Powell Industries, Inc. Form 10-Q Summary
Business Context and Reporting Period
Powell designs, manufactures and services custom-engineered electrical distribution, control and monitoring systems for oil and gas, petrochemical, electric utility, traction power and other industrial markets. This unaudited Form 10-Q covers the quarter and six months ended March 31, 2020, representing fiscal 2020 second-quarter and year-to-date results. The filing was signed May 6, 2020.
Key Financial Metrics
| Metric | Three months ended March 31, 2020 | Three months ended March 31, 2019 | Six months ended March 31, 2020 | Six months ended March 31, 2019 |
|---|---|---|---|---|
| Revenue | $151.6 million | $123.7 million | $285.7 million | $233.1 million |
| Gross profit | $29.7 million | $20.1 million | $51.5 million | $34.7 million |
| Gross margin | 20% | 16% | 18% | 15% |
| Operating income | $9.3 million | $1.2 million | $12.3 million | $(1.9) million |
| Operating margin | Approximately 6.1% | Approximately 0.9% | Approximately 4.3% | Approximately (0.8)% |
| Net income (loss) | $7.4 million | $1.0 million | $10.2 million | $(1.7) million |
| Diluted EPS | $0.64 | $0.08 | $0.87 | $(0.15) |
| Operating cash flow | Not separately provided | Not separately provided | $7.4 million | $26.0 million |
- Cash and cash equivalents were $120.6 million at March 31, 2020, compared with $118.6 million at September 30, 2019. Cash, cash equivalents and short-term investments totaled $120.6 million versus $124.7 million at fiscal year-end because short-term investments had matured.
- Current assets were $307.7 million and current liabilities were $133.0 million, or approximately 2.3 times coverage. Total assets were $446.6 million and stockholders’ equity was $300.1 million.
- Total debt was $0.8 million, consisting of industrial development revenue bonds, with $0.4 million classified as current. Debt to total capitalization was 0.27%.
- The $75.0 million U.S. revolving credit facility had no borrowings, $35.1 million of outstanding letters of credit and $39.9 million available for borrowings and letters of credit. The company was in compliance with its covenants.
- Backlog was $566.4 million at March 31, 2020; approximately $342.9 million was expected to be recognized as revenue within twelve months. Backlog increased 43% from March 31, 2019 and 35% from September 30, 2019.
- Surety bonds outstanding totaled $162.8 million, with $587.2 million of additional bonding capacity available. No significant draws or claims had occurred.
- The company paid dividends of $6.0 million during the first six months and declared a further quarterly dividend of $0.26 per share on May 5, 2020.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue increased 22%, primarily from higher petrochemical activity and increased volume in domestic and international manufacturing operations. Petrochemical revenue rose 110% to $47.3 million, while oil and gas revenue declined 7% to $52.0 million.
- Six-month revenue increased 23%, with petrochemical revenue up 84%, utility revenue up 19% and traction-power revenue up 102%. Oil and gas revenue increased 6% for the six-month period.
- Second-quarter gross profit increased 48% and gross margin expanded to 20% from 16%, reflecting cost efficiencies, stronger volume and project execution.
- SG&A increased 8% to $18.6 million in the quarter, but declined to 12% of revenue from 14% because of operating leverage.
- Six-month operating cash flow declined to $7.4 million from $26.0 million, primarily due to the timing of project billings and the absence of a $6.6 million tax refund received in the prior-year period.
- New orders increased 53% in the quarter to $300.7 million and 19% year to date to $438.1 million. A substantial January 2020 contract for a U.S. industrial complex is expected to require more than three years to design, manufacture, integrate, test and ship.
- Contract assets increased to $61.3 million from $55.4 million at September 30, 2019, while contract liabilities decreased to $57.8 million from $71.5 million, producing a net contract asset of $3.5 million versus a net contract liability of $16.1 million.
- Accumulated other comprehensive loss increased to $29.1 million, primarily because of foreign-currency movements affecting the Canadian dollar and British pound.
- The company adopted the new lease accounting standard on October 1, 2019, recognizing approximately $7.0 million of operating lease assets and liabilities without an adjustment to retained earnings.
Guidance, Outlook, Risks and Unusual Items
- The filing does not provide formal numerical revenue or earnings guidance.
- Management stated that COVID-19, reduced oil and gas demand and steeply lower oil prices are expected to decrease commercial activity and negatively affect future results and cash flows. Certain customers requested manufacturing delays, and supplier disruptions remain a concern.
- Powell continued operating as an essential business and had not closed facilities for an extended period as of the filing. Social-distancing and enhanced-cleaning measures may reduce efficiency and productivity.
- Management anticipated workforce and labor-cost adjustments and disclosed a workforce reduction in early May expected to generate severance and restructuring costs of less than $1 million. Additional adjustments may be required.
- Management may reduce capital expenditures and research and development spending and may reduce or eliminate future dividends to preserve liquidity. The ultimate COVID-19 impact was described as not currently determinable.
- Fixed-price, percentage-of-completion contracts create exposure to cost overruns, change orders, liquidated damages, customer delays, contract cancellations and revisions to estimated profitability. Changes in contract estimates favorably affected operating results by $9.0 million during the first six months of fiscal 2020.
- The effective tax rate was 22% for the quarter and 21% year to date. A $0.5 million valuation allowance was recorded against U.K. deferred tax assets. Management also stated that unrecognized tax benefits could decrease by approximately $0.7 million within the next twelve months, although timing of related cash outflows was uncertain.
- Other significant risks include cyclical end markets, commodity-price and foreign-currency volatility, customer credit exposure, supply-chain constraints, dependence on surety bonds and letters of credit, litigation, cybersecurity, regulatory matters and potential force-majeure disputes related to COVID-19.
- Management believes pending litigation will not have a material adverse effect on consolidated financial position, results of operations or liquidity, although outcomes are uncertain.
Important Facts for Investors to Verify
- Whether COVID-19, oil-price declines and customer-requested project delays reduce order conversion, revenue recognition, margins and operating cash flow after March 31, 2020.
- The collectability and timing of the $61.3 million contract-asset balance, $90.5 million of accounts receivable and $6.0 million of retention amounts.
- Whether the $566.4 million backlog, including the large multiyear industrial-complex contract, remains executable and is not cancelled or materially modified.
- The effect of workforce reductions, potential restructuring costs and possible reductions in capital expenditures, research and development and dividends.
- Availability under the revolving facility after considering $35.1 million of letters of credit, compliance with the $30 million minimum cash covenant and any material-adverse-effect provisions.
- Exposure under $162.8 million of surety bonds, $35.1 million of letters of credit and other guarantees, including any future claims or draws.
- Changes in contract estimates, commodity costs, foreign exchange rates and customer credit quality that could materially affect future gross margins and cash flows.