Powell Industries, Inc. — Form 10-Q Summary
Business context and reporting period
Powell develops, manufactures and services custom engineered-to-order equipment and systems for managing electrical energy and other critical processes. Its reportable segments are Electrical Power Products and Process Control Systems, serving transportation, environmental, energy, industrial and utility markets.
This unaudited Form 10-Q covers the three and nine months ended June 30, 2013, the third quarter and first nine months of fiscal 2013. Comparisons are to the corresponding periods of fiscal 2012, with balance-sheet comparisons to September 30, 2012.
Key financial metrics
| Metric | Q3 FY2013 | Q3 FY2012 | 9M FY2013 | 9M FY2012 |
|---|---|---|---|---|
| Revenue | $179.5 million | $194.1 million | $487.4 million | $533.0 million |
| Gross profit | $38.5 million | $43.8 million | $104.0 million | $98.5 million |
| Gross margin | 21.4% | 22.6% | 21.3% | 18.5% |
| Operating income | $12.5 million | $18.3 million | $30.8 million | $30.2 million |
| Net income | $9.3 million | $12.1 million | $23.5 million | $17.8 million |
| Diluted EPS | $0.77 | $1.02 | $1.96 | $1.50 |
| Operating cash flow | Not separately provided | Not separately provided | $88.7 million | $6.5 million |
At June 30, 2013, cash and cash equivalents were $124.9 million, compared with $90.0 million at September 30, 2012. Current assets exceeded current liabilities by 2.2 times, and debt to total capitalization was 1.1%.
Total debt and capital lease obligations were $3.6 million, including $3.2 million of long-term debt, compared with $4.4 million at September 30, 2012. Powell had no borrowings under its $75.0 million U.S. revolver or its approximately $9.5 million Canadian revolver. Availability was $56.2 million under the U.S. facility and $9.4 million under the Canadian facility, after letters of credit.
Material changes versus the prior comparable period
- Third-quarter revenue declined 7.5%, primarily because several complex domestic and international petrochemical and oil and gas projects completed in the prior year. International revenue decreased 19.1%, while domestic revenue increased 2.2%.
- Nine-month revenue declined 8.6%, but gross profit increased 5.6% and gross margin expanded by 2.8 percentage points, primarily because fiscal 2012 included execution challenges and cost overruns on certain Powell Canada projects.
- Third-quarter net income and diluted EPS decreased 23.3% and 24.5%, respectively, reflecting lower revenue, lower gross profit and a $1.7 million restructuring and relocation charge recognized during the nine-month period. The quarter also benefited from a lower effective tax rate of 25.6% versus 33.6%.
- Nine-month net income increased 32.1%, with the effective tax rate declining to 27.4% from 40.9%. The lower tax rate reflected the reinstated Federal R&D Tax Credit, Canadian loss carryforward utilization and foreign tax credits.
- Backlog increased to $496.1 million at June 30, 2013, from $436.7 million at September 30, 2012 and $433.5 million at June 30, 2012. Third-quarter orders were $154.9 million.
- Capital expenditures increased to $53.7 million from $25.5 million, largely for new facilities in Houston and near Edmonton and for business-system upgrades.
Guidance, outlook, risks and unusual items
- Management expects long-term demand to benefit from energy growth and replacement of aging infrastructure, but describes near-term project timing and pricing as difficult to predict because markets are cyclical, competitive and affected by global economic conditions.
- Two new facilities were expected to be completed in late summer 2013, with relocation planned for the fourth quarter of fiscal 2013. Total facility costs were estimated at approximately $75 million, of which $55.7 million had been incurred.
- Additional relocation costs of approximately $2.0 million to $2.5 million were expected over the following three to six months. Powell also expected potential additional non-cash depreciation of approximately $2.2 million annually after the new facilities entered service.
- Powell expected to record a potential loss in the fourth quarter related to subleasing its Canadian facility. The lease expires in July 2023 and costs approximately $1.2 million annually; no assurance was provided that a sublease would cover those costs.
- A $1.7 million settlement received in April 2013 from litigation against the former owners of Powell Canada was recorded as other income.
- Management continued to pursue recovery of approximately $1.4 million of Canadian project cost overruns recorded in other assets. Revenue had not been recognized for those amounts because recovery was not considered probable until customer change orders were approved.
- Outstanding performance and maintenance bonds totaled $275.6 million, with additional bonding capacity of $124.4 million. Letters of credit totaled $18.9 million, and additional guarantees under a foreign facility totaled $4.9 million.
- Key risks include fixed-price and percentage-of-completion contracts, project delays and cancellations, commodity-price volatility, customer credit risk, international and foreign-currency exposure, competition, skilled-labor availability, litigation, and construction and start-up risks related to the new facilities.
- Management stated that cash, operating cash flow and available borrowing capacity should be sufficient for anticipated operations, capital improvements, expansions and debt repayments. The filing provides no formal earnings or revenue guidance.
Important facts for investors to verify
- Whether the $496.1 million backlog converts to revenue and cash flow as expected, given the company’s warnings regarding cancellations, change orders, engineering delays and project execution.
- The final cost and completion timing of the Houston and Edmonton-area facilities, including the expected $2.0 million to $2.5 million of additional relocation costs.
- Any fourth-quarter sublease loss related to the Canadian facility and the ongoing annual lease exposure.
- Progress in recovering the approximately $1.4 million of Canadian project cost overruns and the ultimate impact of unresolved change orders.
- Whether higher capital spending and new-facility depreciation affect future margins and liquidity.
- Compliance with financial covenants and availability under the U.S. and Canadian revolvers, including the effect of letters of credit and performance bonds.
- The sustainability of the lower effective tax rate, which depends partly on tax credits and Canadian loss carryforward utilization.
- The filing’s statement that disclosure controls were effective and that there were no material changes in internal control over financial reporting.