ITEM 1. BUSINESS
Powell Industries, Inc. ("Powell" or the "Company") was incorporated under the laws of the State of Nevada in December 1968. The Company is the successor to a corporation founded by William E. Powell in 1947, which merged into the Company in 1977. During 1996 the Company completed the sale of its gas turbine packaging business and its microprocessor based distributed control equipment business. These businesses were operated by U. S. Turbine Corp. and Powell-Process Systems Inc., wholly owned subsidiaries of the Company.
The Company sells, designs, develops, manufactures, packages and services systems and equipment for the distribution, control and management of electrical energy and other dynamic processes. The Company's offices are located in Houston, Texas with plants located in Houston, Greenville and Jacinto Port, Texas; Elyria, Ohio; Franklin Park, Illinois; Fremont and Pleasanton, California; and Norcross, Georgia. Most of the products manufactured by the Company are made pursuant to specifications required for a particular order.
PRODUCTS AND SYSTEMS
Powell designs, develops, manufactures, sells and services electrical power distribution and control equipment and systems through its subsidiaries: Powell Electrical Manufacturing Company; Powell-ESCO Company; Unibus, Inc.; Delta-Unibus Corp. and Transdyn Controls, Inc. As applicable to the context, "Company' is also sometimes used herein to refer to Powell and its subsidiaries.
The principal products are switchgear and related equipment, bus duct and process control systems. These products and systems are utilized primarily by refineries, petrochemical plants, utilities, paper mills, offshore platforms, commuter railways, vehicular transportation and numerous other industrial, commercial and governmental facilities. A brief description of each of the major products follows:
Switchgear and other related Equipment:
Free-standing metal enclosures containing a selection of electrical components that protect, monitor and control the flow of electricity from its source to motors, transformers and other electrically powered equipment. Major electrical components include customized portable buildings (PCR(R)), circuit breakers, protective relays, meters, control switches, fuses, motor control centers and both current and potential transformers. During the fiscal years ended October 31, 1996, 1995 and 1994, sales and service of switchgear and other related equipment accounted for 76%, 73% and 71%, respectively, of consolidated revenues of the Company.
Bus Duct:
Bus duct consists of insulated power conductors housed in a metal enclosure. Individual pieces of bus duct are arranged in whatever physical configuration may be required to distribute electrical power to or from a generator, transformer, switching device or other electrical apparatus. Powell can provide the nonsegregated phase, segregated phase and isolated phase styles of bus duct with numerous amperage and voltage ratings. Sales of bus duct accounted for 15%, 15% and 15% of consolidated revenues for fiscal years 1996, 1995 and 1994, respectively.
Process Control Systems:
The process control systems supplied by the Company consist principally of instrumentation, computer control, communications, and data management systems. Demand for process control systems has been for modernization and expansion projects as well as new facilities that mainly serve the transportation, environmental and utilities industries. During the fiscal years ended October 31, 1996, 1995 and 1994, sales of process control systems accounted for 9%, 12% and 14%, respectively, of consolidated revenues of the Company.
SUPPLIERS
All of the Company's products are manufactured using components and materials that are readily available from numerous domestic suppliers. The Company has three principal suppliers of components and anticipates no difficulty in obtaining its components in sufficient quantities to support its manufacturing and assembly operations.
METHODS OF DISTRIBUTION AND CUSTOMERS
The Company's products are sold through manufacturers' representatives and its internal sales force. The Company is not dependent on any single customer for sales and the loss of any specific customer would not have a material adverse effect upon the Company. No single customer or export country accounted for more than 10% of consolidated revenues in the fiscal years ended 1996, 1995 or 1994. Export revenues were $63,884,000, $39,491,000 and $41,151,000 in fiscal years 1996, 1995 and 1994, respectively. See Note H of the Notes to Consolidated Financial Statements showing in what geographic area these revenues were recorded.
COMPETITION
The Company is engaged in a highly competitive business which is characterized by a small number of much larger companies that dominate the bulk of the market and a large number of smaller companies that compete for a limited share of such market. In the opinion of management, the competitive position of the Company is dependent on the ability of the Company to provide quality products to a customer's specifications, on a timely basis, at a competitive price, utilizing state-of-the-art materials, design and production methods. Some of the Company's principal competitors are larger and have greater capital and management resources.
