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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2014

or

 

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number: 001-32582

 

 

 

PIKE CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

North Carolina		20-3112047
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
100 Pike Way, Mount Airy, NC		27030
(Address of principal executive offices)		(Zip Code)

(336) 789-2171

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer		¨		Accelerated filer		x
Non-accelerated filer		¨  (Do not check if a smaller reporting company)		Smaller reporting company		¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of April 30, 2014, there were 31,921,172 shares of the registrant’s common stock, par value $0.001 per share, outstanding.

 

 

 

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PIKE CORPORATION

FORM 10-Q

FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2014

INDEX

 

		PART I. FINANCIAL INFORMATION
Item 1.		Financial Statements (unaudited):
		Condensed consolidated balance sheets			1
		Condensed consolidated statements of income			2
		Condensed consolidated statements of comprehensive income			3
		Condensed consolidated statements of cash flows			4
		Notes to condensed consolidated financial statements			5
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			16
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			27
Item 4.		Controls and Procedures			27
		PART II. OTHER INFORMATION
Item 1.		Legal Proceedings			29
Item 1A.		Risk Factors			29
Item 6.		Exhibits			30
Signatures					31

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PIKE CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

 

		March 31, 2014				June 30, 2013
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	3,770			$	2,578
Accounts receivable, net			112,982				104,585
Costs and estimated earnings in excess of billings on uncompleted contracts			82,107				71,248
Inventories			14,672				14,396
Prepaid expenses and other			12,333				9,914
Deferred income taxes			7,480				8,720
Total current assets			233,344				211,441
Property and equipment, net			182,965				179,928
Goodwill			153,668				153,668
Other intangibles, net			69,309				74,841
Deferred loan costs, net			1,355				1,561
Other assets			2,989				2,335
Total assets		$	643,630			$	623,774
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	30,195			$	33,500
Accrued compensation			25,893				30,468
Billings in excess of costs and estimated earnings on uncompleted contracts			10,627				6,235
Accrued expenses and other			8,358				5,908
Current portion of insurance and claim accruals			4,813				12,121
Total current liabilities			79,886				88,232
Revolving credit facility			237,500				221,000
Insurance and claim accruals, net of current portion			4,663				4,958
Deferred compensation			7,281				6,431
Deferred income taxes			56,902				58,402
Other liabilities			3,603				2,916
Commitments and contingencies
Shareholders’ equity:
Preferred stock, par value $0.001 per share; 100,000 authorized shares; no shares issued and outstanding			—				—
Common stock, par value $0.001 per share; 100,000 authorized shares; 31,921 and 31,719 shares issued and outstanding at March 31, 2014 and June 30, 2013, respectively			6,424				6,424
Additional paid-in capital			179,587				176,988
Accumulated other comprehensive loss, net of taxes			(133	)			(47	)
Retained earnings			67,917				58,470
Total shareholders’ equity			253,795				241,835
Total liabilities and shareholders’ equity		$	643,630			$	623,774

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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PIKE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except per share amounts)

 

		Three Months Ended March 31,								Nine Months Ended March 31,
		2014				2013				2014				2013
Revenues		$	207,583			$	200,222			$	611,749			$	718,503
Cost of operations			181,337				175,177				534,695				597,302
Gross profit			26,246				25,045				77,054				121,201
General and administrative expenses			19,226				18,704				56,454				58,063
Gain on sale of property and equipment			(297	)			(147	)			(698	)			(345	)
Income from operations			7,317				6,488				21,298				63,483
Other expense (income):
Interest expense			2,185				1,679				5,903				5,686
Other, net			(6	)			(5	)			(250	)			(30	)
Total other expense			2,179				1,674				5,653				5,656
Income before income taxes			5,138				4,814				15,645				57,827
Income tax expense			2,310				2,121				6,198				22,250
Net income		$	2,828			$	2,693			$	9,447			$	35,577
Earnings per share:
Basic		$	0.09			$	0.08			$	0.30			$	1.01
Diluted		$	0.09			$	0.08			$	0.29			$	1.01
Weighted average shares used in computing earnings per share:
Basic			31,869				35,219				31,802				35,132
Diluted			32,265				35,663				32,163				35,363
Dividends per share:		$	—			$	—			$	—			$	1.00

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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PIKE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

 

		Three Months Ended March 31,								Nine Months Ended March 31,
		2014				2013				2014				2013
Net income		$	2,828			$	2,693			$	9,447			$	35,577
Other comprehensive income (loss):
Interest rate cash flow hedges:
Change in fair value arising during the period, net of income taxes of ($37), ($21), ($125) and ($110), respectively			(58	)			(33	)			(194	)			(172	)
Less: reclassification adjustments included in net income, net of income taxes of $24, $20, $69 and $31, respectively			38				30				108				48
Total other comprehensive loss			(20	)			(3	)			(86	)			(124	)
Comprehensive income		$	2,808			$	2,690			$	9,361			$	35,453

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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PIKE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

		Nine Months Ended March 31,
		2014				2013
Cash flows from operating activities:
Net income		$	9,447			$	35,577
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			29,865				31,351
Non-cash interest expense			816				747
Deferred income taxes			(118	)			(2,696	)
Gain on sale of property and equipment			(698	)			(345	)
Equity compensation expense			2,811				2,659
Excess tax benefit from stock-based compensation			(123	)			—
Changes in operating assets and liabilities:
Accounts receivable and costs and estimated earnings in excess of billings on uncompleted contracts			(19,256	)			(15,330	)
Inventories, prepaid expenses and other			(3,625	)			1,515
Insurance and claim accruals			(7,603	)			3,411
Accounts payable and other			167				8,965
Net cash provided by operating activities			11,683				65,854
Cash flows from investing activities:
Purchases of property and equipment			(29,548	)			(27,593	)
Business acquisition, net			—				(69,654	)
Proceeds from sale of property and equipment			3,152				2,667
Net cash used in investing activities			(26,396	)			(94,580	)
Cash flows from financing activities:
Borrowings under revolving credit facility			148,000				249,500
Repayments under revolving credit facility			(131,500	)			(181,500	)
Stock option and employee stock purchase activity, net			(299	)			396
Special cash dividend declared and paid			—				(35,164	)
Excess tax benefit from stock-based compensation			123				—
Deferred loan costs			(419	)			(137	)
Net cash provided by financing activities			15,905				33,095
Net increase in cash and cash equivalents			1,192				4,369
Cash and cash equivalents beginning of year			2,578				1,601
Cash and cash equivalents end of period		$	3,770			$	5,970

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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PIKE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three and nine months ended March 31, 2014 and 2013

(Unaudited)

(In thousands, except per share amounts)

 

1.	Basis of Presentation

On November 5, 2013, Pike Electric Corporation changed its state of incorporation from Delaware to North Carolina (the “Reincorporation”). The Reincorporation was effected by merging Pike Electric Corporation, a Delaware corporation, with and into Pike Corporation, a North Carolina corporation and its wholly-owned subsidiary. In connection with the Reincorporation, Pike Electric Corporation changed its name to “Pike Corporation.” The Reincorporation did not result in any change in the business, management, fiscal year, accounting, location of the principal executive offices or other facilities, capitalization, assets or liabilities of Pike Electric Corporation.

The accompanying condensed consolidated financial statements of Pike Corporation and its wholly-owned subsidiaries (the “Company,” “Pike,” “we,” “us” and “our”) are unaudited and have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, the unaudited condensed consolidated financial statements included herein contain all adjustments necessary to present fairly our financial position, results of operations and cash flows for the periods indicated. Such adjustments, other than nonrecurring adjustments that have been separately disclosed, are of a normal, recurring nature. The operating results for interim periods are not necessarily indicative of results to be expected for a full year or future interim periods. The condensed consolidated balance sheet at June 30, 2013 has been derived from our audited financial statements but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. These financial statements should be read in conjunction with our financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2013.

 

2.

