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PIKE ELECTRIC CORP - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our historical consolidated financial statements and related notes thereto in "Item 8. Financial Statements and Supplementary Data." The discussion below contains forward-looking statements that are based upon our current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from these expectations due to inaccurate assumptions and known or unknown risks and uncertainties, including those identified in "Item 1A. Risk Factors." Overview Pike Electric Corporation, headquartered in Mount Airy, North Carolina, is one of the largest providers of energy solutions for investor-owned, municipal and co-operative electric utilities in the United States. Since our founding in 1945, we have evolved from our roots as a specialty non-unionized contractor for electric utilities focused on the distribution sector in the southeastern United States to a national, leading turnkey energy solutions provider with diverse capabilities servicing over 300 customers. Leveraging our core competencies as a company primarily focused on providing a broad range of electric infrastructure services principally for utilities customers, we believe that our experienced management team has positioned us to benefit from the substantial long-term growth drivers in our industry. Services Over the past five years, we have reshaped our business platform and service territory significantly from being a distribution construction company based primarily in the southeastern United States to a national energy and telecommunications solutions provider. We have done this organically and through strategic acquisitions of companies with complementary service offerings and geographic footprints. Our comprehensive suite of energy and communication solutions includes facilities planning and siting, permitting, engineering, design, installation, maintenance and repair of power delivery systems, including utility-grade solar construction projects and storm-related services. Our planning and siting process leverages technology and the collection of environmental, regulatory, economic, cultural, land use and scientific data to facilitate successful right-of-way negotiations, licensing and permitting for powerlines, substations and electrical generation facilities. Our engineering and design capabilities include designing, providing EPC services, owner engineering, project management, material procurement, multi-entity coordination, grid integration, BOP, training, consulting, DOT projects, and Thermal Rate solutions for individual or turnkey powerline, substation and renewable energy projects. We also provide engineering and design services for the communication industry for wireline and wireless communication infrastructure. Our construction and maintenance capabilities include substation, distribution networks (underground and overhead) and transmission lines with voltages up to 345 kV. We are also a recognized leader in storm-related services due to our ability to rapidly mobilize thousands of existing employees and equipment within 24 hours, while maintaining a functional workforce for unaffected customers. 23-------------------------------------------------------------------------------- Table of Contents Service Revenue Category Description Planning & All Other Our planning and siting process leverages Siting Operations technology and the collection of environmental, regulatory, economic, cultural, land use and scientific data to facilitate successful right-of-way negotiations, licensing and permitting for powerlines, substations and traditional and renewable electrical generation facilities. We also provide NERC reliability studies and renewable generation interconnection studies. Engineering & All Other We provide design, EPC, owner engineer, project Design Operations management, material procurement, multi-entity coordination, grid integration, BOP, training, consulting, DOT projects, and Thermal Rate solutions for individual or turnkey powerline, substation and renewable energy projects. We also provide engineering and design services for the communication industry for wireline and wireless communication infrastructure. Transmission Distribution and We provide overhead and underground powerline and Transmission construction, upgrade, inspection, and extension Distribution services (predominately single-pole and H-frame Construction wood, concrete or steel poles) for distribution networks and transmission lines with voltages up to 345 kV, and energized maintenance work for voltages up to 500 kV. Overhead services consist of construction, repair and maintenance of wire and components in energized overhead electric distribution and transmission systems. Underground services range from simple residential installations, directional boring, concrete encased duct and manhole installation, to the construction of complete underground distribution facilities. Substation Substation We provide substation construction and service for Construction voltages up to 500 kV. Substation services include: construction of new substations, existing substation upgrades, relay testing, transformer maintenance and hauling, foundations, commissioning, emergency outage response and Smart Grid component installation. We also specialize in relay metering and control solutions. Utility-Grade Distribution and We provide complete direct-hire construction Solar Other services of utility-scale PV solar generation Construction facilities including all scopes necessary to deliver power to the grid. We also provide full EPC installations of high voltage (230kV) underground gathering systems in conjunction with CSP facilities - "power towers" and full EPC installations for transmission lines and substations up to 500kV required for the interconnection of solar or wind generators to existing utility and transmission resources. Storm Storm-Related Storm assessment, inspection and restoration Assessment, Services services involve the assessment and repair or Inspection reconstruction of any part of a distribution or and sub-500 kV transmission network, including Restoration substations, powerlines, utility poles or other Services components, damaged during snow, ice or wind storms, flash floods, hurricanes, tornadoes or other natural disasters. We are a recognized leader in storm-related services, due to our ability to rapidly mobilize thousands of existing employees and equipment within 24 hours, while maintaining a functional force for unaffected customers. 24 -------------------------------------------------------------------------------- Table of Contents While storm-related 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 9.3% to 24.9% of total revenues. During periods with significant storm restoration work, we generally see man-hours diverted from core work, which decreases core revenues. The table below sets forth our revenues by category of service for the periods indicated: Percentage Percentage Core of Total Storm-Related of Total Total Fiscal Year Revenues Revenues Revenues Revenues Revenues (in millions) (in millions) (in millions) 2009 $ 460.6 75.1 % $ 152.9 24.9 % $ 613.5 2010 $ 457.5 90.7 % $ 46.6 9.3 % $ 504.1 2011 $ 529.3 89.1 % $ 64.5 10.9 % $ 593.8 2012 $ 614.6 89.7 % $ 70.6 10.3 % $ 685.2 2013 $ 751.4 81.8 % $ 167.3 18.2 % $ 918.7 Seasonality and Fluctuations of Results Our services are performed outdoors and, as a result, our results of operations can be subject to seasonal variations due to weather conditions. These seasonal variations affect both our construction and engineering storm-related services. Extended periods of rain can negatively affect the deployment of our construction crews, particularly with respect to underground work. During the winter months, demand for construction work is generally lower due to inclement weather. Demand for construction work generally increases during the spring and summer months due to improved weather conditions. Due to the unpredictable nature of storms, the level of our storm-related revenues fluctuates from period to period. Inflation Due to relatively low levels of inflation experienced in recent years, inflation has not had a significant effect on our results. However, we have experienced fuel cost volatility during recent fiscal years. Basis of Reporting Revenues. We derive our revenues from two reportable segments, Construction and All Other Operations, through two service categories - core services and storm-related services. Our core services include facilities planning and siting, permitting, engineering, design, installation, maintenance and repair of power delivery systems, including utility-grade solar construction. Our storm-related services involve the rapid deployment of our highly-trained crews and related equipment to restore power on transmission and distribution systems during crisis situations, such as hurricanes, tropical storms, ice storms or wind storms. Cost of Operations. Our cost of operations consists primarily of compensation and benefits to employees, insurance, fuel, specialty equipment rental, operating and maintenance expenses relating to vehicles and equipment, materials and tools and supplies. Our cost of operations also includes depreciation, primarily relating to our vehicles and heavy equipment. General and Administrative Expenses. General and administrative expenses include costs not directly associated with performing work for our customers. These costs consist primarily of compensation and related benefits of management and administrative personnel, facilities expenses, professional fees and administrative overhead. Interest Expense. In addition to cash interest expense, interest expense includes amortization of deferred loan costs, deferred compensation accretion and the write-off of unamortized deferred loan costs resulting from prepayments of debt. Critical Accounting Policies The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires management to make certain estimates and assumptions for financial information that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, we evaluate these estimates and assumptions, including those related to revenue recognition for work in progress, allowance for doubtful accounts, self-insured claims liability, valuation of goodwill and other intangible assets, asset lives and salvage values used in computing depreciation and amortization, including amortization of intangibles, accounting for income taxes, contingencies, litigation and stock- 25 -------------------------------------------------------------------------------- Table of Contents based compensation. Application of these estimates and