EMPLOYEES
At October 31, 1996, the Company employed 945 employees on a full-time basis. Management considers its employee relations to be good.
BACKLOG
The Company's backlog of orders was $106,457,000 and $103,315,000 at October 31, 1996 and 1995, respectively, and the percentage of its 1996 year end backlog that it does not expect to fill in fiscal year 1997 is 25%. Orders included in the backlog are represented by purchase orders which the Company believes to be firm. The terms on which the Company accepts orders include a penalty for cancellation. Historically, no material amount of orders included in backlog has been canceled. No material portion of the Company's business is seasonal in nature.
RESEARCH AND DEVELOPMENT
During the fiscal years ended October 31, 1996, 1995 and 1994, the Company spent approximately $2,283,000, $1,843,000 and $1,670,000 respectively, on research and development programs.
ITEM 2.
ITEM 2. PROPERTIES
The following table sets forth information about the Company's principal facilities at October 31, 1996.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
On August 5, 1993, the Company was served with a lawsuit by National Westminster Bank plc ("NatWest") alleging the Company had defaulted on a Construction Guaranty provided to NatWest in 1992 in connection with a project at MacDill Air Force Base. NatWest is seeking damages in excess of $20,000,000. The Company has denied the substantive allegations of the complaint and has filed counterclaims for damages against NatWest alleging fraud, bad faith and failure to preserve and protect its collateral and seeking a declaratory judgement that the Company is not in default of the Construction Guaranty.
The ultimate disposition of the NatWest litigation is not presently determinable. Accordingly, although an unfavorable outcome to the NatWest litigation could have a material effect on the Company's financial position and results of operations, the Company believes it would be unreasonable to conclude that an unfavorable outcome is probable.
The Company is party to other disputes arising in the ordinary course of business. Management does not believe the ultimate outcome of these disputes will materially effect the financial position or results of operations of the Company.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters which were submitted to a vote of security holders through proxies, or otherwise, during the fourth quarter of the fiscal year ended October 31, 1996.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of October 31, 1996, there were approximately 951 holders of record of Powell Industries, Inc. common stock which is traded on the over-the-counter market and listed on the NASDAQ National Market System under the symbol POWL.
Quarterly stock prices and trading volumes for the last two fiscal years are as follows:
The Company has paid no dividends on its common stock during the last three years and anticipates that it will not do so in the foreseeable future. The terms of the Company's loan agreements restrict the payment of dividends. See Note F of the Notes to Consolidated Financial Statements.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following data has been derived from consolidated financial statements that have been audited by Arthur Andersen LLP, independent public accountants. The information set forth below is not necessarily indicative of the results of future operations and should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this Annual Report on Form 10-K.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated financial statements.
Any forward-looking statements made by or on behalf of the Company are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Readers are cautioned that such forward-looking statements involve risks and uncertainty in that actual results may differ materially from those projected in the forward-looking statements. These risks and uncertainties include, without limitation, the following:
- Difficulties in scheduling which could arise from the inability to obtain materials or components in sufficient quantities as needed for the Company's manufacturing and assembly operations,
- Difficulties in scheduling which could arise from significant customer directed shipment delay,
- Significant decrease in the Company's backlog,
- Unforeseen political or economic problems in countries to which the Company exports its products,
- Unforeseen material employee relations problems,
- Problems in the quality, the design, the production methods or pricing of its products,
- Unfavorable material litigation or claims made against the Company, and
- Changes in general market conditions, competition and pricing.
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of revenues, certain items from the Consolidated Statements of Operations.
REVENUES
The Company reported revenues of $170,123,000, $139,534,000 and $119,453,000 in fiscal years 1996, 1995 and 1994 respectively. Revenues increased 22% in fiscal year 1996 as compared to fiscal year 1995 due primarily to the increased volume of shipments of electrical distribution equipment to export customers. Revenues increased 17% in fiscal year 1995 as compared to fiscal year 1994 due primarily to the improvement in revenues of electrical distribution equipment to domestic transit customers.
