UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark
One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2008
OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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COMMISSION FILE NUMBER 001-32582
PIKE ELECTRIC CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware
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20-3112047
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(State of incorporation)
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(I.R.S. Employer Identification No.)
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100 Pike Way, PO Box 868, Mount Airy, NC 27030
(Address of principal executive office)
(336) 789-2171
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
þ
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer
o
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Accelerated filer
þ
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Non-accelerated filer
o
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Smaller reporting company
o
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(Do not check if smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
Yes
o
No
þ
As of January 30, 2009, there were 33,401,319 shares of our Common Stock, par value $0.001 per
share, outstanding.
PIKE ELECTRIC CORPORATION
FORM 10-Q
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2008
INDEX
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
PIKE ELECTRIC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
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December 31,
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June 30,
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2008
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2008
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(Unaudited)
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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5,591
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$
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11,357
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Accounts receivable from customers, net
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78,393
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62,224
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Costs and estimated earnings in excess of billings on uncompleted contracts
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54,344
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40,410
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Inventories
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9,715
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8,343
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Prepaid expenses and other
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5,424
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5,123
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Deferred income taxes
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14,011
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15,376
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Total current assets
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167,478
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142,833
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Property and equipment, net
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225,091
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229,119
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Goodwill
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104,387
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94,402
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Other intangibles, net
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42,372
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40,065
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Deferred loan costs, net
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2,378
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2,778
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Other assets
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1,464
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1,463
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Total assets
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$
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543,170
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$
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510,660
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LIABILITIES AND STOCKHOLDERS EQUITY
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Current liabilities:
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Accounts payable
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$
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12,090
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$
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10,867
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Accrued compensation
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19,178
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22,157
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Billings in excess of costs and estimated earnings on uncompleted contracts
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6,732
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397
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Accrued expenses and other
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8,931
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5,018
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Income taxes payable
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6,331
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442
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Current portion of deferred compensation
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1,365
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3,666
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Current portion of insurance and claim accruals
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30,637
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28,873
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Total current liabilities
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85,264
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71,420
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Long-term debt
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140,500
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140,500
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Insurance and claim accruals, net of current portion
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6,694
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7,989
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Deferred compensation, net of current portion
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5,241
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6,283
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Deferred income taxes
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57,474
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62,416
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Other liabilities
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5,009
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1,100
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Commitments and contingencies
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Stockholders equity:
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Preferred stock, par value $0.001 per share; 100,000 authorized shares; no
shares issued and outstanding
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Common stock, par value $0.001 per share; 100,000 authorized shares; 33,385
and 33,183 shares issued and outstanding at December 31, 2008 and
June 30, 2008, respectively
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6,427
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6,427
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Additional paid-in capital
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150,625
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148,288
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Accumulated other comprehensive loss, net of taxes
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(1,947
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)
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(806
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)
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Retained earnings
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87,883
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67,043
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Total stockholders equity
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242,988
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220,952
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Total liabilities and stockholders equity
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$
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543,170
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$
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510,660
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The accompanying notes are an integral part of these condensed consolidated financial statements.
1
PIKE ELECTRIC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share amounts)
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Three Months Ended
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Six Months Ended
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December 31,
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December 31,
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2008
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2007
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2008
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2007
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Revenues
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$
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144,586
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$
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143,116
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$
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330,093
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$
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282,852
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Cost of operations
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126,150
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118,653
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266,696
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235,110
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Gross profit
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18,436
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24,463
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63,397
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47,742
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General and administrative expenses
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11,169
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10,564
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24,470
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20,876
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Loss on sale and impairment of property
and equipment
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612
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1,939
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854
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1,984
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Income from operations
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6,655
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11,960
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38,073
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24,882
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Other expense (income):
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Interest expense
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2,730
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3,774
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5,066
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8,146
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Other, net
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(301
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)
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(64
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)
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(508
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)
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(125
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)
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Total other expense
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2,429
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3,710
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4,558
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8,021
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Income before income taxes
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4,226
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8,250
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33,515
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16,861
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Income tax expense
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1,655
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3,171
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12,675
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6,498
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Net income
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$
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2,571
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$
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5,079
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$
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20,840
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$
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10,363
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Earnings per share:
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Basic
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$
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0.08
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$
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0.15
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$
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0.63
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$
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0.32
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Diluted
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$
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0.08
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$
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0.15
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$
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0.62
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$
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0.31
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Shares used in computing earnings per share:
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Basic
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33,012
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32,833
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32,999
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32,764
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Diluted
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33,699
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33,668
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33,747
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33,677
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The accompanying notes are an integral part of these condensed consolidated financial statements.
2
PIKE ELECTRIC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
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Six Months Ended
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December 31,
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2008
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2007
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Cash flows from operating activities:
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Net income
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$
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20,840
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$
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10,363
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Adjustments to reconcile net income to net cash provided by
operating activities:
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Depreciation and amortization
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18,820
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18,712
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Non-cash interest expense
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|
767
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|
|
1,620
|
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Deferred income taxes
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(1,283
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)
|
|
|
(4,402
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)
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Loss on sale and impairment of property and equipment
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|
854
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1,984
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Equity compensation expense
|
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|
1,497
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|
|
1,312
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Excess tax benefit from stock-based compensation
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|
(168
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)
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(957
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)
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Changes in operating assets and liabilities:
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|
|
|
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Accounts receivable and costs and estimated earnings in excess
of billings on uncompleted contracts
|
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(11,388
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)
|
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(4,984
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)
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Inventories, prepaid expenses and other
|
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(1,989
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)
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(747
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)
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Insurance and claim accruals
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469
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2,005
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Accounts payable and other
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(1,648
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)
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(3,975
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)
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Deferred compensation
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(3,710
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)
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(3,034
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)
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Net cash provided by operating activities
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23,061
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17,897
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Cash flows from investing activities:
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Purchases of property and equipment
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(10,432
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)
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(3,584
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)
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Business acquisitions, net
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(22,635
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)
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Net proceeds from sale of property and equipment
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3,649
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6,215
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Net cash (used in) provided by investing activities
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(29,418
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)
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2,631
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Cash flows from financing activities:
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|
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|
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Principal payments on long-term debt
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|
|
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(24,800
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)
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Borrowings under revolving credit facility
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84,705
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|
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|
10,775
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Repayments under revolving credit facility
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(84,705
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)
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(9,975
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)
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Proceeds from exercise of stock options and employee stock purchases
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423
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|
|
1,108
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Excess tax benefit from stock-based compensation
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|
168
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|
957
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Net cash provided by (used in) financing activities
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|
591
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(21,935
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)
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|
|
|
|
|
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|
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|
|
|
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Net decrease in cash and cash equivalents
|
|
|
(5,766
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)
|
|
|
(1,407
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)
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Cash and cash equivalents beginning of year
|
|
|
11,357
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|
|
|
1,467
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|
|
|
|
|
|
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Cash and cash equivalents end of period
|
|
$
|
5,591
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|
|
$
|
60
|
|
|
|
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|
|
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|
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
PIKE ELECTRIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three and six months ended December 31, 2008 and 2007
(In thousands, except per share amounts)
1. Basis of Presentation
The accompanying condensed consolidated financial statements of Pike Electric Corporation and
its wholly-owned subsidiaries (Pike, Pike Electric, we, us, and our) are unaudited and
have been prepared in accordance with United States generally accepted accounting principles (U.S.
GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and footnotes required by
U.S. GAAP for complete financial statements. In the opinion of management these financial
statements include all adjustments (consisting of normal recurring adjustments) that are considered
necessary for a fair presentation of financial position, results of operations and cash flows for
the interim periods presented. The operating results for interim periods are not necessarily
indicative of results to be expected for a full year or future interim periods. The balance sheet
at June 30, 2008 has been derived from our audited financial statements but does not include all of
the information and footnotes required by U.S. GAAP for complete financial statements. Certain
amounts reported previously have been reclassified to conform to the current year presentation.
These financial statements should be read in conjunction with our financial statements and related
notes included in our report on Form 10-K for the year ended June 30, 2008.
2. Business
Pike Electric is headquartered in Mount Airy, North Carolina and is one of the largest
providers of energy solutions in the United States. Our core services are transmission and
distribution powerline construction, engineering, substation, EPC, and renewable energy. We are
also a recognized leader in storm restoration services. We operate in one reportable segment. We
do not have operations or assets outside the United States.
We monitor revenue by two categories of services: core and storm restoration. We use this
breakdown because core services represent ongoing service revenues, most of which are generated by
our customers recurring maintenance needs, and storm restoration revenues represent additional
revenue opportunities that depend on weather conditions.
The following table sets forth our revenue by category of service for the periods indicated:
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|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Core services
|
|
$
|
133,695
|
|
|
|
92.5
|
%
|
|
$
|
123,527
|
|
|
|
86.3
|
%
|
|
$
|
241,532
|
|
|
|
73.2
|
%
|
|
$
|
258,401
|
|
|
|
91.4
|
%
|
Storm restoration
services
|
|
|
10,891
|
|
|
|
7.5
|
%
|
|
|
19,589
|
|
|
|
13.7
|
%
|
|
|
88,561
|
|
|
|
26.8
|
%
|
|
|
24,451
|
|
|
|
8.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
144,586
|
|
|
|
100.0
|
%
|
|
$
|
143,116
|
|
|
|
100.0
|
%
|
|
$
|
330,093
|
|
|
|
100.0
|
%
|
|
$
|
282,852
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3. Energy Delivery Services Acquisition
On September 1, 2008, we acquired substantially all of the assets of Shaw Energy Delivery
Services, Inc. (EDS) for $22,635 in cash, including transaction costs, plus the assumption of
certain operating liabilities. EDS provides engineering, design, procurement and construction
management services on transmission and distribution powerlines and substations, and also performs
maintenance and construction services on transmission and distribution powerlines and substations.
Among other benefits, the acquisition provided us an opportunity to expand our operations to the
West Coast, Southwest, Pacific Northwest and Mid-Atlantic markets.
4
The purchase price to acquire EDS, including transaction costs, has been allocated to the
assets acquired and liabilities assumed at the effective date of the acquisition based on estimated
fair values, as summarized in the table
below. The fair values are based on preliminary valuations and are subject to adjustment as
additional information is obtained.
|
|
|
|
|
Current assets
|
|
$
|
19,227
|
|
Property and equipment
|
|
|
6,245
|
|
Customer relationships
|
|
|
3,400
|
|
Non-compete agreements
|
|
|
700
|
|
Deferred tax asset
|
|
|
1,562
|
|
Goodwill
|
|
|
9,985
|
|
|
|
|
|
Total assets acquired
|
|
|
41,119
|
|
Current liabilities
|
|
|
(14,484
|
)
|
Non-current liabilities
|
|
|
(4,000
|
)
|
|
|
|
|
Total liabilities assumed
|
|
|
(18,484
|
)
|
|
|
|
|
Net assets
|
|
$
|
22,635
|
|
|
|
|
|
The intangible asset related to customer relationships is being amortized over eight years.
Intangible assets related to non-compete agreements with the seller and certain employees are being
amortized over a weighted-average useful life of two years.
The financial results of the operations of EDS have been included in our consolidated
financial statements since the date of the acquisition. The following unaudited pro forma
statement of income data gives effect to the acquisition of EDS as if it had occurred at the
beginning of each period presented. The pro forma results are not necessarily indicative of what
actually would have occurred had the acquisition been in effect for the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
144,586
|
|
|
$
|
165,332
|
|
|
$
|
348,141
|
|
|
$
|
326,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,571
|
|
|
$
|
3,649
|
|
|
$
|
20,351
|
|
|
$
|
6,295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share
|
|
$
|
0.08
|
|
|
$
|
0.11
|
|
|
$
|
0.62
|
|
|
$
|
0.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share
|
|
$
|
0.08
|
|
|
$
|
0.11
|
|
|
$
|
0.60
|
|
|
$
|
0.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4. Stock-Based Compensation
Compensation expense related to stock-based compensation plans was $860 and $706 for the three
months ended December 31, 2008 and December 31, 2007, respectively, and $1,497 and $1,312 for the
six months ended December 31, 2008 and December 31, 2007, respectively. The income tax benefit
recognized for stock-based compensation arrangements was $336 and $276 for the three months ended
December 31, 2008 and December 31, 2007, respectively, and $585 and $513 for the six months ended
December 31, 2008 and December 31, 2007, respectively.
5
5. Earnings Per Share
The following table sets forth the calculations of basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,571
|
|
|
$
|
5,079
|
|
|
$
|
20,840
|
|
|
$
|
10,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
|
|
|
33,012
|
|
|
|
32,833
|
|
|
|
32,999
|
|
|
|
32,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.08
|
|
|
$
|
0.15
|
|
|
$
|
0.63
|
|
|
$
|
0.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,571
|
|
|
$
|
5,079
|
|
|
$
|
20,840
|
|
|
$
|
10,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
|
|
|
33,012
|
|
|
|
32,833
|
|
|
|
32,999
|
|
|
|
32,764
|
|
Potential common stock arising from stock
options and restricted stock
|
|
|
687
|
|
|
|
835
|
|
|
|
748
|
|
|
|
913
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares diluted
|
|
|
33,699
|
|
|
|
33,668
|
|
|
|
33,747
|
|
|
|
33,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
0.08
|
|
|
$
|
0.15
|
|
|
$
|
0.62
|
|
|
$
|
0.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding options and restricted stock awards equivalent to 1,656 and 432 shares of common
stock were excluded from the calculation of diluted earnings per share for the three months ended
December 31, 2008 and 2007, respectively, because their effect would have been anti-dilutive.
Outstanding options and restricted stock awards equivalent to 1,406 and 374 shares of common stock
were excluded from the calculation of diluted earnings per share for the six months ended December
31, 2008 and 2007, respectively, because their effect would have been anti-dilutive.
