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United States
Securities and Exchange Commission
 Washington, D.C. 20549
 FORM 10-Q
 (Mark One)þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006ORo
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 COMMISSION FILE NUMBER 001-32582
 PIKE ELECTRIC CORPORATION
 (Exact name of registrant as specified in its charter)
 Delaware
    
    20-3112047(State of incorporation)
    
    (I.R.S. Employer Identification No.)
 100 Pike Way, PO Box 868, Mount Airy, NC 27030  (Address of principal executive office)
 (336) 789-2171  (Registrants telephone number, including area code)
 þ o
  o o þ
 o þ




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##### 



PIKE ELECTRIC CORPORATION
FORM 10-Q
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006
 INDEX
 Part I. FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (unaudited):Condensed Consolidated Balance Sheets
    
    
    1Condensed Consolidated Statements of Operations
    
    
    2Condensed Consolidated Statements of Cash Flows
    
    
    3Notes to Condensed Consolidated Financial Statements
    
    
    4Item 2.
    
    Managements
Discussion and Analysis of Financial Condition and Results of Operations
    
    
    7Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    15Item 4.
    
    Controls and Procedures
    
    
    15Part II. OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    16Item 1A.
    
    Risk Factors
    
    
    16Item 6.
    
    Exhibits
    
    
    16Signatures
    
    
    
    
    17EX-31.1EX-31.2EX-32.1




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PART I  FINANCIAL INFORMATION
 
 Item 1.     Financial Statements
 PIKE ELECTRIC CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (In thousands, except par value amount)
 September 30,
    
    
    June 30,2006
    
    
    2006(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    5,760
    
    
    $
    3,391Accounts receivable, net
    
    
    55,191
    
    
    
    66,629Work completed not billed
    
    
    59,785
    
    
    
    56,430Inventories
    
    
    10,175
    
    
    
    8,041Prepaid expenses and other
    
    
    5,334
    
    
    
    5,928Deferred income taxes
    
    
    12,460
    
    
    
    12,460Total current assets
    
    
    148,705
    
    
    
    152,879Property and equipment, net
    
    
    288,296
    
    
    
    284,452Goodwill
    
    
    94,402
    
    
    
    94,402Other intangibles, net
    
    
    45,516
    
    
    
    49,978Deferred loan costs, net
    
    
    6,053
    
    
    
    6,265Other assets
    
    
    1,770
    
    
    
    1,990Total assets
    
    $
    584,742
    
    
    $
    589,966LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    11,762
    
    
    $
    9,706Accrued compensation
    
    
    22,329
    
    
    
    24,954Accrued expenses and other
    
    
    8,073
    
    
    
    5,243Current portion of deferred compensation
    
    
    2,570
    
    
    
    10,614Current portion of insurance and claim accruals
    
    
    27,593
    
    
    
    18,867Revolving credit facility
    
    
    
    
    
    
    4,500Total current liabilities
    
    
    72,327
    
    
    
    73,884Long-term debt, net of current portion
    
    
    244,000
    
    
    
    249,000Insurance and claim accruals, net of current portion
    
    
    13,267
    
    
    
    13,439Deferred compensation, net of current portion
    
    
    9,827
    
    
    
    10,378Deferred income taxes
    
    
    71,700
    
    
    
    72,333Other liabilities
    
    
    192
    
    
    
    200Commitments and contingenciesStockholders equity:Common stock, par value $0.001 per share; 100,000
authorized shares; 32,515 and 32,577 shares issued
and outstanding at September 30, 2006 and June 30,
2006, respectively
    
    
    6,426
    
    
    
    6,426Additional paid-in capital
    
    
    136,964
    
    
    
    135,869Retained earnings
    
    
    30,039
    
    
    
    28,437Total stockholders equity
    
    
    173,429
    
    
    
    170,732Total liabilities and stockholders equity
    
    $
    584,742
    
    
    $
    589,966
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PIKE ELECTRIC CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
 Three Months EndedSeptember 30,2006
    
    
    2005Revenues
    
    $
    149,855
    
    
    $
    218,431Cost of operations
    
    
    130,115
    
    
    
    169,776Gross profit
    
    
    19,740
    
    
    
    48,655General and administrative expenses
    
    
    11,556
    
    
    
    11,065Loss on sale of property and equipment
    
    
    367
    
    
    
    145Income from operations
    
    
    7,817
    
    
    
    37,445Other expense (income):Interest expense
    
    
    5,178
    
    
    
    8,148Other, net
    
    
    (58
    )
    
    
    (21
    )Total other expense
    
    
    5,120
    
    
    
    8,127Income before income taxes
    
    
    2,697
    
    
    
