Powell Industries, Inc. 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, LNG, utility, traction power, mining and other industrial markets. This unaudited Form 10-Q covers the quarter and nine months ended June 30, 2021, the third quarter and first nine months of fiscal 2021.
Financial Performance and Position
| Metric | Three Months Ended June 30, 2021 | Prior-Year Period | Nine Months Ended June 30, 2021 | Prior-Year Period |
|---|---|---|---|---|
| Revenue | $115.8 million | $118.1 million | $341.1 million | $403.8 million |
| Gross profit | $17.2 million | $21.3 million | $52.6 million | $72.9 million |
| Gross margin | 15% | 18% | 15% | 18% |
| Operating income (loss) | $(1.4) million | $2.8 million | $(2.8) million | $15.1 million |
| Net income (loss) | $(2.0) million | $3.5 million | $(2.6) million | $13.7 million |
| Diluted EPS | $(0.17) | $0.30 | $(0.22) | $1.17 |
- Operating cash flow was $(39.7) million for the first nine months of fiscal 2021 versus $53.4 million provided in the prior-year period, primarily due to the timing of contract billing milestones and a $35.7 million net change in contract assets and liabilities.
- Capital expenditures were $2.4 million, and investing activities used $2.0 million.
- Cash dividends paid were $9.1 million, or $0.78 per share for the nine-month period. A further quarterly dividend of $0.26 per share was declared on August 3, 2021.
- Cash and cash equivalents were $108.7 million, and short-term investments were $20.2 million at June 30, 2021, for total cash and short-term investments of $128.8 million versus $178.9 million at September 30, 2020.
- Total assets were $422.0 million and stockholders’ equity was $302.9 million at June 30, 2021.
- Total debt was $0.4 million, consisting of industrial development revenue bonds maturing in October 2021. No amounts were borrowed under the $75.0 million revolving credit facility; $35.1 million remained available after outstanding letters of credit.
- Management stated that current assets exceeded current liabilities by 2.7 times and that available cash, working capital and borrowing capacity should fund operations, capital improvements, research and development and debt repayments for the foreseeable future.
- Backlog was $425.5 million at June 30, 2021, including approximately $292.8 million expected to be recognized as revenue within twelve months.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue declined 2% year over year, while nine-month revenue declined 16%, reflecting lower orders, project delays and cancellations associated with COVID-19 and weaker industrial demand.
- Nine-month petrochemical revenue fell 68% to $34.7 million and oil and gas revenue fell 12% to $139.4 million. These declines were partly offset by increases in electric utility and traction power revenue of 29% and 35%, respectively.
- Third-quarter gross profit fell 20%; gross margin declined to 15% from 18%, primarily due to higher copper and steel costs, facility under-utilization and increased employee benefit costs.
- SG&A increased 8% in the third quarter to $16.7 million, but declined 2% for the nine-month period to $50.3 million. SG&A as a percentage of revenue increased to 15% from 13% for the nine-month comparison.
- The prior-year third quarter included $1.4 million of workforce-reduction costs; no restructuring expense was recorded in the current quarter.
- Backlog declined 20% from June 30, 2020, 11% from September 30, 2020 and 3% from March 31, 2021. Nine-month bookings declined 46% to $282.9 million, although third-quarter bookings increased 27% to $103.2 million.
- Net contract assets increased to $7.7 million from a net contract liability of $28.5 million at September 30, 2020, primarily because of contract billing milestone timing. Approximately $63.5 million of current-period revenue related to contract liabilities outstanding at September 30, 2020.
Outlook, Commentary, Risks and Unusual Items
- Management expects cyclical conditions related to COVID-19, oil and gas volatility and reduced industrial capital spending may persist through fiscal 2021 and into early fiscal 2022. The filing provides no specific revenue or earnings guidance.
- A large domestic industrial project awarded in fiscal 2020 represented approximately 18% of third-quarter revenue and is expected to be substantially completed in fiscal 2022.
- Nine-month results benefited by $11.4 million from changes in contract estimates, including favorable project execution, negotiations of variable consideration, cancellation fees and other project changes. Such estimates may be volatile and can materially affect margins.
- Fixed-price contracts expose Powell to commodity-cost inflation, execution issues, liquidated damages, change-order disputes and customer credit risk. The company has not entered into derivatives to hedge commodity price exposure.
- COVID-19 and lower oil and gas demand have caused customers to defer or cancel projects. Management may reduce capital expenditures and research and development spending and may reduce or eliminate future dividends if conditions deteriorate.
- Letters of credit totaled $39.9 million, surety bonds totaled $141.2 million, and additional surety bonding capacity was $458.8 million. Changes in market conditions could require cash collateralization.
- Management reported compliance with the revolving-credit and UK facility covenants. The revolver requires a 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.
- The third-quarter tax provision was $0.7 million despite a pretax loss, producing a negative 53% effective tax rate, primarily because tax benefits could not be recognized for certain UK losses. The prior-year quarter benefited from a $1.7 million IRS audit-related tax benefit.
- Pending litigation and claims are described as uncertain, but management believes they will not have a material adverse effect on consolidated financial position, results of operations or liquidity. No material changes to previously disclosed risk factors were reported.
Important Facts for Investors to Verify
- Whether bookings and backlog stabilize or continue declining, particularly in petrochemical, oil and gas markets.
- The timing, profitability and remaining execution risk of the large domestic industrial project expected to continue into fiscal 2022.
- Whether copper, steel and other commodity-cost inflation can be recovered under fixed-price contracts.
- Whether contract billing milestones, working-capital needs and customer collections allow operating cash flow to recover.
- The potential impact of project cancellations, liquidated damages, contract-estimate revisions and customer credit risk.
- Availability under the revolver and surety facilities, covenant compliance, and any requirement to collateralize letters of credit or bonds.
- Whether the company maintains its $0.26 quarterly dividend while management continues to cite the possibility of reducing or eliminating future payments.