Filed with the SEC from Dec 11 to Dec 17:
Pike Electric (PEC)
Oaktree Capital Group Holdings cut its stake to 2.16 million shares (6.48%) from the 2.68 million (8.04%) reported on Dec. 9.
Pike Electric (â€śPike,â€ť â€śwe,â€ť â€śus,â€ť and â€śourâ€ť) is one of the largest providers of outsourced electric distribution and transmission services in the United States. We perform engineering, design, maintenance, upgrade and construction of electric distribution powerlines, sub-500 kilovolt (â€śkVâ€ť) transmission powerlines and substations for electric utilities, cooperatives and municipalities. We are also a recognized leader in storm restoration services. Our common stock is traded on the New York Stock Exchange under the symbol PEC.
We were founded by Floyd S. Pike in 1945 and were incorporated in North Carolina in 1968. On July 1, 2005, in connection with our initial public offering (â€śIPOâ€ť) we reincorporated in Delaware by merging Pike Holdings, Inc., our predecessor, with and into a newly-created wholly-owned subsidiary, Pike Electric Corporation. We completed our IPO of ten million shares of common stock on August 1, 2005.
On September 1, 2008, we acquired substantially all of the assets of Shaw Energy Delivery Services, Inc. (â€śEDSâ€ť), formerly an affiliate of The Shaw Group, for $24.25 million in cash, subject to a working capital adjustment, plus the assumption of certain operating liabilities. EDS provides engineering, design, procurement and construction management services on distribution and transmission powerlines and substations, and also performs maintenance and construction services on distribution and transmission powerlines and substations. Among other benefits, the acquisition provides us an opportunity to expand our operations to the West Coast, Southwest, Pacific Northwest and Mid-Atlantic markets. For the twelve months ended August 31, 2007 EDS generated approximately $108 million in revenues.
The annual market for electric power in the United States is nearly $300 billion and electricity consumption has grown at an average compound annual growth rate of 2.1% from 1980 to 2007, according to the Energy Information Administration (â€śEIAâ€ť). The industry is comprised of investor-owned utilities, municipal utilities, cooperatives, federally-owned utilities, independent power producers and independent transmission companies with three distinct functions: generation, distribution and transmission. The electric distribution and transmission infrastructure is the critical network that connects power from generators to residential, commercial and industrial end users. Electric transmission refers to power lines through which electricity is transmitted over long distances at high voltages (over 230 kV) and the lower voltage lines that connect the high voltage transmission infrastructure to local distribution networks. Electric distribution refers to the local municipal, cooperative or utility distribution network, including associated substations, that provides electricity to end users over shorter distances. Within this electric network, there are over five million miles of distribution lines and more than 600,000 miles of transmission lines. Approximately 85% of transmission line miles carry less than 250 kV, and approximately one-half of these miles are in our geographical footprint.
Electric distribution and transmission infrastructure requires ongoing maintenance, upgrades and extensions to manage power line congestion, avoid delivery failures and connect distribution lines to new end users. According to the EEI, electric utilities spent an estimated $17 billion on electric distribution capital expenditures in 2007 and are anticipated to spend, on average, $14 billion annually through 2015 on distribution investments, which is almost triple the size of projected transmission investment. This infrastructure further requires emergency repairs whenever unexpected power outages or damages occur. The required maintenance, upgrades and extensions, as well as the emergency repairs, are performed by the utility companies that own the relevant power lines and by third-party service providers, such as our company, to which utilities, cooperatives and municipalities outsource some of their needs.
Long-term demand for power line services is primarily driven by the continuous need to maintain and upgrade the electric distribution and transmission infrastructure. As a result, future demand for infrastructure services will be driven generally by increased demand for electricity, increased outsourcing by utilities and the need to correct the inadequacy of the electric distribution and transmission infrastructure.
Growth in Demand for Electricity and Need for Improved Infrastructure. Demand for electricity is a direct driver of spending on electric distribution and transmission infrastructure. According to a 2008 EIA report, United States electricity consumption has increased by approximately 73% since 1980 and is expected to further increase by approximately 40% by 2030. This increasing demand is being placed on an aging power grid. Based on these facts, we expect increased investment both to establish new distribution and transmission infrastructure and to maintain and improve existing infrastructure.
The Energy Policy Act of 2005. The Energy Policy Act of 2005 was designed, among other things, to improve electric transmission capacity and reliability and to encourage investment in the transmission infrastructure. The Act calls for the formation of a self-regulating reliability organization, subject to oversight by the Federal Energy Regulatory Commission (â€śFERCâ€ť) to create and enforce minimum reliability standards. FERC has issued rules to create a more profitable situation for transmission system owners, and it has approved incentive rates to promote increased transmission construction and help ensure reliability in certain regions of the country. The Act also facilitates effective competition by repealing the Public Utility Holding Company Act (â€śPUHCAâ€ť). We believe this repeal will spur investments from non-utility entities, which are likely to focus on reducing costs, while enabling utilities to focus on their core competencies. Additionally, we believe that the repeal of PUHCA may lead to increased interest in outsourcing solutions. Over the long-term, we believe that our business will benefit from any increase in spending in the transmission infrastructure due to the associated increases in maintenance, extension and upgrade of distribution and sub-500 kV transmission lines â€“ our core business services.
Increased Outsourcing of Infrastructure Services. Utilities, cooperatives and municipalities are continuously seeking ways to improve cost efficiencies. In addition, utilities are facing an aging workforce. According to North American Electric Reliability Corporation, one in three United States utility workers will be age 50 or older by 2010. Over the last decade, electric utilities and cooperatives have increased their reliance on outsourcing the maintenance and improvement of their electric distribution and transmission systems to third-party service providers. Given our size, our skilled workforce, our experienced operations management and our existing equipment and truck fleet, we are well-positioned to provide these outsourcing services in a manner that is cost efficient to our customers and attractive to our prospective customers.
Increased Power Generation and Alternate Energy Sources. Based on increased demand for electricity, power generation will continue to be a focus for utilities. This focus will include traditional and renewable power resources. Our acquisition of EDS will expand our service offering to include engineering, design and construction of the distribution, transmission and substation requirements for solar and wind projects.
New Home Development. New home development has decreased in our markets. This decline has negatively impacted home connections and certain underground distribution services. Given our size and geographical footprint we have reallocated certain employees to areas with greater current demand. Even with this effort our headcount has declined with demand in these areas. The turnaround in the demand for these services is impacted by mortgage and other financial institution difficulties, new and existing home inventories, home prices, interest rates and overall political and economic conditions.
We believe our significant competitive strengths are as follows:
â€˘ Company Branding. We are one of the largest service providers to electric utilities, cooperatives and municipalities in the United States. We are also one of the few service providers of scale in our industry that operates under a single, well-recognized brand over a contiguous geographic area, providing us a distinct competitive advantage with both large and small territory customers.
â€˘ Outsourced Services-Based Business Model. We provide vital services to electric utilities, cooperatives and municipalities, which have increased their reliance on outsourcing the maintenance and improvement of their distribution and transmission systems. Over 99% of our revenues are derived under master service arrangements. We derive less than 1% of our revenues from fixed-price agreements relating to large-scale capital improvement projects.
â€˘ Geographic Market. Our service territory includes the Southeastern and South-Central United States. Both overall and on a state-by-state basis, our market has exhibited strong population growth and increases in electricity consumption, thereby increasing demand for our services. Moreover, the contiguous nature of our transmission and distribution service territory enables us to respond nimbly to our customersâ€™ needs, particularly in situations requiring rapid response, where we are able to seamlessly transition crews and equipment within our territory. This agility also provides the added benefit of increased operating efficiency by enabling us to maximize the highest and best use of our crews and equipment within our industry without significant barriers.
â€˘ Storm Restoration Opportunities. Our transmission and distribution market includes the Southeastern and South-Central United States, generally the most affected areas of the country when considering the impact of inclement weather, such as ice storms and hurricanes, on the electric infrastructure. Of the competitors in our market, we believe we are the leading provider of emergency services for storm restoration.