Export revenues continued to be an important component of the Company's operations accounting for 38%, 28% and 34% of consolidated revenues in fiscal years 1996, 1995 and 1994, respectively. A schedule is provided in Note H of the Notes to Consolidated Financial Statements showing in which geographic area these sales were made. Management anticipates that consolidated revenues will increase in fiscal 1997 and that export revenues will continue to contribute approximately 35% to 40% to consolidated revenues.
GROSS PROFIT
Gross profit, as a percentage of revenues, was 25.3%, 22.2% and 22.3% in fiscal years 1996, 1995 and 1994, respectively. Gross profit improved in fiscal year 1996 from fiscal year 1995 due to improved prices, higher volumes and higher margin contracts and services resulting primarily from a more favorable economy in most of the markets in which the Company competes. Gross profit varied only slightly from fiscal year 1995 to fiscal year 1994 due to changes in product mix. The Company continues to focus on productivity improvements to respond to the competitive market it serves.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses as a percentage of revenues were 15.8%, 14.5% and 16.3% for fiscal years 1996, 1995 and 1994, respectively. The increase in fiscal year 1996, as a percentage of revenues is due to higher marketing, incentives and commissions expenses. The decrease in fiscal year 1995 as a percentage of revenues, is due to a higher revenue volume without a corresponding increase in costs.
INTEREST, NET
Interest expense (net of interest income) is lower in fiscal years 1996 and 1995 primarily due to a reduction in total debt.
INCOME TAX PROVISION
The effective tax rate on earnings from continuing operations before income taxes was 33%, 30% and 29% for fiscal years 1996, 1995 and 1994, respectively. The effective tax rates are lower than the statutory rate due primarily to foreign sales corporation credits.
EARNINGS FROM CONTINUING OPERATIONS
Earnings from continuing operations recorded in fiscal year 1996 were $10,758,000 or $1.00 per share. This represented a 52.0% percent increase in earnings when compared to fiscal year 1995 earnings. The increase was primarily due to the factors discussed above. Earnings from continuing operations recorded in fiscal year 1995 were $7,080,000 or $.67 per share, an increase of 55.3% compared to net earnings in fiscal year 1994.
DISCONTINUED OPERATIONS
See Note L to Notes to Consolidated Financial Statements for discussion of the operations that were discontinued in fiscal year 1996.
NET EARNINGS
Net earnings were $4,760,000 or $.44 per share in fiscal year 1996 compared to $5,698,000 or $.54 per share and $4,395,000 or $.42 per share in fiscal year 1995 and 1994, respectively. The losses from discontinued operations, explained in the previous paragraph, resulted in lower net earnings in fiscal year 1996 as compared to fiscal year 1995.
LIQUIDITY AND CAPITAL RESOURCES
In October 1995, the Company entered into a $15,000,000 revolving line of credit agreement with a major domestic bank. As of October 31, 1996, the Company did not have borrowings outstanding under this revolving line of credit. The Company's ability to satisfy its cash requirements is evaluated by analyzing key measures of liquidity applicable to the Company. The following table is a summary of the measures which are significant to management.
Management believes that the Company continues to maintain a strong liquidity position. The increase in working capital at October 31, 1996, as compared to October 31, 1995, is due mainly to increases in accounts receivable and costs and estimated earnings in excess of billings, partially offset by increases in accrued liabilities.
Capital expenditures totaled $3,349,000 during fiscal year 1996 compared to $3,378,000 during fiscal year 1995. During fiscal year 1996 the Company approved major capital expenditures for future plant expansions at three operating facilities totalling approximately $12,000,000. Management expects the Company's capital expenditures to increase substantially in fiscal year 1997 due to these plant expansions.
The Company's fiscal year 1997 asset management program will continue to focus on the collection of receivables and reduction in inventories. Management believes that the cash and cash equivalents of $8,935,000 at October 31, 1996, along with funds generated from operating activities and funds available through borrowings from the credit line will be sufficient to meet the capital requirements and operating needs of the Company.
EFFECTS OF INFLATION AND RECESSION
During the last three years, the Company has not experienced any significant effects of inflation on its operations. Management continues to evaluate the potential impact inflation could have on future growth and minimize the impact by including escalation clauses in long-term contracts. Recent marketing and financial reports indicate that the current economic conditions should improve slightly in 1997 and the Company does not anticipate significant increases in inflation in the immediate future.
