of such capital expenditures in the future will be affected by the addition of
new customers or expansion of existing customer relationships. Capital
expenditures were $33.9 million, $19.1 million and $17.7 million for fiscal
2012, 2011 and 2010, respectively. Capital expenditures for all periods
consisted primarily of purchases of vehicles and equipment used to service our
customers. As of June 30, 2012, we had no material outstanding commitments for
capital expenditures. We expect capital expenditures to range from $35.0 million
to $40.0 million for the year ending June 30, 2013, which could vary depending
on the addition of new customers or increased work on existing customer
relationships. We intend to fund those expenditures primarily from operating
cash flow and available cash and cash equivalents.
EBITDA U.S. GAAP Reconciliation
EBITDA is a non-U.S.GAAP financial measure that represents the sum of net income
(loss), income tax expense (benefit), interest expense, depreciation and
amortization. EBITDA is used internally when evaluating our operating
performance and allows investors to make a more meaningful comparison between
our core business operating results on a consistent basis over different periods
of time, as well as with those of other similar companies. Management believes
that EBITDA, when viewed with our results under U.S. GAAP and the accompanying
reconciliation, provides additional information that is useful for evaluating
the operating performance of our business without regard to potential
distortions. Additionally, management believes that EBITDA permits investors to
gain an understanding of the factors and trends affecting our ongoing cash
earnings, from which capital investments are made and debt is serviced. However,
EBITDA has limitations and should not be considered in isolation or as a
substitute for performance measures calculated in accordance with U.S. GAAP,
such as net income (loss) or cash flow from operating activities, as indicators
of operating performance or liquidity. This non-U.S. GAAP measure excludes
certain cash expenses that we are obligated to make. In addition, other
companies in our industry may calculate this non-U.S. GAAP measure differently
than we do or may not calculate it at all, limiting its usefulness as a
comparative measure. The table below provides a reconciliation between net
income and EBITDA.
Year Ended June 30,
2012 2011
(in millions)
Net income $ 10.9 $ 1.4
Adjustments:
Interest expense 7.3 6.6
Income tax expense 8.0 1.5
Depreciation and amortization 38.3 38.1
EBITDA $ 64.5 $ 47.6
EBITDA increased $16.9 million to $64.5 million for the year ended June 30, 2012
from $47.6 million for the year ended June 30, 2011.
Credit Facility
On August 24, 2011, we replaced our prior credit facility with a new $200.0
million revolving credit facility. As of such date, we had $115.0 million in
borrowings and $61.9 million of availability under this facility (after giving
effect to outstanding standby letters of credit of $23.1 million).
On June 27, 2012, we exercised the accordion feature of the new revolving credit
facility and entered into a commitment increase agreement with our lenders
thereby increasing the lenders' commitments by $75 million, from $200.0 million
to $275.0 million. The increased commitments will be used to support our general
corporate purposes, including funding the UCS acquisition completed on July 2,
2012.
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As of June 30, 2012, we had $123.0 million of borrowings outstanding and
$139.2 million of availability under our $275.0 million revolving credit
facility (after giving effect to outstanding standby letters of credit of $12.8
million). The obligations under our revolving credit facility are
unconditionally guaranteed by us and each of our existing and subsequently
acquired or organized domestic and first-tier foreign subsidiaries and secured
on a first-priority basis by security interests (subject to permitted liens) in
substantially all assets owned by us and each of our subsidiaries, subject to
limited exceptions.
Our new revolving credit facility contains a number of other affirmative and
restrictive covenants including limitations on dissolutions, sales of assets,
investments, indebtedness and liens. Our credit facility requires us to
maintain: (i) a leverage ratio, which is the ratio of total debt to adjusted
EBITDA (as defined in our senior credit facility; measured on a trailing
four-quarter basis), of no more than 3.75 to 1.0 as of the last day of each
fiscal quarter, declining to 3.50 on June 30, 2012 and declining to 3.00 on
June 30, 2013 and thereafter, and (ii) a consolidated fixed charge coverage
ratio (as defined in the revolving credit facility) of at least 1.25 to 1.0. At
June 30, 2012, we were in compliance with such covenants with a fixed charge
coverage and leverage ratio of 2.55 and 1.79, respectively.