â€˘ Long-Standing Customer Relationships. We have a diverse, well-capitalized customer base that includes over 150 electric companies throughout our service territory. We employ a customer-focused philosophy that has resulted in long-standing customer relationships. Our relationships with our top 15 customers average approximately 34 years.
â€˘ Major Investments in Fleet and Safety. We have made significant investments in our business. In addition to investing in our fleet, substantially all of which we own, we have invested in our employee safety and development programs, establishing training and safety programs certified by the Department of Labor.
â€˘ Experienced Management Team with Demonstrated Operational Excellence. Our strong management has led us to operational excellence, as demonstrated by our continuing success in effectively growing our business, managing our costs, supervising our workforce and deploying our fleet. All members of our senior operational management team have been with us for over 20 years and most obtained significant operating experience prior to being promoted to their current positions.
â€˘ Financial Position. Our strong cash flows have provided the opportunity to reduce our debt by $279.0 million since June 30, 2005. We are in a position to pursue all avenues of business growth.
We strive to be our customersâ€™ service provider of choice and to expand our leadership position in the outsourced services sector of the electric infrastructure industry, while continuing to increase our revenues and profitability. In order to accomplish these goals, we are pursuing the following strategies:
â€˘ Increased Penetration Within Our Existing Service Territory. We intend to continue to increase our penetration and market share within our existing service territory by expanding our existing customer relationships, attracting new customers and pursuing selective acquisitions. We believe our quality service, modern fleet, regional presence, storm restoration capabilities and strong safety record will enable us to develop our business with both existing and prospective customers as they continue to outsource their servicing needs.
â€˘ Expand Our Service Territory and Service Offerings. We intend to continue to grow our business by seeking new opportunities from our existing customers that have operations outside our current service territory or outsourcing needs beyond our current service offerings, capturing new customers in other geographic markets and pursuing selective acquisitions.
â€˘ Continued Focus on Distribution and Sub-500 kV Transmission. We will continue to focus on the maintenance, upgrade and extension of electric distribution and sub-500 kV transmission power lines. By focusing on the distribution and sub-500 kV transmission sector of the industry and providing high-quality services to our customers, we believe that we will be in a position to capture a significant share of the expected increased amount of work in this market sector.
â€˘ Capitalize on Favorable Long-Term Industry Trends. We believe that we are well positioned to benefit from expected long-term industry trends, which are described in more detail above under the heading â€śIndustry Trends.â€ť
â€˘ Employer of choice for transmission and distribution line workers. We believe the demand for skilled line workers will increase dramatically over the next five to ten years. We will continue to focus on employee development and retention. This effort includes periodic wage and benefits reviews, recruitment programs, advertising, new educational programs and continuously improving communications with mobile workforce. We have also initiated a leadership retirement program, effective for fiscal 2009.
â€˘ Continued Focus on Operating Efficiency and Customer Service. We intend to use the scale and scope of our capabilities to achieve higher levels of operating efficiency and productivity while further enhancing our customer service. Additionally, we intend to use our modern fleet, repair and maintenance capabilities and skilled workforce to increase our cost competitiveness so that we may profitably win new business. Development, implementation and deployment of new technologies will be a key component of this effort.
â€˘ Continued Focus on Safety. We will continue to focus on safety through the use of safety programs, training, technology and equipment.
We provide services to the electric power distribution and transmission market. We focus primarily on the maintenance, upgrade and extension of overhead and underground power lines, and secondarily on providing storm restoration services and various ancillary services. We provide a breakdown of our revenues by type of service in â€śManagementâ€™s Discussion and Analysis of Financial Condition and Results of Operations - Services.â€ť
Core Powerline Services. We began as a provider of distribution infrastructure services, and these services continue to be our primary revenue generator. Today, using over 5,800 pieces of motorized equipment, we provide overhead and underground maintenance, upgrade and extension services in a 19-state region. Overhead services consist of the construction and repair of wire and components in energized overhead electric distribution systems. Underground services range from simple residential installations, directional boring, duct bank and manhole installation, to the construction of complete underground distribution facilities. We also perform routine maintenance work, consisting of repairing or replacing damaged or defective components, inspecting distribution systems for safety hazards and upgrading outdated or low-capacity infrastructure.
In addition, we offer maintenance, upgrade and extension services for transmission lines with voltages of up to and including 230 kV and perform energized maintenance work for voltages up to 500 kV. These applications are predominantly single-pole and H-frame structures utilizing wood, concrete or steel poles. Given the current load on regional electricity grids, our ability to perform energized maintenance work is a significant competitive advantage because the work can be performed without interrupting the electric network.
Our ancillary services include the construction of power substations and the installation of street lighting and fiber optic lines to meet the needs of certain of our distribution customers. While we do not actively pursue these ancillary services as stand-alone services, they add significant value for our customers who prefer to utilize a single electric distribution and transmission infrastructure service provider. Our various ancillary services have generated less than 5% of our total revenue for each year during the past five years and have been decreasing as a percentage of revenue during that time.
Storm Restoration Services. Storm restoration involves the repair or reconstruction of any part of a distribution or sub-500 kV transmission network, including substations, power lines, utility poles or other components, damaged during snow, ice or wind storms, flash floods, hurricanes, tornados or other natural disasters. We have earned a reputation as a storm restoration leader in the Southeast and South-Central United States due to our ability to rapidly mobilize the necessary employees and equipment while maintaining a functional force for our unaffected customers. In crisis situations, we have deployed over 2,000 employees within 24 hours to respond to our customersâ€™ emergency needs. We maintain a dedicated 24-hour Storm Center that acts as the single hub of command. While current master service arrangement (â€śMSAâ€ť) customers get priority services, we also perform these services outside our normal geographic service area and to utilities and cooperatives not under MSA arrangements.
Storm restoration services do not require that we keep a dedicated team on call. Rather, we are able to shift crews performing core powerline services for our customers in unaffected areas to those areas affected by severe storms. Consequently, we are better able to manage our workforce and respond quickly to storm-affected areas, especially given our contiguous geographic market. Upon completion of the storm work, our crews return to those customers in unaffected areas and complete the deferred work. This method of staffing storm crews has proven both cost-efficient and effective. Our core powerline revenues decline as storm restoration revenues increase.
As illustrated in the tables above, our storm restoration services are very volatile. At the peak of our restoration activity, we have dedicated more than 3,000 field, supervisory and support staff to storm restoration services. We cannot accurately predict the occurrence or magnitude of future storm restoration revenues and therefore, rely on our core powerline business and revenues for our day-to-day profitability.
We have focused on developing strong, long-term relationships with major electric utilities, cooperatives and municipalities. We have a diverse, well-capitalized customer base that includes over 150 electric companies throughout our service territory. We have employed a customer-focused philosophy that has resulted in customer loyalty, as exemplified by our 62-year relationship with our first customer, Duke Energy. Our relationships with our top 15 customers average approximately 34 years. We preserve these relationships by providing top-quality service and modern equipment.
Our top ten customers accounted for approximately 55.5%, 47.8% and 56.1% of our revenues during fiscal 2008, 2007 and 2006, respectively. Duke Energy was our only customer that represented greater than 10% of our revenues during that time frame, with 19.9%, 15.6%, and 14.7% for fiscal 2008, 2007 and 2006, respectively. Given the composition of the utilities, cooperatives and municipalities in our geographical market, we expect that a substantial portion of our total revenues will continue to be derived from a limited group of customers.
Types of Service Arrangements
Over 99% of our services are provided under MSAs that cover maintenance, upgrade and extension services, as well as new construction. Work under these arrangements is typically billed based on either hourly usage of labor and equipment or unit of work. For the year ended June 30, 2008, approximately 62% of our revenues were generated from hourly arrangements, while approximately 37% were generated from unit-based arrangements. Hourly arrangements involve billing for actual productive hours spent on a particular job. The unit-based arrangements involve billing for actual units completed (poles, cross arms, specific length of line, etc.) based on prices defined in the customersâ€™ MSAs. We derive less than 1 % of our revenues from fixed-price agreements relating to large-scale capital improvements. Initial arrangement awards are usually made on a competitive bid basis; however, extensions are often completed on a negotiated basis. As a result of our track record of quality work and services, a majority of our arrangements are renewed at or before the expiration of their terms.