Business

We are one of the largest providers of construction and engineering services for investor-owned, municipal and co-operative electric utilities in the United States. Since our founding in 1945, we have evolved from a specialty non-unionized contractor for electric utilities focused on the distribution sector in the southeastern United States to one of the nation’s largest specialty construction and engineering firms servicing over 300 customers. 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 renewables (primarily ground-based), utility-grade solar construction projects and storm-related services. As a result of the acquisition of Synergetic Design Holdings, Inc. and its subsidiary UC Synergetic, Inc. (together “UCS”) expanding the size and scope of our engineering business, we decided in the first quarter of fiscal 2013 to change our reportable segments. As a result of these changes, we operated our business as two reportable segments: Construction and All Other Operations. On January 1, 2014, as part of the integration of our engineering businesses, Synergetic Design Holdings, Inc. merged with and into Pike Enterprises, Inc., a wholly-owned subsidiary of the Company, and UC Synergetic, Inc. merged with and into Pike Energy Solutions, LLC, the surviving entity of which was named UC Synergetic, LLC. In order to properly align our segments with our current financial reporting structure, we changed the name of our All Other Operations segment to Engineering. Prior year segment information has been revised to conform to the current-year presentation. See Note 14 for further information on our segments.

We are pursuing additional international opportunities. We believe that there will be large and financially attractive projects to pursue in international markets over the next few years as developing regions install or develop their electric infrastructure. We believe that our reputation and experience combined with our broad platform of service offerings allow us to opportunistically bid on attractive international projects.

 

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We monitor revenue by two categories of services: core and storm-related. We use this breakdown because core services represent ongoing service revenues, most of which are generated by our customers’ recurring maintenance and planning needs, and storm-related revenues represent additional revenue opportunities that depend on weather conditions.

The table below sets forth our revenues by category of service for the periods indicated:

 

		Three Months Ended March 31,																Nine Months Ended March 31,
		2014								2013								2014								2013
Core services		$	173,863				83.8	%		$	174,756				87.3	%		$	551,826				90.2	%		$	559,836				77.9	%
Storm-related services			33,720				16.2	%			25,466				12.7	%			59,923				9.8	%			158,667				22.1	%
Total		$	207,583				100.0	%		$	200,222				100.0	%		$	611,749				100.0	%		$	718,503				100.0	%

 

3.	Acquisitions

UC Synergetic

On July 2, 2012, we completed the acquisition of UCS, a privately-held company headquartered in Charlotte, North Carolina, for $69,654, net of cash acquired of $666. The funding for the acquisition consisted of cash borrowed from the $75,000 accordion loan feature of our revolving credit facility that was finalized on June 27, 2012. UCS provides engineering and consulting services focusing on (i) energy distribution, transmission and substation infrastructure, including storm assessment and inspection, and (ii) wireline and wireless communications. This acquisition extended our footprint in the Northeast and Midwest and resulted in our being one of the largest utility infrastructure engineering and design firms in the United States.

We completed our analysis of the valuation of the assets acquired and liabilities assumed of UCS during the year ended June 30, 2013. In June 2013, we recorded additional adjustments increasing goodwill and deferred income taken totaling $11 to accurately reflect the amounts recognized as of the acquisition date. The purchase price of $69,654 has been allocated to the assets acquired and liabilities assumed at the effective date of the acquisition based on estimated fair values as summarized in the following table:

 

Current assets		$	13,632
Property and equipment			1,760
Intangible assets			39,800
Goodwill			30,736
Other			100
Total assets acquired			86,028
Current liabilities			(3,009	)
Deferred income taxes			(13,365	)
Total liabilities assumed			(16,374	)
Net assets		$	69,654

The intangible assets recognized are attributable to customer relationships totaling $34,000, non-compete agreements with the seller totaling $1,800 and a trademark totaling $4,000, and are being amortized over twelve, three and twenty years, respectively. The allocation of the purchase price, which primarily used a discounted cash flow approach with respect to identified intangible assets, was based upon Level 3 fair value inputs and a discount rate consistent with the inherent risk of each of the acquired assets. The goodwill recognized is attributable primarily to expected synergies and $5,357 is deductible for tax purposes.

The financial results of the operations of UCS have been included in our consolidated financial statements since the date of its acquisition, July 2, 2012.

 

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4.	Assets Held For Sale

Assets held for sale are recorded at the lower of carrying value or fair value, less selling costs. Fair value for this purpose is generally determined based on prices in the used equipment market. Assets held for sale totaled $261 and $175 at March 31, 2014 and June 30, 2013, respectively, and are included in prepaid expenses and other in the condensed consolidated balance sheets. All of the assets held for sale at March 31, 2014 are expected to be sold in the next 12 months.

 

5.	Derivative Instruments and Hedging Activities

All derivative instruments are recorded on the condensed consolidated balance sheets at their respective fair values. Changes in fair value are recognized either in income (loss) or other comprehensive income (loss) (“OCI”), depending on whether the transaction qualifies for hedge accounting and, if so, the nature of the underlying exposure being hedged and how effective the derivatives are at offsetting price movements in the underlying exposure. The effective portions recorded in OCI are recognized in the condensed consolidated statements of income when the hedged item affects earnings.

We have used certain derivative instruments to manage risk relating to diesel fuel and interest rate exposure. Derivative instruments are not entered into for trading or speculative purposes. We document all relationships between derivative instruments and related items, as well as our risk-management objectives and strategies for undertaking various derivative transactions.

Interest Rate Risk

We are exposed to market risk related to changes in interest rates on borrowings under our revolving credit facility, which bears interest based on LIBOR, plus an applicable margin dependent upon our total leverage ratio. We use derivative financial instruments to manage exposure to fluctuations in interest rates on our revolving credit facility.

Effective January 2013, we entered into an interest rate swap agreement (the “January 2013 Swap”) with a notional amount of $10,000 to help manage a portion of our interest risk related to our floating-rate debt. Under the January 2013 Swap, we pay a fixed rate of 0.42% and receive a rate equivalent to the 30-day LIBOR, adjusted monthly. The January 2013 Swap qualified for hedge accounting and is designated as a cash flow hedge. There was no hedge ineffectiveness for the January 2013 Swap for the three and nine months ended March 31, 2014 and 2013. The swap will expire in June 2015.

Effective December 2012, we entered into two interest rate swap agreements (the “December 2012 Swaps”), with notional amounts of $10,000 and $25,000, respectively, to help manage a portion of our interest risk related to our floating-rate debt. Under the December 2012 Swaps, we pay fixed rates of 0.42% and 0.45%, respectively, and receive a rate equivalent to the 30-day LIBOR, adjusted monthly. The December 2012 Swaps qualified for hedge accounting and are designated as cash flow hedges. There was no hedge ineffectiveness for the December 2012 Swaps for the three and nine months ended March 31, 2014 and 2013. These swaps will expire in June 2015.

Effective September 2012, we entered into two interest rate swap agreements (the “September 2012 Swaps”), each with notional amounts of $25,000, to help manage a portion of our interest risk related to our floating-rate debt. Under the September 2012 Swaps, we pay fixed rates of 0.40% and 0.42%, respectively, and receive a rate equivalent to the 30-day LIBOR, adjusted monthly. The September 2012 Swaps qualified for hedge accounting and are designated as cash flow hedges. There was no hedge ineffectiveness for the September 2012 Swaps for the three and nine months ended March 31, 2014 and 2013. These swaps will expire in February and March 2015, respectively.

The net derivative income (loss) recorded in OCI will be reclassified into earnings over the term of the underlying cash flow hedge. The amount that will be reclassified into earnings will vary depending upon the movement of the underlying interest rates. As interest rates decrease, the charge to earnings will increase. Conversely, as interest rates increase, the charge to earnings will decrease.

 

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Diesel Fuel Risk

We have a large fleet of vehicles and equipment that primarily uses diesel fuel. As a result, we have market risk for changes in diesel fuel prices. If diesel prices rise, our gross profit and operating income could be negatively affected due to additional costs that may not be fully recovered through increases in prices to customers.

We periodically enter into diesel fuel swaps to manage our exposure to diesel price volatility. At March 31, 2014, we had economically hedged approximately 51% of our next 12 months of projected diesel fuel purchases at prices ranging from $3.80 to $3.99 per gallon at a weighted-average price of $3.90 per gallon. We are not currently utilizing hedge accounting for any active diesel fuel derivatives and, accordingly, changes in the fair value of the diesel fuel swaps are recognized in the condensed consolidated statements of income.