6. Fair Value of Financial Instruments
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 157,
Fair Value Measurements
(SFAS 157). SFAS 157 defines
fair value, establishes a framework for measuring fair value in accordance with accounting
principles generally accepted in the United States, and expands disclosures about fair value
measurements. We have adopted the provisions of SFAS 157 as of July 1, 2008, for financial
instruments. Although the adoption of SFAS 157 did not materially impact our financial condition,
results of operations, or cash flow, we are now required to provide additional disclosures as part
of our financial statements.
In February 2008, the FASB issued FASB Staff Position SFAS No. 157-2,
Effective Date of FASB
Statement No. 157
, which defers the application date of the provisions of SFAS 157 for all
nonfinancial assets and liabilities until fiscal years beginning after November 15, 2009, except
for items that are recognized or disclosed at fair value in the financial statements on a recurring
basis. SFAS 157 currently applies to all financial assets and liabilities and for nonfinancial
assets and liabilities recognized or disclosed at fair value on a recurring basis.
SFAS 157 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in
measuring fair value. These tiers include:
|
|
|
Level 1 Valuations based on quoted prices in active markets for
identical instruments that we are able to access. Since valuations
are based on quoted prices that are readily and regularly available in
an active market, valuation of these products does not entail a
significant degree of judgment.
|
|
|
|
|
Level 2 Valuations based on quoted prices in active markets for
instruments that are similar, or quoted prices in markets that are not
active for identical or similar instruments, and model-derived
valuations in which all significant inputs and significant value
drivers are observable in active markets.
|
|
|
|
|
Level 3 Valuations based on inputs that are unobservable and
significant to the overall fair value measurement.
|
6
As of December 31, 2008, we held certain items that are required to be measured at fair value
on a recurring basis. These included interest rate derivative instruments and diesel fuel
derivative instruments. Derivative instruments are used to hedge a portion of our diesel fuel
costs and our exposure to interest rate fluctuations. These derivative instruments currently
consist of swaps only. See Note 8 for further information on our derivative instruments and
hedging activities.
Our interest rate derivative instruments and diesel fuel derivative instruments consist of
over-the-counter contracts, which are not traded on a public exchange. The fair values for our
interest rate swaps and diesel fuel swaps are based on current settlement values and represent the
estimated amount we would have received upon termination of these agreements. The fair values are
derived using pricing models that rely on market observable inputs such as yield curves and
commodity forward prices, and therefore are classified as Level 2. We also consider counterparty
credit risk in our determination of all estimated fair values. We have consistently applied these
valuation techniques in all periods presented.
At December 31, 2008, both the carrying amounts and fair values for our interest rate swaps
and diesel fuel swaps were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
2008
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap agreements
|
|
$
|
(3,195
|
)
|
|
$
|
|
|
|
$
|
(3,195
|
)
|
|
$
|
|
|
Diesel fuel swap agreements
|
|
|
(1,596
|
)
|
|
|
|
|
|
|
(1,596
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(4,791
|
)
|
|
$
|
|
|
|
$
|
(4,791
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7. Income Taxes
Effective income tax rates of 39.2% and 38.4% for the three months ended December 31, 2008 and
December 31, 2007, respectively, and 37.8% and 38.5% for the six months ended December 31, 2008 and
December 31, 2007, respectively, varied from the statutory federal income tax rate of 35% primarily
as a result of the effect of state income taxes.
8. Derivative Instruments, Other Comprehensive Income and Comprehensive Income
All derivative instruments are recorded on the consolidated balance sheet at their respective
fair values in accordance with SFAS 133, as amended. Changes in fair value are recognized either
in income or other comprehensive income (loss) (OCI), depending on whether the transaction
qualifies for hedge accounting and, if so, the nature of the underlying exposure being hedged and
how effective the derivatives are at offsetting price movements in the underlying exposure. The
effective portions recorded in OCI are recognized in the statement of income when the hedged item
affects earnings.
We have used certain derivative instruments to enhance our ability to manage risk relating to
diesel fuel and interest rate exposure. Derivative instruments are not entered into for trading or
speculative purposes. We document all relationships between derivative instruments and related
items, as well as our risk-management objectives and strategies for undertaking various derivative
transactions.
Interest Rate Risk
We are exposed to market risk related to changes in interest rates on borrowings under our
senior credit facility, which bears interest based on LIBOR, plus an applicable margin dependent
upon our total leverage ratio. We use derivative financial instruments to manage exposure to
fluctuations in interest rates on our senior credit facility.
Effective December 2007, we entered into two interest rate swap agreements with a total
notional amount of $100,000 to help manage a portion of our floating-rate debt interest risk.
Under both swap agreements, we pay a fixed rate of 3.99% and receive a rate equivalent to the
thirty-day LIBOR, adjusted monthly. Based on our current leverage ratio, these swap agreements
effectively fix the interest rate at 5.49% for $100,000 of our term debt. The interest rate swaps
qualified for hedge accounting and were designated as cash flow hedges. As determined in
accordance with SFAS 133, as amended, there was no hedge ineffectiveness for the interest rate
swaps for the three and six months ended December 31, 2008. The interest rate swaps expire in
December 2009. The fair value of the interest rate swaps at December 31, 2008 was reflected on the
balance sheet in accrued expenses and other for $3,195.
7
The net derivative income (loss) recorded in OCI will be reclassified into earnings over the
term of the underlying cash flow hedge. The amount that will be reclassified into earnings will
vary depending upon the movement of the underlying interest rates. As interest rates decrease, the
charge to earnings will increase. Conversely, as interest rates increase, the charge to earnings
will decrease.
Diesel Fuel Risk
We have a large fleet of vehicles and equipment that primarily uses diesel fuel. As a result,
we have market risk for changes in diesel fuel prices. If diesel prices rise, our gross profit and
operating income would be negatively affected due to additional costs that may not be fully
recovered through increases in prices to customers.
We periodically enter into diesel fuel swaps to decrease our price volatility. We currently
hedge approximately 30% of our diesel usage with prices ranging from $2.52 to $4.25 per gallon. In
prior periods, we designated one diesel fuel swap as a cash flow hedge qualifying for hedge
accounting treatment. We did not elect to apply hedge accounting for the swaps we entered into
during the first and second quarters of fiscal 2009 and are currently not utilizing hedge
accounting for any active diesel fuel derivatives. Accordingly, the changes in the fair values of
these derivatives are currently recorded in cost of operations in our consolidated statements of
income. We recognized a loss on the change in fair value of diesel fuel swaps for $1,333 and
$1,596 for the three and six months ended December 31, 2008, respectively.
The ineffective portion of the change in the fair value of our diesel fuel cash flow hedge,
which expired in February 2008, was recognized in cost of operations in the consolidated statements
of income during the three and six months ended December 31, 2007. The amount was insignificant
for both periods.