The terms of our service arrangements are typically between one to three years for cooperatives and municipalities and three to five years for investor-owned utilities, with periodic pricing reviews. Due to the nature of our MSAs, in many instances our customers are not committed to minimum volumes of services, but rather we are committed to perform the specific services covered by the MSAs if and to the extent requested by the customer. The customer is, however, obligated to obtain these services from us if they are not performed by the customerâ€™s employees. Therefore, there can be no assurance as to the customerâ€™s requirements during a particular period or that such estimates at any point in time are predictive of future revenues. Most of our arrangements, including MSAs, may be terminated by our customers on short notice. Because the majority of our customers are well-capitalized, investment grade-rated electric utilities or cooperatives, we have experienced minimal bad debts historically.
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 powerline and storm restoration services. Extended periods of rain affect the deployment of our core powerline crews, particularly with respect to underground work. During the winter months, demand for core powerline work is generally lower due to inclement weather. In addition, demand for core powerline 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.
We have obtained U.S. federal trademark registration for our â€śPIKEâ€ť word mark and our â€śPIKEâ€ť logo mark. We own registrations for three other trademarks. We have invested substantial time, effort and capital in establishing the Pike name and believe that our trademarks are a valuable part of our business.
Training, Quality Assurance and Safety
Performance of our services requires the use of heavy equipment and exposure to potentially dangerous conditions. Our safety record reflects our commitment to operating safely and prudently. As employee safety is a top corporate priority, we have developed an extensive safety and training program, utilizing physical training facilities and on-line courses. Our lineman training program, an accredited four-year program, has grown to be one of the largest non-union power line training programs in the United States. We have received recognition of excellence from the North Carolina Department of Labor for the results of our apprenticeship program. In addition to on-the-job training, our Career Development Program and specialized training, we require our employees to attend ongoing safety training programs. Our continued focus on safety and workforce developments has resulted in year-over-year improvements in lost-time incidence rates in each of the last five fiscal years. These rates are calculated in accordance with the methodologies prescribed by the Occupational Safety and Health Administration (â€śOSHAâ€ť). We also conduct other mandatory training programs covering a variety of areas, such as supervisor development and CPR/ First Aid Certification.
We consistently communicate our rules, regulations and training guidelines to our employees. These rules and regulations are strictly enforced throughout the company. In addition, we maintain a safety incentive program that rewards employees for working safely and minimizing injuries.
As is common in our industry, we regularly have been and will continue to be subject to claims by employees, customers and third parties for property damage and personal injuries.
Our fleet, substantially all of which we own, consists of over 5,800 pieces of motorized equipment with an average age of approximately five years (measured as of June 2008) as compared to their average useful lives of 4 to 12 years. Our equipment includes standardized trucks and trailers, support vehicles and specialty construction equipment, such as backhoes, excavators, generators, boring machines, cranes, wire pullers and tensioners. The standardization of our trucks and trailers allows us to minimize training, maintenance and parts costs. We believe that our vehicles generally are well maintained and adequate for current operations.
We service the majority of our fleet and are a final-stage manufacturer for several configurations of our specialty vehicles. We can build components on-site, which reduces our reliance on our equipment suppliers.
Our maintenance function has the capability to operate 24 hours a day, both at our maintenance centers and in the field, and provides high-quality custom repair work and expedient service, in order to maintain a fleet poised for mobilization. Compared to our competitors, we believe that this helps us achieve a greater local presence, lower fuel costs and more efficient equipment maintenance. We believe that our maintenance facilities are adequate for our current operations.
At June 30, 2008, we employed approximately 5,400 full-time and part-time employees, of which approximately 4,600 were revenue producing and approximately 800 were non-revenue producing. We offer our employees a competitive package of benefits including medical, dental, life and disability insurance, paid vacation and holidays, a 401(k) plan, leadership retirement program, and safety and incentive bonuses. The level of benefits per employee varies and is based upon years of service, as well as levels of seniority and other variables.
Our employees are not currently unionized, and we believe that our relationship with our employees is very good.
Nominees for Election of Directors
J. Eric Pike , age 40, has been a director since 1994. Mr. Pike has served as President since 1998, Chief Executive Officer since 2002 and Chairman since July 2005. He is the grandson of our founder Floyd Pike, joined the Company in 1990 as an A-class lineman on an overhead construction crew, advancing through various office positions, and served as Vice President of the Central Region from 1993 to 1998, where he was responsible for the powerline operations in North Carolina and South Carolina. Mr. Pike graduated from Emory University with a B.A. in History.
Charles E. Bayless , age 65, has been a director since 2006. Mr. Bayless was the President of the West Virginia University Institute of Technology from April 2005 until June 2008. Mr. Bayless served as Chairman, President, and Chief Executive Officer of Illinova Corporation, an electric utility company, from 1998 to 1999. From 1992 to 1998, he served as Chief Executive Officer of UniSource Energy Corp., an electric utility company. Mr. Bayless holds a B.S.E.E. from the West Virginia University Institute of Technology, an M.S.E.E. in power engineering and a J.D. from the West Virginia University, and an M.B.A. from the Graduate School of Business Administration at the University of Michigan. He currently serves as a director of Recycled Energy Development, Commerce Energy and the Ontario Power Authority.
Adam P. Godfrey , age 46, has been a director since July 2007 and previously was a director from 2002 to October 2006, when he voluntarily resigned to ensure that our Board continued to be comprised of a majority of independent directors. Mr. Godfrey has been a Partner with Lindsay Goldberg since 2002. Previously, he was a Partner with Bessemer Holdings, which he joined in 1992. He holds an A.B. from Brown University and an M.B.A. from the Amos Tuck School at Dartmouth College. He currently serves as a director of Pride Manufacturing Company, LLC, FAPS Holdings, Inc., Intermex Holdings, Inc. and Bell Nursery Holdings LLC. He also serves as a member of the Board of Schneider National, Inc. and as a member of the MBA Advisory Board at the Tuck School of Business at Dartmouth.
James R. Helvey III , age 49, has been a director since 2005. Mr. Helvey is the founder and President of Helvey and Associates, LLC, a financial and strategic consulting firm to educational and non-profit entities, and also currently serves as Risk Management Officer for CMT Asset Management. From 1985 to 2000, Mr. Helvey was employed by J.P. Morgan & Co., serving in a variety of capacities, including as Vice-Chairman of JP Morganâ€™s Risk Management Committee, Global Head of Derivative Counterparty Risk Management, head of the swap derivative trading business in Asia and manager of the firmâ€™s short-term interest rate and foreign exchange derivative business in Europe. Mr. Helvey served as Chairman and CEO of Cygnifi Derivatives Services, LLC, an online derivatives services provider, from 2000 to 2002. In 2004, Mr. Helvey was a candidate for the United States Congress in the 5 th District of North Carolina. Mr. Helvey graduated magna cum laude with honors in 1981 from Wake Forest University. In 1982, Mr. Helvey was a Fulbright Scholar at the University of Cologne in Germany, and in 1984 Mr. Helvey received a masters degree in international finance and banking from Columbia University, School of International and Public Affairs. Mr. Helvey is a member of the Wake Forest University Board of Trustees, and of the Oakwood Country School Board of Trustees in Morgan Hill, California.
Robert D. Lindsay , age 53, has been a director since 2002. Mr. Lindsay co-founded Lindsay Goldberg in 2001. Previously, he was the Managing General Partner of Bessemer Holdings. Mr. Lindsay is a graduate of Harvard College and holds an M.B.A. from Stanford University. He is President and Chief Executive Officer of Bessemer Securities LLC as well as a director of The Bessemer Group, Incorporated and its subsidiary banks, including Bessemer Trust Company, N.A. Mr. Lindsay serves as a director of FAPS Holdings, Inc., Maine Beverage Company, LLC, Keystone Foods Holdings LLC, PL Olefins LLC, Continental Energy Systems LLC, FSB Global Holdings, Inc., Intermex Holdings, Inc., The Brock Group, Inc., Bell Nursery Holdings LLC, Brightstar Corp., Rosetta LLC, Ambulatory Services of America, Inc., Crane & Co., Inc. and Scandza AS. He also serves as a Trustee of the Cold Spring Harbor Biological Laboratory and St. Paulâ€™s School in Concord, New Hampshire.
