Powell Industries, Inc. — Form 10-Q Summary
Business context and reporting period
Powell develops, manufactures and services engineered-to-order equipment and systems for managing electrical energy and 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 six months ended March 31, 2012, representing the second quarter and first half of fiscal 2012. Comparisons are primarily with the corresponding periods ended March 31, 2011.
Key financial metrics
| Metric | Three months ended March 31, 2012 | Three months ended March 31, 2011 | Six months ended March 31, 2012 | Six months ended March 31, 2011 |
|---|---|---|---|---|
| Revenue | $181.5 million | $125.1 million | $338.9 million | $249.8 million |
| Gross profit | $34.2 million | $24.9 million | $54.6 million | $50.7 million |
| Gross margin | 18.9% | 19.9% | 16.1% | 20.3% |
| Operating income | $12.0 million | $2.1 million | $11.9 million | $5.9 million |
| Net income | $7.4 million | $1.7 million | $5.7 million | $4.2 million |
| Diluted EPS | $0.63 | $0.15 | $0.48 | $0.35 |
| Cash flow from operations | Not separately provided | Not separately provided | $23.4 million | $8.5 million |
Six-month selling, general and administrative expense was $41.3 million, or 12.2% of revenue, compared with $42.5 million, or 17.0% of revenue, in the prior-year period. The six-month effective tax rate increased to 52.1% from 40.4%, partly because the company could not record a tax benefit for Canadian pretax losses.
At March 31, 2012, cash and cash equivalents were $128.1 million, compared with $123.5 million at September 30, 2011. Total assets were $451.9 million and stockholders’ equity was $282.5 million. Total debt and capital lease obligations, including current maturities, were $4.6 million, down from $5.4 million at September 30, 2011.
- U.S. revolving facility: $75.0 million capacity, no borrowings, $32.3 million available after $42.7 million of letters of credit.
- Canadian revolving facility: $10.0 million capacity, no borrowings, and $10.0 million available.
- Net cash used in investing activities was $17.9 million, including $18.9 million of capital expenditures, primarily for land and expansion support.
- Net cash used in financing activities was $0.4 million.
- Current assets exceeded current liabilities by approximately 2.2 times; debt to total capitalization was 1.6%.
Material changes versus the prior comparable period
- Second-quarter revenue increased 45.1% and six-month revenue increased 35.7%, primarily reflecting the larger order backlog entering fiscal 2012.
- Second-quarter net income increased substantially despite lower gross margin. The prior-year quarter included a $1.2 million gain on the sale of a Kazakhstan joint-venture investment, so the current-period improvement was not driven by that unusual item.
- Six-month gross margin declined to 16.1% from 20.3%. Management attributed the decline to execution challenges and cost overruns on certain Powell Canada projects, scope changes, and lower-margin competitive-bid work.
- Six-month orders were $392.1 million, approximately $10 million below the prior-year period. Backlog nevertheless increased to $497.0 million at March 31, 2012, from $443.0 million at September 30, 2011 and $436.6 million at March 31, 2011.
- Capital expenditures increased to $18.9 million from $2.7 million, principally for land supporting expansion in the Canadian Oil Sands and offshore production markets.
- Letters of credit increased to $42.7 million from $13.2 million at September 30, 2011, reducing U.S. revolver availability.
Guidance, outlook, risks and unusual items
Management did not provide numerical revenue or earnings guidance. It expects demand over the long term to benefit from energy infrastructure, power-generation and distribution investment, aging U.S. infrastructure, transit projects, petrochemical activity, offshore oil and gas projects, and Canadian Oil Sands development. Project timing and pricing remain difficult to predict.
Management expects gross-margin levels to remain depressed relative to fiscal 2011 through the balance of fiscal 2012 because of the current backlog mix. Powell is pursuing recovery of certain Canadian project cost overruns and scope-change costs, but recovery is not assured; amounts are recorded only when customer change orders are approved.
- Fixed-price and percentage-of-completion contracts may create earnings volatility, particularly if estimated costs change.
- Raw-material price and availability fluctuations may pressure margins, and fixed-price contracts may limit the ability to pass through cost increases.
- Backlog may be adjusted or canceled and may not reliably predict future earnings.
- Economic, financial-market, regulatory and political conditions may affect customers, suppliers, offshore drilling activity and capital projects.
- Outstanding performance and maintenance bonds totaled $217.5 million, with additional bonding capacity of $382.5 million. The filing states that no significant expenses had resulted from letters of credit or performance bonds for the periods reported.
- The company remained involved in ordinary-course litigation and disputes; management did not expect them to materially affect financial position, results or liquidity.
- Material weaknesses in internal control over financial reporting identified in the prior Form 10-K continued at March 31, 2012. Management concluded disclosure controls were not effective, although additional procedures were performed and the financial statements were judged fairly presented.
- Remediation efforts included new accounting personnel and training at Powell Canada, enhanced project and account reviews, ERP training, segregation-of-duties review, consultant recommendations and internal-audit oversight. The weaknesses had not yet been remediated.
- The company held approximately $6.2 million of cash internationally and stated that foreign earnings were intended to remain indefinitely reinvested abroad; repatriation could result in additional tax expense.
Most important facts for investors to verify
- Whether Powell Canada project execution improves and whether disputed cost recoveries and customer change orders are approved.
- Whether gross margins continue to decline as lower-margin fiscal 2012 and 2013 backlog is executed.
- Progress toward remediation of the material weaknesses in internal control over financial reporting.
- Conversion of the $497.0 million backlog into revenue, cash collections and profitable projects, including the risk of cancellations or cost revisions.
- Liquidity after the substantial increase in capital expenditures, letters of credit and bonding commitments.
- The effect of the elevated six-month effective tax rate and the inability to recognize tax benefits for Canadian losses.