assumptions requires the exercise of judgment as to future uncertainties and, as a result, actual results could differ from these estimates. We believe the following to be our most important accounting policies, including those that use significant judgments and estimates in the preparation of our consolidated financial statements. Revenue Recognition. Revenues from service arrangements are recognized when services are performed. We recognize revenue from hourly services based on actual labor and equipment time completed and on materials when billable to our customers. We recognize revenue on unit-based services as the units are completed. We recognize the full amount of any estimated loss on site-specific unit projects if estimated costs to complete the remaining units for the project exceed the revenue to be received from such units. Revenues for fixed-price contracts are recognized using the percentage-of-completion method, measured by the percentage of costs incurred to date to total estimated costs for each contract. Contract costs include all direct material, labor and subcontract costs, as well as indirect costs related to contract performance, such as indirect labor, tools, repairs and depreciation. The cost estimation process is based on the professional knowledge and experience of our engineers, project managers, field construction supervisors, operations management and financial professionals. Changes in job performance, job conditions, estimated profitability and final contract settlements may result in revisions to costs and income and their effects are recognized in the period in which the revisions are determined. At the time a loss on a contract becomes known, the entire amount of the estimated ultimate loss is accrued. The current asset "Costs and estimated earnings in excess of billings on uncompleted contracts" represents revenues recognized in excess of amounts billed. The current liability "Billings in excess of costs and estimated earnings on uncompleted contracts" represents billings in excess of revenues recognized. Allowance for Doubtful Accounts. We provide an allowance for doubtful accounts that represents an estimate of uncollectible accounts receivable. The determination of the allowance includes certain judgments and estimates including our customers' willingness or ability to pay and our ongoing relationship with the customer. In certain instances, primarily relating to storm-related work and other high-volume billing situations, billed amounts may differ from ultimately collected amounts. We incorporate our historical experience with our customers into the estimation of the allowance for doubtful accounts. These amounts are continuously monitored as additional information is obtained. Accounts receivable are primarily due from customers located within the United States. Any material change in our customers' business or cash flows would affect our ability to collect amounts due. Property and Equipment. We capitalize property and equipment as permitted or required by applicable accounting standards, including replacements and improvements when costs incurred for those purposes extend the useful life of the asset. We charge maintenance and repairs to expense as incurred. Depreciation on capital assets is computed using the straight-line method based on the useful lives of the assets, which range from three to 39 years. Our management makes assumptions regarding future conditions in determining estimated useful lives and potential salvage values based on dealer black book valuations. 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 property and equipment for impairment when events or changes in business conditions indicate the carrying value of the assets may not be recoverable, as required by U.S. GAAP. An impairment of assets classified as "held and used" exists if the sum of the undiscounted estimated future cash flows expected is less than the carrying value of the assets. If this measurement indicates a possible impairment, we compare the estimated fair value of the asset to the net book value to measure the impairment charge, if any. If the criteria for classifying an asset as "held for sale" have been met, we record the asset at the lower of carrying value or fair value, less estimated selling costs. We continually evaluate the depreciable lives and salvage values of our equipment. Valuation of Goodwill and Other Intangible Assets. We test our goodwill for impairment annually or more frequently if events or circumstances indicate impairment may exist. Examples of such events or circumstances could include a significant change in business climate or a loss of significant customers. We complete our annual analysis of our reporting units as of the first day of our fourth fiscal quarter. For purposes of our fiscal 2013 analysis, we had five reporting units: non-union construction, union construction, Pike Energy Solutions - energy engineering, UCS - energy engineering, and UCS - telecom engineering . In evaluating reporting units, we first consider our operating segments and related components in accordance with U.S. GAAP. We allocate goodwill to the reporting units that are expected to benefit from the synergies of the business combinations generating the goodwill. We apply a two-step fair value-based test to assess goodwill for impairment. The first step compares the fair values of the reporting units to their carrying amounts, including goodwill. If the carrying amount of any reporting unit exceeds its fair value, the second step is then performed. The second step compares the carrying amount of the reporting unit's goodwill to the implied fair value of the goodwill. If the implied fair value of the goodwill is less than the carrying amount, an impairment loss would be recorded. 26-------------------------------------------------------------------------------- Table of Contents We determine the fair value of our reporting units based on a combination of the income approach, using a discounted cash flow model, and a market approach, which considers comparable companies and transactions. Under the income approach, the discounted cash flow model determines fair value based on the present value of projected cash flows over a specific projection period and a residual value related to future cash flows beyond the projection period. Both values are discounted using a rate which reflects our best estimate of the weighted-average cost of capital of a market participant, and is adjusted for appropriate risk factors. We perform sensitivity tests with respect to growth rates and discount rates used in the income approach. Under the market approach, valuation multiples are derived based on a selection of comparable companies and acquisition transactions, and applied to projected operating data for each reporting unit to arrive at an indication of fair value. For our annual impairment analysis, we weighted the income and market approaches 70% and 30%, respectively. The income approach was given a higher weight because it has a more direct correlation to the specific economics of the reporting units than the market approach which is based on multiples of companies that, although comparable, may not have the exact same risk factors as our reporting units. The analysis indicated that, as of the first day of our fourth fiscal quarter, the fair values of each of our reporting units exceeded their respective carrying values in excess of 10%. For our analysis, we also considered various elements of an implied control premium in assessing the reasonableness of the reconciliation of the summation of the fair values of the invested capital of our five reporting units (with appropriate consideration of the interest bearing debt) to the Company's overall market capitalization and our net book value. This analysis included (i) the current control premium being paid for companies with a similar market capitalization and within similar industries and (ii) certain synergies that a market participant buyer could realize, such as the elimination of potentially redundant costs. Based on these analyses, management determined that a control premium in the annual impairment analysis was not necessary. Based on these analyses, we concluded that goodwill was not impaired. In addition to goodwill, we identify and value other intangible assets that we acquire in business combinations, such as customer arrangements, customer relationships, intellectual property and non-compete agreements, that arise from contractual or other legal rights or that are capable of being separated or divided from the acquired entity and sold, transferred, licensed, rented or exchanged. The fair value of identified intangible assets is based upon an estimate of the future economic benefits expected to result from ownership, which represents the amount at which the assets could be bought or sold in a current transaction between willing parties, that is, other than in a forced or liquidation sale. For customers with whom we have an existing relationship prior to the date of the transaction, we utilize assumptions that a marketplace participant would consider in estimating the fair value of customer relationships that an acquired entity had with our pre-existing customers in accordance with U.S. GAAP. The inputs into goodwill and intangible asset fair value calculations reflect our market assumptions and are not observable. Consequently, the inputs are considered to be Level 3 as specified in the fair value accounting guidance. Intangible assets with definite lives are amortized over their estimated useful lives and are also reviewed for impairment if events or changes in circumstances indicate that their carrying amount may not be realizable. We have no intangibles with indefinite lives other than goodwill. Inherent in valuation determinations related to goodwill and other intangible assets are significant judgments and estimates, including assumptions about our future revenue, profitability and cash flows, our operational plans, current economic indicators and market valuations. To the extent these assumptions are incorrect or there are declines in our business outlook, impairment charges may be recorded in future periods. Insurance and Claims Accruals. In the ordinary course of our business, we are subject to individual workers' compensation, vehicle, general liability and health insurance claims for which we are partially self-insured. We maintain commercial insurance for individual workers' compensation and vehicle and general liability claims exceeding $1.0 million. We also maintain commercial insurance for health insurance claims exceeding $500,000 per person on an annual basis. We determine the amount