Accumulated OCI
For the interest rate swaps and diesel fuel swap, the following table summarizes the net
derivative gains or losses, net of taxes, deferred into accumulated other comprehensive loss and
reclassified to earnings for the periods indicated below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net accumulated derivative (loss) income deferred
at beginning of period
|
|
$
|
(668
|
)
|
|
$
|
43
|
|
|
$
|
(806
|
)
|
|
$
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferral of net derivative loss in accumulated other
comprehensive loss
|
|
|
(1,495
|
)
|
|
|
(203
|
)
|
|
|
(1,588
|
)
|
|
|
(160
|
)
|
Reclassification of net derivative income (loss) to
income
|
|
|
216
|
|
|
|
(100
|
)
|
|
|
447
|
|
|
|
(92
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net accumulated derivative loss deferred at
end of period
|
|
$
|
(1,947
|
)
|
|
$
|
(260
|
)
|
|
$
|
(1,947
|
)
|
|
$
|
(260
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
Comprehensive
Income
The components of comprehensive income were as follows for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net income
|
|
$
|
2,571
|
|
|
$
|
5,079
|
|
|
$
|
20,840
|
|
|
$
|
10,363
|
|
Change in fair value of diesel fuel cash
flow hedge, net of income taxes
|
|
|
|
|
|
|
59
|
|
|
|
|
|
|
|
110
|
|
Change in fair valur of interest rate cash
flow hedges, net of income taxes
|
|
|
(1,279
|
)
|
|
|
(362
|
)
|
|
|
1,140
|
|
|
|
(362
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
1,292
|
|
|
$
|
4,776
|
|
|
$
|
21,980
|
|
|
$
|
10,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9. Recent Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 141(R),
Business Combinations
(SFAS 141R). SFAS
141R will significantly change the accounting for business combinations in a number of areas
including the treatment of contingent consideration, contingencies, acquisition costs, and
restructuring costs. In addition, under SFAS 141R, changes in deferred tax asset valuation
allowances and acquired income tax uncertainties in a business combination after the measurement
period will impact income tax expense. SFAS 141R is effective for business combinations for which
the acquisition date is on or after the beginning of the first annual reporting period beginning
after December 15, 2008 and early adoption is not permitted. SFAS 141R will impact our
consolidated financial statements if we are party to a business combination that closes after our
fiscal year that ends June 30, 2009.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated
Financial Statements, an amendment of ARB No. 51
(SFAS 160). SFAS 160 will change the accounting
and reporting for minority interests, which will be recharacterized as noncontrolling interests and
classified as a component of equity. This new consolidation method will significantly change the
accounting for transactions with minority interest holders. SFAS 160 is effective for fiscal years
beginning after December 15, 2008. We intend to adopt SFAS 160 for our fiscal year 2010 which
begins July 1, 2009. We currently have no minority interest; therefore we do not expect the
standard to have an effect on our consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and
Hedging Activities
(SFAS 161)
.
SFAS 161 is intended to improve financial reporting about
derivative instruments and hedging activities by requiring enhanced disclosures to enable investors
to better understand how and why an entity uses derivative instruments, how they are accounted for
under SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities,
and related
interpretations, and their effects on an entitys financial position, financial performance, and
cash flows. It is effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008, with early application encouraged. We intend to adopt SFAS 161
for our third quarter of fiscal year 2009 which begins January 1, 2009. We are currently
evaluating the effects of SFAS 161, but do not expect the standard to have a material effect on our
consolidated financial statements.
9
10. Commitments and Contingencies
Litigation
We are from time to time a party to various lawsuits, claims and other legal proceedings that
arise in the ordinary course of business. These actions typically seek, among other things,
compensation for alleged personal injury, workers compensation, employment discrimination, breach
of contract, property damage, punitive damages, civil
penalties or other losses, or injunctive or declaratory relief. With respect to all such
lawsuits, claims and proceedings, we accrue reserves when it is probable that a liability has been
incurred and the amount of loss can be reasonably estimated. We do not believe that any of these
proceedings, individually or in the aggregate, would be expected to have a material adverse effect
on our results of operations or financial position.
Performance Bonds
In certain circumstances we are required to provide performance bonds in connection with our
contractual commitments. We have indemnified the surety for any expenses that may be paid out
under these performance bonds. At December 31, 2008 we had an outstanding letter of credit of
$4,000 to provide collateral to the surety. At December 31, 2008 the total amount of outstanding
performance bonds was $61,852.
Operating Leases
In connection with our acquisition of EDS (Note 3), we assumed certain operating lease
obligations. Commitments for minimum payments under these leases total $3,471 for the remainder of
fiscal 2009. For fiscal 2010, 2011, 2012, 2013 and thereafter, the commitments for minimum
payments total $6,570, $5,577, $2,447, $588 and $599, respectively.
10
Item 2.
Managements Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion and analysis of our financial condition and results of operations
should be read in conjunction with our unaudited condensed consolidated financial statements and
related notes included elsewhere in this Quarterly Report on Form 10-Q and with our Annual Report
on Form 10-K, which was filed with the Securities and Exchange Commission (SEC) on September 5,
2008 and is available on the SECs website at www.sec.gov. 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 Uncertainty of Forward-Looking Statements and Information below in this Item
2 and Risk Factors in Item 1A of Part II of this Quarterly Report.
Introduction
Pike Electric is headquartered in Mount Airy, North Carolina and is one of the largest
providers of energy solutions in the United States. Our core services are transmission and
distribution powerline construction, engineering, substation, EPC, and renewable energy. We are
also a recognized leader in storm restoration services. We operate in one reportable segment. We
do not have operations or assets outside the United States.
We monitor our revenues by the two categories of services we provide: core and storm
restoration. We use this breakdown because core services represent our ongoing service revenues,
most of which are generated by our customers recurring maintenance needs and new construction
projects, and storm restoration revenues represent additional revenue opportunities that depend on
weather conditions. Although 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 2.6% to 25.5% of total revenues.
The following table sets forth our revenues by category of service for the periods indicated
(dollars in millions):
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Three Months Ended
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Six Months Ended
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December 31,
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December 31,
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2008
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2007
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2008
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2007
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Core services
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$
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133.7
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92.5
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%
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$
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123.5
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86.3
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%
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$
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241.5
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73.2
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%
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$
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258.4
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91.4
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%
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Storm restoration services
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10.9
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7.5
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%
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19.6
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13.7
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%
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88.6
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26.8
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%
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24.5
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8.6
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%
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Total
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$
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144.6
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100.0
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%
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$
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143.1
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100.0
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%
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$
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330.1
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100.0
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%
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$
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282.9
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100.0
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%
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Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations are based on
our condensed 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 interim 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, and 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. Please refer to Managements Discussion and Analysis of Financial Condition and
Results of Operations Critical Accounting Policies included in our Annual Report on Form 10-K
for the year ended June 30, 2008 for further information regarding our critical accounting policies
and estimates.
11
Operational and Other Factors
We are subject to various operational and other factors that can affect our business and
results of operations. To mitigate the effects of these factors, we focus on elements of our
business we can control, including excellent customer service, safety and employee development and
cost control. The statements in this section are based on our current expectations. See
Uncertainty of Forward-Looking Statements and Information. Certain of these operational and
other factors that affect our business include the following:
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General economic conditions may impact utility maintenance expenditures, and certain of
our customers powerline maintenance projects may be temporarily deferred. We continue to
work closely with all customers to provide a skilled, flexible work force.