NEW ACCOUNTING STANDARDS
The Company is required to adopt SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of" and SFAS No. 123, "Accounting for Stock Based Compensation" during its fiscal year ending October 31, 1997. Adoption of SFAS No. 121 will not have significant effect on the Company's consolidated financial statements. The Company expects to disclose the fair value of options granted in a footnote to its October 31, 1997 consolidated financial statements, as required by SFAS No. 123.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
ITEM 9.
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Board of Directors and Stockholders of Powell Industries, Inc.:
We have audited the accompanying consolidated balance sheets of Powell Industries, Inc. (a Nevada Corporation) and subsidiaries as of October 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended October 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Powell Industries, Inc. and subsidiaries as of October 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended October 31, 1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas December 3, 1996
POWELL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS
The accompanying notes are an integral part of these consolidated financial statements.
POWELL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
The accompanying notes are an integral part of these consolidated financial statements.
POWELL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
The accompanying notes are an integral part of these consolidated financial statements.
POWELL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
The accompanying notes are an integral part of these consolidated financial statements.
POWELL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. BUSINESS AND ORGANIZATION
Powell Industries, Inc. ("Powell" or the "Company") was incorporated under the laws of the State of Nevada in December 1968. The Company is the successor to a corporation founded by William E. Powell in 1947, which merged into the Company in 1977.
Powell designs, develops, manufactures, sells and services electrical power distribution and control equipment and systems through its subsidiaries: Powell Electrical Manufacturing Company; Powell-ESCO Company; Unibus, Inc.; Delta-Unibus Corp. and Transdyn Controls, Inc. As applicable to the context, "Company" is also sometimes used herein to refer to Powell and its subsidiaries.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Powell Industries, Inc. and its wholly-owned subsidiaries (the Company). All material intercompany accounts and transactions have been eliminated.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of less than three months to be cash equivalents.
Accounts Receivable
The Company's receivables are generally not collateralized. Management performs ongoing credit analyses of the accounts of its customers and provides allowances as deemed necessary. Accounts receivable at October 31, 1996 and 1995 include $3,603,000 and $2,835,000, respectively due from customers in accordance with applicable retainage provisions of engineering and construction contracts, which will become billable upon completion of such contracts. Approximately $706,000 of the retained amount at October 31, 1996 is expected to be billed subsequent to 1997.
Inventories
Inventories are stated at the lower of cost (primarily first-in, first-out method) or market and include material, labor and manufacturing overhead.
Property, Plant and Equipment
Property, plant and equipment is stated at cost and is depreciated using the straight-line method over the estimated useful lives of the assets. Expenditures for repairs and maintenance are charged to expense when incurred. Expenditures for major renewals and betterments, which extend the useful lives of existing equipment, are capitalized and depreciated. Upon retirement or disposition of property and equipment, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in the statements of operations.
Amortization of Intangibles
Included in other assets are net intangible assets totalling $2,172,000 and $2,461,000 at October 31, 1996 and 1995, respectively. Intangible assets primarily include goodwill and patents which are amortized using the straight-line method over periods ranging from five to twenty years. The accumulated amortization of intangible accounts totalled $1,873,000 and $1,540,000 at October 31, 1996 and 1995, respectively. Management continually evaluates whether events or circumstances have occurred that indicate the remaining
POWELL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
estimated useful life of intangible assets may warrant revision or that remaining balances may not be recoverable.
Revenue Recognition
Revenues from product sales are recognized at the time of shipment. Revenues related to multiple unit orders and their associated costs are recorded as identifiable units are delivered. Contract revenues are recognized on a percentage-of-completion basis primarily using labor dollars incurred to date in relation to estimated total labor dollars of the contracts to measure the stage of completion. Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies and depreciation costs. Provisions for total estimated losses on uncompleted contracts are recorded in the period in which they become evident.
Warranties
The Company provides for estimated warranty costs at the time of sale based upon historical rates applicable to individual product lines. In addition, specific provisions are made when the costs of such warranties are expected to exceed accruals.