Contractual Obligations and Other Commitments
As of June 30, 2012, our contractual obligations and other commitments were as
follows:
Payment Obligationsby Fiscal Year Ended June 30,
Total 2013 2014 2015 2016 2017 Thereafter
(in millions)
Long-term debt obligations (1) $ 123.0 $ - $ - $ - $ 123.0 $ - $ -
Interest payment obligations (2) 12.6 4.0 4.0 4.0 0.6 - -
Operating lease obligations 42.3 9.7 9.0 7.5 6.4 4.7 5.0
Purchase obligations (3) 38.2 38.2 - - - - -
Deferred compensation (4) 6.6 - - - - - 6.6
Total $ 222.7 $ 51.9 $ 13.0 $ 11.5 $ 130.0 $ 4.7 $ 11.6
(1) Includes only obligations to pay principal, not interest expense.
(2) Represents estimated interest payments to be made on our variable rate debt.
All interest payments assume that principal payments are made as originally
scheduled. Interest rates utilized to determine interest payments for
variable rate debt are based upon our current term loan interest rate and
include the impact of our interest rate swaps. For more information, see Note
7 of the Notes to Consolidated Financial Statements.
(3) Represents purchase obligations related to materials and subcontractor
services for customer contracts.
(4) For a description of the deferred compensation obligation, see Note 16 of the
Notes to Consolidated Financial Statements.
Off-Balance Sheet Arrangements
As is common in our industry, we have entered into certain off-balance sheet
arrangements in the ordinary course of business that result in risks not
directly reflected in our balance sheets. Our significant off-balance sheet
transactions include liabilities associated with non-cancelable operating
leases, including sales-leaseback arrangements, letter of credit obligations,
and surety guarantees entered into in the normal course of business. We have not
engaged in any off-balance sheet financing arrangements through special purpose
entities.
Leases
In the ordinary course of business, we enter into non-cancelable operating
leases for certain of our facility, vehicle and equipment needs. These leases
allow us to conserve cash by paying a monthly lease rental fee for use of the
related facilities, vehicles and equipment rather than purchasing them. The
terms of these agreements vary from lease to lease, including with renewal
options and escalation clauses. We may decide to cancel or terminate a lease
before the end of its term, in which case we are typically liable to the lessor
for the remaining lease payments under the term of the lease.
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Letters of Credit
Certain of our vendors require letters of credit to ensure reimbursement for
amounts they are disbursing on our behalf. In addition, from time to time some
customers require us to post letters of credit to ensure payment to our
subcontractors and vendors under those contracts and to guarantee performance
under our contracts. Such letters of credit are generally issued by a bank or
similar financial institution. The letter of credit commits the issuer to pay
specified amounts to the holder of the letter of credit if the holder claims
that we have failed to perform specified actions. If this were to occur, we
would be required to reimburse the issuer of the letter of credit. Depending on
the circumstances of such a reimbursement, we may also have to record a charge
to earnings for the reimbursement. We do not believe that it is likely that any
material claims will be made under a letter of credit in the foreseeable future.
We use the revolving credit facility to issue letters of credit. As of June 30,
2012, we had $12.8 million of standby letters of credit issued under our
revolving credit facility primarily for insurance and bonding purposes. Our
ability to obtain letters of credit under the revolving credit facility is
conditioned on our continued compliance with its affirmative and negative
covenants.
Performance Bonds and Parent Guarantees
In the ordinary course of business, we are required by certain customers to post
surety or performance bonds in connection with services that we provide to them.
These bonds provide a guarantee to the customer that we will perform under the
terms of a contract and that we will pay subcontractors and vendors. If we fail
to perform under a contract or to pay subcontractors and vendors, the customer
may demand that the surety make payments or provide services under the bond. We
must reimburse the surety for any expenses or outlays it incurs. As of June 30,
2012, we had $130.1 million in surety bonds outstanding. To date, we have not
been required to make any reimbursements to our sureties for bond-related costs.
We believe that it is unlikely that we will have to fund significant claims
under our surety arrangements in the foreseeable future.
