Business Context and Reporting Period
Powell Industries, Inc. designs, manufactures and services custom-engineered electrical distribution, control and monitoring equipment for oil and gas, petrochemical, LNG, utility, traction power, mining, commercial and industrial markets. This unaudited Form 10-Q covers the three and nine months ended June 30, 2022, within fiscal 2022, compared with the corresponding periods of fiscal 2021.
Financial Performance and Position
| Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Nine Months Ended June 30, 2022 | Nine Months Ended June 30, 2021 |
|---|---|---|---|---|
| Revenue | $135.5 million | $115.8 million | $369.9 million | $341.1 million |
| Gross profit | $19.1 million | $17.2 million | $51.6 million | $52.6 million |
| Gross margin | 14.1% | 14.8% | 13.9% | 15.4% |
| Operating income (loss) | $0.8 million | $(1.4) million | $(3.1) million | $(2.8) million |
| Net income (loss) | $9.1 million | $(2.0) million | $5.0 million | $(2.6) million |
| Diluted earnings (loss) per share | $0.76 | $(0.17) | $0.42 | $(0.22) |
| Operating cash flow | Not separately provided | Not separately provided | $(27.8) million | $(39.7) million |
- Third-quarter revenue increased 17%, driven by higher domestic and international activity, particularly in oil and gas, electric utility and other commercial markets. Nine-month revenue increased 8%.
- Third-quarter operating income improved to $0.8 million, but nine-month operating results remained a $3.1 million loss.
- Net income was substantially aided by a $5.9 million release of the valuation allowance on Canadian deferred tax assets and a $2.0 million gain on the sale of a non-core Canadian valve repair and servicing business.
- Cash, cash equivalents and short-term investments totaled $98.5 million at June 30, 2022, down from $134.0 million at September 30, 2021. Cash and cash equivalents alone were $75.8 million versus $114.3 million.
- Current assets were $324.8 million and current liabilities were $144.4 million, representing current assets approximately 2.2 times current liabilities.
- Accounts receivable increased to $103.0 million from $78.3 million, inventories increased to $48.7 million from $29.8 million, and contract assets increased to $68.2 million from $54.2 million.
- The company had no outstanding borrowings under its $75.0 million revolving credit facility and no long-term debt at June 30, 2022. Letters of credit outstanding were $30.8 million, with $44.2 million available for borrowing or additional letters of credit.
- Dividends were $0.26 per share for each quarter; $9.2 million was paid during the first nine months. The board declared another $0.26 per share dividend payable September 21, 2022.
Material Changes Versus the Prior Comparable Period
- Revenue growth was accompanied by lower profitability: third-quarter gross margin declined from 14.8% to 14.1%, and nine-month gross margin declined from 15.4% to 13.9%.
- Management attributed margin pressure primarily to inflation in raw materials and components, supply-chain disruptions, labor availability and execution challenges on selected fixed-price contracts where cost increases could not be passed to customers.
- Third-quarter SG&A decreased 2% to $16.4 million, while SG&A as a percentage of revenue declined from 14% to 12%. Nine-month SG&A decreased 2% to $49.4 million.
- Backlog increased to $502.5 million at June 30, 2022, up 14% from March 31, 2022, 21% from September 30, 2021, and from $425.5 million at June 30, 2021. Approximately $379.6 million was expected to be recognized as revenue within twelve months.
- Third-quarter bookings, net of cancellations and scope reductions, increased 95% to $201.5 million. Nine-month bookings increased 63% to $460.0 million.
- Operating cash use improved from $39.7 million to $27.8 million, but remained negative because of increased accounts receivable and strategic inventory buildup related to supply-chain uncertainty.
- Accumulated other comprehensive loss increased to $22.9 million, primarily from foreign-currency movements affecting the Canadian dollar and British pound.
Guidance, Outlook, Risks and Unusual Items
- The filing does not provide quantitative revenue or earnings guidance. Management expects cyclical conditions and related uncertainty may persist through the remainder of fiscal 2022.
- Management reported increased demand in core markets and continued diversification outside oil, gas and petrochemical markets, but noted that project timing, customer approvals, construction delays, change orders, contract claims and liquidated damages can cause substantial earnings variability.
- Supply-chain disruption, inflation, labor constraints and higher material costs may reduce margins, delay deliveries and create underutilization. Fixed-price contracts expose Powell to cost overruns when escalation cannot be recovered from customers.
- Backlog is not necessarily indicative of future earnings because projects may be cancelled, modified or affected by execution and cost-estimation changes. Contract-estimate revisions positively affected operating results by $5.9 million in the first nine months of fiscal 2022, compared with $11.4 million in the prior-year period.
- The company stated that it may reduce capital expenditures and research and development spending or reduce or eliminate future dividends to preserve liquidity if economic conditions deteriorate.
- Letters of credit totaled $30.8 million and surety bonds totaled $159.9 million, with $440.1 million of additional bonding capacity. Management reported no significant draws or claims and compliance with applicable credit and facility covenants.
- Legal proceedings and commercial disputes are ongoing, but management believes any ultimate liabilities not otherwise provided for or covered by insurance will not materially affect financial position, results or liquidity.
- The effective tax rate was unusually negative in the quarter because of the Canadian deferred-tax valuation allowance release. This benefit is not necessarily indicative of recurring tax performance.
Investor Verification Items
- Verify whether gross-margin pressure from fixed-price backlog, supply-chain constraints and inflation is improving or persisting.
- Assess the sustainability of reported net income excluding the $5.9 million tax valuation allowance release and $2.0 million divestiture gain.
- Monitor conversion of the $502.5 million backlog into revenue, cash collections and operating profit, including the $379.6 million expected within twelve months.
- Track accounts receivable, inventories, contract assets and operating cash flow, which remained significant uses of liquidity.
- Confirm availability under the revolving facility after considering letters of credit, covenant calculations and the required minimum cash balance.
- Review future dividend declarations in light of management’s stated possibility of reducing or eliminating dividends under prolonged economic stress.