Powell Industries, Inc. — Fiscal 2017 Third-Quarter Form 10-Q
Reporting period: Quarter and nine months ended June 30, 2017; comparative periods ended June 30, 2016. Powell designs, manufactures and services custom-engineered electrical distribution, control and monitoring equipment for industrial, utility, transportation and infrastructure markets.
Financial Performance and Position
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Revenue | $85.9 million, down 35% | $300.9 million, down 31% |
| Gross profit | $9.1 million; 11.0% margin | $39.9 million; 13.2% margin |
| Operating income (loss) | $(7.5) million | $(12.5) million |
| Net income (loss) | $(3.2) million; $(0.28) diluted EPS | $(4.3) million; $(0.38) diluted EPS |
| Operating cash flow | Not separately provided | $27.1 million |
- Gross margin declined from 20% to 11% in the quarter and from 18% to 13% for the nine-month period, reflecting lower volume, manufacturing underutilization and pricing pressure, partly offset by favorable project execution.
- Cash and cash equivalents were $32.5 million at June 30, 2017. Short-term investments were $55.4 million, and restricted cash totaled $25.3 million current and $9.8 million non-current on the balance sheet. Cash, cash equivalents and short-term investments totaled $87.8 million, excluding restricted cash.
- Total assets were $424.3 million and stockholders’ equity was $325.1 million at June 30, 2017.
- Total debt was $2.0 million, consisting of industrial development revenue bonds. Debt-to-total-capitalization was 0.61%.
- The company had no borrowings under its $75.0 million U.S. revolving facility, $24.6 million of outstanding letters of credit and $50.4 million of availability. Current assets exceeded current liabilities by 2.9 times.
- Dividends were $0.26 per share for the quarter and $0.78 per share for the nine-month period. The board declared another $0.26 per-share dividend payable September 13, 2017.
Material Changes Versus Prior Comparable Period
- Quarterly revenue decreased $47.3 million, primarily due to continued backlog contraction and lower demand in oil, gas and petrochemical markets. Domestic revenue fell 41%, while international revenue fell 21%.
- Commercial and industrial revenue declined 52% in the quarter and 42% for the nine-month period. Utility revenue increased 25% in the quarter but declined 22% year to date; municipal and transit revenue increased 67% year to date.
- Quarterly gross profit fell 67%, and the company moved from $5.5 million of operating income and $4.9 million of net income in the prior-year quarter to operating and net losses.
- Year-to-date operating cash flow declined from $61.8 million to $27.1 million, primarily because of reduced earnings.
- Backlog was $232.9 million at June 30, 2017, down from $291.4 million at September 30, 2016. Nine-month new orders were $243.5 million versus $306.7 million in the prior-year period.
- SG&A expense declined 24% in the quarter and 20% year to date due to cost reductions and lower incentive compensation, but SG&A represented a larger percentage of revenue.
- Restructuring and separation costs were $0.8 million year to date versus $7.7 million in the prior-year period; none were incurred in the current quarter.
- Changes in contract estimates improved operating results by approximately $3.6 million in the quarter and $7.4 million year to date, primarily from project execution, close-out improvements and changed facts and circumstances.
Guidance, Outlook, Risks and Unusual Items
- Management expects a net loss for Fiscal 2017 and stated that near-term cost reductions will not be sufficient to avoid operating losses.
- The outlook remains pressured by depressed oil, gas and petrochemical markets, weak customer capital spending, competitive pricing, project delays or cancellations and facility underutilization. Management stated that the duration of the depressed market cycle is difficult to predict.
- Potential liquidated-damages exposure was $6.8 million, of which approximately $1.5 million was considered probable and recorded as a reduction of revenue. Additional amounts could be incurred if change orders, extensions or accelerated completion do not resolve obligations.
- Outstanding surety bonds totaled $221.7 million, with $528.3 million of additional bonding capacity. Outstanding letters of credit totaled $24.6 million.
- The June 2017 credit amendment extended the U.S. revolver maturity to June 2022 and required pledged cash collateral equal to 102% of outstanding revolver and letter-of-credit obligations during a cash-collateral period. The company was in compliance with its financial covenants.
- Powell received the final $2.3 million payment under its amended GE supply agreement in April 2017 and recognized $1.5 million of related other income during the nine-month period. Approximately $1.0 million remained in the deferred credit balance at June 30.
- The effective tax rate was unusually favorable at 53% for the quarter and 60% year to date, benefiting from Canadian net operating loss carryforward utilization and discrete research and development tax credits.
- Management believes available cash, investments and borrowing capacity are sufficient for foreseeable operating, capital and debt requirements. Approximately $33 million of cash and short-term investments was held outside the United States and intended to remain reinvested internationally.
- Key risks include cyclical oil and gas demand, backlog cancellations, percentage-of-completion estimates, fixed-price contract exposure, commodity prices, liquidated damages, foreign exchange, litigation, skilled labor availability, cybersecurity and regulatory changes. Management reported no material changes to previously disclosed risk factors.
Investor Verification Checklist
- Verify whether backlog, new orders and margins stabilize or continue to decline after June 30, 2017.
- Assess the sustainability of the $3.6 million quarterly and $7.4 million year-to-date benefit from contract-estimate changes.
- Review cash availability after excluding $25.3 million of pledged collateral and consider the effect of outstanding letters of credit and surety bonds.
- Monitor liquidated-damages exposure, contract claims, change orders and project close-outs for additional margin or cash impacts.
- Evaluate whether the company can maintain dividends while reporting losses and operating under revolver covenant restrictions.
- Review the timing and expected impact of the pending revenue-recognition standard and other accounting standards described in the filing.