Pike Electric Corporation, from time to time, guarantees the obligations of its
wholly owned subsidiaries, including obligations under certain contracts with
customers.
Recent Accounting Pronouncements
Presentation of Comprehensive Income
In June 2011, the Financial Accounting Standards Board ("FASB") amended its
guidance on the presentation of comprehensive income. Under the amended
guidance, an entity has the option to present comprehensive income in either one
continuous statement or two consecutive financial statements. A single statement
must present the components of net income and total net income, the components
of other comprehensive income and total other comprehensive income, and a total
for comprehensive income. In a two-statement approach, an entity must present
the components of net income and total net income in the first statement. That
statement must be immediately followed by a financial statement that presents
the components of other comprehensive income, a total for other comprehensive
income, and a total for comprehensive income. The option under current guidance
that permits the presentation of components of other comprehensive income as
part of the statement of changes in stockholders' equity has been eliminated.
The amendment becomes effective retrospectively for our interim period ending
September 30, 2012. Early adoption is permitted. We do not expect that this
guidance will have an impact on our financial position, results of operations or
cash flows as it is disclosure-only in nature.
Accounting for Goodwill and Intangible Assets
In September 2011, the FASB issued guidance related to testing goodwill for
impairment which amends existing guidance by giving an entity the option to
first assess qualitative factors to determine whether it is more likely than not
that the fair value of a reporting unit is less than its carrying amount. If
this is the case, a more detailed two-step goodwill impairment test will need to
be performed which is used to identify potential goodwill impairments and to
measure the amount of goodwill impairment losses to be recognized, if any. The
amendment will be effective for annual and interim goodwill impairment tests
performed for fiscal years beginning after December 15, 2011, with early
adoption permitted. The amendment becomes effective for our interim period
ending September 30, 2012. We do not expect the adoption of this amendment to
have a material impact on our financial statements.
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In December 2010, the FASB amended its guidance on goodwill and other intangible
assets. The amendment modifies Step 1 of the goodwill impairment test for
reporting units with zero or negative carrying amounts. For those reporting
units, an entity is required to perform Step 2 of the goodwill impairment test
if there are qualitative factors indicating that it is more likely than not that
a goodwill impairment exists. The qualitative factors are consistent with the
existing guidance which requires goodwill of a reporting unit to be tested for
impairment between annual tests if an event occurs or circumstances change that
would more likely than not reduce the fair value of a reporting unit below its
carrying amount. This amendment was effective for our interim period ended
March 31, 2012. The amendment did not have an impact on our financial position,
results of operations or cash flows as we do not have any reporting units with
zero or negative carrying amounts.
Accounting for Business Combinations
In December 2010, the FASB issued an accounting standards update for business
combinations. This standards update specifies that if a public entity presents
comparative financial statements, the entity should disclose revenue and
earnings of the combined entity as though the business combination(s) that
occurred during the current year had occurred as of the beginning of the
comparable prior annual reporting period only. The amendments also expand the
supplemental pro forma disclosures to include a description of the nature and
amount of material, nonrecurring pro forma adjustments directly attributable to
the business combination included in the reported pro forma revenue and
earnings. The amendments are effective prospectively for business combinations
for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2010 (July 1, 2011 for us).
This new guidance was adopted during the interim period ended September 30, 2011
and utilized for the acquisition of Pine Valley. The adoption did not have a
significant impact on our consolidated financial statements.
Disclosures for Fair Value Measurements
In May 2011, the FASB amended its guidance to converge fair value measurement
and disclosure guidance about fair value measurement under U.S. GAAP with
International Financial Reporting Standards ("IFRS"). IFRS is a comprehensive
series of accounting standards published by the International Accounting
Standards Board. The amendment changes the wording used to describe many of the
requirements in U.S. GAAP for measuring fair value and for disclosing
information about fair value measurements. For many of the requirements, the
FASB does not intend for the amendment to result in a change in the application
of the requirements in the current authoritative guidance. The amendment becomes
effective prospectively for our interim period ending September 30, 2012. Early
adoption is not permitted. We do not expect the amendment to have a material
impact on our financial position, results of operations or cash flows.