Balance Sheet and Statement of Income Information

The fair value of derivatives at March 31, 2014 and June 30, 2013 is summarized below:

 

				Asset Derivatives at March 31, 2014												Liability Derivatives at March 31, 2014
		Balance Sheet Location		Gross Fair Value of Recognized Assets				Gross Fair Value Offset				Net Fair Value				Gross Fair Value of Recognized Liabilities				Gross Fair Value Offset				Net Fair Value
Derivatives designated as hedging instruments:
Interest rate swaps		Accrued expenses and other		$	—			$	—			$	—			$	(219	)		$	—			$	(219	)
Total derivatives designated as hedging instruments				$	—			$	—			$	—			$	(219	)		$	—			$	(219	)
Derivatives not designated as hedging instruments:
Diesel fuel swaps		Accrued expenses and other		$	54			$	(54	)		$	—			$	(88	)		$	54			$	(34	)
Total derivatives not designated as hedging instruments				$	54			$	(54	)		$	—			$	(88	)		$	54			$	(34	)
Total derivatives				$	54			$	(54	)		$	—			$	(307	)		$	54			$	(253	)
				Asset Derivatives at June 30, 2013												Liability Derivatives at June 30, 2013
		Balance Sheet Location		Gross Fair Value of Recognized Assets				Gross Fair Value Offset				Net Fair Value				Gross Fair Value of Recognized Liabilities				Gross Fair Value Offset				Net Fair Value
Derivatives designated as hedging instruments:
Interest rate swaps		Accrued expenses and other		$	—			$	—			$	—			$	(77	)		$	—			$	(77	)
Total derivatives designated as hedging instruments				$	—			$	—			$	—			$	(77	)		$	—			$	(77	)
Derivatives not designated as hedging instruments:
Diesel fuel swaps		Accrued expenses and other		$	22			$	(22	)		$	—			$	(316	)		$	22			$	(294	)
Total derivatives not designated as hedging instruments				$	22			$	(22	)		$	—			$	(316	)		$	22			$	(294	)
Total derivatives				$	22			$	(22	)		$	—			$	(393	)		$	22			$	(371	)

 

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The effects of derivative instruments on the condensed consolidated statements of income for the three and nine months ended March 31, 2014 and 2013 are summarized in the following tables:

Derivatives designated as cash flow hedging instruments:

 

										Location of Loss		Amount of Loss
		Amount of Loss								Reclassified from		Reclassified from
		Recognized in OCI								Accumulated OCI into		Accumulated OCI into
		(Effective Portion)								Earnings		Earnings
Three Months Ended March 31,		2014				2013						2014				2013
Interest rate swaps (1)		$	(20	)		$	(3	)		Interest expense		$	(38	)		$	(30	)
Total		$	(20	)		$	(3	)				$	(38	)		$	(30	)
Nine Months Ended March 31,		2014				2013						2014				2013
Interest rate swaps (1)		$	(86	)		$	(124	)		Interest expense		$	(108	)		$	(48	)
Total		$	(86	)		$	(124	)				$	(108	)		$	(48	)

 

(1)	Net of income tax.

Derivatives not designated as cash flow hedging instruments:

 

		Location of Gain
		(Loss) Recognized				Amount of Gain (Loss)
		in Earnings				Recognized in Earnings
Three Months Ended March 31,						2014				2013
Diesel fuel swaps			Cost of operations			$	(265	)		$	328
Total						$	(265	)		$	328
Nine Months Ended March 31,						2014				2013
Diesel fuel swaps			Cost of operations			$	260			$	1,789
Total						$	260			$	1,789

Accumulated OCI

For the interest rate swaps, the following table summarizes the net derivative losses, net of taxes, deferred into accumulated OCI and reclassified to income for the periods indicated below.

 

		Three Months Ended								Nine Months Ended
		March 31,								March 31,
		2014				2013				2014				2013
Net accumulated derivative loss deferred at beginning of period		$	(113	)		$	(121	)		$	(47	)		$	—
Changes in fair value			(58	)			(33	)			(194	)			(172	)
Reclassification to net income			38				30				108				48
Net accumulated derivative loss deferred at end of period		$	(133	)		$	(124	)		$	(133	)		$	(124	)

 

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The estimated net amount of the existing losses in OCI at March 31, 2014 expected to be reclassified into net income over the next 12 months is approximately $133. This amount was computed using the fair value of the cash flow hedges at March 31, 2014 and will differ from actual reclassifications from OCI to net income during the next 12 months.

 

6.

Debt

On August 24, 2011, we entered into a $200,000 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 existing 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. Total costs associated with entering into our revolving credit facility were approximately $1,800, including the commitment fee, which are capitalized and being amortized over the term of the debt using the effective interest method.

Borrowings under our revolving credit facility bear interest at a variable rate at our option of either (i) the Base Rate, defined as the greater of the Prime Rate, the Federal Funds Effective Rate plus 0.50% or LIBOR plus 1.00%, plus a margin ranging from 0.50% to 1.50% or (ii) LIBOR plus a margin ranging from 2.00% to 3.00%. The margins are applied based on our leverage ratio, which is computed quarterly. We are subject to a commitment fee ranging from 0.375% to 0.625% and letter of credit fees between 2.00% and 3.00% based on our leverage ratio. We are also subject to letter of credit fronting fees of 0.125% per annum for amounts available to be withdrawn.

Our revolving credit facility contains a number of other affirmative and restrictive covenants, including limitations on dissolutions, sales of assets, investments, and indebtedness and liens. On December 17, 2013, we entered into an amendment to our revolving credit facility to restate the leverage covenant ratio. Total costs associated with this amendment were approximately $419, which are capitalized and being amortized over the term of the debt using the effective interest method. Our revolving credit facility includes a requirement that we 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 4.00 to 1.00 as of the last day of each fiscal quarter, declining to 3.75 on June 30, 2014 and declining to 3.50 on September 30, 2014 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.

On June 27, 2012, we exercised the accordion feature of our revolving credit facility and entered into a commitment increase agreement with our lenders thereby increasing the lenders’ commitments by $75,000, from $200,000 to $275,000. Total costs associated with the new accordion commitment were approximately $800, which are capitalized and being amortized over the term of the debt using the effective interest method.

At March 31, 2014, we had $237,500 in borrowings and our availability under our revolving credit facility was $33,500 (after giving effect to $4,000 of outstanding standby letters of credit).

 

7.	Shareholders’ Equity

Special Dividend

On December 4, 2012, we announced that our Board of Directors declared a special cash dividend of $1.00 per share on our common stock totaling $35,164. The dividend was payable to shareholders of record as of December 14, 2012 and was paid on December 21, 2012.

 

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8.	Fair Value of Financial Instruments

Fair value rules currently apply to all financial assets and liabilities and for certain nonfinancial assets and liabilities that are required to be recognized or disclosed at fair value. For this purpose, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.

U.S. GAAP establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:

 

•

Level 1 - Valuations based on quoted prices in active markets for identical instruments that we are able to access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.

 

•

Level 2 - Valuations based on quoted prices in active markets for instruments that are similar, or quoted prices in markets that are not active for identical or similar instruments, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.

 

•

Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

At March 31, 2014, we held certain items that are required to be measured at fair value on a recurring basis. These included interest rate derivative instruments and diesel fuel derivative instruments. Derivative instruments are used to hedge our exposure to interest rate fluctuations and a portion of our diesel fuel costs. These derivative instruments currently consist of swaps only. See Note 5 for further information on our derivative instruments and hedging activities.

Our interest rate derivative instruments and diesel fuel derivative instruments consist of over-the-counter contracts, which are not traded on a public exchange. The fair values for our interest rate swaps and diesel fuel swaps are based on current settlement values and represent the estimated amount we would have received or paid upon termination of these agreements. The fair values are derived using pricing models that rely on market observable inputs such as yield curves and commodity forward prices, and therefore are classified as Level 2. We also consider counterparty credit risk in our determination of all estimated fair values. We have consistently applied these valuation techniques in all periods presented.

At March 31, 2014 and June 30, 2013, the carrying amounts and fair values for our interest rate swaps and diesel fuel swaps were as follows:

 

		March 31,
Description		2014				Level 1				Level 2				Level 3
Liability:
Diesel fuel swap agreements		$	(34	)		$	—			$	(34	)		$	—
Interest rate swap agreements			(219	)			—				(219	)			—
Total		$	(253	)		$	—			$	(253	)		$	—
Description		June 30, 2013				Level 1				Level 2				Level 3
Liability:
Diesel fuel swap agreements		$	(294	)		$	—			$	(294	)		$	—
Interest rate swap agreements			(77	)			—				(77	)			—
Total		$	(371	)		$	—			$	(371	)		$	—

 

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The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair values due to the short-term nature of these instruments. The carrying value of our debt approximates fair value based on the market-determined, variable interest rates.