of our loss reserves and loss adjustment expenses for self-insured claims based on analyses prepared quarterly that use both company-specific and industry data, as well as general economic information. Our estimates for insurance loss exposures require us to monitor and evaluate our insurance claims throughout their life cycles. Using this data and our assumptions about the emerging trends, we estimate the size of ultimate claims. Our most significant assumptions in forming our estimates include the trend in loss costs; the expected consistency with prior year claims of the frequency and severity of claims incurred but not yet reported, changes in the timing of the reporting of losses from the loss date to the notification date, and expected costs to settle unpaid claims. We also monitor the reasonableness of the judgments made in the prior year's estimates and adjust current year assumptions based on that analysis. While the final outcome of claims may vary from estimates due to the type and severity of the injury, costs of medical claims and uncertainties surrounding the litigation process, we believe that none of these items, when finally resolved, will have a material adverse effect on our financial condition or liquidity. However, should a number of these items occur in the same period, it could have a material adverse effect on the results of operations in a particular quarter or fiscal year. 27-------------------------------------------------------------------------------- Table of Contents Stock-Based Compensation. In accordance with U.S. GAAP, we recognize the cost of employee services received in exchange for an award of equity instruments in the financial statements over the period the employee is required to perform the services in exchange for the award (presumptively the vesting period). We measure the cost of employee services received in exchange for an award based on the grant-date fair value of the award. The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model. The risk-free interest rate is based on the U.S. Treasury rate for the expected term of the option at the time of grant. As of July 1, 2010, we began to use our historical volatility as a basis for our expected volatility. Prior to that, we had limited trading history beginning July 27, 2005 and had based our expected volatility on the average long-term historical volatilities of peer companies. We are using the "simplified method" to calculate the expected terms of the options as allowed under U.S. GAAP, which represents the period of time that options granted are expected to be outstanding. Forfeitures are estimated based on certain historical data. We will continue to use this method until we have sufficient historical exercise experience to give us confidence that our calculations based on such experience will be reliable. It is our current intent not to issue dividends and none are contemplated when estimating fair value for our option awards. Results of Operations The following table sets forth selected statement of operations data as percentages of revenues for the periods indicated (dollars in millions): Year Ended June 30, 2013 2012 2011 Revenues: Core revenues $ 751.4 81.8 % $ 614.6 89.7 % $ 529.3 89.1 % Storm-related revenues 167.3 18.2 % 70.6 10.3 % 64.5 10.9 % Total revenues 918.7 100.0 % 685.2 100.0 % 593.8 100.0 % Cost of operations 771.5 84.0 % 593.5 86.6 % 525.9 88.6 % Gross profit 147.2 16.0 % 91.7 13.4 % 67.9 11.4 % General and administrative expenses 75.6 8.2 % 66.2 9.7 % 57.6 9.7 % Secondary offering and other related costs 4.1 0.5 % - - - - (Gain) loss on sale and impairment of property and equipment (0.6 ) -0.1 % (0.6 ) -0.1 % 0.8 0.1 % Income from operations 68.1 7.4 % 26.1 3.8 % 9.5 1.6 % Interest expense and other, net 7.3 0.8 % 7.2 1.0 % 6.6 1.1 % Income before income tax 60.8 6.6 % 18.9 2.8 % 2.9 0.5 % Income tax expense 24.6 2.7 % 8.0 1.2 % 1.5 0.3 % Net income $ 36.2 3.9 % $ 10.9 1.6 % $ 1.4 0.2 % Year Ended June 30, 2013 Compared to Year Ended June 30, 2012 Revenues. Revenues increased 34%, or $233.5 million, to $918.7 million for the year ended June 30, 2013 from $685.2 million for the year ended June 30, 2012. The increase was attributable to a $136.8 million increase in core revenues and a $96.7 million increase in storm-related revenues. Our acquisition of UCS on July 2, 2012 accounted for $77.3 million in revenues ($67.9 million core services and $9.4 million storm assessment and inspection services) for the current year. Our storm-related revenues are highly volatile and unpredictable. For the year ended June 30, 2013, storm-related revenues totaled $167.3 million, which was primarily attributable to a large derecho storm in the Northeast, Hurricane Isaac and Hurricane Sandy. For the year ended June 30, 2012, storm-related revenues totaled $70.6 million, which was primarily attributable to Hurricane Irene and a large snow storm that occurred in the Northeast during November 2011. Gross Profit. Gross profit increased 61%, or $55.5 million, to $147.2 million for the year ended June 30, 2013 from $91.7 million for the year ended June 30, 2012. Gross profit as a percentage of revenues increased to 16.0% for the year ended June 30, 2013 from 13.4% for the prior year. Our gross profit was positively impacted by our higher storm-related revenues and improving margins in construction and engineering services and the UCS acquisition. We experienced volatility in our mark-to-market adjustment on our diesel hedging program that caused a $1.3 million decrease in our cost of operations during the year ended June 30, 2013 from a $2.5 million increase for the prior year. As a percentage of revenues, fuel costs decreased to 3.6% for the year ended June 30, 2013 from 4.9% for the prior year. 28-------------------------------------------------------------------------------- Table of Contents General and Administrative Expenses. General and administrative expenses increased 14% to $75.6 million for the year ended June 30, 2013 from $66.2 million for the year ended June 30, 2012. As a percentage of revenues, general and administrative expenses decreased to 8.2% for the year ended June 30, 2013 from 9.7% for the prior year. The increase in general and administrative expenses was primarily due to approximately $3.6 million of overhead costs related to UCS, $3.5 million in compensation, benefits, recruiting and travel to support geographic expansion and revenue growth, $1.2 million for additional incentive expense, and $0.6 million in severance. Costs of Secondary Offering and Concurrent Share Repurchase. In fiscal 2013, we incurred approximately $4.1 million in fees and expenses for a secondary equity offering and concurrent share repurchase, both of which closed on May 21, 2013, and included fees and expenses associated with a special committee of our board of directors. Offering costs totaling approximately $2.5 million are non-deductible for income tax purposes. See Note 7 of the Notes to Consolidated Financial Statements for further details. These costs were not allocated to our Construction or All Other Operations segments for the year ended June 30, 2013. Interest Expense and Other, Net. Interest expense and other, net increased 1% to $7.3 million for the year ended June 30, 2013 from $7.2 million for the year ended June 30, 2012. Fiscal 2012 includes the write-off of approximately $1.7 million of unamortized deferred loan costs as additional interest expense related to our prior credit facility in August 2011. In 2013, our interest expense increased due to additional borrowings for the UCS acquisition and the fourth quarter stock repurchase. See Note 6 of the Notes to Consolidated Financial Statements for further information on our revolving credit facility. Income Tax Expense. Income tax expense was $24.6 million and $8.0 million for the years ended June 30, 2013 and June 30, 2012, respectively. Effective income tax rates of 40.5% and 42.3% for the years ended June 30, 2013 and June 30, 2012, respectively, varied from the statutory federal income tax rate of 35% due to several factors, including state income and gross margin taxes, changes in permanent differences primarily related to non-deductibility of certain secondary offering costs and deductibility of certain costs related to the UCS acquisition, Internal Revenue Code Section 199 deduction for production activities, Internal Revenue Code Section 162(m) deduction limitations for compensation, meals and entertainment, and the relative size of our consolidated income before income taxes. Operating Results by Segment - Year Ended June 30, 2013 Compared to Year Ended June 30, 2012 Year Ended June 30, 2013 2012 Revenues: Construction core services $ 605.6 66.0 % $ 552.0 80.6 % Intersegment eliminations (0.6 ) -0.1 % (8.0 ) -1.2 % Total Construction core services, net 605.0 65.9 % 544.0 79.4 % All Other Operations core services 183.8 20.0 % 78.6 11.5 % Intersegment eliminations (37.4 ) -4.1 % (8.0 ) -1.2 % Total All Other Operations core services, net 146.4 15.9 % 70.6 10.3 % Total core services, net 751.4 81.8 % 614.6 89.7 % Construction storm restoration 157.9 17.2 % 70.6 10.3 % All Other Operations storm assessment and inspection 9.4 1.0 % - - Total storm-related revenue 167.3 18.2 % 70.6 10.3 % Total revenue $ 918.7 100.0 % $ 685.2 100.0 % Operating Income (Loss): Construction $ 69.1 101.5 % $ 25.9 99.3 % All Other Operations 5.1 7.5 % 2.2 8.4 % Total 74.2 109.0 % 28.1 107.7 % Other (6.1 ) -9.0 % (2.0 ) -7.7 % Total Operating Income $ 68.1 100.0 % $ 26.1 100.0 % 29 -------------------------------------------------------------------------------- Table of Contents Construction Year Ended June 30, 2013 2012 % Change Construction revenue $ 763.5 $ 622.7 Intersegment eliminations (0.6 ) (8.1 ) Total revenues, net $ 762.9 $ 614.6 24.1 % Segment income from operations $ 69.1 $ 25.9 166.8 % Revenues. Construction revenues increased 24.1%, or $148.3 million, to $762.9 million for the year ended June 30, 2013 from $614.6 million for the year ended June 30, 2012. The following table contains supplemental information on construction revenue and percentage changes by category for the periods indicated: Year Ended June 30, Category of Revenue 2013 2012 % Change Distribution and other $ 449.2 $ 418.8 7.3 % Transmission 101.5 72.5 40.0 % Substation 54.3 52.7 3.0 % Total core revenue $ 605.0 $ 544.0 11.2 % Storm restoration services 157.9 70.6 123.7 % Total $ 762.9 $ 614.6 24.1 % • Distribution and Other Revenues. Our revenues for distribution services and other revenue increased 7.3% from the prior year, due to a general increase in demand for distribution maintenance services for the year ended June 30, 2013. We experienced some