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When we add new customers and arrangements, we generally experience an increase in
costs, including the costs of training and outfitting our crews and spending on equipment
and specialized tools and supplies. Once the crews and equipment are fully utilized, our
margins generally increase over the life of the arrangement.
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Industry-wide insurance costs for workmens compensation, medical and general liability
could rise at a rate faster than our revenues. We have implemented several safety
initiatives designed to reduce incident rates and corresponding insurance costs.
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There are a limited number of skilled workers who can perform our work. When we
experience increased demand in a particular market, labor costs tend to increase. We
historically have been able to obtain price increases when we renegotiate rates with our
customers to offset these cost increases.
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We own the majority of our equipment and vehicles. We maintain certain underutilized
equipment and vehicles for future growth. As utility maintenance is deferred our fixed
fleet costs will cause a decline in our gross profit percentage.
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We have a large fleet of vehicles and equipment that primarily use diesel fuel. Fuel
costs have been extremely volatile in recent years and, until the most recent quarter, at
historically high levels. We have implemented bulk purchasing in certain areas to lower
our fuel costs. We utilize diesel fuel swaps and fixed price arrangements and may enter
into additional diesel fuel derivative instruments and fixed price arrangements in the
future, depending on market conditions.
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Results of Operations
The following table sets forth selected statements of income data as approximate percentages
of revenues for the periods indicated:
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Three Months Ended
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Six Months Ended
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December 31,
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December 31,
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2008
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2007
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2008
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2007
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Revenues:
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Core services
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92.5
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%
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86.3
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%
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73.2
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%
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91.4
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%
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Storm restoration services
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7.5
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13.7
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26.8
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8.6
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Total
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100.0
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%
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100.0
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%
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100.0
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%
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100.0
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%
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Cost of operations
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87.2
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82.9
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80.8
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83.1
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Gross profit
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12.8
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17.1
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19.2
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16.9
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General and administrative expenses
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7.7
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7.4
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7.4
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7.4
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Loss on sale of property and equipment
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0.5
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1.3
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0.3
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0.7
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Income from operations
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4.6
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8.4
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11.5
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8.8
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Interest expense and other, net
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1.7
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2.6
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1.4
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2.8
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Income before income taxes
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2.9
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5.8
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10.1
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6.0
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Income tax expense
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1.1
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2.3
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3.8
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2.3
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Net income
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1.8
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%
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3.5
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%
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6.3
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%
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3.7
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%
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12
Three Months Ended December 31, 2008 Compared to Three Months Ended December 31, 2007
Revenues.
Revenues increased 1.0%, or $1.5 million, to $144.6 million for the three months
ended December 31, 2008 from $143.1 million for the three months ended December 31, 2007. The
increase was attributable to a $10.2 million increase in core revenues, partially offset by an
$8.7 million decrease in storm restoration revenues compared to the prior fiscal year.
Our core revenue increased 8.2% to $133.7 million for the three months ended December 31, 2008
from $123.5 million for the same period in the prior year. The September 1, 2008 acquisition of
EDS provided $23.8 million in core revenues for the quarter. Our transmission services grew by
$4.3 million, or 42.0%, compared to the same period in the prior year. These increases were
partially offset by a reduction in distribution service revenues as customers reduced their
distribution, maintenance and upgrade spending across our operating territory.
The majority of our distribution services are provided to utilities, co-operatives and
municipalities under master service agreements (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
provides 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 ramp up 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 reductions in residential
housing developments. We began experiencing a decline in underground distribution service revenue
in our first fiscal quarter of 2008. Many residential developments utilize underground power
distribution powerlines for aesthetic reasons and the underground powerlines can be put in place
with required cable, phone or gas lines. Recent economic conditions and tight credit markets have
also caused our customers to reduce overhead distribution maintenance spending. Our customers face
difficulty in obtaining capital for capital projects and are faced with declining power usage from
residential and commercial customers. Reducing maintenance expenditures is an action taken by our
customers to improve short-term cash flow and operating results. We believe that a significant
amount of pent up demand is building and power system reliability is being challenged. 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. Where customers have reduced our crews,
in many cases we have extended the terms and conditions of our MSAs to allow us to return to
historical staffing levels as the economy improves. In addition to our traditional transmission
and distribution services, we believe smart grid technology implementation, the demand for
renewable energy solutions, and the anticipated energy infrastructure stimulus plan will continue
to highlight the needs for our services.
Storm restoration revenue decreased 44.4% to $10.9 million for the three months ended December
31, 2008 from $19.6 million for the same period in the prior year. Storm restoration work during
both periods included various winter storm events and for the three months ended December 31, 2008,
work continued related to damages caused by Hurricane Ike. Our storm restoration revenues are
highly volatile and unpredictable.
Gross Profit.
Gross profit decreased 24.6%, or $6.1 million, to $18.4 million for the three
months ended December 31, 2008 from $24.5 million for the three months ended December 31, 2007.
Gross profit as a percentage of revenues decreased to 12.8% for the three months ended December 31,
2008 from 17.1% for the three months ended December 31, 2007. Our gross profit was negatively
impacted by the following:
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Higher fixed equipment costs as a percent of revenue due to decreased utilization
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We own much of our equipment, and both underground and overhead distribution equipment
utilization decreased as a result of a reduction in overall utility distribution
maintenance projects in our territory. This impact was compounded by the excess leased and
special rental equipment which we assumed in the EDS transaction. The overall
worsening condition of the secondary market for used utility equipment and vehicles has also
made it difficult to sell excess equipment. If equipment utilization in the second quarter
of fiscal 2009 was at the same level as the second quarter of the prior fiscal year, our
gross profit would have been approximately $2.0 million higher.
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13
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Higher fuel expense as a percentage of revenue
. Fuel expense increased to 5.9% of
total revenues in the second quarter of fiscal 2009 compared to 5.5% for the same period in
the prior year. Fuel costs have moderated but the market continues to fluctuate. The
reduction in our average fuel price this quarter compared to the prior year was more than
offset by a $1.3 million non-cash, mark-to-market adjustment from our diesel fuel swap and
$0.4 million for cash settlement charges.
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A lower mix of storm revenue.
Our storm restoration services typically generate a
higher profit margin than core services. During a storm response, our storm-assigned crews
and equipment are fully utilized. In addition, the overtime typically worked on storm
events lowers the ratio of fixed costs to revenue. Storm gross profit margins can vary
greatly depending on the geographic area, customer and amount of overtime worked.
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Lower gross profit margin material procurement services
. Material procurement services
offered in the EDS business generate lower gross profit margins compared to other core
services. Our engineering and substation businesses recognized approximately $5.0 million
in material procurement revenues in the quarter.
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Investment in engineering services growth
. During the quarter, we added additional
engineering staff and office space. We expect to experience increased non-billable wages
and cost of the office space until these resources are fully utilized.
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EDS transition costs.
During the quarter, we relocated all legacy EDS
employees to new Pike facilities. In addition to the expense associated with the moves, the
moves also negatively impacted utilization in our engineering group.