Assets that are measured at fair value on a nonrecurring basis include assets held for sale. Assets held for sale are valued using Level 2 inputs, primarily observed prices for similar assets in the used equipment market.

 

9.	Stock-Based Compensation

Compensation expense related to stock-based compensation plans was $873 and $988 for the three months ended March 31, 2014 and 2013, respectively, and $2,811 and $2,659 for the nine months ended March 31, 2014 and 2013, respectively. The income tax benefit recognized for stock-based compensation arrangements was $341 and $386 for the three months ended March 31, 2014 and 2013, respectively, and $1,098 and $1,039 for the nine months ended March 31, 2014 and 2013, respectively.

 

10.	Income Taxes

The liability method is used in accounting for income taxes as required by U.S. GAAP. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date.

In assessing the value of deferred tax assets, we consider whether it was more likely than not that some or all of the deferred tax assets would not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based upon these considerations, we provide a valuation allowance to reduce the carrying value of certain of its deferred tax assets to their net expected realizable value, if applicable. We have concluded that no valuation allowance is required for deferred tax assets at March 31, 2014 and June 30, 2013, respectively.

Effective income tax rates of 45.0% and 44.1% for the three months ended March 31, 2014 and 2013, respectively, and 39.6% and 38.5% for the nine months ended March 31, 2014 and 2013, respectively, varied from the statutory federal income tax rate of 35% due to several factors, including changes in permanent differences primarily related to the Internal Revenue Code Section 199 deduction and Internal Revenue Code Section 162(m) deduction limitations for compensation, meals and entertainment, state income and gross margin taxes and the relative size of our consolidated income before income taxes. In addition, North Carolina enacted new legislation on July 23, 2013, which will lower its corporate tax rate in 2014 and again in 2015. Accordingly, we recognized the income tax accounting effects of the changes in North Carolina’s tax rates during the nine months ended March 31, 2014.

 

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11.	Earnings Per Share

The following table sets forth the calculations of basic and diluted earnings per share:

 

		Three Months Ended								Nine Months Ended
		March 31,								March 31,
		2014				2013				2014				2013
Basic:
Net income		$	2,828			$	2,693			$	9,447			$	35,577
Weighted average common shares			31,869				35,219				31,802				35,132
Basic earnings per share		$	0.09			$	0.08			$	0.30			$	1.01
Diluted:
Net income		$	2,828			$	2,693			$	9,447			$	35,577
Weighted average common shares			31,869				35,219				31,802				35,132
Potential common stock arising from stock options and restricted stock			396				444				361				231
Weighted average common shares—diluted			32,265				35,663				32,163				35,363
Diluted earnings per share		$	0.09			$	0.08			$	0.29			$	1.01

Outstanding options and restricted stock awards equivalent to 1,523 and 1,516 shares of common stock were excluded from the calculation of diluted earnings per share for the three months ended March 31, 2014 and 2013, respectively, and 1,557 and 2,260 shares of common stock were excluded from the calculation of diluted earnings per share for the nine months ended March 31, 2014 and 2013, respectively, because their effect would have been anti-dilutive.

 

12.	Recent Accounting Pronouncements

Presentation of Comprehensive Income

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 was effective prospectively for our interim period ended September 30, 2013. The adoption of this guidance only affected presentation and did not have an impact on our financial position, results of operations or cash flows.

Disclosures about Offsetting Assets and Liabilities

In December 2011, the FASB issued an accounting standards update regarding disclosures about offsetting assets and liabilities, which requires entities to disclose information about offsetting and related arrangements of financial instruments and derivative instruments. The amendment was effective retrospectively for our interim period ended September 30, 2013. The adoption of this guidance only affected presentation and did not have an impact on our financial position, results of operations or cash flows.

 

13.	Commitments and Contingencies

Legal Proceedings

We are from time to time a party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of business. These actions typically seek, among other things, (i) compensation for alleged personal injury, workers’ compensation, employment discrimination, breach of contract or property damages, (ii) punitive damages, civil penalties or other damages, or (iii) injunctive or declaratory relief. With respect to all such lawsuits, claims and proceedings, we accrue an expense when it is

 

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probable that a liability has been incurred and the amount of loss can be reasonably estimated. We do not believe that any of these proceedings, individually or in the aggregate, would be expected to have a material adverse effect on our financial position, results of operations or cash flows.

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 March 31, 2014, we had $118,357 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 Corporation, from time to time, guarantees the obligations of its wholly-owned subsidiaries, including obligations under certain contracts with customers.

Collective Bargaining Agreements

Several of our subsidiaries are party to collective bargaining agreements with unions representing craftworkers performing field construction operations. The collective bargaining agreements expire at various times and have typically been renegotiated and renewed on terms similar to the ones contained in the expiring agreements. The agreements require those subsidiaries to pay specified wages, provide certain benefits to their respective union employees and contribute certain amounts to multi-employer pension plans and employee benefit trusts. A subsidiary’s multi-employer pension plan contribution rates generally are specified in the collective bargaining agreements (usually on an annual basis), and contributions are made to the plans on a “pay-as-you-go” basis based on such subsidiary’s union employee payrolls, which cannot be determined for future periods because of the location and number of union employees that any such subsidiary employs at any given time and the plans in which it may participate vary depending on the projects it has ongoing at any time and the need for union resources in connection with those projects. If any of these subsidiaries withdrew from, or otherwise terminated its participation in, one or more multi-employer pension plans or if the plans were to otherwise become underfunded, such subsidiary could be assessed liabilities for additional contributions related to the underfunding of these plans. We are not aware of any amounts of withdrawal liability that have been incurred as a result of a withdrawal by any of our subsidiaries from any multi-employer defined benefit pension plans.

Indemnities

We generally indemnify our customers for the services we provide under our contracts, as well as other specified liabilities, which may subject us to indemnity claims and liabilities and related litigation. As of March 31, 2014, we do not believe that any future indemnity claims against us would have a material adverse effect on our financial position, results of operations or cash flows.

 

14.	Business Segment Information

As a result of the acquisition of UCS expanding the size and scope of our engineering business, we decided in the first quarter of fiscal 2013 to change our reportable segments. Prior to December 31, 2013, our operations were managed in four business units, which were shown as two reportable segments for financial reporting purposes: Construction and All Other Operations. These segments were organized principally by service category. Each segment had its own management that was responsible for the operations of the segment’s businesses. On January 1, 2014, as a result of the merger of UC Synergetic, Inc. into Pike Energy Solutions, LLC discussed in Note 2, changes in management reflecting sole leadership over the combined engineering entity, and in order to properly align our segments with our current financial reporting structure, we changed the name of our All Other Operations segment to Engineering and will manage our operations as two business units. Prior year segment information has been revised to conform to the current-year presentation.

 

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The types of services from which each reportable segment derives its revenues are as follows:

 

•

Construction includes installation, maintenance and repair of power delivery systems, including storm restoration services. The Construction segment accounted for 81% and 83% of consolidated revenue for the three months ended March 31, 2014 and 2013, respectively, and 83% of consolidated revenue for the nine months ended March 31, 2014 and 2013.

 

•

Engineering includes siting, permitting, engineering and design of power and communication delivery systems, including storm assessment and inspection services.

We evaluate the operating performance of our segments based upon segment income from operations. The Other column below represents certain corporate general and administrative costs not allocated to the segments. We review total assets at the consolidated level and, accordingly, those amounts have not been disclosed for each reportable segment. The accounting policies of the segments are consistent with those described in Note 2 to our consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2013.

