Powell Industries, Inc. — Fiscal 2018 Form 10-K Summary
Business context and reporting period
Powell designs, manufactures and services custom-engineered electrical distribution, control and monitoring systems for oil and gas, petrochemical, utility, mining, transit and other heavy industrial markets. The filing covers the fiscal year ended September 30, 2018. Fiscal fourth-quarter revenue was $134.9 million and net income was $1.5 million.
Projects are generally engineered to order, competitively bid and accounted for primarily under the percentage-of-completion method. Results can fluctuate materially with project timing, customer approvals, change orders and contract cost estimates.
Financial performance and position
| Metric | Fiscal 2018 | Fiscal 2017 | Change |
|---|---|---|---|
| Revenue | $448.7 million | $395.9 million | Up 13% |
| Gross profit | $65.4 million | $50.8 million | Up 29% |
| Gross margin | 15% | 13% | Up 2 percentage points |
| Operating loss | $9.1 million | $19.3 million | Improved $10.2 million |
| Net loss | $7.2 million | $9.5 million | Improved $2.3 million |
| Diluted loss per share | $0.62 | $0.83 | Improved |
| Cash flow from operations | $(28.5) million | $36.8 million | Decreased $65.4 million |
| Backlog | $260.9 million | $250.1 million | Up 4% |
| New orders | $458.9 million | $355.1 million | Up 29% |
Domestic revenue increased 19% to $332.2 million, while international revenue was approximately flat at $116.5 million. Commercial and industrial revenue rose 28% to $325.2 million, utility revenue rose 6% to $89.0 million, and municipal and transit revenue declined 40% to $34.5 million. Approximately $7 million of commercial and industrial revenue related to Hurricane Harvey remediation.
SG&A increased 9% to $66.8 million, primarily because of higher performance-based compensation, but declined to 15% of revenue from 16%. Research and development expense was $6.7 million. Restructuring expense was $0.8 million, compared with $1.3 million in fiscal 2017.
At September 30, 2018, cash, cash equivalents and short-term investments totaled $49.8 million, excluding $25.1 million of restricted cash. Total assets were $430.0 million and stockholders’ equity was $301.6 million. Long-term debt, including current maturities, was $1.6 million, and reported debt to total capitalization was 0.53%.
Current assets exceeded current liabilities by 2.3 times. However, cash declined from $95.2 million at September 30, 2017, as working capital funded higher project volume. Accounts receivable increased to $92.5 million from $53.9 million, and costs and estimated earnings in excess of billings increased to $82.5 million from $51.6 million.
Capital expenditures were $4.5 million. The Company paid $11.9 million of dividends, or $1.04 per share, and declared a subsequent quarterly dividend of $0.26 per share in November 2018.
Material changes versus prior comparable period
- Revenue, orders and backlog improved as core oil, gas and petrochemical markets began recovering and U.S. commercial and industrial demand strengthened.
- Gross margin improved because of higher volume and manufacturing efficiencies.
- The Company remained loss-making, but reduced its net loss and operating loss substantially.
- Operating cash flow turned negative because increased accounts receivable, contract assets and inventories absorbed cash during the project-volume ramp-up.
- Cash and short-term investments decreased by $45.4 million, while restricted cash increased slightly to $25.1 million.
- Accumulated other comprehensive loss increased to $21.8 million, primarily because of Canadian dollar and British pound translation effects.
Guidance, outlook, risks and unusual items
Management stated that the increase in new orders, revenue and operating results was expected to continue into fiscal 2019. Management also said available cash, short-term investments and working capital should be sufficient for operations, capital improvements, research and development and debt repayments for the foreseeable future. The filing does not provide quantitative revenue or earnings guidance.
The $75.0 million U.S. revolving facility had no borrowings, but could generally be used only for letters of credit until specified financial ratios were achieved. Letters of credit outstanding totaled $23.1 million, and $51.9 million remained available for issuance, subject to cash-collateral requirements. The Company was in compliance with its covenants at year-end.
Key exposures include oil and gas spending cycles, project cancellations and delays, percentage-of-completion estimates, fixed-price contract execution, commodity prices and tariffs, supplier concentration, skilled-labor availability, competition, foreign currency movements, customer credit risk, cybersecurity, legal claims, warranty costs and liquidated damages.
Letters of credit and bank guarantees totaled $26.4 million, while performance and maintenance bonds totaled $160.6 million. Potential liquidated-damages exposure was $2.4 million, of which approximately $0.7 million was considered probable and recorded as a reduction of revenue. Outstanding surety bonds included additional bonding capacity of $589.4 million.
Fiscal 2018 operating loss was reduced by $3.9 million from changes in estimates on projects in progress, reflecting execution and close-out improvements. The Company also recorded $0.8 million of restructuring expense related to anticipated losses on subletting a previously exited Canadian facility.
The Company planned to adopt the new revenue-recognition standard in the quarter ending December 31, 2018, using the modified retrospective method. Management estimated that the cumulative retained-earnings adjustment would not be material.
Most important facts for investors to verify
- Whether the reported improvement in orders and backlog converts into profitable revenue and positive operating cash flow.
- Collection of the substantially higher accounts receivable and contract-asset balances.
- Compliance with the U.S. Revolver’s leverage and fixed-charge-coverage requirements and the timing of release of restricted cash.
- Actual project margins, contract-estimate revisions, change orders, claims and liquidated-damages outcomes.
- Exposure to oil and gas capital spending, commodity prices, tariffs and supplier disruptions.
- Impact of the new revenue-recognition standard on contract assets, liabilities, revenue timing and retained earnings.
- Future dividend sustainability while the Company reports net losses and negative operating cash flow.