    29,318Income tax expense
    
    
    1,095
    
    
    
    11,803Net income
    
    $
    1,602
    
    
    $
    17,515Earnings per share:Basic earnings per share
    
    $
    0.05
    
    
    $
    0.61Diluted earnings per share
    
    $
    0.05
    
    
    $
    0.58Shares used in computing earnings per share:Basic
    
    
    32,221
    
    
    
    28,786Diluted
    
    
    33,221
    
    
    
    29,948
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PIKE ELECTRIC CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 Three Months EndedSeptember 30,2006
    
    
    2005Cash flows from operating activities:Net income
    
    $
    1,602
    
    
    $
    17,515Adjustments to reconcile net income to net cash provided
by (used in) operating activities:Depreciation and amortization
    
    
    8,954
    
    
    
    9,340Non-compete litigation settlement
    
    
    3,551
    
    
    
    Non-cash interest expense
    
    
    947
    
    
    
    2,490Deferred income taxes
    
    
    (633
    )
    
    
    (1,289
    )Loss on sale of property and equipment
    
    
    367
    
    
    
    145Equity compensation expense
    
    
    272
    
    
    
    984Changes in operating assets and liabilities:Accounts receivable and work completed not billed
    
    
    8,083
    
    
    
    (50,836
    )Inventories, prepaid expenses and other
    
    
    (1,514
    )
    
    
    2,996Insurance and claim accruals
    
    
    8,554
    
    
    
    2,411Accounts payable and other
    
    
    2,254
    
    
    
    15,032Deferred compensation
    
    
    (9,331
    )
    
    
    (7,092
    )Net cash provided by (used in) operating activities
    
    
    23,106
    
    
    
    (8,304
    )Cash flows from investing activities:Purchases of property and equipment
    
    
    (14,457
    )
    
    
    (13,824
    )Net proceeds from sale of property and equipment
    
    
    2,397
    
    
    
    488Net cash used in investing activities
    
    
    (12,060
    )
    
    
    (13,336
    )Cash flows from financing activities:Principal payments on long-term debt
    
    
    (5,000
    )
    
    
    (121,950
    )(Payments) borrowings on revolving credit facility, net
    
    
    (4,500
    )
    
    
    13,500Net proceeds from sale of common stock
    
    
    823
    
    
    
    127,120Equity compensation tax benefit
    
    
    
    
    
    
    1,198Net cash (used in) provided by financing activities
    
    
    (8,677
    )
    
    
    19,868Net increase (decrease) in cash and cash equivalents
    
    
    2,369
    
    
    
    (1,772
    )Cash and cash equivalents beginning of year
    
    
    3,391
    
    
    
    3,106Cash and cash equivalents end of period
    
    $
    5,760
    
    
    $
    1,334
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PIKE ELECTRIC CORPORATION AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended September 30, 2006 and 2005
(In thousands, except per share amounts)
 1. Basis of Presentation
  2. Business
    Three Months Ended September 30,2006
    
    
    2005Powerline services
    
    $
    137,568
    
    
    
    91.8
    %
    
    $
    123,549
    
    
    
    56.6
    %Storm restoration services
    
    
    12,287
    
    
    
    8.2
    
    
    
    94,882
    
    
    
    43.4Total
    
    $
    149,855
    
    
    
    100.0
    %
    
    $
    218,431
    
    
    
    100.0
    %
 3. Stock-Based Compensation
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4. Earnings Per Share
  Three Months EndedSeptember 30,2006
    
    
    2005Net income (numerator)
    
    $
    1,602
    
    
    $
    17,515Weighted-average number of common shares (denominator)
    
    
    32,221
    
    
    
    28,786Basic earnings per common share
    
    $
    0.05
    
    
    $
    0.61Weighted-average number of common shares
    
    
    32,221
    
    
    
    28,786Potential common shares arising from stock options and
restricted stock
    
    
    1,000
    
    
    
    1,162Total shares-diluted (denominator)
    
    
    33,221
    
    
    
    29,948Diluted earnings per common share
    
    $
    0.05
    
    
    $
    0.58
  Three months endedSeptember 30,2006
    
    
    2005Common stock options
    
    
    999
    
    
    
    696Shares of restricted stock
    
    
    17
    
    
    
    
 5. Income Taxes
  6. Commitments and Contingencies
 Litigation
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Performance Bonds
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Introduction
     Three Months Ended September 30,2006
    
    
    2005Powerline services
    
    $
    137.6
    
    
    
    91.8
    %
    
    $
    123.5
    
    
    
    56.6
    %Storm restoration services
    
    $
    12.3
    
    
    
    8.2
    %
    
    $
    94.9
    
    
    
    43.4
    %Total
    
    $
    149.9
    
    
    
    100.0
    %
    
    $
    218.4
    
    
    
    100.0
    %
 Critical Accounting Policies
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Operational and Other Factors
  
    
    When we add new customers and contracts, we generally experience an increase in costs,
including the costs of training and outfitting our crews and spending on equipment and
specialized tools and supplies. Once the crews and equipment are fully utilized, our
margins generally increase over the life of the contract.
    