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General and Administrative Expenses.
General and administrative expenses increased
$0.6 million to $11.2 million for the three months ended December 31, 2008 from $10.6 million for
the three months ended December 31, 2007. As a percentage of revenues, general and administrative
expenses increased to 7.7% from 7.4%. Approximately $0.9 million of costs were incurred in the
second quarter related to the recently acquired EDS business. Our general and administrative
expenses were favorably impacted in the quarter by the voluntary forfeiture of the 2009 fiscal year
cash incentives for our top seven management members. This forfeiture caused the reversal of $1.1
million of incentive expense accrued in the first quarter.
Interest Expense and Other, Net.
Interest expense and other, net decreased $1.3 million to
$2.4 million for the quarter ended December 31, 2008 from $3.7 million for the quarter ended
December 31, 2007. This decrease was primarily due to lower average debt balances and lower
interest rates.
Income Tax Expense.
Income tax expense decreased $1.5 million to $1.7 million for the three
months ended December 31, 2008 from $3.2 million for the three months ended December 31, 2007
primarily as a result of a decrease in income before income taxes. The effective tax rate was
39.2% and 38.4% for the three months ended December 31, 2008 and December 31, 2007, respectively.
Net Income.
As a result of the factors discussed above, net income decreased $2.5 million to
$2.6 million for the three months ended December 31, 2008 from $5.1 million for the three months
ended December 31, 2007.
Six Months Ended December 31, 2008 Compared to the Six Months Ended December 31, 2007
Revenues.
Revenues increased 16.7%, or $47.2 million, to $330.1 million for the six months
ended December 31, 2008 from $282.9 million for the same period in the prior year. The revenue
increase resulted from: storm
restoration revenues; the September 1, 2008 acquisition of EDS, which provided $29.0 million
in core revenues in the period; and continued growth in transmission services of $1.5 million, or
7%.
Our storm restoration revenues are highly volatile and unpredictable. In the six months
ended December 31, 2008, primarily due to damages caused by Hurricanes Gustav and Ike, storm
revenues totaled $88.6 million. This compares to $24.5 million in storm revenue for the six months
ended December 31, 2007. The large amount of storm restoration work in the current fiscal year,
however, diverted significant man-hours from core work. Core revenues were also negatively impacted
as our customers reduced overhead distribution maintenance projects. As a result, core revenues
decreased by 6.5% to $241.5 million for the six months ended December 31, 2008 as compared to the
comparable period of the prior fiscal year.
14
Gross Profit.
Gross profit increased $15.7 million to $63.4 million for the six months ended
December 31, 2008 from $47.7 million for the six months ended December 31, 2007. Gross profit as a
percentage of revenues increased to 19.2% from 16.9% during the six months ended December 31, 2008
primarily due to the significant increase in higher-margin storm restoration revenues, including
Hurricanes Gustav and Ike.
General and Administrative Expenses.
General and administrative expenses increased $3.6
million to $24.5 million for the six months ended December 31, 2008 from $20.9 million for the six
months ended December 31, 2007. This increase is primarily due to higher incentive compensation
expense and increased administration costs of approximately $1.2 million related to the EDS
acquisition. As a percentage of revenues, general and administrative expenses remained constant at
7.4%.
Interest Expense and Other, Net.
Interest expense and other, net decreased $3.4 million to
$4.6 million for the six months ended December 31, 2008 from $8.0 million for the six months ended
December 31, 2007. This decrease was primarily due to a reduction in average debt balances and
lower interest rates.
Income Tax Expense.
Income tax expense increased $6.2 million to $12.7 million for the six
months ended December 31, 2008 from $6.5 million for the six months ended December 31, 2007
primarily as a result of the increase in income before income taxes. The effective tax rate was
37.8% and 38.5% for the six months ended December 31, 2008 and 2007, respectively.
Net
Income.
As a result of the factors discussed above, net income increased $10.4 million to
$20.8 million for the six months ended December 31, 2008 from $10.4 million for the six months
ended December 31, 2007.
Liquidity and Capital Resources
Our primary cash needs have been for working capital. Our primary source of cash for the six
months ended December 31, 2008 was cash provided by operations. Our primary sources of cash for
the six months ended December 31, 2007 were cash provided by operations and, to a lesser extent,
proceeds from the sale of property and equipment.
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 senior credit facility to satisfy normal cash needs during these
periods.
As of December 31, 2008, our cash totaled $5.6 million and we had $66.4 million available
under the $90.0 million revolving portion of our senior credit facility (after giving effect to the
outstanding balance of $23.6 million of standby letters of credit).
We believe that our cash flow from operations, available cash and cash equivalents, and
borrowings available under our senior credit facility will be adequate to meet our ordinary course
liquidity needs for the foreseeable future. However, our ability to satisfy our obligations or to
fund planned capital expenditures will depend on our
future performance, which to a certain extent is subject to general economic, financial,
competitive, legislative, regulatory and other factors beyond our control.
15
Changes in Cash Flows:
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Six Months Ended
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December 31,
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2008
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2007
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(In millions)
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Net cash provided by operating activities
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$
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23.1
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$
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17.9
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Net cash (used in) provided by investing activities
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$
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(29.4
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)
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$
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2.6
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Net cash provided by (used in) financing activities
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$
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0.6
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$
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(21.9
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)
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Net cash provided by operating activities increased $5.2 million to $23.1 million for the six
months ended December 31, 2008 from $17.9 million for the six months ended December 31, 2007. The
increase in cash flows from operating activities was primarily to storm restoration services
related to Hurricanes Gustav and Ike. Our receivable balance was $6.6 million higher at December
31, 2008 compared to December 31, 2007. Our customers are financially stable and creditworthy.
We did have one utility customer with a $13.0 million unpaid balance at December 31, 2008 related
to hurricane storm restoration work performed during September 2008. Of this balance, $10.0
million was paid in January 2009. We believe the remaining $3.0 million will be collected during
the remainder of our third quarter of fiscal 2009. We have not experienced any other major change
in customer payment patterns.
Net cash used in investing activities was $29.4 million for the six months ended December 31,
2008 compared to net cash provided by investing activities of $2.6 million for the six months ended
December 31, 2007. The change in cash provided by investing activities was primarily due to the
purchase of EDS during the six months ended December 31, 2008 and, to a lesser extent, an increase
in purchases of property and equipment. Our access to capital for growth and acquisitions will be
impacted by the credit market crisis and volatility in the equity markets.
Net cash provided by financing activities was $0.6 million for the six months ended December
31, 2008 compared to net cash used in financing activities of $21.9 million for the six months
ended December 31, 2007. Net cash used in financing activities for the six months ended December
31, 2007 primarily reflected net payments under our senior credit facility.