 

		Three Months Ended
		March 31, 2014
		Construction				Engineering				Other				Total
Core services		$	136,854			$	42,767			$	—			$	179,621
Less: Intersegment revenues			(196	)			(5,562	)			—				(5,758	)
Core services, net			136,658				37,205				—				173,863
Storm-related services			32,074				1,646				—				33,720
Revenues, net		$	168,732			$	38,851			$	—			$	207,583
Income (loss) from operations		$	6,247			$	1,178			$	(108	)		$	7,317
Depreciation and amortization		$	8,515			$	1,268			$	—			$	9,783
Purchases of property and equipment		$	5,841			$	329			$	—			$	6,170
		Three Months Ended
		March 31, 2013
		Construction				Engineering				Other				Total
Core services		$	143,215			$	40,530			$	—			$	183,745
Less: Intersegment revenues			(531	)			(8,458	)			—				(8,989	)
Core services, net			142,684				32,072				—				174,756
Storm-related services			24,034				1,432				—				25,466
Revenues, net		$	166,718			$	33,504			$	—			$	200,222
Income (loss) from operations		$	5,246			$	1,344			$	(102	)		$	6,488
Depreciation and amortization		$	8,558			$	1,341			$	—			$	9,899
Purchases of property and equipment		$	9,747			$	142			$	—			$	9,889
		Nine Months Ended
		March 31, 2014
		Construction				Engineering				Other				Total
Core services		$	447,743			$	130,463			$	—			$	578,206
Less: Intersegment revenues			(326	)			(26,054	)			—				(26,380	)
Core services, net			447,417				104,409				—				551,826
Storm-related services			57,527				2,396				—				59,923
Revenues, net		$	504,944			$	106,805			$	—			$	611,749
Income (loss) from operations		$	19,245			$	2,354			$	(301	)		$	21,298
Depreciation and amortization		$	25,990			$	3,875			$	—			$	29,865
Purchases of property and equipment		$	28,968			$	580			$	—			$	29,548
		Nine Months Ended
		March 31, 2013
		Construction				Engineering				Other				Total
Core services		$	449,634			$	140,843			$	—			$	590,477
Less: Intersegment revenues			(769	)			(29,872	)			—				(30,641	)
Core services, net			448,865				110,971				—				559,836
Storm-related services			149,629				9,038				—				158,667
Revenues, net		$	598,494			$	120,009			$	—			$	718,503
Income (loss) from operations		$	60,153			$	5,306			$	(1,976	)		$	63,483
Depreciation and amortization		$	27,307			$	4,044			$	—			$	31,351
Purchases of property and equipment		$	26,904			$	689			$	—			$	27,593

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes thereto in this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for the fiscal year ended June 30, 2013. The discussion below contains forward-looking statements that are based upon our current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from these expectations due to inaccurate assumptions and known or unknown risks and uncertainties, including those identified in “Uncertainty of Forward-Looking Statements and Information” below in this Item 2 and in “Risk Factors” in Item 1A of Part I of our Annual Report on Form 10-K for the fiscal year ended June 30, 2013.

Overview

We are one of the largest providers of construction and engineering services for investor-owned, municipal and co-operative electric utilities in the United States. Since our founding in 1945, we have evolved from a specialty non-unionized contractor for electric utilities focused on the distribution sector in the southeastern United States to one of the nation’s largest specialty construction and engineering firms servicing over 300 customers. Leveraging our core competencies as a company primarily focused on providing a broad range of electric infrastructure services principally for utility customers, we believe that our experienced management team has positioned us to benefit from the substantial long-term growth drivers in our industry.

Over the past few 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 communications solutions provider. We have done this organically and through strategic acquisitions of companies with complementary service offerings and geographic footprints. Our acquisition of Shaw Energy Delivery Services, Inc. on September 1, 2008 expanded our operations into engineering, design, procurement and construction management services, including in the renewable energy arena, and significantly enhanced our substation and transmission construction capabilities. This acquisition also extended our geographic presence across the continental United States. Our acquisition of Facilities Planning & Siting, PLLC on June 30, 2009 enabled us to provide siting and planning services to our customers, which positions us to be involved at the conceptual stage of our customers’ projects. On June 30, 2010, we acquired Klondyke Construction LLC (“Klondyke”), based in Phoenix, Arizona, which complemented our existing engineering and design capabilities with construction services related to substation, transmission and renewable energy infrastructure. Our August 1, 2011 acquisition of Pine Valley Power, Inc. (“Pine Valley”), located near Salt Lake City, Utah, further strengthened our substation, transmission and distribution construction service capabilities in the western United States. We believe that our acquisitions of Klondyke and Pine Valley allow us to continue to expand our engineering and construction services in the western United States and better compete in markets with unionized workforces. Our July 2, 2012 acquisition of Synergetic Design Holdings, Inc. and its subsidiary, UC Synergetic, Inc. (together “UCS”), headquartered in Charlotte, North Carolina, significantly expanded our ability to provide outsourced engineering and design services for distribution powerline, transmission and substation projects and other technical services to our customers and is consistent with our long-term growth strategy. The UCS acquisition also added new engineering and design services for the communications industry as well as storm assessment and inspection services. UCS’s engineering capabilities complement our existing portfolio of companies, add scale and extend our footprint into the Northeast and Midwest.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations are based on our condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires management to make certain estimates and assumptions for interim financial information that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, we evaluate these estimates and assumptions, including those related to revenue recognition for work in progress, allowance for doubtful accounts, self-insured claims liability, valuation of goodwill and other intangible assets, asset lives and salvage values used in computing depreciation and amortization, including amortization of intangibles, and accounting for income taxes, contingencies, litigation and stock-based compensation. Application of these estimates and assumptions requires the exercise of judgment as to future uncertainties and, as a result, actual results could differ from these estimates. Please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” included in Item 7 of Part II of our Annual Report on Form 10-K for the fiscal year ended June 30, 2013 for further information regarding our critical accounting policies and estimates.

 

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Results of Operations

The following table sets forth selected statements of income data as approximate percentages of revenues for the periods indicated:

 

		Three Months Ended March 31,								Nine Months Ended March 31,
		2014				2013				2014				2013
Revenues:
Core services			83.8	%			87.3	%			90.2	%			77.9	%
Storm-related services			16.2	%			12.7	%			9.8	%			22.1	%
Total			100.0	%			100.0	%			100.0	%			100.0	%
Cost of operations			87.4	%			87.5	%			87.4	%			83.1	%
Gross profit			12.6	%			12.5	%			12.6	%			16.9	%
General and administrative expenses			9.3	%			9.3	%			9.2	%			8.1	%
Gain on sale of property and equipment			-0.2	%			-0.1	%			-0.1	%			-0.1	%
Income from operations			3.5	%			3.3	%			3.5	%			8.9	%
Interest expense and other, net			1.0	%			0.8	%			1.0	%			0.8	%
Income before income taxes			2.5	%			2.5	%			2.5	%			8.1	%
Income tax expense			1.1	%			1.1	%			1.0	%			3.1	%
Net income			1.4	%			1.4	%			1.5	%			5.0	%

Consolidated Three Months Ended March 31, 2014 Compared to Three Months Ended March 31, 2013

Revenues. Revenues increased 4%, or $7.4 million, to $207.6 million for the three months ended March 31, 2014 from $200.2 million for the three months ended March 31, 2013. The increase was attributable to an $8.2 million increase in storm-related revenues and a $0.8 million decrease in core revenue. Our core business decline also reflects significantly lower solar construction revenues in California as compared to the same quarter in the prior year.

Our storm-related revenues are highly volatile and unpredictable. For the three months ended March 31, 2014, storm-related revenues totaled $33.8 million. For the three months ended March 31, 2013, storm-related revenues totaled $25.5 million.

Gross Profit. Gross profit increased 5%, or $1.2 million, to $26.2 million for the three months ended March 31, 2014 from $25.0 million for the three months ended March 31, 2013. Gross profit as a percentage of revenues increased to 12.6% for the three months ended March 31, 2014 from 12.5% for the same period in the prior year. Our storm restoration services typically generate a higher profit margin than core services. During a storm response, our storm-assigned crews and equipment are fully utilized. In addition, the overtime typically worked on storm events lowers the ratio of fixed costs to revenue. Storm gross profit margins can vary greatly depending on the geographic area, customer and amount of overtime worked.

 

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General and Administrative Expenses. General and administrative expenses marginally increased to $19.2 million for the three months ended March 31, 2014 from $18.7 million for the three months ended March 31, 2013. As a percentage of revenues, general and administrative expenses were 9.3% for the three months ended March 31, 2014 and 2013. The increase in general and administrative expenses was primarily due to additional infrastructure costs associated with expansion of our communication engineering business with an existing customer during the three months ended March 31, 2014 compared to the same period in the prior year.