additional displacement in distribution revenue during the year ended June 30, 2013 due to the increased diversion of work crews to perform incremental storm services compared to the year ended June 30, 2012. • Transmission Revenues. Transmission revenues increased 40.0% from the prior year period. A significant amount of our transmission projects are fixed price, site specific projects and revenues can vary based on start dates of the projects and mobilization time.Transmission revenues were positively impacted by new projects in California and timing of the SCE&G EPC project which commenced construction in January 2012. • Substation Revenues. Substation revenues increased 3.0% from the prior year. A significant amount of our substation projects are fixed price, site specific projects and revenues can vary based on start dates of the projects and mobilization time. The substation construction market remains very competitive especially in the southeastern United States. Segment Income from Operations. Segment income from operations increased 166.8% to $69.1 million for the year ended June 30, 2013 from $25.9 million for the year ended June 30, 2012. Segment income from operations as a percentage of revenues increased to 9.1% for the year ended June 30, 2013 from 4.2% for the prior year. Our segment income from operations was positively impacted by our higher storm restoration revenues and improving margins in core construction services. We also benefited from a mark-to-market adjustment on our diesel hedging program that provided a $1.3 million decrease in our cost of operations during the year ended June 30, 2013. We were negatively impacted by the mark-to-market adjustment during the year ended June 30, 2012 that caused a $2.5 million increase in our cost of operations for that period. 30-------------------------------------------------------------------------------- Table of Contents All Other Operations Year Ended June 30, 2013 2012 % Change All Other Operations core revenue $ 183.8 $ 78.6 Intersegment eliminations (37.4 ) (8.0 ) Total core revenue, net $ 146.4 $ 70.6 107.4 % Storm assessment and inspection revenue 9.4 - Total revenues, net $ 155.8 $ 70.6 120.7 % Segment income from operations $ 5.1 $ 2.2 131.8 % Revenues. All Other Operations revenues increased 120.7%, or $85.2 million, to $155.8 million for the year ended June 30, 2013 from $70.6 million for the year ended June 30, 2012. The acquisition of UCS on July 2, 2012 contributed $77.3 million of revenue (including $9.4 million in storm assessment and inspection services) during the year ended June 30, 2013. Engineering revenues were also positively impacted by increased activity on the SCE&G EPC project which commenced construction around January 2012. Engineering revenues may fluctuate, especially on a quarterly basis, due to the timing of material procurement revenues. Material procurement services, if they are provided, are typically on our EPC projects that are administered by engineering. As a result, our revenue will fluctuate due to material procurement associated with our EPC projects. Segment Income from Operations. Segment income from operations increased 131.8% to $5.1 million for the year ended June 30, 2013 from $2.2 million for the year ended June 30, 2012. Segment income from operations as a percentage of revenues increased to 3.3% for the year ended June 30, 2013 from 3.1% for the prior year. Our segment income from operations was positively impacted by the acquisition of UCS, which benefits from higher margin engineering services, including storm assessment and inspection services. UCS does not provide material procurement services that lower overall margin percentages. In addition, engineering services were positively impacted by increased activity on the SCE&G EPC project which commenced construction in January 2012. Our segment income from operations was negatively impacted from severance costs totaling $1.1 million and non-productive start-up paid time incurred on a new large telecom project with an existing customer during the year ended June 30, 2013. Other Other represents certain corporate general and administrative costs not allocated to the segments. Other loss from operations increased 205% to $6.1 million for the year ended June 30, 2013 from $2.0 million for the year ended June 30, 2012. The increase in loss from the prior year is primarily attributable to the $4.1 million in fees and expenses in connection with the secondary equity offering and concurrent share repurchase not being allocated to the segments for the year ended June 30, 2013. See Note 7 of the Notes to Consolidated Financial Statements for further details. Year Ended June 30, 2012 Compared to Year Ended June 30, 2011 Revenues. Revenues increased 15%, or $91.4 million, to $685.2 million for the year ended June 30, 2012 from $593.8 million for the year ended June 30, 2011. The increase was attributable to a $6.1 million increase in storm-related revenues and an $85.3 million increase in core revenues. Our core revenues increased 16.1% to $614.6 million for the year ended June 30, 2012 from $529.3 million for the prior year. Our acquisition of Pine Valley on August 1, 2011 provided $18.9 million in core revenues for the year ended June 30, 2012. Our project in Tanzania, which began construction in July 2011, provided $10.1 million in core revenues for the year ended June 30, 2012. Our storm-related revenues are highly volatile and unpredictable. For the year ended June 30, 2012, storm-related revenues totaled $70.6 million compared to $64.5 million for the year ended June 30, 2011. The increase was primarily attributable to more severe damages caused by Hurricane Irene, which occurred along the East coast during August 2011, and a large snow storm that occurred in the Northeast during November 2011. Gross Profit. Gross profit increased 35% to $91.7 million for the year ended June 30, 2012 from $67.9 million for the year ended June 30, 2011. Gross profit as a percentage of revenues increased to 13.4% for the year ended June 30, 2012 from 11.4% for the prior year. Greater volume of core services and the increase in storm-related revenues favorably contributed to our increased gross profit in the current year. The increased gross profit percentage also reflects the positive impact from a decrease of $11.1 million in material procurement service revenues during the year ended June 30, 2012. The gross profit on material procurement services in the current market is generally lower than our other services and currently ranges from 0% to 5% as a percentage of revenues. 31-------------------------------------------------------------------------------- Table of Contents We experienced volatility in our mark-to-market adjustment on our diesel hedging program that caused a $2.5 million increase in our cost of operations during the year ended June 30, 2012. As a percentage of revenues, fuel costs increased to 4.9% for the year ended June 30, 2012 from 4.3% for the prior year. Gross profit for the year ended June 30, 2011 was negatively impacted by a $2.0 million reduction of costs and estimated earnings in excess of billings on uncompleted contracts that related to prior periods (see Note 2 of the Notes to Consolidated Financial Statements). General and Administrative Expenses. General and administrative expenses increased 15% to $66.2 million for the year ended June 30, 2012 from $57.6 million for the year ended June 30, 2011. As a percentage of revenues, general and administrative expenses remained unchanged at 9.7% for the years ended June 30, 2012 and 2011. The increase in general and administrative expenses was primarily due to approximately $2.0 million of overhead costs related to Pine Valley, which was acquired on August 1, 2011, $0.3 million related to the Tanzania project, which began construction in July 2011, $1.5 million in compensation, benefits, recruiting and travel to support geographic expansion and revenue growth, $0.6 million in professional fees related to the UCS acquisition process, $1.1 million related to increased professional fees for accounting and project consulting as we continue to integrate acquired companies, including the system conversion for Pine Valley, $0.7 million for intangible asset amortization and IT related system depreciation and $1.0 million for accrued incentive and other bonuses. Interest Expense and Other, Net. Interest expense and other, net increased 9% to $7.2 million for the year ended June 30, 2012 from $6.6 million for the year ended June 30, 2011. This increase was primarily due to the write-off of $1.7 million of unamortized deferred loan costs as additional interest expense related to the prior credit facility. The increase was partially offset by lower deferred loan cost amortization under the existing revolving credit facility. On August 24, 2011, we entered into a $200.0 million revolving credit facility that replaced our prior credit facility. See Note 6 of the Notes to Consolidated Financial Statements for additional details of the existing revolving credit facility. Income Tax Expense. Income tax expense was $8.0 million and $1.5 million for the years ended June 30, 2012 and June 30, 2011, respectively. Effective income tax rates of 42.3% and 52.8% for the years ended June 30, 2012 and June 30, 2011, respectively, varied from the statutory federal income tax rate of 35% due to several factors, including state income and gross margin taxes, changes in permanent differences primarily related to acquisition costs from the UCS acquisition and Internal Revenue Code Section 199 deduction for 2012, Internal Revenue Code Section 162(m) deduction limitations for compensation and meals and entertainment, and the relative size of our consolidated income before income taxes. 