Powell Industries, Inc. — Fiscal 2021 Second-Quarter 10-Q Summary
Business Context and Reporting Period
Powell designs, manufactures and services custom-engineered electrical distribution, control and monitoring equipment for oil and gas, petrochemical, electric utility, traction power and other industrial markets. The filing covers the three and six months ended March 31, 2021, Powell’s fiscal second quarter and first half of Fiscal 2021. Results were significantly affected by COVID-19, lower oil and gas demand, customer project delays and cancellations, facility underutilization and higher copper and steel costs.
Key Financial Metrics
| Metric | Q2 Fiscal 2021 | Q2 Fiscal 2020 | Six Months Fiscal 2021 | Six Months Fiscal 2020 |
|---|---|---|---|---|
| Revenue | $118.7 million | $151.6 million | $225.3 million | $285.7 million |
| Gross profit | $17.2 million | $29.7 million | $35.4 million | $51.5 million |
| Gross margin | 14% | 20% | 16% | 18% |
| Operating income (loss) | $(1.2) million | $9.3 million | $(1.5) million | $12.3 million |
| Net income (loss) | $(0.2) million | $7.4 million | $(0.6) million | $10.2 million |
| Diluted EPS | $(0.02) | $0.64 | $(0.05) | $0.87 |
| Operating cash flow | Not separately provided | Not separately provided | $(18.1) million | $7.4 million |
- Cash and cash equivalents were $134.1 million at March 31, 2021, compared with $160.2 million at September 30, 2020. Cash, cash equivalents and short-term investments totaled $153.9 million.
- Current assets exceeded current liabilities by 2.5 times. Total assets were $440.7 million and stockholders’ equity was $306.3 million.
- Total debt was $0.4 million, consisting of current industrial development revenue bond maturities. Debt to total capitalization was 0.13%.
- The $75.0 million revolving credit facility had no borrowings, $38.6 million of outstanding letters of credit and $36.4 million available for borrowings and additional letters of credit.
- Backlog was $436.6 million at March 31, 2021, including approximately $322.7 million expected to be recognized as revenue within twelve months.
Material Changes Versus Prior Comparable Period
- Second-quarter revenue declined 22%, or $32.9 million, primarily from lower orders, project delays and cancellations. Six-month revenue declined 21%, or $60.4 million.
- Petrochemical revenue fell 78% in the quarter and 75% year to date. Oil and gas revenue declined 3% in the quarter and 19% year to date.
- Utility and traction power revenue increased in both comparable periods, partially offsetting declines in energy-related markets.
- Second-quarter gross profit declined 42%, and gross margin fell to 14% from 20%. Management cited underutilization, a one-week Texas facility shutdown caused by Winter Storm Uri, and higher copper and steel costs.
- SG&A declined 10% in the quarter and 6% year to date due to prior restructuring, lower personnel costs and reduced travel, but SG&A as a percentage of revenue increased.
- Bookings, net of cancellations and scope reductions, declined 71% in the quarter to $88.5 million and 59% year to date to $179.6 million. Backlog declined 23% from March 31, 2020 and 8% from September 30, 2020.
- Operating cash flow changed from $7.4 million provided in the first half of Fiscal 2020 to $18.1 million used in the first half of Fiscal 2021, primarily due to collections and contract billing milestone timing.
Guidance, Outlook, Risks and Unusual Items
- Management expects cyclical conditions to persist throughout Fiscal 2021 and cannot reasonably estimate the duration or severity of the COVID-19-related disruption.
- A substantial Fiscal 2020 contract for a large domestic industrial complex is expected to be substantially completed in Fiscal 2022 and represented approximately 20% of second-quarter consolidated revenue.
- Management may reduce capital expenditures, research and development spending, and future dividends to preserve liquidity. A quarterly dividend of $0.26 per share was declared on May 4, 2021.
- First-half results benefited by $8.2 million from changes in contract estimates, including favorable project execution, variable consideration, project cancellations and reduced costs. Contract-estimate changes contributed $9.0 million in the prior-year period.
- The effective tax rate was unusually high at 81% in the quarter and 59% year to date, despite tax benefits, due primarily to the mix of income and losses across jurisdictions, Canadian tax attributes and the estimated R&D tax credit.
- Backlog is subject to cancellations, scope reductions, customer delays and modifications and may not reliably predict future revenue or earnings. Fixed-price contracts expose Powell to labor, material, commodity, execution, liquidated-damages and customer-credit risks.
- Powell had $173.4 million of outstanding surety bonds and $38.6 million of letters of credit. Sureties could require cash collateralization if market conditions or their assessment of Powell’s financial position changes.
- Powell was in compliance with its revolving-credit and bond covenants at March 31, 2021. Litigation was not expected by management to have a material adverse effect, although outcomes are uncertain.
Important Facts for Investors to Verify
- Whether bookings and backlog stabilize or continue declining, particularly in oil and gas and petrochemical markets.
- The timing, profitability and remaining execution risk of the large domestic industrial project.
- Whether copper, steel and other input-cost inflation continues to pressure fixed-price contract margins.
- Whether negative operating cash flow and contract billing timing improve during the remainder of Fiscal 2021.
- Powell’s ability to maintain credit-facility covenant compliance and access to letters of credit if EBITDAS declines.
- The sustainability of the $0.26 quarterly dividend given management’s stated willingness to reduce or eliminate future payments.