Daniel J. Sullivan , age 62, has been a director since 2007. Mr. Sullivan was the President and Chief Executive Officer of FedEx Ground Package Systems, Inc., a wholly owned subsidiary of FedEx Corporation, a position he maintained from 1998 until his retirement in 2006. From 1995 to 1998, Mr. Sullivan was the Chairman, President and Chief Executive Officer of Caliber System, Inc. and its predecessor, Roadway Services, Inc., a provider of national and regional general trucking, small package delivery and custom logistics. Mr. Sullivan is a graduate of Amherst College. He also is a director of Computer Task Group, Inc., GDS Express, Inc. and Gevity HR, Inc. and is a federal commissioner on the Flight 93 National Memorial Federal Advisory Committee.
Louis F. Terhar , age 59, has been a director since 2006. Mr. Terhar, has been Managing Director for Strategic Planning Advisors LLC, a firm specializing in strategic planning advice and operational improvement strategies, since February 2005. From 2004 to 2005, he served as President and Chief Executive Officer of Integris Metals, Inc., a processor and distributor of metals. From 2002 to 2003, Mr. Terhar served as President and Chief Executive Officer of Indian Motorcycle Company, a manufacturer of cruiser motorcycles, which filed for liquidation under California law for the benefit of its creditors under the supervision of its stockholder in October 2003. From 1989 to 2001, Mr. Terhar served as Vice President of Operations for The David J. Joseph Company, as an Operations Staff Member for SHV Holdings N.V., as President and Chief Executive Officer of The David J. Joseph Company and as President of the SHV North America/SHV Capital Ventures. Mr. Terhar holds a B.S. in General Engineering from the United States Naval Academy, an M.B.A. in Finance from Syracuse University and an M.A. in Government from Harvard University.
Board Meetings and Attendance
The Board of Directors held eight meetings during fiscal 2008. No current director attended fewer than 75% of the aggregate number of the meetings of the Board of Directors held while such director was a member of the Board and of all the committees on which he served during such period. Absent extenuating circumstances, our Board members are expected to attend our annual meeting of stockholders. All of our directors attended our 2007 Annual Meeting of Stockholders either in person or telephonically.
Our Board of Directors believes that a majority of the Board should consist of directors who are independent under both the applicable New York Stock Exchange rules and regulations, which we refer to as the NYSE rules, and the applicable SEC rules and regulations, which we refer to as the SEC rules.
The NYSE rules provide that a director does not qualify as â€śindependentâ€ť unless the Board affirmatively determines that the director has no material relationship with us (either directly or as a partner, stockholder or officer of an organization that has a relationship with us). The NYSE rules require a board of directors to consider all of the relevant facts and circumstances in determining the materiality of a directorâ€™s relationship with a company and permit the board to adopt and disclose standards to assist the board in making determinations of independence. Accordingly, our Board has adopted our Director Independence Standards, which incorporate the independence standards of the NYSE rules, to assist the Board in determining whether a director has a material relationship with us. Our Director Independence Standards are available on our website, http://www.pike.com , under â€śInvestor Relationsâ€ť and â€śCorporate Governance,â€ť as an attachment to our Corporate Governance Guidelines.
In August 2008, the Board of Directors, with the assistance of the Nominating and Governance Committee, conducted an evaluation of director independence based on our Director Independence Standards. In connection with this review, the Board evaluated banking, commercial, charitable, consulting, family or other relationships with each director or immediate family member and their related interests and us and our subsidiaries, including those relationships described below under â€śCertain Relationships and Related Party Transactions.â€ť As a result of this evaluation, the Board of Directors affirmatively determined that none of Messrs. Bayless, Helvey, Sullivan and Terhar had a relationship with Pike Electric other than in their capacity as directors and that each of them is an independent director under our Director Independence Standards, the NYSE rules and the SEC rules. In addition, the Board of Directors determined that Mr. Pike was not independent due to his employment with Pike Electric and that Messrs. Godfrey and Lindsay were not independent due to their relationships with Lindsay Goldberg and its affiliates.
The Board of Directors has the authority to appoint committees to perform certain management and administration functions and currently has an Audit Committee, a Compensation Committee and a Nominating and Governance Committee.
MANAGEMENT DISCUSSION FROM LATEST 10K
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 (â€śSECâ€ť) on September 5, 2008 and is available on the SECâ€™s 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 â€śUncertainty of Forward-Looking Statements and Informationâ€ť below in this Item 2 and â€śRisk Factorsâ€ť in Item 1A of Part II of this Quarterly Report.
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 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 customersâ€™ 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. For the three months ended September 30, 2008 and 2007, storm restoration activity resulted in revenues of $77.7 million and $4.8 million, respectively.
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 â€śManagementâ€™s Discussion and Analysis of Financial Condition and Results of Operations â€” Critical Accounting Policiesâ€ť 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.
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 â€śUncertainty of Forward-Looking Statements and Information.â€ť Certain of these operational and other factors that affect our business include the following:
â€˘ General economic conditions may impact utility maintenance expenditures, and certain of our customersâ€™ powerline maintenance projects may be temporarily deferred. We continue to work closely with all customers to provide a skilled, flexible work force.
â€˘ 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.
â€˘ Industry-wide insurance costs for workmensâ€™ 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.
â€˘ 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.
â€˘ Fuel costs have risen and may continue to rise at a rate faster than our revenues. We have a large fleet of vehicles and equipment that primarily use diesel fuel. We have implemented bulk purchasing in certain areas to lower our fuel costs. We utilize diesel fuel swaps and may enter into additional diesel fuel derivative instruments in the future, depending on market conditions.
Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2007
Revenues. Revenues increased 32.8%, or $45.8 million, to $185.5 million for the three months ended September 30, 2008 from $139.7 million for the three months ended September 30, 2007. The revenue increase results from storm restoration revenues and our September 1, 2008 acquisition of EDS which increased our revenue producing workforce by approximately 15%.
Our storm restoration revenues are highly volatile and unpredictable. In the three months ended September 30, 2008, primarily due to damages caused by Hurricanes Gustav and Ike, storm revenues totaled $77.7 million. This compares to $4.8 million in storm revenue for the three months ended September 30, 2007. The large amount of storm restoration work in the current fiscal year, however, diverted significant man-hours from core work. As a result, core revenues decreased by 20.0% to $107.9 million for the three months ended September 30, 2008 as compared to the comparable period of the prior fiscal year.
Gross Profit. Gross profit increased 93.1%, or $21.7 million, to $45.0 million for the three months ended September 30, 2008 from $23.3 million for the same period in the prior year. Gross profit as a percentage of revenues increased to 24.2% for the three months ended September 30, 2008 from 16.7% the three months ended September 30, 2007, primarily due to the significant increase in higher-margin storm restoration revenues.
General and Administrative Expenses. General and administrative expenses increased $3.0 million to $13.3 million for the three months ended September 30, 2008 from $10.3 million for the three months ended September 30, 2007. This increase is primarily due to higher incentive compensation expense. As a percentage of revenues, general and administrative expenses decreased to 7.2% from 7.4%.
Interest Expense and Other, Net. Interest expense and other, net decreased $2.2 million to $2.1 million for the quarter ended September 30, 2008 from $4.3 million for the quarter ended September 30, 2007. This decrease was primarily due to lower average debt balances.
Income Tax Expense. Income tax expense increased $7.7 million to $11.0 million for the three months ended September 30, 2008 from $3.3 million for the three months ended September 30, 2007 as a result of an increase in income before income taxes. The effective tax rate was 37.6% and 38.6% for the three months ended September 30, 2008 and September 30, 2007, respectively.