Income Tax Expense. Income tax expense was $2.3 million and $2.1 million for the three months ended March 31, 2014 and 2013, respectively. Effective income tax rates of 45.0% and 44.1% for the three months ended March 31, 2014 and 2013, respectively, varied from the statutory federal income tax rate of 35% due to several factors, including changes in permanent differences primarily related to the Internal Revenue Code Section 199 deduction and Internal Revenue Code Section 162(m) deduction limitations for compensation, meals and entertainment, state income and gross margin taxes and the relative size of our consolidated income before income taxes.

Operating Results by Segment – Three Months Ended March 31, 2014 Compared to Three Months Ended March 31, 2013

Construction

 

		Three Months Ended March 31,
		2014				2013				% Change
		(In millions)
Construction revenues		$	168.9			$	167.2
Intersegment eliminations			(0.2	)			(0.5	)
Total revenues, net		$	168.7			$	166.7				1.2	%
Segment income from operations		$	6.2			$	5.2				19.2	%

Revenues. Construction revenues increased 1.2%, or $2.0 million, to $168.7 million for the three months ended March 31, 2014 from $166.7 million for the three months ended March 31, 2013.

The following table contains supplemental information on construction revenue and percentage changes by category for the periods indicated:

 

		Three Months Ended March 31,
Category of Revenues		2014				2013				% Change
		(In millions)
Distribution and other		$	98.3			$	104.7				-6.1	%
Transmission and substation			38.3				38.0				0.8	%
Total core revenue			136.6				142.7				-4.2	%
Storm restoration services			32.1				24.0				33.8	%
Total		$	168.7			$	166.7				1.2	%

 

•

Distribution and Other Revenues. Our combined revenues for overhead and underground distribution services and other revenue decreased 6.1% from the prior year period. Our distribution services experienced a decrease in the current period due to more storm restoration revenues compared to the same period in the prior year, as storm restoration work generally diverts man-hours from core work. In addition, our distribution and other revenues were negatively impacted by lower volume large solar construction projects in California during the three months ended March 31, 2014.

The majority of our distribution services are provided to investor-owned, municipal and co-operative utilities under master services agreements (“MSAs”). Services provided under these MSAs include both overhead and underground powerline distribution services. Our MSAs do not guarantee a minimum volume of work. The MSAs provide a framework for core and storm restoration pricing and provide an outline of the service territory in which we will work or the percentage of

 

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overall outsourced distribution work we will provide for the customer. Our MSAs also provide a platform for multi-year relationships with our customers. We can easily increase or decrease staffing for a customer without exhaustive contract negotiations.

Other revenues in this category include primarily solar construction projects in California.

 

•

Transmission and Substation Revenues. Transmission and substation revenues increased 0.8% from the prior year period. A significant amount of our transmission and substation projects are fixed price, site specific projects and revenues can vary based on start dates of the projects and mobilization time. Growth for the three months ended March 31, 2014 was primarily related to our transmission and substation services added in the western United States. The substation construction market remains very competitive especially in the southeastern United States.

Segment Income from Operations. Segment income from operations increased 19.2% to $6.2 million for the three months ended March 31, 2014 from $5.2 million for the three months ended March 31, 2013. Segment income from operations as a percentage of revenues increased to 3.7% for the three months ended March 31, 2014 from 3.1% for the same period in the prior year. Segment income from operations during the three months ended March 31, 2013 was negatively impacted as a result of tool purchases related to the physical expansion of our motorized fleet at Pine Valley. We were negatively impacted by the mark-to-market adjustment for diesel fuel during the three months ended March 31, 2014 that caused a $0.3 million increase in our cost of operations. We benefited from the mark-to-market adjustment for diesel fuel during the three months ended March 31, 2013 that provided a $0.3 million decrease in our cost of operations.

Engineering

 

		Three Months Ended March 31,
		2014				2013				% Change
		(In millions)
Engineering core revenues		$	42.8			$	40.6
Intersegment eliminations			(5.6	)			(8.5	)
Total core revenues, net		$	37.2			$	32.1				15.9	%
Storm assessment and inspection revenue			1.7				1.4
Total revenues, net		$	38.9			$	33.5				16.1	%
Segment income from operations		$	1.2			$	1.3				-7.7	%

Revenues. Engineering revenues increased 16.1%, or $5.4 million, to $38.9 million for the three months ended March 31, 2014 from $33.5 million for the three months ended March 31, 2013. Engineering revenues benefited from increased growth in our communication engineering business with an existing customer in the southeastern United States. In addition, 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 engineering, procurement and construction (“EPC”) projects that are administered by engineering. As a result, our revenue will fluctuate due to the level of material procurement associated with our EPC projects.

Segment Income from Operations. Segment income from operations decreased 7.7% to $1.2 million for the three months ended March 31, 2014 from $1.3 million for the three months ended March 31, 2013. Segment income from operations as a percentage of revenues decreased to 3.1% for the three months ended March 31, 2014 from 3.9% for the same period in the prior year. Our segment income from operations was negatively impacted from increased non-productive start-up time incurred on additional new large communication engineering projects with an existing customer during the three months ended March 31, 2014.

 

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Consolidated Nine Months Ended March 31, 2014 Compared to Nine Months Ended March 31, 2013

Revenues. Revenues decreased 15%, or $106.8 million, to $611.7 million for the nine months ended March 31, 2014 from $718.5 million for the nine months ended March 31, 2013. The decrease was attributable to a $98.8 million decrease in storm-related revenues and an $8.0 million decrease in core revenue, including significantly lower solar construction revenues in California as compared to the same period in the prior year. Our Tanzania project, which was substantially complete as of December 31, 2012, provided no revenues during the nine months ended March 31, 2014 compared to $6.3 million for the nine months ended March 31, 2013.

Our storm-related revenues are highly volatile and unpredictable. For the nine months ended March 31, 2014, storm-related revenues totaled $59.9 million. For the nine months ended March 31, 2013, storm-related revenues totaled $158.7 million, which included Hurricane Issac and Hurricane Sandy.

Gross Profit. Gross profit decreased 36.4%, or $44.1 million, to $77.1 million for the nine months ended March 31, 2014 from $121.2 million for the nine months ended March 31, 2013. Gross profit as a percentage of revenues decreased to 12.6% for the nine months ended March 31, 2014 from 16.9% for the same period in the prior year. Our gross profit was negatively impacted by a significantly lower mix of storm revenue. Our storm restoration services typically generate a higher profit margin than core services. During a storm response, our storm-assigned crews and equipment are fully utilized. In addition, the overtime typically worked on storm events lowers the ratio of fixed costs to revenue. Storm gross profit margins can vary greatly depending on the geographic area, customer mix and amount of overtime worked. In addition, we experienced losses on five specific jobs in California for two customers at our western subsidiary companies for the three months ended September 30, 2013, which had a negative impact on our gross profit during the nine months ended March 31, 2014.

General and Administrative Expenses. General and administrative expenses decreased 3% to $56.5 million for the nine months ended March 31, 2014 from $58.1 million for the nine months ended March 31, 2013. As a percentage of revenues, general and administrative expenses increased to 9.2% for the nine months ended March 31, 2014 from 8.1% for the same period in the prior year. The decrease in general and administrative expenses was primarily due to significantly more incentive bonuses accrued for the nine months ended March 31, 2013 compared to the nine months ended March 31, 2014.

Interest Expense. Interest expense increased 4% to $5.9 million for the nine months ended March 31, 2014 from $5.7 million for the nine months ended March 31, 2013. The increase is attributable to additional interest expense for the nine months ended March 31, 2014 from interest rate swap agreements entered into during the nine months ended March 31, 2013 and reflects a full period of interest for the nine months ended March 31, 2014. See Note 5, “Derivative Instruments and Hedging Activities,” of the Notes to Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report for further information on our interest rate swap agreements.

