Powell Industries, Inc. — Fiscal 2011 Form 10-K Summary
Reporting period: Fiscal year ended September 30, 2011. The filing also provides unaudited quarterly data, including fourth-quarter results. Powell designs, manufactures and services engineered-to-order electrical power equipment and process-control systems through its Electrical Power Products and Process Control Systems segments.
Financial performance and liquidity
| Metric | Fiscal 2011 | Fiscal 2010 |
|---|---|---|
| Revenue | $562.4 million | $550.7 million |
| Gross profit | $99.9 million | $142.1 million |
| Gross margin | 17.8% | 25.8% |
| Operating income | $3.0 million | $45.7 million |
| Net income attributable to Powell | $(2.7) million | $25.0 million |
| Diluted EPS | $(0.23) | $2.14 |
| Cash flow from operations | $15.5 million | $64.1 million |
| Capital expenditures | $7.3 million | $4.4 million |
| Cash and cash equivalents | $123.5 million | $115.4 million |
| Total debt and capital leases | $5.4 million | $6.9 million |
- Current assets exceeded current liabilities by approximately 2.4 times, and debt represented 1.9% of total capitalization.
- No amounts were outstanding under the $75.0 million U.S. revolver or approximately $19.4 million Canadian revolver at year-end. Availability was $61.8 million in the U.S. and $16.5 million in Canada after applicable limitations.
- Letters of credit totaled $22.5 million, of which $13.2 million reduced U.S. revolver availability. Performance and maintenance bonds outstanding totaled $195.1 million.
- Fourth-quarter revenue was $171.2 million, gross profit was $27.3 million, and the company recorded a fourth-quarter net loss of $7.0 million, primarily reflecting the Powell Canada intangible-asset impairment and other items.
Material changes versus the prior comparable period
- Revenue increased 2.1%, but gross profit declined 29.7% and gross margin fell 8.0 percentage points. Management attributed the deterioration primarily to competitive pricing pressure, higher commodity costs and execution problems on large Powell Canada projects.
- Electrical Power Products revenue increased to $533.3 million from $517.1 million, while segment gross margin declined to 17.2% from 25.1%.
- Process Control Systems revenue declined to $29.1 million from $33.6 million, and segment gross margin declined to 28.2% from 36.5% because of a less favorable project mix.
- New orders increased to $725.2 million from $466.8 million, raising ending backlog to $443.0 million from $282.3 million. Approximately $392 million of the ending backlog was expected to be fulfilled during fiscal 2012: approximately $370 million in Electrical Power Products and $22 million in Process Control Systems.
- Operating cash flow fell to $15.5 million from $64.1 million, principally because of the net loss, higher accounts receivable and increased costs and estimated earnings in excess of billings.
- Powell recorded a $7.2 million impairment of Powell Canada intangible assets in fiscal 2011. Fiscal 2010 included a $7.5 million goodwill impairment related to Powell Canada.
- A $1.2 million gain was recorded from the sale of the company’s 50% Kazakhstan investment.
- The effective tax rate increased to approximately 168% from 44%, mainly because Powell could not recognize a $4.5 million tax benefit associated with Canadian losses and maintained a valuation allowance against Canadian deferred tax assets.
Guidance, outlook, risks and unusual items
- Management expected backlog growth and large petrochemical and offshore oil and gas projects to support fiscal 2012 activity, but warned that competitive bidding and higher commodity prices would pressure margins through fiscal 2012 and 2013.
- Management stated that cash, projected operating cash flow and available borrowing capacity should fund anticipated operations, capital improvements and debt repayments for the foreseeable future.
- Key business risks include cyclical capital spending, oil-price and economic uncertainty, customer delays or cancellations, fixed-price contract exposure, commodity-price volatility, supplier constraints, competition, offshore drilling regulation and international currency or political risks.
- Revenue is frequently recognized using percentage-of-completion accounting. Changes in estimated contract costs, change orders, project delays, claims or liquidated damages could cause significant earnings volatility.
- Powell Canada presented significant execution and integration challenges and generated continued operating losses. The company stated that these issues could negatively affect fiscal 2012 net income.
- Management identified material weaknesses in internal control over financial reporting at Powell Canada involving the financial close, long-term-project revenue recognition, cost accumulation, and service-contract revenue and receivables processes.
- Previously issued second- and third-quarter fiscal 2011 financial statements were determined to be unreliable because of Canadian accounting errors and were corrected through amended Form 10-Q filings. PricewaterhouseCoopers issued an adverse opinion on the effectiveness of internal control over financial reporting, while expressing an unqualified opinion on the consolidated financial statements.
- Remediation included hiring accounting personnel, additional training, ERP training, review of user access and segregation of duties, consultant assistance and internal-audit monitoring. The weaknesses had not yet operated long enough to be considered remediated.
- The company recorded $2.6 million of separation payments and related compensation expense for its former CEO in the fourth quarter; $1.2 million was paid in October 2011.
- The company paid no cash dividends and stated that credit agreements restricted dividends without lender consent.
Most important facts for investors to verify
- Whether Powell Canada’s control weaknesses were fully remediated and whether subsequent filings identify additional misstatements or restatements.
- Actual margins and cash conversion on the large petrochemical and offshore oil and gas projects in the $443.0 million backlog.
- Backlog cancellations, delays, change-order recoverability and customer credit quality, particularly for fixed-price and percentage-of-completion contracts.
- Availability and renewal status of the Canadian revolving facility, which was scheduled to expire February 29, 2012, and compliance with all credit-facility covenants.
- Commodity-cost trends and Powell’s ability to pass steel, copper, aluminum and component-cost increases through to customers.
- Future tax recoverability in Canada, the $6.2 million Canadian deferred-tax valuation allowance and the $0.8 million of unrecognized tax benefits.
- Exposure represented by $195.1 million of performance and maintenance bonds, $22.5 million of letters of credit and other contractual commitments.