Net Income. As a result of the factors discussed above, net income increased $13.0 million to $18.3 million for the three months ended September 30, 2008 from $5.3 million for the three months ended September 30, 2007.
Liquidity and Capital Resources
Our primary cash needs have been for working capital. Our primary source of cash for the three months ended September 30, 2008 was cash provided by borrowings under our revolving credit facility. Our primary sources of cash for the three months ended September 30, 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. We may experience working capital needs in connection with our storm restoration services as we did in our most recently completed quarter. The increased service activity 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 September 30, 2008, our cash totaled $1.1 million and we had $49.0 million available under the $90.0 million revolving portion of our senior credit facility (after giving effect to the outstanding balance of $17.4 million and the outstanding standby letters of credit of $23.6 million).
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.
Net cash used in operating activities was $0.6 million for the three months ended September 30, 2008 compared to net cash provided by operating activities of $10.1 million for the three months ended September 30, 2007. The decrease in cash flows from operating activities was primarily due to the increase in accounts receivable caused by storm restoration work that occurred in the last half of the quarter.
Net cash used in investing activities was $27.5 million for the three months ended September 30, 2008 compared to net cash provided by investing activities of $2.3 million for the three months ended September 30, 2007. The change in cash provided by investing activities was primarily due to the purchase of EDS during the three months ended September 30, 2008 and, to a lesser extent, an increase in purchases of property and equipment.
Net cash provided by financing activities was $17.8 million for the three months ended September 30, 2008 compared to net cash used in financing activities of $13.9 million for the three months ended September 30, 2007. Because of the increased service activity caused by the significant storm restoration activity during the three months ended September 30, 2008, we had an excess of customer billings over customer collections, which lead to increased accounts receivables. Therefore, we temporarily utilized borrowings under the revolving portion of our senior credit facility to satisfy our working capital needs.
Senior Credit Facility
As of September 30, 2008, we had $140.5 million of term loan and $17.4 million of revolver indebtedness outstanding under our senior credit facility. As of September 30, 2008, our borrowing availability under the $90.0 million revolving portion of our senior credit facility was $49.0 million (after giving effect to the outstanding balance of $17.4 million and $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.
Our $17.4 million balance of revolver loans at September 30, 2008 was due to the timing of working capital needs related to significant storm restoration activity during the quarter.
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. We are currently in compliance with our debt covenants.
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 $5.2 million for the remainder of fiscal 2009. For fiscal 2010, 2011, 2012, 2013 and thereafter, the commitments total $6.6 million, $5.6 million, $2.5 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 September 30, 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 September 30, 2008, we had $45.2 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.
Due to relatively low levels of inflation experienced during the first three months of fiscal 2009 and 2008, inflation did not have a significant effect on our results. However, we have experienced significant increases in the costs of fuel used to operate our vehicles and equipment during the last several fiscal years.
Recent Accounting Pronouncements
See Note 9, â€śRecent Accounting Pronouncements,â€ť 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 â€śforward-looking statementsâ€ť 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 â€śmay,â€ť â€świll,â€ť â€śshould,â€ť â€śexpect,â€ť â€śanticipate,â€ť â€śintend,â€ť â€śplan,â€ť â€śpredict,â€ť â€śpotential,â€ť â€ścontinue,â€ť â€śbelieve,â€ť â€śseek,â€ť â€śestimate,â€ť 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:
â€˘ 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 the Companyâ€™s results of operation or financial position;
â€˘ 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.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our historical consolidated financial statements and related notes thereto in Item 8 â€śFinancial Statements and Supplementary Data.â€ť 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 â€śRisk Factors.â€ť
Pike Electric is one of the largest providers of outsourced electric distribution and transmission services in the United States. We perform engineering, design, maintenance, upgrade and construction of electric distribution powerlines, sub-500 kilovolt (â€śkVâ€ť) transmission powerlines and substations for electric utilities, cooperatives and municipalities. We are also a recognized leader in storm restoration services.
We monitor our revenues by the two categories of services we provide: core powerline and storm restoration. We use this breakdown because core powerline services represent our ongoing service revenues, most of which are generated by our customersâ€™ recurring maintenance needs. Storm restoration revenues represent additional revenue opportunities that depend on weather conditions.
Our powerline services are our core business because of the magnitude and stability of our revenues from these operations. These powerline services have benefited from the industry trends described above. 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 8.9% to 25.5% of our total revenues. During fiscal 2006 and 2005, we experienced the largest storm restoration events of our history as several significant hurricanes affected the Gulf Coast and Florida. Our storm restoration revenue for fiscal 2006 and 2005 are not indicative of the revenues that we typically generate in any period or can be expected to generate in any future period. We cannot accurately predict the occurrence or magnitude of future storm restoration revenues.
Seasonality; Fluctuations of Results
Our services are performed outdoors, therefore our results of operations can be subject to seasonal variations due to weather conditions. These seasonal variations affect both our core powerline and storm restoration services. Extended periods of rain affect the deployment of our core powerline crews, particularly with respect to underground work. During the winter months, demand for core powerline work is generally lower due to inclement weather. In addition, demand for core powerline 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.
Due to relatively low levels of inflation experienced in recent years, inflation has not had a significant effect on our results. However, we have experienced significant increases in the costs of fuel used to operate our vehicles and equipment during the last three fiscal years.
Basis of Reporting
Revenues. We derive our revenues from one reportable segment through two service categories â€” core powerline and storm restoration. Our core powerline services consist of the maintenance, upgrade and extension of electric distribution and transmission power lines. Our storm restoration services involve the rapid deployment of our highly-trained crews and related equipment to restore power on distribution and transmission systems during crisis situations, such as hurricanes or ice or wind storms.
Approximately 99% of our services, including substantially all of our core powerline and a majority of our storm restoration services, are provided under MSAs, which are based on a price per hour worked or a price per unit of service. Less than 1% of our annual revenues are from fixed-price agreements. In addition, we do not derive significant revenues from large-scale capital projects, which typically involve competitive bidding, fixed price agreements and substantial performance bond requirements. The mix of hourly and per unit revenues changes during periods of high storm restoration services, as these services are all billed on an hourly basis. We determine our revenue generated on an hourly basis based on actual labor and equipment time completed and on materials billed to our customers. Revenue based on hours worked is recognized as hours are completed. We recognize revenue on unit-based services as the units are completed.
Cost of Operations. Our cost of operations consists primarily of compensation and benefits to employees, insurance, fuel, rental, operating and maintenance expenses relating to vehicles and equipment, materials and parts and supplies. Our cost of operations also includes depreciation, primarily relating to our vehicles and heavy equipment.
General and Administrative Expenses. General and administrative expenses include costs not directly associated with performing work for our customers. These costs consist primarily of compensation and related benefits of management and administrative personnel, facilities expenses, professional fees and administrative overhead.
Interest Expense and Other, Net. Interest expense and other, net primarily include interest expense and other nonoperating expenses. In addition to cash interest expense, interest expense includes amortization of deferred loan costs, deferred compensation accretion and the write-off of unamortized deferred loan costs resulting from prepayments of debt.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (â€śGAAPâ€ť). The preparation of these consolidated financial statements requires the use of estimates, assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenues and expenses reported. We believe our uses of estimates and underlying accounting assumptions adhere to GAAP and are consistently applied. Valuations based on estimates are reviewed for reasonableness on a consistent basis. Actual results may differ materially from these estimates. We believe the following to be our most important accounting policies, including those that use significant judgments and estimates in the preparation of our consolidated financial statements.
Revenue Recognition. Revenues from service arrangements are recognized when services are performed. We recognize revenue from hourly services based on actual labor and equipment time completed and on materials billed to our customers. We recognize revenue on unit-based services as the units are completed, and the price for each unit is determined under the service arrangement. For unit-based services, any estimated loss is recognized when the actual costs to complete each unit exceed original estimates. Costs typically include both direct labor and material costs and indirect costs related to performance, such as indirect labor, supplies, tools, repairs and depreciation costs. We recognize the full amount of any estimated loss on these projects if estimated costs to complete the remaining units for the project exceed the revenue to be received from such units. As of each of the periods presented we did not have a material amount of loss accruals.
