Powell Industries, Inc. — Form 10-Q Summary
Business context and reporting period
Powell develops, manufactures and services custom-engineered electrical distribution, control and monitoring equipment for oil and gas, petrochemical, utility, mining, transit and other industrial markets. This unaudited Form 10-Q covers the quarter and nine months ended June 30, 2016, the third quarter and first nine months of fiscal 2016.
Key financial metrics
| Metric | Three months ended June 30, 2016 | Three months ended June 30, 2015 | Nine months ended June 30, 2016 | Nine months ended June 30, 2015 |
|---|---|---|---|---|
| Revenue | $133.2 million | $176.7 million | $435.5 million | $499.5 million |
| Gross profit | $27.3 million | $32.9 million | $80.5 million | $78.3 million |
| Gross margin | 20.5% | 18.6% | 18.5% | 15.7% |
| Operating income | $5.5 million | $11.8 million | $9.3 million | $11.8 million |
| Operating margin | 4.2% | 6.7% | 2.1% | 2.4% |
| Net income | $4.9 million | $7.0 million | $10.0 million | $3.1 million |
| Diluted earnings per share | $0.43 | $0.60 | $0.87 | $0.26 |
- Cash and cash equivalents were $89.4 million at June 30, 2016, compared with $43.6 million at September 30, 2015.
- Operating cash flow was $61.8 million for the first nine months, compared with $18.6 million in the prior-year period. The improvement primarily reflected collections, project milestone billings, inventory reduction and payment timing.
- Capital expenditures were $2.0 million, down from $34.2 million, primarily because the Canadian facility expansion was completed in fiscal 2015.
- Total debt was $2.4 million, consisting of industrial development revenue bonds, compared with $2.8 million at September 30, 2015. Debt to total capitalization was 0.71%.
- No borrowings were outstanding under the $75.0 million U.S. revolving facility or the $7.7 million Canadian revolver. Availability was $48.2 million and $7.7 million, respectively, after consideration of letters of credit.
- Current assets exceeded current liabilities by approximately 2.6 times. Approximately $30 million of cash was held outside the United States and was intended to remain reinvested internationally.
- Dividends were $0.26 per share for the quarter and $0.78 per share for the nine months. The company repurchased 806,018 shares for approximately $25 million under a program that expired December 31, 2015.
Material changes versus the prior comparable period
- Third-quarter revenue declined 25%, or $43.5 million, primarily because of reduced project backlog and lower oil and gas market demand. Domestic revenue fell 30% to $94.0 million; international revenue fell 8% to $39.2 million.
- First-nine-month revenue declined 13%, or $64.1 million. Commercial and industrial revenue decreased, while utility revenue increased.
- Gross margin improved in both comparison periods because of better project execution, operational efficiency and lower Canadian operating costs. The improvement was partly offset by lower domestic volume and cost overruns on a large transit project.
- Third-quarter net income declined primarily because of lower revenue. First-nine-month net income increased despite lower revenue because of improved international gross profit and substantially lower income taxes, partially offset by higher restructuring and separation costs.
- Backlog declined to $311.6 million at June 30, 2016 from $441.4 million at September 30, 2015. New orders were $88.1 million in the quarter versus $193.2 million in the prior-year quarter and $306.7 million for the nine months versus $514.7 million.
- The effective tax rate was 19% in the quarter and 8% for the nine months, compared with 42% and 77%, respectively. Fiscal 2016 benefited from the mix of Canadian income, use of Canadian net operating losses and a $0.8 million discrete research and development tax credit item.
Outlook, commentary, risks and unusual items
- Management expects continued pressure from low oil and gas prices, reduced customer capital spending, project deferrals or cancellations, competitive pricing and a smaller backlog. The filing does not provide specific financial guidance.
- Management expects cash on hand and borrowing capacity to fund operations, capital improvements and debt repayments for the foreseeable future, but operating results and cash flows remain sensitive to project timing, milestone billings, customer schedules, change orders and contract claims.
- Restructuring and separation costs were $7.7 million for the first nine months, including $3.8 million related to the former chief executive officer’s departure. Approximately $5.3 million had been paid and $2.4 million remained payable over the following fifteen months.
- Potential liquidated-damages exposure was $7.4 million, of which approximately $1.7 million was considered probable and recorded as a reduction of revenue. Additional amounts could be payable if contractual relief is not obtained.
- Outstanding letters of credit totaled $26.8 million, and surety bonds totaled $233.0 million, with additional bonding capacity of $517.0 million. Management stated that litigation outcomes were not expected to have a material adverse effect, although outcomes remain uncertain.
- Key risks include fixed-price and percentage-of-completion contract estimates, raw-material price volatility, foreign currency exposure, customer credit risk, cyclical oil and gas markets, project delays, liquidated damages, competition, skilled-labor availability and potential impairment if the downturn persists.
- Accumulated other comprehensive loss was $21.7 million, primarily reflecting foreign currency translation effects. The company does not currently hedge foreign currency translation or commodity price exposure.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether backlog and new-order trends stabilize or continue declining, particularly in oil and gas markets.
- Whether improved Canadian execution and gross margins offset lower domestic volume and transit-project cost overruns.
- The sustainability of operating cash flow, given its sensitivity to milestone billings, collections and working-capital timing.
- Future restructuring payments, separation costs and any additional workforce or facility actions.
- Potential liquidated damages, contract claims, warranty costs and other contingencies beyond recorded amounts.
- The recurring versus discrete components of the unusually low fiscal 2016 effective tax rate.
- Availability under revolving facilities after letters of credit, compliance with debt covenants and the scheduled repayment of industrial development revenue bonds.
- The effect of foreign exchange movements, commodity prices and prolonged low oil and gas prices on margins, cash flow and asset recoverability.