In January 2010, the FASB issued authoritative guidance for fair value
measurements. This guidance now requires a reporting entity to disclose
separately the amounts of significant transfers in and out of Level 1 and
Level 2 fair value measurements and also to describe the reasons for these
transfers. This authoritative guidance also requires enhanced disclosure of
activity in Level 3 fair value measurements. The guidance for Level 1 and
Level 2 fair value measurements was effective for our interim reporting period
ended March 31, 2010. The implementation did not have an impact on our financial
position, results of operations or cash flows as it is disclosure-only in
nature. The guidance for Level 3 fair value measurements disclosures became
effective for our interim reporting period ending December 31, 2011 and the
implementation did not have an impact on our financial position, results of
operations or cash flows.
Disclosures about Offsetting Assets and Liabilities
In December 2011, the FASB issued an accounting standards update regarding
disclosures about offsetting assets and liabilities, which requires entities to
disclose information about offsetting and related arrangements of financial
instruments and derivative instruments. The guidance is effective for us
beginning July 1, 2013 and is to be applied retrospectively. The adoption of
this guidance, which is related to disclosure only, is not expected to have a
material impact on our financial position, results of operations or cash flows.
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FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains statements that are intended to be
"forward-looking statements" under the Private Securities Litigation Reform Act
of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. These forward-looking statements are based on
current expectations, estimates, forecasts and projections about us and the
industry in which we operate and management's beliefs and assumptions. Such
statements include, in particular, statements about our plans, strategies and
prospects under the headings "Business - Overview," "- Industry Overview," "-
Our Growth Strategy,"
"- Competitive Strengths," "- Competition," "- Customers," "- Equipment," "-
Government Regulation," "- Environmental Matters," and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Words such as "may," "should," "expect," "anticipate," "intend," "plan,"
"predict," "potential," "continue," "believe," "seek," "estimate," variations of
such words and similar expressions are intended to identify such forward-looking
statements. These statements are not guarantees of future performance and
involve risks, uncertainties and assumptions which are difficult to predict.
Such risks include, without limitation, those identified under the heading "Risk
Factors." Therefore, actual outcomes and results may differ materially from what
is expressed or forecasted in such forward-looking statements. These
forward-looking statements include, but are not limited to, statements relating
to:
• our belief that there are significant growth opportunities for our business and the services we provide due to the required future investment
in transmission and distribution infrastructure, the expanded development
of energy sources and the increased outsourcing of infrastructure
services;
• our belief that our acquisitions of Klondyke and Pine Valley will allow us
to continue to expand our EPC services in the Western United States and
better compete in markets with unionized workforces;
• our belief that there is significant demand for first or second generation
build-out of electricity infrastructure in developing countries;
• our belief that the markets in developing countries present opportunities
for companies, such as ourselves, with scale, sophistication and size to
utilize their skills and equipment in productive and profitable projects;
• our expectation that we will benefit from the development of new sources
of electric power generation;
• our belief that growth in our markets will be driven by bundling services and marketing these offerings to our large and extensive customer base and
new customers and that by offering these services on a turnkey basis, we
enable our customers to achieve economies and efficiencies over separate
unbundled services, which should ultimately lead to an expansion of our
market share across our existing customer base and provide us the
credibility to secure additional opportunities from new customers;
• our belief that the United States electric power system and network
reliability will require significant future upkeep given the postponement
of maintenance spending in recent years due to the difficult economic
conditions, that such upkeep will drive demand for our services and that
our leading position in the markets we service will enable us to
capitalize on increases in demand for our services;
• our belief that our existing and potential customers desire a deeper range
of service offerings on an ever-increasing scale and that our broad
platform of service offerings will enable us to acquire additional market
share and further penetrate our existing markets;
• our belief that our broad platform of service offerings will be attractive
to local and regional firms looking to consolidate with a larger company
offering a more diversified and complete set of services;
• our belief that our reputation and experience combined with our broad
range of services allows us to opportunistically bid on attractive international projects and that there will be large and financially
attractive projects to pursue in international markets over the next few
years as developing regions, including Africa, install or develop their
electric infrastructure;
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• our belief that we have a unique and strong competitive position in the