Work completed and not billed represents service revenues earned under hourly arrangements and recognized in the period performed but not billed until a subsequent period and work performed under certain unit service arrangements and not yet billed to customers in accordance with specific contract terms regarding the timing of billing. In some instances, a portion of the total revenues billed under the customer arrangement are held by the customer as a â€śretainageâ€ť until the job is complete, and we record these amounts as work completed not billed.
Allowance for Doubtful Accounts. We provide an allowance for doubtful accounts that represents an estimate of uncollectible accounts receivable. The determination of the allowance includes certain judgments and estimates including our customersâ€™ willingness or ability to pay and our ongoing relationship with the customer. In certain instances, primarily relating to storm restoration work and other high-volume billing situations, billed amounts may differ from ultimately collected amounts. We incorporate our historical experience with our customers into the estimation of the allowance for doubtful accounts. These amounts are continuously monitored as additional information is obtained. Accounts receivable are due from customers located within the United States. Any material change in our customersâ€™ business or cash flows would affect our ability to collect amounts due.
Property, Plant and Equipment and Impairment of Long-Lived Assets. We capitalize property and equipment as permitted or required by applicable accounting standards, including replacements and improvements when costs incurred for those purposes extend the useful life of the asset. We charge maintenance and repairs to expense as incurred. Depreciation on capital assets is computed using the straight-line method and ranges from 3 to 39 years. Our management makes assumptions regarding future conditions in determining estimated useful lives and potential salvage values. These assumptions impact the amount of depreciation expense recognized in the period and any gain or loss once the asset is disposed.
We review our long-lived assets for impairment when events or changes in business conditions indicate the carrying value of the assets may not be recoverable, as required by SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. An impairment of assets classified as â€śheld and usedâ€ť exists if the sum of the undiscounted estimated future cash flows expected is less than the carrying value of the assets. If this measurement indicates a possible impairment, we compare the estimated fair value of the asset to the net book value to measure the impairment charge, if any. If the criteria for classifying an asset as â€śheld for saleâ€ť have been met, we record the asset at the lower of carrying value or fair value, less estimated selling costs. We also review the estimated salvage values and useful lives of our equipment at least annually.
Valuation of Goodwill and Other Intangible Assets. In accordance with SFAS No. 141, Business Combinations , we identify and value intangible assets that we acquire in business combinations, such as customer arrangements, customer relationships and non-compete agreements, that arise from contractual or other legal rights or that are capable of being separated or divided from the acquired entity and sold, transferred, licensed, rented or exchanged. The fair value of identified intangible assets is based upon an estimate of the future economic benefits expected to result from ownership, which represents the amount at which the assets could be bought or sold in a current transaction between willing parties, that is, other than in a forced or liquidation sale. For customers with whom we have an existing relationship prior to the date of the transaction, we utilize assumptions that a marketplace participant would consider in estimating the fair value of customer relationships that an acquired entity had with our pre-existing customers in accordance with EITF 02-17, Recognition of Customer Relationship Intangible Assets Acquired in a Business Combination.
In accordance with SFAS No. 142, Goodwill and Other Intangible Assets , we test our goodwill for impairment annually or more frequently if events or circumstances indicate impairment may exist. Examples of such events or circumstances could include a significant change in business climate or a loss of significant customers. We generally complete our annual analysis of our reporting unit on the first day of our fourth fiscal quarter. We apply a two-step fair value-based test to assess goodwill for impairment. The first step compares the fair value of a reporting unit to its carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, the second step is then performed. The second step compares the carrying amount of the reporting unitâ€™s goodwill to the fair value of the goodwill. If the fair value of the goodwill is less than the carrying amount, an impairment loss would be recorded in our income from operations. Intangible assets with definite lives are amortized over their estimated useful lives and are also reviewed for impairment if events or changes in circumstances indicate that their carrying amount may not be realizable. We have no intangibles with indefinite lives other than goodwill.
Our management makes certain estimates and assumptions in order to determine the fair value of net assets and liabilities, including, among other things, an assessment of market conditions, projected cash flows, cost of capital and growth rates, which could significantly impact the reported value of goodwill and other intangible assets. Estimating future cash flows requires significant judgment, and our projections may vary from cash flows eventually realized. When necessary, we engage third-party specialists to assist us with our valuations. The valuations employ a combination of present value techniques to measure fair value, corroborated by comparisons to estimated market multiples. These valuations are based on a discount rate determined by our management to be consistent with industry discount rates and the risks inherent in our current business model.
We cannot predict the occurrence of certain future events that might adversely affect the reported value of goodwill and other intangible assets that totaled $134.5 million at June 30, 2008. Such events include strategic decisions made in response to economic and competitive conditions, the impact of the economic environment on our customer base or material negative changes in our relationships with material customers.
Insurance and Claims Accruals. In the ordinary course of our business, we are subject to individual workersâ€™ compensation, vehicle, general liability and health insurance claims for which we are partially self-insured. We maintain commercial insurance for individual workersâ€™ compensation and vehicle and general liability claims exceeding $1.0 million ($0.5 million per claim prior to 2004). We also maintain commercial insurance for health insurance claims exceeding $0.35 million per person on an annual basis. We determine the amount of our loss reserves and loss adjustment expenses for self-insured claims based on third-party actuarial analyses prepared semi-annually that use both company-specific and industry data, as well as general economic information. Our estimates for insurance loss exposures require us to monitor and evaluate our insurance claims throughout their life cycles. Using this data and our assumptions about the emerging trends, we estimate the size of ultimate claims. Our most significant assumptions in forming our estimates include the trend in loss costs, the expected consistency with prior year claims of the frequency and severity of claims incurred but not yet reported, changes in the timing of the reporting of losses from the loss date to the notification date, and expected costs to settle unpaid claims. We also monitor the reasonableness of the judgments made in the prior yearâ€™s estimates and adjust current year assumptions based on that analysis.
While the final outcome of claims may vary from estimates due to the type and severity of the injury, costs of medical claims and uncertainties surrounding the litigation process, we believe that none of these items, when finally resolved, will have a material adverse effect on our financial condition or liquidity. However, should a number of these items occur in the same period, it could have a material adverse effect on the results of operations in a particular quarter or fiscal year.
Stock-Based Compensation. Effective July 1, 2005, we adopted SFAS No. 123 (revised 2004) (â€śSFAS No. 123Râ€ť), Share-Based Payment , which was issued by the FASB in December 2004. SFAS No. 123R revises SFAS No. 123, Accounting for Stock Based Compensation , and supersedes APB Opinion No. 25 (â€śAPB No. 25â€ť), Accounting for Stock Issued to Employees , and its related interpretations. SFAS No. 123R requires recognition of the cost of employee services received in exchange for an award of equity instruments in the financial statements over the period the employee is required to perform the services in exchange for the award (presumptively the vesting period). SFAS No. 123R also requires measurement of the cost of employee services received in exchange for an award based on the grant-date fair value of the award. SFAS No. 123R also amends SFAS No. 95, Statement of Cash Flows , to require that excess tax benefits be reported as financing cash inflows, rather than as a reduction of taxes paid, which is included within operating cash flows.
We adopted SFAS No. 123R using the modified prospective application as permitted under SFAS No. 123R. Accordingly, prior period amounts have not been restated. Under this application, we are required to record compensation expense for all awards granted after the date of adoption and for the unvested portion of previously granted awards that remain outstanding at the date of adoption.
Prior to the adoption of SFAS No. 123R, we used the intrinsic value method as prescribed by APB No. 25 and thus recognized no compensation expense for options granted with exercise prices equal to the fair market value of our common stock on the date of grant.