    The significant storm activity during our fiscal years 2006 and 2005 has had a
significant financial impact on several of our customers. As a result, they may defer
certain powerline maintenance projects, which would affect our powerline revenues.
    
    Industry-wide insurance costs for workmens compensation, medical and general liability
have risen in the past several years and are expected to continue to rise at a rate faster
than our revenues. We have implemented several safety initiatives designed to reduce
incident rates and corresponding insurance costs as well as introduced an employee safety
bonus in fiscal 2005 that has initially increased our costs.
    
    There are a limited number of skilled workers that can perform our work, and during
historic periods of increased demand, labor costs have tended to increase. We have been
experiencing an improved economic cycle, and we are currently experiencing shortages of
skilled personnel in certain markets. While shortages have caused our labor costs to
increase, we historically have been able to obtain increases when we renegotiate rates with
our customers to offset these cost increases.
    
    Our general and administrative expenses will include additional implementation costs
relating to compliance with Section 404 of the Sarbanes-Oxley Act of 2002 and will range
from $1.5 million to $2.5 million in fiscal 2007 compared to approximately $0.7 million in
fiscal 2006.
    
    Fuel costs have risen significantly in the past year and are expected to continue to
rise at a rate faster than our revenues. We have a large fleet of vehicles and equipment
that primarily use diesel fuel. We have implemented bulk purchasing in certain areas to
lower our fuel costs. In addition, we have entered into two diesel fuel swaps that cover,
based on current volumes, approximately 15% of our diesel requirements in October 2006 and
30% of our diesel requirements for the period from November 2006 through February 2008.
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Results of Operations
  Three months endedSeptember 30,2006
    
    
    2005Revenues:Powerline services
    
    
    91.8
    %
    
    
    56.6
    %Storm restoration services
    
    
    8.2
    
    
    
    43.4Total
    
    
    100.0
    %
    
    
    100.0
    %Cost of operations
    
    
    86.8
    
    
    
    77.7Gross profit
    
    
    13.2
    
    
    
    22.3General and administrative expenses
    
    
    7.7
    
    
    
    5.1Loss on sale of property and equipment
    
    
    0.3
    
    
    
    0.1Income from operations
    
    
    5.2
    %
    
    
    17.1
    %Other expense (income):Interest expense, net
    
    
    3.5
    
    
    
    3.7Other, net
    
    
    (0.1
    )
    
    
    Income before income tax
    
    
    1.8
    
    
    
    13.4Income tax expense
    
    
    0.7
    
    
    
    5.4Net income
    
    
    1.1
    %
    
    
    8.0
    %
 Three Months Ended September 30, 2006 Compared to Three Months Ended September 30, 2005
 Revenues.
    Gross Profit.
 General and Administrative Expenses.
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Loss on Sale of Property and Equipment .
 Interest Expense and Other, Net.
 Income Tax Expense.
 Net Income.
 Liquidity and Capital Resources
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Changes in Cash Flows:
 Three Months EndedSeptember 30,2006
    
    
    2005(In millions)Net cash provided by (used in) operating activities
    
    $
    23.1
    
    
    $
    (8.3
    )Net cash used in investing activities
    
    $
    (12.0
    )
    
    $
    (13.3
    )Net cash (used in) provided by financing activities
    
    $
    (8.7
    )
    
    $
    19.9
    Senior Credit Facility
    Off-Balance Sheet Arrangements
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Seasonality; Fluctuations of Results
  Inflation
  Recent Accounting Pronouncements
 Accounting Changes and Error Corrections, a replacement of
ABP Opinion No. 20, Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes in
Interim Financial Statements.
 Accounting for
Conditional Asset Retirement Obligations  an interpretation of FASB Statement No. 143,
Accounting for Asset Retirement Obligations conditional asset retirement obligation,
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Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans
 Uncertainty of Forward-Looking Statements and Information
  
    
    our belief that the lawsuits, claims or other proceedings to which we are subject in the
ordinary course of business will not have a material adverse effect on the Companys
results of operation or financial position;
    
    our expectation that our general and administrative expenses will include additional
implementation costs relating to compliance with Section 404 of the Sarbanes-Oxley Act of
2002 and will range from $1.5 million to $2.5 million in fiscal 2007 compared to
approximately $0.7 million in fiscal 2006; and
    
    our belief that our cash flow from operations and borrowings available under our senior
credit facility will be adequate to meet our ordinary course liquidity needs for the
foreseeable future.
  