Income Tax Expense. Income tax expense was $6.2 million and $22.3 million for the nine months ended March 31, 2014 and 2013, respectively. Effective income tax rates of 39.6% and 38.5% for the nine months ended March 31, 2014 and 2013, respectively, varied from the statutory federal income tax rate of 35% due to several factors, including changes in permanent differences primarily related to the Internal Revenue Code Section 199 deduction and Internal Revenue Code Section 162(m) deduction limitations for compensation, meals and entertainment, state income and gross margin taxes and the relative size of our consolidated income before income taxes. In addition, North Carolina enacted new legislation on July 23, 2013, which will lower its corporate tax rate in 2014 and again in 2015. Accordingly, we recognized the income tax accounting effects of the changes in North Carolina’s tax rates during the nine months ended March 31, 2014.

 

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Operating Results by Segment – Nine Months Ended March 31, 2014 Compared to Nine Months Ended March 31, 2013

Construction

 

		Nine Months Ended March 31,
		2014				2013				% Change
		(In millions)
Construction revenues		$	505.2			$	599.3
Intersegment eliminations			(0.3	)			(0.8	)
Total revenues, net		$	504.9			$	598.5				-15.6	%
Segment income from operations		$	19.2			$	60.2				-68.1	%

Revenues. Construction revenues decreased 15.6%, or $93.6 million, to $504.9 million for the nine months ended March 31, 2014 from $598.5 million for the nine months ended March 31, 2013.

The following table contains supplemental information on construction revenue and percentage changes by category for the periods indicated:

 

		Nine Months Ended March 31,
Category of Revenues		2014				2013				% Change
		(In millions)
Distribution and other		$	326.6			$	336.9				-3.1	%
Transmission and substation			120.8				112.0				7.9	%
Total core revenue			447.4				448.9				-0.3	%
Storm restoration services			57.5				149.6				-61.6	%
Total		$	504.9			$	598.5				-15.6	%

 

•

Distribution and Other Revenues. Our combined revenues for overhead and underground distribution services and other revenue decreased 3.1% from the prior year period. Our distribution services experienced an increase in the current period due to significantly less storm restoration revenues compared to the same period in the prior year, as storm restoration work generally diverts man-hours from core work. This increase was more than offset by lower volume large solar construction projects in California during the nine months ended March 31, 2014 as compared to the same period in the prior year. In addition, there were no Tanzania project revenues for the nine months ended March 31, 2014 compared to $6.3 million for the nine months ended March 31, 2013 due to substantial completion of this project at December 31, 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 MSAs do not guarantee a minimum volume of work. The MSAs provide a framework for core and storm restoration pricing and provide an outline of the service territory in which we will work or the percentage of overall outsourced distribution work we will provide for the customer. Our MSAs also provide a platform for multi-year relationships with our customers. We can easily increase or decrease staffing for a customer without exhaustive contract negotiations.

Other revenues in this category include primarily solar construction projects in California.

 

•

Transmission and Substation Revenues. Transmission and substation revenues increased 7.9% from the prior year period. A significant amount of our transmission and substation projects are fixed price, site specific projects and revenues can vary based on start dates of the projects and mobilization time. Growth for the nine months ended March 31, 2014 is primarily related to our transmission and substation services added in the western United States. The substation construction market remains very competitive especially in the southeastern United States.

 

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Segment Income from Operations. Segment income from operations decreased 68.1% to $19.2 million for the nine months ended March 31, 2014 from $60.2 million for the nine months ended March 31, 2013. Segment income from operations as a percentage of revenues decreased to 3.8% for the nine months ended March 31, 2014 from 10.1% for the same period in the prior year. Segment income from operations was negatively impacted from the factors discussed above under “Gross Profit” with respect to the nine months ended March 31, 2014. We benefited from a mark-to-market adjustment on our diesel hedging program that provided a $0.3 million and $1.8 million decrease in our cost of operations during the nine months ended March 31, 2014 and 2013, respectively.

Engineering

 

		Nine Months Ended March 31,
		2014				2013				% Change
		(In millions)
Engineering core revenues		$	130.5			$	140.9
Intersegment eliminations			(26.1	)			(29.9	)
Total core revenues, net		$	104.4			$	111.0				-5.9	%
Storm assessment and inspection revenue			2.4				9.0
Total revenues, net		$	106.8			$	120.0				-11.0	%
Segment income from operations		$	2.4			$	5.3				-54.7	%

Revenues. Engineering revenues decreased 11.0%, or $13.2 million, to $106.8 million for the nine months ended March 31, 2014 from $120.0 million for the nine months ended March 31, 2013. Engineering revenues were negatively impacted by less storm assessment and inspection revenues compared to the same period in the prior year. In addition, 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 the level of material procurement associated with our EPC projects.

Segment Income from Operations. Segment income from operations decreased 54.7% to $2.4 million for the nine months ended March 31, 2014 from $5.3 million for the nine months ended March 31, 2013. Segment income from operations as a percentage of revenues decreased to 2.2% for the nine months ended March 31, 2014 from 4.4% for the same period in the prior year. Segment income from operations was negatively impacted by a significantly lower mix of storm assessment and inspection revenue compared to the prior year period and specific project-related receivable reserves totaling approximately $1.4 million adjusted for one customer as part of our on-going collection efforts.

Liquidity and Capital Resources

Our primary cash needs have been for working capital, capital expenditures, payments under our revolving credit facility and acquisitions. Our primary sources of cash for the nine months ended March 31, 2014 and 2013 were through borrowings from our revolving credit facility and cash from operations. At March 31, 2014, we had $23.7 million in accounts receivable and costs and estimated earnings in excess of billings on uncompleted contracts from storm-related jobs. At March 31, 2013, we had $22.2 million in accounts receivable and costs and estimated earnings in excess of billings on uncompleted contracts from storm-related jobs.

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 our revolving credit facility and cash on hand to satisfy normal cash needs during these periods.

 

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On August 24, 2011, we entered into a $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 existing revolving credit facility. 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.

At March 31, 2014, we had $237.5 million in borrowings, and availability under our revolving credit facility was $33.5 million (after giving effect to $4.0 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 addressed below.

We believe that our cash flow from operations, available cash and cash equivalents, and borrowings available under our revolving credit facility will be adequate to meet our 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

 

		Nine Months Ended March 31,
		2014				2013
		(In millions)
Net cash provided by operating activities		$	11.7			$	65.9
Net cash used in investing activities		$	(26.4	)		$	(94.6	)
Net cash provided by financing activities		$	15.9			$	33.1

Net cash provided by operating activities was $11.7 million for the nine months ended March 31, 2014 compared to $65.9 million for the nine months ended March 31, 2013. The decrease in operating cash flows was primarily due to timing of working capital requirements and the significant decrease in income related to lower storm activity during the nine months ended March 31, 2014 compared to the nine months ended March 31, 2013.

We made a payment to 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 $1.6 million in July 2013, which is included in net cash provided by operating activities for the nine months ended March 31, 2014. These payments are included in changes in insurance and claim accruals. Retrospective adjustments have historically been prepared annually on a “paid-loss” basis by our commercial insurance carrier. The last retrospective premium payment adjustment from our commercial insurance carrier resulted in a refund totaling $5.5 million that was received in December 2012.

Net cash used in investing activities decreased to $26.4 million for the nine months ended March 31, 2014 from $94.6 million for the nine months ended March 31, 2013. This decrease 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) offset by increased capital expenditures during the nine months ended March 31, 2014. 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 $15.9 million for the nine months ended March 31, 2014 compared to $33.1 million for the nine months ended March 31, 2013. We borrowed $70.0 million to finance the UCS acquisition during the nine months ended March 31, 2013. On December 4, 2012, we announced that our Board of Directors declared a special cash dividend of $1.00 per share on our common stock totaling approximately $35.2 million. The dividend was payable to shareholders of record as of

 

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December 14, 2012 and was paid on December 21, 2012. The funds for the dividend were initially borrowed from our revolving credit facility but were repaid before December 31, 2012 from cash received from customers related to storm activity.

EBITDA to 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.

 

		Three Months Ended March 31,								Nine Months Ended March 31,
		2014				2013				2014				2013
		(In millions)								(In millions)
Net income		$	2.8			$	2.7			$	9.4			$	35.6
Adjustments:
Interest expense			2.2				1.7				5.9				5.7
Income tax expense			2.3				2.1				6.2				22.3
Depreciation and amortization			9.8				9.9				29.9				31.4
EBITDA		$	17.1			$	16.4			$	51.4			$	95.0

EBITDA increased 4.3% to $17.1 million for the three months ended March 31, 2014 from $16.4 million for the three months ended March 31, 2013. EBITDA decreased 46.0% to $51.4 million for the nine months ended March 31, 2014 from $95.0 million for the nine months ended March 31, 2013. The increased EBITDA for the three months ended March 31, 2014 was primarily due to a higher level of storm activity compared to the prior year period. The decreased EBITDA for the nine months ended March 31, 2014 was primarily due to a significantly lower level of storm activity compared to the prior year period.