The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model. The risk-free interest rate is based on the U.S. Treasury rate for the expected life at the time of grant. We have limited trading history beginning July 27, 2005; as such our expected volatility is based on the average long-term implied volatilities of peer companies. Also, due to our limited trading history, we are using the â€śsimplified methodâ€ť to calculate expected holding periods as allowed under the provisions of the SECâ€™s Staff Accounting Bulletin No. 107 (â€śSAB 107â€ť), which represents the period of time that options granted are expected to be outstanding. Forfeitures are estimated at 5% based on certain historical data.
Year Ended June 30, 2008 Compared to Year Ended June 30, 2007
Revenues. Revenues decreased 7.5%, or $44.8 million, to $552.0 million for the fiscal year ended June 30, 2008 from $596.8 million for the fiscal year ended June 30, 2007. The decrease was due to a $41.0 million decrease in core powerline revenues and a $3.8 million decrease in storm restoration revenues. Total billable hours decreased 12.9% during fiscal 2008 compared to fiscal 2007. In addition, our average revenue-producing headcount decreased 12.5% during fiscal 2008 from the prior year.
Our core powerline service revenues decreased 7.5% to $502.6 million for fiscal 2008 from $543.6 million for fiscal 2007. Our core powerline revenue per man-hour increased 6.4%, while on the other hand, our core powerline billable man-hours decreased 13.6%. Billable hours decreased primarily due to our terminating certain services during our 2007 fiscal year that did not meet strategic goals, including right-of-way maintenance, and our exiting certain accounts that did not meet long-term profitability goals. These exited accounts represented approximately $23.0 million of revenue for the 2007 fiscal year.
Our storm restoration revenues decreased 7.3% to $49.4 million for fiscal 2008 from $53.2 million for fiscal 2007. Our storm restoration revenues are highly volatile and unpredictable.
Gross Profit. Gross profit decreased $5.7 million to $91.7 million for fiscal 2008 from $97.4 million for fiscal 2007. Gross profit as a percentage of revenues increased to 16.6% from 16.3% during fiscal 2008 primarily due to positive impacts related to customer pricing increases, operational efficiency improvements and the successful elimination of certain lower-margin accounts and services during fiscal 2007, and lower fleet repair parts expenses, partially offset by higher fuel prices, an increase in group insurance costs and cost related to the initial rollout of fire retardant clothing.
General and Administrative Expenses. General and administrative expenses decreased $4.8 million to $41.7 million for fiscal 2008 from $46.5 million for fiscal 2007. This decrease is primarily due to a $4.6 million decrease in legal fees. As a percentage of revenues, general and administrative expenses decreased to 7.6% from 7.8%.
Loss on Sale and Impairment of Property and Equipment . Loss on sale and impairment of property and equipment was $3.1 million for fiscal 2008 compared to $1.0 million for fiscal 2007. The level of losses is affected by several factors, including the timing of the continued replenishment of aging, damaged or excess fleet equipment and conditions in the market for used equipment. Most of the losses for fiscal 2008 related to certain equipment that we decided to permanently idle in the second fiscal quarter of the year, and for which we initially recorded a $1.9 million impairment charge. We subsequently realized $0.6 million in additional losses when the equipment was sold.
Interest Expense and Other, Net. Interest expense and other, net decreased $5.9 million to $13.7 million for fiscal 2008 from $19.6 million for fiscal 2007. This decrease was primarily due to a reduction in average debt levels and lower interest rates.
Income Tax Expense. Income tax expense increased $1.1 million to $13.0 million for fiscal 2008 from $11.9 million for fiscal 2007 primarily as a result of the increase in income before income taxes. The effective tax rate was 39.1% and 39.4% for fiscal 2008 and 2007, respectively.
Net Income . As a result of the factors discussed above, net income increased $1.8 million to $20.2 million for fiscal 2008 from $18.4 million for fiscal 2007.
Year Ended June 30, 2007 Compared to Year Ended June 30, 2006
Revenues. Revenues decreased 18.0%, or $130.7 million, to $596.8 million for the fiscal year ended June 30, 2007 from $727.5 million for the fiscal year ended June 30, 2006. The decrease was due to a $132.1 million decrease in storm revenues partially offset by a $1.4 million increase in core powerline revenues. We generated substantial revenues from storm restoration services in fiscal 2006 related to major storms impacting the Gulf Coast and Florida. As a result, total billable hours decreased 17.7% during fiscal 2007 compared to fiscal 2006. Our crews worked significant amounts of overtime on storm restoration projects during fiscal 2006. In addition, our average revenue-producing headcount decreased 8.0% during fiscal 2007 from the prior year.
Our core powerline service revenues increased 0.3% to $543.6 million for fiscal 2007 from $542.2 million for fiscal 2006. Our revenue per man-hour increased 3.5%, while on the other hand, our core powerline billable man-hours decreased 3.2%. The slight growth in core powerline revenues is primarily a result of renegotiated customer pricing, partially offset by the reduction in revenue related to exiting right-of-way vegetation maintenance and other non-strategic or non-profitable work during 2007.
Our storm restoration revenues decreased 71.3% to $53.2 million for fiscal 2007 from $185.3 million for fiscal 2006. We generated unusually high revenues from storm restoration services during the prior fiscal year due primarily to Hurricanes Dennis, Katrina, Rita and Wilma that impacted the Gulf Coast and Florida.
Welcome to Pike Electric's conference call to review our 2009 first quarter results. Joining us this morning are Eric Pike, our Chairman, Chief Executive Officer and President, and Anthony Slater, our Chief Financial Officer.
Before I turn the call over to Eric and Anthony, I'll run through the usual housekeeping details. This morning, we'll be talking about our 2009 first quarter financial results published on Form 8-K earlier today, and our outlook for fiscal 2009. After our prepared remarks, we will have time for questions.
Media questions should be directed to 336-719-4492. This conference is being recorded. It will be available for replay this afternoon at the investor relations section of our corporate web site www.pike.com, which will also contain a transcript of the conference call, press releases and other investor related information. You can also register there to receive Pike Electric's financial news alert.
Please be advised that any statements made today may include forward-looking statements within the meaning of the Private Securities and Litigation Reform Act of 1995. Forward-looking statements may include, but are not limited to, projected revenues, earnings per share, tax rate, capital expenditures and other projections of financial and operations results as well as growth, strategies and plans anticipated future projects, expected benefits associated with acquisition and any other statements reflecting Pike's expectations, intentions, assumptions or beliefs about future events or performance or anything that does not fully rely on or relate to historical or current facts.
During this conference call, we may also make references to EBITDA or other non-GAAP financial measures. The reconciliation of non-GAAP measures to applicable GAAP measures can be found on our web site. All statements are based on information available to Pike Electric's management as of this date. These statements are no guarantee of future performance and are subject to risks and uncertainties that could cause actual results to be materially different from those currently anticipated.
Risks are further described in periodic reports filed with the Securities and Exchange Commission, the SEC. Any such forward-looking statements whether written or oral are expressly qualified by these cautionary statements. Except as may be required by applicable law Pike Electric disclaims any intention and assumes no obligation to update or revise forward-looking statements.
This concludes our housekeeping. I'll now turn the call over to Eric Pike, Chairman, Chief Executive Officer and President of Pike Electric who will begin the call with our business update.
Thank you for joining Pike Electric's fiscal 2009 first quarter earnings call. Today, I will discuss the state of Pike Electric and our evolution into an energy solutions company. I will provide a general overview of the period with perspectives and insights on the current market conditions affecting the company.
My comments will be followed by those of Anthony Slater, our CFO who will provide a review of the first quarter financial results and our outlook for 2009. Then, following our prepared remarks, we'll open the call for your questions.
Much of the success this quarter was attributable to our line crew's fine performance restoring power outages after hurricanes Gustaf and Ike. Storm revenues following hurricanes Gustaf and Ike were up significantly to $78 million in the first quarter of 2008, compared to $5 million in the prior year.
Our storm restoration capabilities are a testament to the dedication of our field work force and the knowledge and experience of our leadership team. When we deal with the aftermath of a storm, as when we perform our core business, it's our ability to execute that sets us apart. Our crews' efficient response this past quarter showed that once again we're able to quickly mobilize across our system, get the job done and return to our core business.