Senior Credit Facility
As of December 31, 2008, we had $140.5 million of term loan outstanding under our senior
credit facility. As of December 31, 2008, our borrowing availability under the $90.0 million
revolving portion of our senior credit facility was $66.4 million (after giving effect to the
outstanding balance of $23.6 million of outstanding standby letters of credit). The obligations
under our senior credit facility are unconditionally guaranteed by us and each of our existing and
subsequently acquired or organized subsidiaries (other than Pike Electric, Inc., which is the
borrower under the facility) and secured on a first-priority basis by security interests (subject
to permitted liens) in substantially all assets owned by us, Pike Electric, Inc. and each of our
other domestic subsidiaries, subject to limited exceptions.
We continue to monitor the tightening of the overall credit market. Over the next several
quarters, we will be renegotiating the revolving portion of our credit facility, which matures in
July 2010. The economic environment and overall credit market will have an impact on those
negotiations including availability, interest rates, fees and restrictive covenants. Our long-term
debt matures in 2012.
Our credit agreement contains a number of affirmative and restrictive covenants including
limitations on mergers, consolidations and dissolutions, sales of assets, investments and
acquisitions, indebtedness and liens, and other restricted payments. Among these covenants, our
credit agreement includes a requirement that we maintain: (i) a leverage ratio (as defined in the
senior credit facility) of no more than 3.75 to 1.0 as of the last day of each fiscal quarter,
measured on a trailing four-quarter basis and (ii) a cash interest coverage ratio (as defined in
the
senior credit facility) of at least 3.5 to 1.0 as of the last day of each fiscal quarter,
measured on a trailing four-quarter basis. As of December 31, 2008, we were in compliance with
these covenants with a leverage ratio of 1.41 to 1.00 and a cash interest coverage ratio of 11.43
to 1.00. The credit agreement also contains an excess cash provision which requires us to make
debt payments based on a defined calculation. As of December 31, 2008, we were in compliance with
all of our debt covenants, including those noted above.
16
Contractual Obligations and Other Commitments
In connection with our acquisition of EDS (Note 3 of Notes to Condensed Consolidated
Financial Statements), we assumed certain operating lease obligations. These commitments total
$3.5 million for the remainder of fiscal 2009. For fiscal 2010, 2011, 2012, 2013 and thereafter,
the commitments total $6.6 million, $5.6 million, $2.4 million, $0.6 million and $0.6 million,
respectively.
Off-Balance Sheet Arrangements
Other than letters of credit issued under the $90.0 million revolving portion of our senior
credit facility and our obligations under the surety and performance bonds described below, we have
no obligations or relationships that could be considered material off-balance sheet arrangements.
As of December 31, 2008, we had $23.6 million of standby letters of credit issued under our
senior credit facility primarily for insurance and bonding purposes.
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. As of December 31, 2008, we
had $61.9 million in surety bonds outstanding, and we also had provided collateral in the form of a
letter of credit to sureties in the amount of $4.0 million, which is included in the total letters
of credit outstanding above.
Seasonality; Fluctuations of Results
Because our services are performed outdoors, our results of operations can be subject to
seasonal variations due to weather conditions. These seasonal variations affect both our core and
storm restoration services. Extended periods of rain affect the deployment of our core crews,
particularly with respect to underground work. During the winter months, demand for core work is
generally lower due to inclement weather. In addition, demand for core work generally increases
during the spring months due to improved weather conditions and is typically the highest during the
summer 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 during the first six months of fiscal
2009 and 2008, inflation did not have a significant effect on our results.
Recent Accounting Pronouncements
See Note 9, Recent Accounting Pronouncements, to our Notes to Condensed Consolidated
Financial Statements in Item 1 of this Quarterly Report for a description of recent accounting
pronouncements, including the expected dates of adoption and estimated effects, if any, on our
consolidated financial statements.
Uncertainty of Forward-Looking Statements and Information
This Quarterly Report on Form 10-Q includes statements reflecting assumptions, expectations,
projections, intentions or beliefs about future events that are intended to be forward-looking
statements under the Private Securities Litigation Reform Act of 1995. You can identify these
statements by the fact that they do not relate strictly to historical or current facts. Words such
as may, will, 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. In particular, these include, but are not
limited to, statements relating to the following:
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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
operation or financial position;
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our belief that our cash flow from operations, available cash and cash equivalents, and
borrowings available under our senior credit facility will be adequate to meet our ordinary
course liquidity needs for the foreseeable future.
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17
Any or all of our forward-looking statements may turn out to be incorrect. They can be
affected by inaccurate assumptions and by known or unknown risks and uncertainties, including the
following, which are described in more detail in our Annual Report on Form 10-K for the fiscal year
ended June 30, 2008:
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We derive a significant portion of our revenues from a small group of customers. The
loss of or a significant decrease in services to one or more of these customers could
negatively impact our business and results of operations.
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Our customers often have no obligation to assign work to us, and many of our
arrangements may be terminated on short notice. As a result, we are at risk of losing
significant business on short notice.
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Our storm restoration services are highly volatile and unpredictable, which could result
in substantial variations in, and uncertainties regarding, the levels of our financial
results from period to period.
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Our business is subject to numerous hazards that could subject us to substantial
monetary and other liabilities. If accidents occur, they could materially and adversely
affect our business and results of operations.
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Our current insurance coverage may not be adequate, and we may not be able to obtain
insurance at acceptable rates, or at all.
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Fuel costs could materially and adversely affect our operating results.
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Demand for some of our services is cyclical and vulnerable to industry and economic
downturns, which could materially and adversely affect our business and results of
operations.
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Failure to maintain effective internal control over financial reporting could have a
material adverse effect on our business, operating results and stock price.
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To be successful, we need to attract and retain qualified personnel, and any inability
to do so would adversely affect our business.
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We are dependent on our senior management and other key personnel, the loss of which
could have a material adverse effect on our business.
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A continued deterioration in the housing market could negatively affect our revenues
from distribution work.
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Our industry is highly competitive and we may be unable to compete effectively, retain
our customers or win new customers, which could result in reduced profitability and loss of
market share.
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We may be unsuccessful at acquiring companies or at integrating companies that we may
acquire, and as a result, we may not achieve the expected benefits and our profitability
could materially suffer.
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We acquired substantially all of the assets of EDS on September 1, 2008, and this
acquisition could have a negative effect on our business and results of operations.
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We have incurred indebtedness under a senior credit facility, which may restrict our
business and operations, adversely affect our cash flow, and restrict our future access to
sufficient funding to finance desired growth.
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18
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We are in the process of implementing various information technology systems which could
temporarily disrupt our day-to-day operations.
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During the ordinary course of our business, we may become subject to lawsuits or
indemnity claims, which could materially and adversely affect our business and results of
operations.
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Our failure to comply with or the imposition of liability under, environmental laws and
regulations could result in significant costs.
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Weather conditions can adversely affect our operations and, consequently, revenues.
The electric infrastructure servicing business is subject to seasonal variations, which
may cause our operating results to vary significantly from period to period and could cause
the market price of our stock to fall.
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Our results of operations could be adversely affected as a result of the impairment of
goodwill or other intangibles.
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The market price of our stock may be influenced by many factors, some of which are
beyond our control.
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Shares eligible for future sale may cause the market price of our common stock to drop
significantly, even if our business is doing well.