32 -------------------------------------------------------------------------------- Table of Contents Operating Results by Segment - Year Ended June 30, 2012 Compared to Year Ended June 30, 2011 Year Ended June 30, 2012 2011 Revenues: Construction core services $ 552.0 80.6 % $ 453.7 76.4 % Intersegment eliminations (8.0 ) -1.2 % - - Total Construction core services, net 544.0 79.4 % 453.7 76.4 % All Other Operations core services 78.6 11.5 % 75.6 12.7 % Intersegment eliminations (8.0 ) -1.2 % - - Total All Other Operations core services, net 70.6 10.3 % 75.6 12.7 % Total core services, net 614.6 89.7 % 529.3 89.1 % Construction storm restoration 70.6 10.3 % 64.5 10.9 % All Other Operations storm assessment and inspection - - - - Total storm-related revenue 70.6 10.3 % 64.5 10.9 % Total revenue $ 685.2 100.0 % $ 593.8 100.0 % Operating Income (Loss): Construction $ 25.9 99.3 % $ 12.3 129.5 % All Other Operations 2.2 8.4 % (2.4 ) -25.3 % Total 28.1 107.7 % 9.9 104.2 % Other (2.0 ) -7.7 % (0.4 ) -4.2 % Total Operating Income $ 26.1 100.0 % $ 9.5 100.0 % Construction Year Ended June 30, 2012 2011 % Change Construction revenue $ 622.7 $ 518.2 Intersegment eliminations (8.1 ) - Total revenues, net $ 614.6 $ 518.2 18.6 % Segment income from operations $ 25.9 $ 12.3 110.6 % Revenues. Construction revenues increased 18.6%, or $96.4 million, to $614.6 million for the year ended June 30, 2012 from $518.2 million for the year ended June 30, 2011. The following table contains supplemental information on core revenue and percentage changes by category for the periods indicated: Year Ended June 30, Category of Revenue 2012 2011 % Change Distribution and other $ 418.8 $ 333.3 25.7 % Transmission 72.5 78.2 -7.3 % Substation 52.7 42.2 24.9 % Total core revenue $ 544.0 $ 453.7 19.9 % Storm restoration services 70.6 64.5 9.5 % Total $ 614.6 $ 518.2 18.6 % • Distribution and Other Revenues. Our combined revenues for overhead and underground distribution services and other revenue increased 25.7% from the prior year, primarily due to a general increase in demand for overhead distribution maintenance, an increase in renewable projects in California, the addition of Pine Valley ($14.4 33 -------------------------------------------------------------------------------- Table of Contents million), and our Tanzania project ($10.1 million). This growth rate was affected by our decision to divert distribution crews to respond to increased storm activity from Hurricane Irene and a large Northeast snow storm that occurred during the year ended June 30, 2012. The majority of our distribution services are provided to investor-owned, municipal and co-operative utilities under MSAs. Services provided under these MSAs include both overhead and underground powerline distribution services. Our underground distribution services continue to be adversely affected by a weak market for new residential housing. Our MSAs do not guarantee a minimum volume of work. The MSAs provide a framework for core and storm restoration pricing and provide an outline of the service territory in which we will work or the percentage of overall outsourced distribution work we willprovide for the customer. Our MSAs also provide a platform for multi-year relationships with our customers. MSAs enable us to easilyincrease or decrease staffing for a customer without exhaustive contract negotiations. • Transmission Revenues. Transmission revenues decreased 7.3% from the prior year. Our transmission project pipeline remains strong but the timing of certain projects negatively impacted the year over year comparison. In addition, we had reductions in material procurement service revenues totaling $2.7 million during the year ended June 30, 2012. We began construction activity on the SCE&G EPC project during 2012 and expect this project will continue through 2018. The addition of Pine Valley contributed $0.3 million in transmission revenues during the year ended June 30, 2012. • Substation Revenues Substation revenues increased 24.9% from the prior year. Our substation services growth has benefited from the addition of Pine Valley ($4.2 million) and the organic growth of Klondyke's business. Segment Income from Operations. Segment income from operations increased 110.6% to $25.9 million for the year ended June 30, 2012 from $12.3 million for the year ended June 30, 2011. Segment income from operations as a percentage of revenues increased to 4.2% for the year ended June 30, 2012 from 2.4% for the prior year. Our segment income from operations was positively impacted by greater volume of core services and the increase in storm restoration revenues favorably contributed to our increased gross profit in the current year. We experienced volatility in our mark-to-market adjustment on our diesel hedging program that caused a $2.5 million increase in our cost of operations during the year ended June 30, 2012. As a percentage of revenues, fuel costs increased to 4.9% for the year ended June 30, 2012 from 4.3% for the prior year. All Other Operations Year Ended June 30, 2012 2011 % Change All Other Operations revenue $ 78.6 $ 75.6 Intersegment eliminations (8.0 ) - Total revenues, net $ 70.6 $ 75.6 -6.6 % Segment income (loss) from operations $ 2.2 $ (2.4 ) 191.7 % Revenues. All Other Operations revenue decreased 6.6%, or $5.0 million, to $70.6 million for the year ended June 30, 2012 from $75.6 million for the year ended June 30, 2011. Engineering revenues were negatively impacted by a decrease in material procurement service revenues which decreased from $50.0 million for the prior year, primarily for the VC Summer nuclear substation project, to $37.5 million for the year ended June 30, 2012. Engineering revenues may fluctuate, especially on a quarterly basis, due to the timing of material procurement revenues. Material procurement services, if they are provided, are typically on our EPC projects that are administered by engineering. As a result, our revenue will fluctuate due to material procurement associated with our EPC projects. Revenues from the year ended June 30, 2011 were negatively impacted by a $2.0 million reduction of costs and estimated earnings in excess of billings on uncompleted contracts that related to prior periods (see Note 2 of the Notes to Consolidated Financial Statements). Segment Income (Loss) from Operations. Segment income (loss) from operations increased 191.7% to $2.2 million for the year ended June 30, 2012 from a $2.4 million loss for the year ended June 30, 2011. Segment income (loss) from operations as a percentage of revenues increased to 3.1% for the year ended June 30, 2012 from (3.2%) for the prior year. Engineering services were positively impacted by increased activity on the SCE&G EPC project which commenced construction in January 2012. Gross profit for the year ended June 30, 2011 was negatively impacted by a $2.0 million reduction of costs and estimated earnings in excess of billings on uncompleted contracts that related to prior periods discussed above under "Revenues" with respect to the year ended June 30, 2011. 34 -------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources Our primary cash needs have been working capital, capital expenditures, payments under our revolving credit facility and acquisitions. In fiscal 2013, our cash needs also included a special dividend and a repurchase of common stock. Our primary source of cash for fiscal 2013 was cash from operations and borrowings under our revolving credit facility. Our primary source of cash for fiscal 2012 and 2011 was cash provided by operations. We need working capital to support seasonal variations in our business, primarily due to the impact of weather conditions on the electric infrastructure and the corresponding spending by our customers on electric service and repairs. The increased service activity during storm-related events temporarily causes an excess of customer billings over customer collections, leading to increased accounts receivable during those periods. In the past, we have utilized borrowings under the revolving portion of our credit facility and cash on hand to satisfy normal cash needs during these periods. On August 24, 2011, we entered into a new $200.0 million revolving credit facility that replaced our prior credit facility. Our revolving credit facility matures in August 2015. We repaid outstanding term loans and borrowings on the revolver of our prior credit facility upon entering into our revolving credit facility. The obligations under our revolving credit facility are unconditionally guaranteed by us and each of our existing and subsequently acquired or organized domestic and first-tier foreign subsidiaries and secured on a first-priority basis by security interests (subject to permitted liens) in substantially all assets owned by us and each of our subsidiaries, subject to limited exceptions. On June 27, 2012, we exercised the accordion feature of the revolving credit facility and entered into a commitment increase agreement with our lenders thereby increasing the lenders' commitments by $75.0 million, from $200.0 million to $275.0 million. As of June 30, 2013, we had $221.0 million in borrowings and our availability under our revolving credit facility was $49.9 million (after giving effect to $4.1 million of outstanding standby letters of credit). This borrowing availability is subject to, and potentially limited by, our compliance with the covenants of our revolving credit facility, which are discussed below. We believe that our cash flows from operations, available cash and cash equivalents, and borrowings available under our revolving credit facility will be adequate to meet our liquidity needs in the ordinary course of business for the foreseeable future. However, our ability to satisfy our obligations or to fund planned capital expenditures will depend on our future performance, which to a certain extent is subject to general economic, financial, competitive, legislative, regulatory and other factors beyond our control. In addition, if we fail to comply with the covenants contained in our revolving credit facility, we may be unable to access our revolving credit facility upon which we depend for letters of credit and other short-term borrowings. This would have a negative impact on our liquidity and require us to obtain alternative short-term financing. Changes in Cash Flows: 2013 Compared to 2012 Year Ended June 30, 2013 2012 (in millions) Net cash provided by operating activities $ 82.8 $ 25.7 Net cash used in investing activities $ (105.9 ) $ (45.5 ) Net cash provided by financing activities $ 24.1 $ 21.1 Net cash provided by operating activities increased to $82.8 million for the fiscal year ended June 30, 2013 from $25.7 million for the fiscal year ended June 30, 2012. The increase in operating cash flows was primarily due to improvement of net income by $25.3 million and our ability to decrease the rate of our working capital growth as the business grew in 2013. We received a refund from the commercial insurance carrier that administers our partially self-insured individual workers' compensation, vehicle and general liability insurance programs for retrospective premium payment adjustments of $5.5 million in December 2012, which is included in net cash provided by operating activities for the year ended June 30, 2013. These refunds are included in changes in insurance and claims accruals. Retrospective adjustments have historically been prepared annually on a "paid-loss" basis by our commercial insurance carrier. The prior year retrospective premium payment adjustment from our commercial insurance carrier resulted in a refund totaling $3.5 million that was received in August 2011. Net cash used in investing activities increased to $105.9 million for the fiscal year ended June 30, 2013 from $45.5 million for the fiscal year June 30, 2012. This increase is primarily due to cash used for the acquisition of UCS in July 2012 totaling $69.7 million (net of cash acquired totaling $0.7 million), and increased capital expenditures. Capital expenditures for both periods consisted primarily of purchases of vehicles and equipment used to service our customers. 