On a personal level, I want to tell you that I'm extremely proud of what our linemen accomplished after the hurricanes. When a storm takes down power lines, Pike Electric typically gets there first and stays the longest. This kind of service is vital for the public. It's necessary for our customers and it's profitable for our company, and our customers were pleased that Pike Electric was there for them. While we do not rely on the earnings that storm restorations bring, it is one of our core competencies and a service that our customers rely on.
In terms of our core business, we do have a lot of exciting opportunities to discuss and some challenges. As to the opportunities, we remain focused on expansion with our successful acquisition and integration of EDS. Now that the integration is complete, we've expanded our foot print across the country. We've also expanded our capabilities as an energy solutions company with turn key services for our customers.
In addition to the core construction business that's been our service platform for 63 years, we now provide customer solutions in the engineering, sub station and renewable energy sectors. We are continuing to grow and diversify our business in areas where we can offer field expertise. We have a rich history of delivering dependable service, and as an energy solutions company we believe we offer a lot more across the spectrum of our customers' electrical energy supply chain needs through the addition of engineering services, sub station, renewables and EPC work.
Now for the challenges; as we see it, every market and virtually every industry has challenges in the present economy. Credit market concerns and uncertainty in the U.S. economy translate to the potential for a down turn in utility maintenance and capital projects, and that could impact our business.
However, Pike has always taken a long term approach to our business, and we feel that fundamentally, we're well positioned with growth opportunities even in a challenging economy. The services we offer are important. We will continue to design, construct, maintain, connect and restore the power lines and sub stations vital to our nation's infrastructure, and we'll do it well.
We have continued to demonstrate good financial discipline and to that end we remain focused on paying down debt and controlling expenses. We will also continue reviewing potential acquisition candidates that would further enhance our service offerings. This leads me to be more convinced than ever that we continue on the right track.
With that, I'll turn the call over to Anthony for our financial review.
I'm going to walk through the income statement for our fiscal 2009 first quarter, balance sheet and cash flows and provide our outlook for the remainder of fiscal 2009.
Total revenues for the fiscal first quarter ending September 30, 2008 increased 33% to $186 million from $140 million in the comparable period last year. Our revenue increase was driven by storm restoration revenues and the September 1 acquisition of EDS.
Storm revenues totaled $78 million in the first quarter of fiscal 2009 compared to $5 million in the comparable quarter last year. A large amount of storm work in the quarter diverted a significant number of our crews from core work. As a result, core revenues decreased by 20% to $108 million.
Gross profit for the first quarter of fiscal 2009 was $45 million compared to $23 million in the first quarter of fiscal 2008. Gross profit was 24.2% of revenues compared to 16.7% in the prior year. The year over year increase was due to a significant increase in higher margin storm restoration revenues in the quarter which accounted for 42% of the quarter's total revenues compared to 4% in the prior year.
Fuel costs increased to 6.2% of total revenues in the first quarter compared to 5.4% in the same period of the prior year.
General and Administrative expenses increased approximately $3 million year over year to $13 million in the first quarter of fiscal 2009 but decreased 20 basis points to 7.2% of total revenues.
Interest expense for the fiscal first quarter of 2009 decreased 51% to $2 million compared to the first quarter last year, due to significant debt reductions. Our effective tax rate was 37.6% in the quarter.
Net income for the fiscal first quarter of 2009 was $18.3 million or $0.54 per diluted share compared to $5.3 million or $0.16 per diluted share last year.
EBITDA was $41 million for the first quarter 2009, versus $22.5 million for the same period last year. Depreciation and amortization for the first quarter totaled $9.4 million versus $9.6 million last year. A reconciliation of net income to EBITDA is posted on our website under the investor relations section.
Turning to our cash flow and balance sheet; net cash used in operations totaled $577,000 for the quarter. Major storm restoration efforts caused a short term working capital drain. We have the cost of mobilizing staff, and the cost of significant overtime pay for our crews. Our storm restoration is billed on a time and materials basis, but most storm invoicing will go through a customer audit review before payments are made due to the nature and magnitude of such invoices.
Our receivables billed and unbilled will increase dramatically during a storm event. This short term increase in receivables will negatively impact our cash flow from operation totals during a storm period. Our total receivables increased by $67 million since our fiscal year end primarily due to storm activity as well as the EDS acquisition.
Our cash position was $1.1 million at the end of the first quarter of 2009, and total long term debt was $140.5 million. In addition, our revolver balance totaled $17.4 million at September 30, 2008 due to the working capital needs related to the storm events as discussed.
Based on the trailing 12 month EBITDA, our long term debt to EBITDA ratio is approximately 1.4 times. Our long term debt is due in 2012.
As of September 30, 2008 our borrowing availability under our $90 million revolving portion of our credit facility was $49 million after giving effect, the current borrowings and outstanding letters of credit.
To date, all of our banks have participated in our revolver draws and based on our review, we believe the participating banks will continue to be active partners in the revolver. Our revolver matures on July 1, 2010.
And now, let me provide some additional color on the recent acquisition of EDS. We acquired this business for approximately $24 million in cash subject to a working capital adjustment. We acquired approximately $22 million of net assets in the EDS transaction. We did assume operating leases for the majority of the EDS fleet that will have annual payments of approximately $7 million. The entire purchase price was paid with available cash on hand as of September 1, 2008.
Only September's results for EDS are included in our first quarter results. We have already completed the integration of EDS and incurred minimal integration costs. The EDS, T&D crews assisted in our storm restoration efforts in September and operating results while only visible for 30 days, appear to be on track with our targets.
Let me provide some context about our guidance. While our guidance reflects the benefits from our increased service capabilities, and anticipates the potential for declining diesel prices, we also face continued uncertainties including the economic environment, tight credit and weak housing markets.
We are still in the early bidding stages for projects that combine the Pike and EDS skill sets. Therefore, we still feel that it's prudent at this time to refrain from assuming any incremental revenues or profit contributions from large scale contracts.
Regarding diesel prices, the market remains quite volatile. Following the surge in diesel prices which reached as high as $4.70 per gallon in July, there has been a decline in pricing to about $4.00 per gallon toward the end of the September quarter, and it has continued to decline through the first half of our second quarter.
We have assumed storm revenues of approximately $35 million to $40 million for the remainder of the year. We originally had an assumption of $50 million of storm revenues in our annual guidance, but clearly we exceeded that during our first quarter. As always, storm revenues remain unpredictable.
I'd also like to point out a couple of other things. While we don't give quarterly guidance, there are some aspects about our second quarter that are different from other quarters. First, I want to remind you that our second quarter has far more holidays, double the amount in any other quarter. Again, double the amount of holidays than any other quarter.
In addition, more people typically take vacations in our second quarter and there's also a higher probability of inclement weather like rain which is not positive to the business. That's just something to be aware of.
It's also the last quarter for most of our utility customers' fiscal years. Historically, we have seen those customers adjust spending as they approach their year end based on how they're performing against their targets. With that said, here's where we're at with guidance.
In terms of outlook, we're increasing our fiscal 2009 guidance based on the storm and first quarter. We expect total revenues to range from $650 million to $680 million for our fiscal 2009 compared to our prior range of $620 million to $650 million for fiscal 2009.
We expect earnings per diluted share to be in the range of $0.85 to $0.95 compared to our prior range of $0.55 to $0.65.
That concludes my remarks. Now, I'll turn the call back over to Eric.
In closing, we had a solid start to fiscal 2009. I'd like to thank all our Pike employees for their hard work and dedication, especially during the demanding storm restorations. In the near term, we anticipate continued economic challenges as tight credit markets impact our customers. However, I'm confident that we're well positioned to emerge an even stronger company when their spending picks up.
Before the EDS acquisition, we were one of the largest, best equipped power line construction contractors in the United States. Now, Pike Electric is one of the nation's largest providers of energy solutions including power line construction, engineering, sub stations, EPC and renewable energy work.
These capabilities, together with our deep customer relationships, operating discipline and strong balance sheet position us to continue to drive growth over the long term.
With that, we'll now open the call for your questions.