    
    We derive a significant portion of our revenues from a small group of customers. The
loss of one or more of these customers could negatively impact our business and results of
operations.
    
    Our customers often have no obligation to assign work to us, and many of our
arrangements may be terminated on short notice. As a result, we are at risk of losing
significant business on short notice. This risk may be accentuated for customers we
obtained in the Red Simpson acquisition.
    
    Our storm restoration services are highly volatile and unpredictable, which could result
in substantial variations in, and uncertainties regarding, the levels of our financial
results from period to period.
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
    
    Our business is subject to numerous hazards that could subject us to substantial
monetary and other liabilities. If accidents occur, they could materially and adversely
affect our business and results of operations.
    
    Our current insurance coverage may not be adequate, and we may not be able to obtain
insurance at acceptable rates, or at all.
    
    Record high fuel costs could materially and adversely affect our operating results.
    
    Demand for some of our services is cyclical and vulnerable to industry and economic
downturns, which could materially and adversely affect our business and results of
operations.
    
    The Energy Policy Act may fail to result in increased spending in the electric power
transmission infrastructure, which could slow our expected growth.
    
    Failure to establish and maintain effective internal control over financial reporting
could have a material adverse effect on our business, operating results and stock price.
    
    To be successful, we need to attract and retain qualified personnel, and any inability
to do so would adversely affect our business.
    
    We are dependent on our senior management and other key personnel, the loss of which
could have a material adverse effect on our business.
    
    Our industry is highly competitive and we may be unable to compete effectively, retain
our customers or win new customers, which could result in reduced profitability and loss of
market share.
    
    We may be unsuccessful at acquiring companies or at integrating companies that we may
acquire, and as a result, we may not achieve the expected benefits and our profitability
could materially suffer.
    
    We have a substantial amount of indebtedness incurred under a senior credit facility,
which may restrict our business and operations, adversely affect our cash flow, and
restrict our future access to sufficient funding to finance desired growth.
    
    We are in the process of implementing certain financial and accounting applications and
investigating a company-wide ERP system which could temporarily disrupt our day-to-day
operations
    
    During the ordinary course of our business, we may become subject to lawsuits or
indemnity claims, which could materially and adversely affect our business and results of
operations.
    
    Our failure to comply with, or the imposition of liability under, environmental laws and
regulations could result in significant costs.
    
    The electric infrastructure servicing business is subject to seasonal variations, which
may cause our operating results to vary significantly from period to period and could cause
the market price of our stock to fall.
    
    Weather conditions can adversely affect our operations and revenues.
    
    We have incurred and will continue to incur increased costs as a result of being a public company.
    
    Our results of operations could be adversely affected as a result of the impairment of
goodwill or other intangibles.
    
    The market price of our stock may be influenced by many factors, some of which are
beyond our control.
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
    
    Shares eligible for future sale may cause the market price of our common stock to drop
significantly, even if our business is doing well.
    
    A significant stockholder controls the direction of our business. The concentrated
ownership of our common stock will prevent you and other stockholders from influencing
significant corporate decisions.
    
    Anti-takeover provisions of our charter and bylaws may reduce the likelihood of any
potential change of control or unsolicited acquisition proposal that stockholders might
consider favorable.
   
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures
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PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
    
 Item 1A.     Risk Factor s
  
 Item 6. Exhibits
 Exhibit
    
    Description10.1
    
    Separation Agreement and General Release, dated as of October 31,
2006, between Mark Castaneda and Pike Electric, Inc. (Incorporated
by reference to Exhibit 10.1 on our Form 8-K filed November 6,
2006)31.1
    
    Certification of Periodic Report by Chief Executive Officer
pursuant to Rule 13a-14(a)/15d-14a and pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 (filed herewith)31.2
    
    Certification of Periodic Report by Chief Financial Officer
pursuant to Rule 13a-14(a)/15d-14a and pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 (filed herewith)32.1
    
    Certification of Periodic Report by Chief Executive Officer and
Chief Financial Officer pursuant to U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(filed herewith)
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SIGNATURES
  PIKE ELECTRIC CORPORATION
(Registrant)Date: November 14, 2006
    
    By:
    
    /s/ J. Eric PikeJ. Eric Pike
Chairman, Chief Executive Officer and PresidentDate: November 14, 2006
    
    By:
    
    /s/ Anthony K. SlaterAnthony K. Slater
Chief Financial Officer
 17