Credit Facility

On August 24, 2011, we entered into a $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.

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 contains a number of other affirmative and restrictive covenants, including limitations on dissolutions, sales of assets, investments, and indebtedness and liens. On December 17, 2013, we entered into an amendment to our revolving credit facility to restate the leverage covenant ratio. Total costs associated with this amendment were approximately $419,000, which are capitalized and being amortized over the term of the debt using the effective interest method. Our revolving credit facility includes a requirement that we 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 4.00 to 1.00 as of the last day of each fiscal quarter, declining to 3.75 on June 30, 2014 and declining to 3.50 on September 30, 2014 and thereafter, and (ii) a

 

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consolidated fixed charge coverage ratio (as defined in our revolving credit facility) of at least 1.25 to 1.00. At March 31, 2014, we were in compliance with such covenants with a leverage ratio and a fixed charge coverage ratio of 3.30 and 1.76, respectively.

Concentration of Credit Risk

We are subject to concentrations of credit risk related primarily to our cash and cash equivalents and accounts receivable. We maintain substantially all of our cash investments with what we believe to be high credit quality financial institutions. We grant credit under normal payment terms, generally without collateral, to our customers, which include electric power companies, governmental entities, general contractors and builders, and owners and managers of commercial and industrial properties located in the United States. Consequently, we are subject to potential credit risk related to changes in business and economic factors throughout the United States. However, we generally have certain statutory lien rights with respect to services provided.

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. At March 31, 2014, we had $4.0 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 our revolving credit facility is conditioned on our continued compliance with the affirmative and negative covenants of our credit facility.

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. At March 31, 2014, we had $118.4 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.

 

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Pike Corporation, from time to time, guarantees the obligations of its wholly-owned subsidiaries, including obligations under certain contracts with customers.

Seasonality; Fluctuations of Results

Because our construction-related 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-related services. Extended periods of rain affect the deployment of our core crews, particularly with respect to underground work. During the winter months, demand for construction work is generally lower due to inclement weather. In addition, demand for construction work generally increases during the spring months due to improved weather conditions and is typically the highest during the summer due to better weather conditions. Due to the unpredictable nature of storms, the level of storm-related revenues fluctuates from period to period.

Recent Accounting Pronouncements

See Note 12, “Recent Accounting Pronouncements,” of the Notes to Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report for a description of recent accounting pronouncements, including the dates of adoption and effects, if any, on our consolidated financial statements.

Uncertainty of Forward-Looking Statements and Information

This Quarterly Report on Form 10-Q, as well as information included in future filings by Pike Corporation with the Securities and Exchange Commission (the “SEC”) and information contained in written material, press releases and oral statements issued by or on behalf of the Company, contains, or may contain, certain “forward-looking statements” under Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such forward-looking statements include information relating to, among other matters, our future prospects, developments and business strategies for our operations. These forward-looking statements are based on current expectations, estimates, forecasts and projections about our company and the industry in which we operate and management’s beliefs and assumptions. Words such as “may,” “will,” “should,” “estimate,” “expect,” “anticipate,” “intend,” “plan,” “predict,” “potential,” “project,” “continue,” “believe,” “seek,” variations of such words and similar expressions are intended to identify such forward-looking statements. These statements include, among others, statements relating to:

 

•

our belief that there will be large and financially attractive projects to pursue in international markets over the next few years as developing regions install or develop their electric infrastructure, and that our reputation and experience combined with our broad platform of service offerings allow us to opportunistically bid on attractive international projects;

 

•

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 expectation that the net amount of the existing losses in OCI at March 31, 2014 reclassified into net income over the next 12 months will be approximately $133,000;

 

•

our belief that the lawsuits, claims and other legal proceedings that arise in the ordinary course of business will not be expected to have, individually or in the aggregate, a material adverse effect on our financial position, results of operations or cash flows;

 

•

our belief that it is unlikely that we will have to fund significant claims under our surety arrangements in the foreseeable future;

 

•

our belief that any future indemnity claims against us would not have a material adverse effect on our financial position, results of operations or cash flows;

 

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•

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 utility customers;

 

•

our belief that our acquisitions of Klondyke and Pine Valley allow us to continue to expand our engineering and construction services in the western United States and better compete in markets with unionized workforces;

 

•

our belief that our cash flow from operations, available cash and cash equivalents, and borrowings available under our revolving credit facility will be adequate to meet our 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 future performance 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 a negative impact on our liquidity and require us to obtain alternative short-term financing;

 

•

our belief that the financial institutions with whom we maintain substantially all of our cash investments are high credit quality financial institutions; and

 

•

our belief that it is unlikely that any material claims will be made under a letter of credit in the foreseeable future.

These statements are based on certain assumptions and analyses made by us in light of our experience and perception of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances, and involve risks and uncertainties that may cause actual future activities and results of operations to be materially different from historical or anticipated results. Factors that could impact those differences or adversely affect future periods include, but are not limited to, the factors set forth in “Risk Factors” in Item 1A of Part I of our Annual Report on Form 10-K for the fiscal year ended June 30, 2013.

Caution should be taken not to place undue reliance on our forward-looking statements, which reflect the expectations of management of Pike only as of the time such statements are made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

For quantitative and qualitative disclosures about our market risks, see Item 7A of Part II of our Annual Report on Form 10-K for the fiscal year ended June 30, 2013.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management has established and maintains a system of disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act, such as this Quarterly Report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. The disclosure controls and procedures are also designed to provide reasonable assurance that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

 

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As of the end of the period covered by this Quarterly Report, we evaluated the effectiveness of the design and operation of our “disclosure controls and procedures” (as defined in Rule 13a-15(e) of the Exchange Act) pursuant to Rule 13a-15(b) of the Exchange Act. This evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. Based on this evaluation, these officers have concluded that, as of March 31, 2014, our disclosure controls and procedures were effective to provide reasonable assurance of achieving their objectives.

Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting during the quarter ended March 31, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Design and Operation of Control Systems

Our management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and breakdowns can occur because of simple errors or mistakes. Controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

 

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We are from time to time a party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of business. These actions typically seek, among other things, (i) compensation for alleged personal injury, workers’ compensation, employment discrimination, breach of contract or property damages, (ii) punitive damages, civil penalties or other damages, or (iii) injunctive or declaratory relief. With respect to all such lawsuits, claims and proceedings, we accrue an expense when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. We do not believe that any of these proceedings, individually or in the aggregate, would be expected to have a material adverse effect on our financial position, results of operations or cash flows.

Item 1A. Risk Factors

There have been no material changes from the risk factors disclosed in Item 1A of Part I of our Annual Report on Form 10-K for the fiscal year ended June 30, 2013.

 

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Item 6. Exhibits

 

Exhibit		Description
3.1		Amended and Restated Articles of Incorporation of Pike Corporation (incorporated by reference to Exhibit 3.1 on our Current Report on Form 8-K filed November 6, 2013)
3.2		Amended and Restated Bylaws of Pike Corporation (incorporated by reference to Exhibit 3.2 on our Current Report on Form 8-K filed November 6, 2013)
31.1		Certification of Periodic Report by Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) and pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
31.2		Certification of Periodic Report by Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) and pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
32.1		Certification of Periodic Report by Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)
101		Financial statements (unaudited) from the Quarterly Report on Form 10-Q of Pike Corporation for the quarter ended March 31, 2014, filed on May 6, 2014, formatted in XBRL: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Income, (iii) the Condensed Consolidated Statements of Comprehensive Income, (iv) the Condensed Consolidated Statements of Cash Flows and (v) the Notes to Condensed Consolidated Financial Statements

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

				PIKE CORPORATION
				(Registrant)
Date: May 6, 2014				By:		/s/ J. Eric Pike
						J. Eric Pike
						Chairman, Chief Executive Officer and President
Date: May 6, 2014				By:		/s/ Anthony K. Slater
						Anthony K. Slater
						Executive Vice President and Chief Financial Officer

 

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