35 -------------------------------------------------------------------------------- Table of Contents Net cash provided by financing activities increased to $24.1 million for the fiscal year ended June 30, 2013 compared to $21.1 million for the fiscal year ended June 30, 2012. On August 24, 2011, we entered into a $200.0 million revolving credit facility that replaced our prior credit facility of which $113.0 million was outstanding under our prior credit facility and accrued interest totaling $0.3 million was paid off at that time. Total costs associated with the existing revolving credit facility were approximately $1.8 million which are being capitalized and amortized over the term of the agreement using the effective interest method. On June 27, 2012, we exercised the accordion feature of the revolving credit facility and entered into a commitment increase agreement with our lenders thereby increasing the lenders' commitments by $75.0 million, from $200.0 million to $275.0 million. We borrowed $70.0 million to finance the UCS acquisition during the year ended June 30, 2013. On December 4, 2012, we announced that our board of directors had declared a special cash dividend of $1.00 per share on our common stock totaling $35.2 million. The dividend was payable to stockholders of record as of December 14, 2012 and was paid on December 21, 2012. In May 2013, we repurchased 3,661,327 shares of our common stock at a price of $10.925 per share, or $40 million, from LGB Pike II. We funded the share repurchase with available cash and borrowings under our revolving credit facility, and the shares were repurchased and cancelled on May 21, 2013. See Note 7 of the Notes to Consolidated Financial Statements for further details. Changes in Cash Flows: 2012 Compared to 2011 Year Ended June 30, 2012 2011 (in millions) Net cash provided by operating activities $ 25.7 $ 22.2 Net cash used in investing activities $ (45.5 ) $ (16.5 ) Net cash provided by (used in) financing activities $ 21.1 $ (16.5 ) Net cash provided by operating activities increased to $25.7 million for the fiscal year ended June 30, 2012 from $22.2 million for the fiscal year ended June 30, 2011. We had net income of $10.9 million for the fiscal year ended June 30, 2012 compared to a net income of $1.4 million for the fiscal year ended June 30, 2011 and a decrease of $18.6 million in accounts receivable related to storm work. This was partially offset by upward trends for core accounts receivable and costs and estimated earnings in excess of billings on uncompleted contracts primarily related to started construction and engineering activity on the SCE&G EPC project and system and procedural issues on the side of two of our investor-owned utility customers. We received a refund from the commercial insurance carrier that administers our partially self-insured individual workers' compensation, vehicle and general liability insurance programs for retrospective premium payment adjustments of $3.5 million in August 2011, which is included in net cash provided by operating activities for the fiscal year ended June 30, 2012. The refund is included in changes in insurance and claims accruals. Retrospective adjustments have historically been prepared annually on a "paid-loss" basis by our commercial insurance carrier. The last retrospective premium payment adjustment from our commercial insurance carrier required us to make payments totaling approximately $5.2 million that were paid from February 2011 through May 2011. Net cash used in investing activities increased to $45.5 million for the fiscal year ended June 30, 2012 from $16.5 million for the fiscal year ended June 30, 2011. This increase is primarily due to cash used for the acquisition of Pine Valley in August 2011 totaling $16.8 million (net of cash acquired totaling $0.5 million), and increased capital expenditures. Capital expenditures for both periods consisted primarily of purchases of vehicles and equipment used to service our customers. Net cash provided by financing activities was $21.1 million for the fiscal year ended June 30, 2012 compared to net cash used in financing activities of $16.5 million for the fiscal year ended June 30, 2011. On August 24, 2011, we entered into a $200.0 million revolving credit facility that replaced our prior credit facility of which $113.0 million was outstanding under our prior credit facility and accrued interest totaling $0.3 million was paid off at that time. Total costs associated with the existing revolving credit facility were approximately $1.8 million which are being capitalized and amortized over the term of the agreement using the effective interest method. Prior to the replacement of our prior credit facility, we had borrowed $14.0 million, including $10.0 million used to finance the Pine Valley acquisition during the fiscal year ended June 30, 2012. We also had additional borrowings under our existing revolving credit facility totaling $10.0 million related to the increases in accounts receivable and costs and estimated in excess of billings during fiscal 2012. In addition, we incurred $0.8 million of costs associated with the exercise of the accordion feature of our revolving credit facility on June 27, 2012. These costs are also being capitalized and amortized over the term of the agreement using the effective interest method. 36-------------------------------------------------------------------------------- Table of Contents Capital Expenditures We routinely invest in vehicles, equipment and technology. The timing and volume of such capital expenditures in the future will be affected by the addition of new customers or expansion of existing customer relationships. Capital expenditures were $40.3 million, $33.9 million and $19.1 million for fiscal 2013, 2012 and 2011, respectively. Capital expenditures for all periods consisted primarily of purchases of vehicles and equipment used to service our customers. As of June 30, 2013, we had no material outstanding commitments for capital expenditures. We expect capital expenditures to range from $38.0 million to $43.0 million for the year ending June 30, 2014, which could vary depending on the addition of new customers or increased work on existing customer relationships. We intend to fund those expenditures primarily from operating cash flows and available cash and cash equivalents. EBITDA U.S. GAAP Reconciliation EBITDA is a non-U.S. GAAP financial measure that represents the sum of net income, income tax expense, interest expense, depreciation and amortization. EBITDA is used internally when evaluating our operating performance and management believes that EBITDA allows investors to make a more meaningful comparison between our core business operating results on a consistent basis over different periods of time, as well as with those of other similar companies. Management believes that EBITDA, when viewed with our results under U.S. GAAP and the accompanying reconciliation, provides additional information that is useful for evaluating the operating performance of our business without regard to potential distortions. Additionally, management believes that EBITDA permits investors to gain an understanding of the factors and trends affecting our ongoing cash earnings, from which capital investments are made and debt is serviced. This non-U.S. GAAP measure excludes certain cash expenses that we are obligated to make. In addition, other companies in our industry may calculate this non-U.S. GAAP measure differently than we do or may not calculate it at all, limiting its usefulness as a comparative measure. The table below provides a reconciliation between net income and EBITDA. Year Ended June 30, 2013 2012 (in millions) Net income $ 36.2 $ 10.9 Adjustments: Interest expense 7.4 7.3 Income tax expense 24.6 8.0 Depreciation and amortization 41.4 38.3 EBITDA $ 109.6 $ 64.5 EBITDA increased 70% to $109.6 million for the year ended June 30, 2013 from $64.5 million for the year ended June 30, 2012. The increased EBITDA for the year ended June 30, 2013 was primarily due to a higher level of storm activity compared to the prior year. In addition, we experienced organic revenue growth in all service lines and added UCS in July 2012. Credit Facility On August 24, 2011, we entered into a new $200.0 million revolving credit facility that replaced our prior credit facility. Our revolving credit facility matures in August 2015. On June 27, 2012, we exercised the accordion feature of the revolving credit facility and entered into a commitment increase agreement with our lenders thereby increasing the lenders' commitments by $75.0 million, from $200.0 million to $275.0 million. We repaid outstanding term loans and borrowings on the revolver of our prior credit facility upon entering into our existing revolving credit facility. As of August 24, 2011, we had $115.0 million in borrowings and our availability under our revolving credit facility was $61.9 million (after giving effect to $23.1 million of outstanding standby letters of credit). The obligations under our revolving credit facility are unconditionally guaranteed by us and each of our existing and subsequently acquired or organized domestic and first-tier foreign subsidiaries and secured on a first-priority basis by security interests (subject to permitted liens) in substantially all assets owned by us and each of our subsidiaries, subject to limited exceptions. Our revolving credit facility requires us to maintain: (i) a leverage ratio, which is the ratio of total debt to adjusted EBITDA (as defined in our revolving credit facility; measured on a trailing four-quarter basis), of no more than 3.75 to 1.00 as of the last day of each fiscal quarter, declining to 3.50 on June 30, 2012 and to 3.00 on June 30, 2013 and thereafter, and (ii) a consolidated fixed charge coverage ratio (as defined in our revolving credit facility) of at least 1.25 to 1.00. At June 30, 2013, we were in compliance with such covenants with a leverage ratio and a fixed charge ratio of 1.96 and 2.56, respectively. Our revolving credit facility contains a number of other affirmative and negative covenants, including limitations on dissolutions, sales of assets, investments, indebtedness and liens. 