markets in which we operate resulting from a number of factors including:
(i) our position as a leading provider of energy solutions; (ii) our
attractive, contiguous presence in key geographic markets; (iii) our long-standing relationships across a high-quality customer base; (iv) our
outsourced services-based business model; (v) our position as a recognized
leader in storm restoration capabilities; and (vi) our experienced
operations management team with extensive relationships;
• our belief that we are one of only a few companies offering a broad spectrum of energy solutions that our current and prospective customers
increasingly demand;
• our belief that our management team's deep industry knowledge, field experience and relationships extend our operating capabilities, improve
the quality of our services, facilitate access to clients and enhance our
strong reputation in the industry;
• our belief that a majority of utility infrastructure services are still conducted in-house and that our customers, especially investor-owned
electric utilities, will expand outsourcing of utility infrastructure
services over time;
• our expectation that a substantial portion of our total revenues will
continue to be derived from a limited group of customers given the composition of the investor-owned, municipal and co-operative utilities in
our geographic market;
• our belief that we have a favorable competitive position in our markets due in large part to our ability to execute with respect to the following
factors: (i) diversified services, including the ability to offer turnkey
EPC project services; (ii) experienced management and employees;
(iii) customer relationships and industry reputation; (iv) responsiveness
in emergency restoration situations; (v) availability of fleet and
specialty equipment; (vi) adequate financial resources and bonding
capacity; (vii) geographic breadth and presence in customer markets;
(viii) pricing of services, particularly under MSA constraints; and
(ix) safety concerns of our crews, customers and the general public;
• our belief that we are in material compliance with applicable regulatory
requirements and have all material licenses required to conduct our
operations;
• our expectation that costs to maintain environmental compliance and/or to
address environmental issues will not have a material adverse effect on
our results of operations, cash flows or financial condition;
• our belief that our customized, well-maintained and extensive fleet and experienced crews provide us with a competitive advantage in our ability
to service our customers and respond rapidly to storm restoration
opportunities;
• our intention to continue to retain any future earnings rather than paying
dividends;
• our belief that the lawsuits, claims or other proceedings to which we are
subject in the ordinary course of business will not have a material
adverse effect on our results of operations, financial position, or cash
flows;
• our belief that we remain well-positioned to benefit from a reacceleration
in maintenance spending, which will remain dependent to a large extent on
the health of the economy;
• our expectation that the current volatility in the capital markets will
not have a material impact on the principal amounts of our cash
investments;
• our belief that our cash flow from operations, available cash and cash
equivalents, and borrowings available under our revolving credit facility
will be adequate to meet our ordinary course liquidity needs for the
foreseeable future and that if we pursue any material acquisitions in the foreseeable future we may need to finance this activity through additional
equity or debt financing;
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• our expectation that our capital expenditures will range from $35.0
million to $40.0 million for the year ending June 30, 2013, which could
vary depending on the addition of new customers or increased work on existing new relationships, and our intention to fund those expenditures
from operating cash flow and available cash and cash equivalents;
• our belief that it is unlikely that any material claims will be made under
a letter of credit in the foreseeable future;
• our belief that it is unlikely that we will have to fund significant
claims under our surety arrangements in the foreseeable future;
• our expectation that certain recent accounting pronouncements will have no
material effect on our consolidated financial statements;
• our expectation that the goodwill recognized in our acquisition of
Klondyke and Pine Valley will be amortizable for tax purposes;
• our expectation that our ability to satisfy our obligations or to fund
planned capital expenditures will depend on our future performance and our belief that this is subject to a certain extent on general economic,
financial, competitive, legislative, regulatory and other factors beyond
our control;
• the possibility that if we fail to comply with the covenants contained in
our revolving credit facility, we may be unable to access funds upon which
we depend for letters of credit and other short-term borrowings and that
this would have a negative impact on our liquidity and require us to
obtain alternative short-term financing; and
• our expectation that our gross profit and operating income (loss) would be
negatively affected if diesel prices rise due to additional costs that may
not be fully recovered through increases in prices to customers.
Except as required under the federal securities laws and the rules and
regulations of the SEC, we do not have any intention or obligation to update
publicly any forward-looking statements after we file this Annual Report on
Form 10-K, whether as a result of new information, future events or otherwise.
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