Research and Development Expense
Research and development costs are charged to expense as incurred. Such amounts were $2,283,000, $1,843,000 and $1,670,000 in fiscal years 1996, 1995 and 1994, respectively.
Earnings per Common and Common Equivalent Share
Per share data has been computed based on the weighted average number of common and common equivalent shares outstanding of 10,764,656, 10,611,331 and 10,509,371 in fiscal years 1996, 1995 and 1994, respectively.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Reclassification
Certain reclassifications of prior year amounts have been made in order to conform with the classifications used in the current year presentation.
Income Taxes
The Company accounts for income taxes using Statement of Financial Accounting Standards (SFAS) No. 109 "Accounting for Income Taxes". Under SFAS No. 109, deferred tax assets and liabilities are computed based on the difference between the financial statements and income tax bases of assets and liabilities using enacted tax rates. Under this standard, the effect on deferred taxes of a change in tax rates is recognized in income in the period that the tax rate changes.
POWELL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
New Accounting Standards
The Company is required to adopt SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of" and SFAS No. 123, "Accounting for Stock Based Compensation" during its fiscal year ending October 31, 1997. Adoption of SFAS No. 121 will not have significant effect on the Company's consolidated financial statements. The Company expects to disclose the fair value of options granted in a footnote to its October 31, 1997 consolidated financial statements, as required by SFAS No. 123.
C. INVENTORIES
The components of inventories are summarized below (in thousands):
D. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is summarized below (in thousands):
E. EMPLOYEE BENEFIT PLANS
The Company has a defined contribution plan (4.01k) for substantially all of its employees. The Company matches 50% of employee contributions up to six percent of their salary. The Company recognized expense of $736,000, $658,000 and $607,000 in fiscal years 1996, 1995 and 1994, respectively, under this plan.
Three long service employees are participants in a deferred compensation plan providing payments in accordance with a predetermined plan upon retirement or death. The Company recognizes the cost of this plan over the projected years of service of the participant. The Company has insured the lives of these key employees to assist in the funding of the deferred compensation liability.
In 1992, the Company formed a new subsidiary and entered into a stock participation agreement with two key employees of the subsidiary providing for them to purchase stock in the subsidiary for a nominal amount. The agreement allows the two employees to sell their stock back to the Company after October 1997 for $1,000,000. The Company has established a deferred compensation liability and prepaid compensation expense included in other assets, based on the net present value of the amount. The charge to fiscal years 1996, 1995 and 1994 for compensation expense and interest was $206,000, $156,000 and $197,000 respectively.
POWELL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During January 1992, the Company established an employee stock ownership plan (ESOP) for the benefit of substantially all full-time employees other than employees covered by a collective bargaining agreement to which the ESOP has not been extended by agreement or by action of the Company. The ESOP purchased 793,525 shares of the Company's common stock from a major stockholder. The funding for this plan was provided through a loan from the Company of $4,500,000. This loan will be repaid over a twenty-year period with equal payments of $424,000 per year including interest at 7%. The Company recorded deferred compensation as a contra-equity account for the amount loaned to the ESOP in the accompanying consolidated balance sheet. The Company is required to make annual contributions to the ESOP to enable it to repay its loan to the Company. The deferred compensation account is amortized as compensation expense over twenty years as employees earn their shares for services rendered. The loan agreement also provides for prepayment of the loan if the Company elects to make any additional contributions. During fiscal year 1994 the Company made an additional contribution of $331,000 to provide ESOP benefits to the increased number of eligible employees. The compensation expense for fiscal years 1996, 1995 and 1994 was $268,000, $147,000 and $452,000, respectively.
In November 1992, the Company established a plan to extend to retirees health benefits which are available to active employees under the Company's existing health plans. Participants become eligible for retiree health care benefits when they retire from active service at age 55 with ten years of service. Generally, the health plans pay a stated percentage of medical and dental expenses reduced for any deductible and co-payment. These plans are unfunded. Medical coverage may be continued by the retired employee up to age 65 at the average cost to the Company of active employees. At the age of 65, when the employee becomes eligible for Medicare, the benefits provided by the Company are reduced by the amount provided by Medicare and the cost to the retired employee is reduced to 50 percent of the average cost to the Company of active employees.
