Powell Industries, Inc. — Fiscal 2022 Second-Quarter Form 10-Q
Business Context and Reporting Period
Powell designs, manufactures and services custom-engineered electrical distribution, control and monitoring systems for oil and gas, petrochemical, utility, traction power, mining, industrial and other markets. The filing covers the quarter and six months ended March 31, 2022, representing the second quarter and first half of fiscal 2022. Results are unaudited and should be read with the fiscal 2021 Form 10-K.
Financial Performance and Position
- Second-quarter revenue: $127.9 million, up 8% from $118.7 million.
- Second-quarter gross profit: $19.1 million, up 11%; gross margin increased to approximately 15% from 14%.
- Second-quarter operating income: $0.3 million, compared with an operating loss of $1.2 million.
- Second-quarter net loss: $1.2 million, or $0.10 per diluted share, compared with a net loss of $0.2 million, or $0.02 per share.
- First-half revenue: $234.4 million, up 4% from $225.3 million.
- First-half gross profit: $32.5 million, down 8% from $35.4 million; higher direct material costs pressured margins.
- First-half operating loss: $4.0 million, compared with a $1.5 million operating loss.
- First-half net loss: $4.1 million, or $0.34 per diluted share, compared with a net loss of $0.6 million, or $0.05 per share.
- Cash flow: Operating activities used $13.0 million in the first six months, versus $18.1 million used in the prior-year period. Investing activities used $7.6 million, and financing activities used $7.2 million, including $6.1 million of dividends.
- Liquidity: Cash, cash equivalents and short-term investments totaled $113.6 million at March 31, 2022, compared with $134.0 million at September 30, 2021. Current assets exceeded current liabilities by approximately 2.3 times.
- Debt and credit availability: Powell had no long-term debt after repaying the $0.4 million industrial development revenue bonds. There were no U.S. Revolver borrowings, $32.2 million of letters of credit outstanding and $42.8 million available under the $75.0 million facility.
- Backlog: $440.0 million at March 31, 2022; approximately $310.9 million was expected to be recognized as revenue within twelve months. Backlog increased from $416.0 million at December 31, 2021 and $436.6 million at March 31, 2021.
- Dividends: The company paid approximately $6.1 million during the first six months and declared a subsequent quarterly dividend of $0.26 per share payable June 15, 2022.
Material Changes Versus Prior Comparable Period
- Second-quarter revenue growth reflected higher international revenue, petrochemical activity, utility revenue and oil and gas revenue, partly offset by a 34% decline in traction-power revenue.
- International revenue increased 33% in the quarter to $40.9 million, while domestic revenue decreased 1% to $87.0 million.
- Petrochemical revenue increased 85% in the quarter to $18.9 million, primarily due to project mix.
- Gross margin improved in the quarter because of higher volume, operating efficiencies and improved U.K. project execution, although inflationary supply costs remained a constraint.
- First-half gross profit declined because direct material cost increases were not fully passed through to customers.
- Bookings, net of cancellations and scope reductions, increased 70% in the quarter to $150.8 million and 44% for the first six months to $258.5 million.
- Inventory increased to $43.7 million from $29.8 million at September 30, 2021, reflecting deliberate purchases to mitigate supply-chain uncertainty. Accounts receivable also increased to $90.7 million from $78.3 million.
- The second-quarter tax provision was $1.8 million despite a pretax profit of $0.6 million, producing an unusual 305% effective tax rate. Management attributed the result to changes in projected income by tax jurisdiction and the estimated annual tax rate.
Guidance, Outlook, Risks and Unusual Items
- Management did not provide specific revenue or earnings guidance. It expects cyclical conditions may persist through the remainder of fiscal 2022.
- COVID-19-related economic uncertainty, oil and gas volatility, customer project delays or cancellations, supply-chain disruptions, labor constraints and inflationary pressures may affect revenue, margins and cash flow.
- Fixed-price contracts expose Powell to cost overruns, commodity-price increases, liquidated damages, change-order risk and contract-estimate revisions. Favorable contract-estimate changes contributed $5.6 million to first-half operating results, down from $8.2 million in the prior-year period.
- Management stated that it may reduce capital expenditures and research and development spending or reduce or eliminate future dividends if economic conditions weaken.
- Letters of credit and surety bonds are material contingent obligations: $32.2 million of letters of credit and $149.0 million of surety bonds were outstanding at March 31, 2022. Additional surety capacity was $451.0 million.
- Powell was in compliance with its revolver and U.K. facility covenants. The revolver requires a consolidated net leverage ratio below 3.0 to 1.0, interest coverage above 3.0 to 1.0 and a minimum consolidated cash balance of $30 million.
- Management believes pending litigation will not have a material adverse effect, although outcomes are uncertain. No material changes to previously disclosed risk factors were reported.
- Management’s disclosure controls and procedures were effective, and no material changes to internal control over financial reporting were identified.
Important Facts for Investors to Verify
- Whether backlog converts to revenue as projected, particularly the $310.9 million expected within twelve months, and whether cancellations or scope reductions increase.
- Whether material, labor and supply-chain cost inflation can be passed through under Powell’s fixed-price contracts.
- The sustainability of quarterly profitability after the first-half gross-margin decline and the impact of contract-estimate adjustments.
- Cash conversion and working-capital requirements, including the elevated inventory and accounts receivable balances.
- Availability under the revolver after considering letters of credit, covenant calculations and the required minimum cash balance.
- The effect of the unusual tax provision, Canadian valuation allowances and any future release of deferred tax valuation allowances.
- Whether customer capital spending in oil and gas, petrochemical and other cyclical markets improves or remains constrained.