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The concentration of our capital stock among a relatively small group of
stockholders may limit other stockholders ability to influence corporate
matters.
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Anti-takeover provisions of our charter and bylaws may reduce the likelihood of any
potential change of control or unsolicited acquisition proposal that stockholders might
consider favorable.
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Utilities focus on power generation and concerns over credit availability may
temporarily divert attention and capital away from maintenance projects we perform.
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Bonding indemnification requirements may change on existing or new contracts.
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Our financial results are based upon estimates and assumptions that may differ from
actual results.
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Many of these factors will be important in determining our actual future results.
Consequently, no forward-looking statement can be guaranteed. Our actual future results may vary
materially from those expressed or implied in any forward-looking statements.
All of our forward-looking statements, whether written or oral, are expressly qualified by
these cautionary statements and any other cautionary statements that may accompany such
forward-looking statements. In addition, except as required under the federal securities laws and
the rules and regulations of the SEC, we do not have any intention to update any forward-looking
statements to reflect events or circumstances after the date of this report.
19
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
We are exposed to market risk related to changes in interest rates on borrowings under our
senior credit facility, which bears interest based on London Interbank Offered Rate (LIBOR), plus
an applicable margin dependent upon a total leverage ratio. We use derivative financial instruments
to manage exposure to fluctuations in interest rates on our senior credit facility. These
derivative financial instruments, which are currently all swap agreements, are not entered into for
trading or speculative purposes. A swap agreement is a contract to exchange a floating rate for a
fixed rate without the exchange of the underlying notional amount. Effective December 2007, we
entered into two separate interest rate swap agreements. The first agreement had a notional amount
of $60.0 million, an effective date of December 13, 2007 and an expiration date of December 13,
2009. The second agreement had a notional amount of $40.0 million, an effective date of December
19, 2007 and an expiration date of December 19, 2009. Under both swap agreements, we pay a fixed
rate of 3.99% and receive a rate equivalent to the thirty-day LIBOR, adjusted monthly. Based on our
current leverage ratio, these swap agreements effectively fix the interest rate at 5.49% for $100.0
million of our term debt. The fair value of the interest rate swaps at December 31, 2008 was
reflected on the balance sheet in accrued expenses and other for $3.2 million.
Diesel Fuel Risk
We have a large fleet of vehicles and equipment that primarily uses diesel fuel. As a result,
we have market risk for changes in diesel fuel prices. If diesel prices rise, our gross profit and
operating income would be negatively affected due to additional costs that may not be fully
recovered through increases in prices to customers.
We periodically enter into diesel fuel swaps to decrease our price volatility. We currently
hedge approximately 30% of our diesel usage with prices ranging from $2.52 to $4.25 per gallon.
Our goal is to gradually increase our hedged positions to 40% to 60% of our annual volumes by
June 30, 2009 and ultimately maintain a program level of hedged positions at 60% to 70% of our
annual volumes on a rolling basis.
Item 4.
Controls and Procedures
An evaluation was performed under the supervision and with the participation of our
management, including the chief executive officer (CEO) and chief financial officer (CFO), of
the effectiveness of the design and operation of our disclosure controls and procedures. Based on
that evaluation, our management, including the CEO and CFO, concluded that our disclosure controls
and procedures were effective as of December 31, 2008.
There has been no change in our internal control over financial reporting during the quarter
ended December 31, 2008 that has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
20
PART II OTHER INFORMATION
Item 1.
Legal Proceedings
We are from time to time a party to various lawsuits, claims and other legal proceedings that
arise in the ordinary course of business. These actions typically seek, among other things,
compensation for alleged personal injury, breach of contract and/or property damages, punitive
damages, civil penalties or other losses, or injunctive or declaratory relief. With respect to all
such lawsuits, claims and proceedings, we record reserves when it is probable a liability has been
incurred and the amount of loss can be reasonably estimated. We do not believe that any of these
proceedings, individually or in the aggregate, would be expected to have a material adverse effect
on our results of operations, cash flow or financial position.
Item 1A.
Risk Factors
Except for the risk factor set forth below, there have been no material changes to these
matters, disclosed in Part I, Item 1 in our Annual Report on Form 10-K for the fiscal year ended
June 30, 2008.
Impairment of our or our customers ability to access the capital and credit markets could
harm our future growth and expansion opportunities
. Recently, the capital and credit markets have
become increasingly volatile as a result of adverse conditions that have caused the failure and
near failure of a number of large financial services companies. If the capital and credit markets
continue to experience volatility and the availability of funds remains limited, we could incur
increased costs associated with borrowing. In addition, it is possible that our ability to access
the capital and credit markets may be limited by these or other factors at a time when we would
like, or need, to do so, which could have an impact on our ability to refinance maturing debt, grow
our operations and/or react to changing economic and business conditions. Furthermore, our
business model is centered upon being an outsourced service provider of energy solutions. To the
extent that our customers are unable to access the capital and credit markets, they may in turn
reduce their spending, and consequently the amount of work outsourced to us.
Item 4.
Submission of Matters to a Vote of Security Holders
We held our annual meeting of stockholders in Bermuda Run, North Carolina on December 3, 2008.
The following matters were submitted to a vote of the shareholders with the results shown below:
(a) Seven members were elected to the board of directors, each to serve until our next annual
meeting of stockholders and until their respective successors have been elected and qualified.
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Nominee
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Votes For
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Votes Withheld
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J. Eric Pike
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31,650,255
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326,183
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Charles W. Bayless
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31,720,862
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255,576
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Adam B. Godfrey
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31,506,141
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470,297
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James R. Helvey, III
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31,720,612
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255,826
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Robert D. Lindsay
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31,508,141
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468,297
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Daniel J. Sullivan
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31,725,462
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250,976
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Louis F. Terhar
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31,725,762
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250,676
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(b) The stockholders ratified the appointment of Ernst & Young LLP as our independent
registered public accounting firm for the fiscal year ending June 30, 2009.
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Votes For
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Votes Against
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Abstained
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Broker Non-Votes
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31,834,903
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141,335
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200
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None
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21
Item 6.
Exhibits
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Exhibit
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Description
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31.1
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Certification of Periodic Report by Chief Executive Officer
pursuant to Rule 13a-14(a)/15d-14a and pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 (filed herewith)
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31.2
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Certification of Periodic Report by Chief Financial Officer
pursuant to Rule 13a-14(a)/15d-14a and pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 (filed herewith)
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32.1
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Certification of Periodic Report by Chief Executive Officer and
Chief Financial Officer pursuant to U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(filed herewith)
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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PIKE ELECTRIC CORPORATION
(Registrant)
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Date: February 9, 2009
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By:
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/s/ J. Eric Pike
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J. Eric Pike
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Chairman, Chief Executive Officer and President
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Date: February 9, 2009
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By:
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/s/ Anthony K. Slater
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Anthony K. Slater
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Chief Financial Officer
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23
Pike Electric (NYSE:PEC)
過去 株価チャート
から 5 2024 まで 6 2024
Pike Electric (NYSE:PEC)
過去 株価チャート
から 6 2023 まで 6 2024