In January 1994, the Company modified its postretirement benefits to provide retiree healthcare benefits to only current retirees and active employees who will be eligible to retire by December 31, 1999. Participants eligible for such benefits will be required to pay between 20 percent and 100 percent of the Company's average cost of benefits based on years of service. In addition, benefits will end upon the employee's attainment of age 65. The effect of these modifications significantly reduced the Company's postretirement benefits cost and accumulated benefits obligation.
The following table sets forth the plans' combined status reconciled with the accrued retirement benefits cost included in the Company's Consolidated Balance Sheets (in thousands):
POWELL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net periodic postretirement benefits cost includes the following components (in thousands):
The assumed health care cost trend rate in measuring the accumulated postretirement benefits obligation was ten percent in fiscal year 1996 decreasing to six percent by fiscal year 2000. If the health care trend rate assumptions were increased by one percent, the accumulated postretirement benefits obligation, as of October 31, 1996, would be increased by 8.8 percent. The effect of this change on the net postretirement benefit cost for 1996 would be an increase of 8.7 percent. The weighted average discount rate used in determining the accumulated postretirement benefits obligation was 7.0 and 6.5 percent for fiscal years 1996 and 1995, respectively.
F. DEBT
In June 1990, the Company concluded a private placement of $15,000,000 in term notes due through June 1997. The notes, with interest at a fixed rate of 10.4 percent, are unsecured. The loan agreements require, among other things, maintenance of minimum levels of working capital and tangible net worth and places various restrictions on the payment of dividends and investments, as defined. The amounts of funds available for payment of dividends and investments, as defined, at October 31, 1996 and 1995 were $16,784,000 and $15,630,000, respectively.
In October 1995, the Company entered into an agreement for a $15,000,000 revolving line of credit with a major U.S. bank that replaced an existing line of credit. The agreement provides for interest at the bank's prime rate on amounts borrowed and a fee of .25 percent on the unused balance. The agreement contains customary affirmative and negative covenants and requirements to maintain a minimum level of working capital and tangible net worth and places restrictions on the payment of dividends and investments, as defined. The agreement matures on August 15, 1998. As of October 31, 1996, the Company did not have any balance outstanding under this line of credit.
Long-term debt is summarized below (in thousands):
Interest paid during the year was $683,000, $1,157,000 and $1,379,000 in 1996, 1995 and 1994, respectively. The interest expense recorded during the year was $637,000, $1,047,000 and $1,244,000 in 1996, 1995 and 1994, respectively.
POWELL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
G. INCOME TAXES
The net deferred tax asset is comprised of the following (in thousands):
The tax effect of significant temporary differences representing deferred tax assets and liabilities are as follows (in thousands):
The components of the income tax provision consist of the following (in thousands):
POWELL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the statutory U.S. income tax rate and the effective income tax rate, as computed on earnings from continuing operations before income taxes reflected in each of the three years presented in the Consolidated Statements of Operations is as follows:
Total cash payments for income taxes during the year were $3,211,000, $2,062,000 and $1,716,000 in fiscal years 1996, 1995 and 1994, respectively.
H. SIGNIFICANT SALES DATA
No single customer or export country accounted for more than 10 percent of consolidated revenues in fiscal years 1996, 1995 and 1994.
Export sales are as follows (in thousands):
I. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases certain offices, facilities and equipment under operating leases expiring at various dates through 2003. At October 31, 1996, the minimum annual rental commitments under leases having terms in excess of one year are as follows (in thousands):
Lease expense for all operating leases, excluding leases with terms of less than one year, was $908,000, $623,000 and $758,000 for fiscal years 1996, 1995 and 1994, respectively.
POWELL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Letters of Credit
The Company is contingently liable for secured and unsecured letters of credit totaling approximately $2,514,000 that were outstanding at October 31, 1996.
Litigation
On August 5, 1993, the Company was served with a lawsuit by National Westminster Bank plc ("NatWest") alleging the Company had defaulted on a Construction Guaranty provided to NatWest in 1992 in connection with a project at MacDill Air Force Base. NatWest is seeking damages in excess of $20,000,000. The Company has denied the substantive allegations of the complaint and has filed counterclaims for damages against NatWest alleging fraud, bad faith and failure to preserve and protect its collateral and seeking a declaratory judgement that the Company is not in default of the Construction Guaranty.