37-------------------------------------------------------------------------------- Table of Contents Contractual Obligations and Other Commitments As of June 30, 2013, our contractual obligations and other commitments were as follows: Payment Obligations by Fiscal Year Ended June 30, Total 2014 2015 2016 2017 2018 Thereafter (in millions) Long-term debt obligations (1) $ 221.0 $ - $ - $ 221.0 $ - $ - $ - Interest payment obligations (2) 14.0 6.5 6.5 1.0 - - - Operating lease obligations 61.7 15.1 12.9 11.6 9.2 7.5 5.4 Purchase obligations (3) 32.6 32.6 - - - - - Deferred compensation (4) 6.6 - - - 2.1 - 4.5 Total $ 335.9 $ 54.2 $ 19.4 $ 233.6 $ 11.3 $ 7.5 $ 9.9 (1) Includes only obligations to pay principal, not interest expense. (2) Represents estimated interest payments to be made on our variable rate debt. All interest payments assume that principal payments are made as originally scheduled. Interest rates utilized to determine interest payments for variable rate debt are based upon our current interest rate and include the impact of our interest rate swaps. For more information, see Note 6 of the Notes to Consolidated Financial Statements. (3) Represents purchase obligations related to materials and subcontractor services for customer contracts. (4) For a description of the deferred compensation obligation, see Note 15 of the Notes to Consolidated Financial Statements. Off-Balance Sheet Arrangements As is common in our industry, we have entered into certain off-balance sheet arrangements in the ordinary course of business that result in risks not directly reflected in our balance sheets. Our significant off-balance sheet transactions include liabilities associated with non-cancelable operating leases, including sale-leaseback arrangements, letter of credit obligations and surety guarantees entered into in the normal course of business. We have not engaged in any off-balance sheet financing arrangements through special purpose entities. Leases In the ordinary course of business, we enter into non-cancelable operating leases for certain of our facility, vehicle and equipment needs. These leases allow us to conserve cash by paying a monthly lease rental fee for use of the related facilities, vehicles and equipment rather than purchasing them. The terms of these agreements vary from lease to lease, including with renewal options and escalation clauses. We may decide to cancel or terminate a lease before the end of its term, in which case we are typically liable to the lessor for the remaining lease payments under the term of the lease. Letters of Credit Certain of our vendors require letters of credit to ensure reimbursement for amounts they are disbursing on our behalf. In addition, from time to time some customers require us to post letters of credit to ensure payment to our subcontractors and vendors under those contracts and to guarantee performance under our contracts. Such letters of credit are generally issued by a bank or similar financial institution. The letter of credit commits the issuer to pay specified amounts to the holder of the letter of credit if the holder claims that we have failed to perform specified actions. If this were to occur, we would be required to reimburse the issuer of the letter of credit. Depending on the circumstances of such a reimbursement, we may also have to record a charge to earnings for the reimbursement. We do not believe that it is likely that any material claims will be made under a letter of credit in the foreseeable future. We use our revolving credit facility to issue letters of credit. As of June 30, 2013, we had $4.1 million of standby letters of credit issued under our revolving credit facility primarily for insurance and bonding purposes. Our ability to obtain letters of credit under the revolving portion of our revolving credit facility is conditioned on our continued compliance with the affirmative and negative covenants of our revolving credit facility. 38-------------------------------------------------------------------------------- Table of Contents Performance Bonds and Parent Guarantees In the ordinary course of business, we are required by certain customers to post surety or performance bonds in connection with services that we provide to them. These bonds provide a guarantee to the customer that we will perform under the terms of a contract and that we will pay subcontractors and vendors. If we fail to perform under a contract or to pay subcontractors and vendors, the customer may demand that the surety make payments or provide services under the bond. We must reimburse the surety for any expenses or outlays it incurs. As of June 30, 2013, we had $98.8 million in surety bonds outstanding. To date, we have not been required to make any reimbursements to our sureties for bond-related costs. We believe that it is unlikely that we will have to fund significant claims under our surety arrangements in the foreseeable future. Pike Electric Corporation, from time to time, guarantees the obligations of its wholly-owned subsidiaries, including obligations under certain contracts with customers. Recent Accounting Pronouncements Presentation of Comprehensive Income In June 2011, the Financial Accounting Standards Board ("FASB") amended its guidance on the presentation of comprehensive income. Under the amended guidance, an entity has the option to present comprehensive income in either one continuous statement or two consecutive financial statements. A single statement must present the components of net income and total net income, the components of other comprehensive income and total other comprehensive income, and a total for comprehensive income. In a two-statement approach, an entity must present the components of net income and total net income in the first statement. That statement must be immediately followed by a financial statement that presents the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. The option under current guidance that permits the presentation of components of other comprehensive income as part of the statement of changes in stockholders' equity has been eliminated. The amendment was effective retrospectively for our interim period ended September 30, 2012. The adoption of this guidance only affected presentation and did not have an impact on our financial position, results of operations or cash flows. In February 2013, the FASB issued final guidance related to the reporting of amounts reclassified out of accumulated other comprehensive income that requires entities to report, either on their income statement or in a footnote to their financial statements, the effects on earnings from items that are reclassified out of accumulated other comprehensive income. The guidance is effective for our fiscal year beginning July 1, 2013 and is to be applied prospectively. The adoption of this guidance, which is related to disclosure only, is not expected to have a material impact on our financial position, results of operations or cash flows. Accounting for Goodwill and Intangible Assets In September 2011, the FASB issued guidance related to testing goodwill for impairment which amends existing guidance by giving an entity the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If this is the case, a more detailed two-step goodwill impairment test will need to be performed which is used to identify potential goodwill impairments and to measure the amount of goodwill impairment losses to be recognized, if any. The amendment will be effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. The amendment was effective prospectively for our interim period ended September 30, 2012. We adopted this guidance in performing our annual goodwill impairment test as of the first day of the fourth quarter this fiscal year. The adoption of this guidance did not have an impact on our financial statements. Disclosures about Offsetting Assets and Liabilities In December 2011, the FASB issued an accounting standards update regarding disclosures about offsetting assets and liabilities, which requires entities to disclose information about offsetting and related arrangements of financial instruments and derivative instruments. The guidance is effective for our fiscal year beginning July 1, 2013 and is to be applied retrospectively. The adoption of this guidance, which is related to disclosure only, is not expected to have a material impact on our financial position, results of operations or cash flows. 39 -------------------------------------------------------------------------------- Table of Contents FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K contains statements that are intended to be "forward-looking statements" under the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are based on current expectations, estimates, forecasts and projections about us and the industry in which we operate and management's beliefs and assumptions. Such statements include, in particular, statements about our plans, strategies and prospects under the headings "Business - Overview," "- Industry Overview," "- Our Growth Strategy," "- Competitive Strengths," "- Competition," "- Customers," "- Employees," "- Equipment," "- Proprietary Rights," "- Government Regulation," "- Environmental Matters," and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Words such as "may," "should," "expect," "anticipate," "intend," "plan," "predict," "potential," "continue," "believe," "seek," "estimate," variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions which are difficult to predict. Such risks include, without limitation, those identified under the heading "Risk Factors." Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. These forward-looking statements include, but are not limited to, statements relating to: • our belief that our experienced management team has positioned us to benefit from the substantial long-term growth drivers in our industry by leveraging our core competencies as a company primarily focused on providing a broad range of electric infrastructure services principally for utilities customers; • our belief that our acquisitions of Klondyke and Pine Valley will allow us to continue to expand our EPC services in the westernUnited States and better compete in markets with unionized workforces; • our belief that there are significant growth opportunities for our business and the services we provide due to the required future investment in transmission and distribution infrastructure, the expanded development of energy sources, the increasedoutsourcing of infrastructure services and the rebound in residentialdevelopment; • our belief that there is significant demand for first or second generation build-out of electricity infrastructure in developing countries; • our belief that certain developing countries suffer from inefficient infrastructure or a lack of infrastructure altogether and that these markets present opportunities for companies, such as ourselves, with scale, sophistication and size to utilize their skills and equipment in productive and profitable projects; • our expectation that we will benefit from the development of new sources of electric power generation; • our belief that a majority of utility infrastructure services are still conducted in-house and that our customers, especially investor-owned electric utilities, will expand outsourcing of utility infrastructure services over time; • our belief that growth in our markets will be driven by bundling services and marketing these offerings to our large andextensive customer base and new customers and that by offering these services on a turnkey basis, we enable our customers to achieve economies and efficiencies over separate unbundled services, which should ultimately lead to an expansion of our market share across our existing customer base and provide us the credibility to secure additional opportunities from new customers; • our belief that the U.S. electric power system and network reliability will require significant future upkeep given the postponement of maintenance spending in recent years due to the difficult economic conditions, that such upkeep will drive demand for ourservices and that our leading position in the markets we service will enable us to capitalize on increases in demand for our services; • our belief that our existing and potential customers desire a deeper range of service offerings on an ever-increasing scale and that our broad platform of service offerings will enable us to acquire additional market share and further penetrate our existing markets; • our belief that our broad platform of service offerings will be attractive to local and regional firms looking to consolidate with a larger company offering a more diversified and complete set of services; • our belief that our reputation and experience combined with our broad platform of service offerings allow us to opportunistically bid on attractive international projects and that there will be large and financially attractive projects to pursue in international markets over the next few years as developing regions install ordevelop their electric infrastructure; 40 -------------------------------------------------------------------------------- Table of Contents • our belief that we have a unique and strong competitive position in the markets in which we operate resulting from a number of factors, including: (i) our position as a leading provider of energy solutions; (ii) our attractive, contiguous presence in key geographic markets; (iii) our long-standing relationships across a high-quality customer base; (iv) our outsourced services-based business model; (v) our position as a recognized leader in storm-related capabilities; and (vi) our experienced operations management team with extensive relationships; • our belief that we are one of only a few companies offering a broad spectrum of energy and communication solutions that our current and prospective customers increasingly demand; • our belief that our customized, well-maintained and extensive fleet and experienced crews provide us with a competitive advantage in our ability to service our customers and respond rapidly to storm-related opportunities; • our belief that our important customer relationships provide us an advantage in competing for their business and developing new client relationships; • our belief that the trend of many of our customers increasing their reliance on outsourcing the maintenance and improvement of their transmission and distribution systems to third-party service providers will continue to be a key growth driver for the leadingparticipants in our industry as electric utilities continue to focus more on power generation; • our belief that our construction and engineering footprint includes the areas of the U.S. power grid that are the most susceptible to damage caused by severe weather, such as tornadoes, tropical storms, hurricanes and ice storms; • our belief that our management team's deep industry knowledge, field experience and relationships extend our operating capabilities, improve the quality of our services, facilitate access to clients and enhance our strong reputation in the industry; • our belief that we have a favorable competitive position in our markets due in large part to our ability to execute withrespect to each of the following factors, which are the principalcompetitive factors in the end markets in which we operate: (i) diversified services, including the ability to offer turnkey EPC project services; (ii) experienced management and employees; (iii) customer relationships and industry reputation; (iv) responsiveness in emergency restoration situations; (v) availability of fleet and specialty equipment; (vi) adequate financial resources and bonding capacity; (vii) geographic breadth and presence in customer markets; (viii) pricing of services, particularly under MSAconstraints; and (ix) safety concerns of our crews, customers and the general public; • our expectation that a substantial portion of our revenues will continue to be derived from a limited group of customers given the composition of the investor-owned, municipal and co-operative electric utilities in our geographic market; • our belief that we have a good relationship with our employees; • our belief that we have an advantage relative to our competitors in our ability to mobilize, outfit and manage the equipment necessary to perform our construction work, given that we own the majority of our fleet; • our belief that the capability of our maintenance team to operate 24 hours a day, both at maintenance centers and in the field, and provide high-quality customer repair work and expedient service in maintaining a fleet poised for mobilization gives us a competitiveadvantage, with stronger local presence, lower fuel costs and more efficient equipment maintenance; • our belief that our trademarks are a valuable part of our business; • our belief that we are in material compliance with applicable regulatory requirements and have all material licensesrequired to conduct our operations; • our expectation that costs to maintain environmental compliance and/or to address environmental issues will not have a material adverse effect on our results of operations, cash flows or financial condition; 41 -------------------------------------------------------------------------------- Table of Contents • our belief that fixed-price contracts will become increasingly prevalent in the powerline industry; • our intention to continue to retain any future earnings in the foreseeable future to finance the growth, development andexpansion of our business and service debt, rather than declaring or paying cash dividends on our common stock; • our belief that our facilities are adequate for our current operations; • our belief that the lawsuits, claims or other legal proceedings that arise in the ordinary course of business will not have,individually or in the aggregate, a material adverse effect on our results of operations, financial position or cash flows; • our belief that variances in the final outcome of self-insured claims from estimates due to the type and severity of the injury, costs of medical claims and uncertainties surrounding the litigation process will not have a material adverse effect on our financial condition or liquidity; • our belief that our cash flows from operations, available cash and cash equivalents, and borrowings available under our revolving credit facility will be adequate to meet our liquidity needs in the ordinary course of business for the foreseeable future; • our expectation that our ability to satisfy our obligations or to fund planned capital expenditures will depend on our futureperformance and our belief that this is subject to a certain extent to general economic, financial, competitive, legislative, regulatory and other factors beyond our control; • the possibility that if we fail to comply with the covenants contained in our revolving credit facility, we may be unable to access our revolving credit facility upon which we depend for letters of credit and other short-term borrowings and that this would have anegative impact on our liquidity and require us to obtain alternative short-term financing; • our expectation that our capital expenditures will range from $38.0 million to $43.0 million for the year ending June 30, 2014, which could vary depending on the addition of new customers or increased work on existing customer relationships, and our intention to fund those expenditures from operating cash flows and available cash and cash equivalents; • our belief that it is unlikely that any material claims will be made under a letter of credit in the foreseeable future; • our belief that it is unlikely that we will have to fund significant claims under our surety arrangements in the foreseeable future; • our expectation that the FASB guidance related to the reporting of amounts reclassified out of accumulated other comprehensive income will not have a material impact on our financial position, results of operations or cash flows; • our expectation that the FASB guidance regarding disclosures about offsetting assets and liabilities will not have a material impact on our financial position, results of operations or cash flows; • our expectation that, if diesel prices rise, our gross profit and operating income could be negatively affected due to additional costs that may not be fully recovered through increases in prices to customers; • our belief that the financial institutions with whom we maintain substantially all of our cash equivalents are high credit quality financial institutions; • our expectation that the net amount of the existing losses in OCI at June 30, 2013 reclassified into net income over the nexttwelve months will be approximately $18,000; and • our belief that any future indemnity claims against us would not have a material adverse effect on our results of operations, financial position or cash flows. 42 -------------------------------------------------------------------------------- Table of Contents Except as required under the federal securities laws and the rules and regulations of the SEC, we do not have any intention or obligation to update publicly any forward-looking statements after we file this Annual Report on Form 10-K, whether as a result of new information, future events or otherwise. |