The ultimate disposition of the NatWest litigation is not presently determinable. Accordingly, although an unfavorable outcome to the NatWest litigation could have a material effect on the Company's financial position and results of operations, the Company believes it would be unreasonable to conclude that an unfavorable outcome is probable.
The Company is party to other disputes arising in the ordinary course of business. Management does not believe the ultimate outcome of these disputes will materially effect the financial position or results of operations of the Company.
J. STOCK OPTION PLAN
In March 1992, the stockholders approved an amendment to a plan that was adopted in March 1989, in which 750,000 shares of common stock would be made available through an incentive program for certain employees of the Company. The awards under this plan are subject to certain conditions and restrictions as determined by the Compensation Committee of the Board of Directors. The fair market value of the shares awarded is deferred and amortized to compensation expense on a straight-line basis over the vesting period. The vesting period for shares awarded vary from the date of the grant up to five years. In March 1996, the stockholders approved an amendment to increase the maximum shares available under the Plan from 750,000 shares to 1,500,000 shares of common stock. The Company recognized compensation expense related to stock grants pursuant to this plan of $487,000, $156,000 and $178,000 in fiscal years 1996, 1995 and 1994, respectively.
There were 820,083 shares available under the plan to be granted as of October 31, 1996. Stock option plan activity (number of shares) for the Company during fiscal years 1996, 1995 and 1994 was as follows:
POWELL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
K. PRODUCTION CONTRACTS
For contracts in which the percentage-of-completion method is used, costs and estimated earnings in excess of billings are reported as a current asset and billings in excess of costs and estimated earnings are reported as a current liability. The components of these contracts are as follows (in thousands):
L. DISCONTINUED OPERATIONS
On July 26, 1996, the Company completed the sale of its power generation set packaging business to Rolls-Royce Acquisition Corporation. This business was operated by U.S. Turbine Corp. (USTC), the Company's subsidiary based in Maineville, Ohio. Total consideration received by the Company, as adjusted, was $12,889,000, including $3,660,000 of cash, a $500,000 note receivable bearing interest at the prime rate due July 1997 and the assumption of liabilities of $8,729,000. The Company recognized a gain on the sale of $89,000, net of taxes. The Company has also guaranteed the collection of certain accounts receivable and the salability of certain inventory. The Company recognized net losses from USTC operations of $3,173,000, $799,000 and $221,000 for the fiscal years 1996, 1995 and 1994, respectively.
On August 1, 1996 the Company announced the discontinuance of its operations in the microprocessor-based equipment manufacturing business segment effective July 31, 1996. This business was operated by Powell-Process Systems, Inc. (PSI), a subsidiary of the Company based in Houston. On October 31, 1996, the Company completed the sale of these assets and the related business to Micon Systems LLC for approximately $874,000, including $650,000 cash and a $224,000 non-interest bearing note receivable due February 13, 1997. The Company recognized a loss on the sale of $1,227,000, net of taxes. The Company recognized net losses (income) from PSI operations of $1,687,000, $583,000 and ($57,000) for the fiscal years 1996, 1995 and 1994, respectively.
The following summarizes the results of operations and consolidated balance sheets of the discontinued operations:
POWELL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
M. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The table below sets forth the unaudited consolidated operating results by fiscal quarter for the years ended October 31, 1996 and 1995 (in thousands, except per share data):
PART III
ITEMS 10, 11, 12 AND 13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; EXECUTIVE COMPENSATION; SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT; AND CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by these items is omitted because the Company will file, within 120 days after the end of the fiscal year ended October 31, 1996, a definitive proxy statement pursuant to Regulation 14A, which information is herein incorporated by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
Financial Statements -- See Index to Consolidated Financial Statements at Item 8 of this report
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed during the last quarter of the fiscal year covered by this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
POWELL INDUSTRIES, INC.
By /s/ THOMAS W. POWELL ------------------------------------ Thomas W. Powell President and Chief Executive Officer (Principal Executive Officer)
By /s/ J.F. AHART ------------------------------------ J.F. Ahart Vice President Secretary and Treasurer (Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the date indicated:
INDEX TO EXHIBITS