Powell Industries, Inc. — Fiscal 2020 Third-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 and other industrial markets. The filing covers the quarter and nine months ended June 30, 2020, within the fiscal year ending September 30, 2020. Results were affected by COVID-19, lower energy demand, oil and gas commodity volatility, project delays and customer capital-spending deferrals.
Key financial metrics
| Metric | Three months ended June 30, 2020 | Comparable 2019 period | Nine months ended June 30, 2020 | Comparable 2019 period |
|---|---|---|---|---|
| Revenue | $118.1 million | $135.6 million | $403.8 million | $368.7 million |
| Gross profit | $21.3 million | $23.7 million | $72.9 million | $58.4 million |
| Gross margin | 18.1% | 17.5% | 18.0% | 15.8% |
| Operating income | $2.8 million | $5.6 million | $15.1 million | $3.8 million |
| Net income | $3.5 million | $5.1 million | $13.7 million | $3.4 million |
| Diluted EPS | $0.30 | $0.44 | $1.17 | $0.29 |
Quarterly operating margin was approximately 2.4%, compared with 4.2% in the prior-year quarter. Nine-month operating margin was approximately 3.7%, compared with 1.0% in the prior-year period. The company recorded a $0.6 million income tax benefit in the quarter versus a $0.8 million provision in the prior-year quarter; the quarterly effective tax rate was negative 19%, influenced by a $1.7 million release of unrecognized tax-benefit reserves, the research and development tax credit and Canadian tax attributes.
Net cash provided by operating activities was $53.4 million for the first nine months of fiscal 2020, compared with $33.9 million in fiscal 2019. Cash, cash equivalents and short-term investments totaled $163.4 million at June 30, 2020, versus $124.7 million at September 30, 2019. Cash and cash equivalents were $156.0 million. Capital expenditures were $4.3 million, dividends paid were $9.0 million, and net cash used in financing activities was $10.1 million.
Total debt was $0.8 million, consisting of industrial development revenue bonds, compared with $1.2 million at September 30, 2019. The $75.0 million U.S. revolving credit facility had no borrowings, $33.1 million of outstanding letters of credit and $41.9 million available for borrowings and letters of credit. The company was in compliance with its financial covenants and required minimum cash balance.
Material changes versus prior comparable periods
- Third-quarter revenue declined 13%, primarily from lower orders, project delays and potential project cancellations in industrial and oil and gas markets.
- Oil and gas revenue fell 26% to $45.9 million, while petrochemical revenue increased 39% to $29.3 million. Utility revenue declined 37%; traction power revenue increased 23%.
- Third-quarter gross profit declined 10% in dollars but margin improved to 18% from 17%, reflecting stronger backlog margins and cost efficiencies.
- Quarterly net income declined 32%, mainly because of lower revenue and gross profit and $1.4 million of workforce-separation costs, partly offset by the tax benefit.
- Nine-month revenue increased 10% and gross profit increased 25%, reflecting strong opening backlog and higher petrochemical and traction-power activity before the full effect of market deterioration.
- Backlog was $532.2 million at June 30, 2020, down 6% from March 31, 2020 but up 31% from June 30, 2019 and up 27% from September 30, 2019. Approximately $342.4 million was expected to be recognized within twelve months.
- Third-quarter new orders decreased 44% to $81.4 million. Nine-month new orders increased 1% to $519.5 million.
- The company adopted the new lease accounting standard on October 1, 2019, recording approximately $7.0 million of operating lease assets and liabilities with no retained-earnings adjustment.
Guidance, outlook, risks and unusual items
Management did not provide quantitative earnings or revenue guidance. It expects reduced commercial activity, lower oil and gas demand and commodity-price volatility to negatively affect future results and cash flows. Management may further reduce workforce and labor costs, capital expenditures, research and development spending and future dividends to preserve liquidity. A temporary North American salaried-workforce furlough was expected to reduce compensation by approximately $1.3 million in the second half of fiscal 2020.
The company recorded $1.4 million of separation costs after reducing its global workforce by approximately 12%. The quarter also benefited from a $1.7 million release of tax reserves following the expiration of certain statutes of limitations and settlement of an IRS audit. Nine-month results benefited by $10.8 million from changes in contract estimates, primarily favorable project execution, negotiations and other changes across the contract portfolio.
COVID-19 has caused customer-requested manufacturing delays, supply disruptions and increased safety-related costs and may affect revenue timing, project execution and collections. Backlog may be cancelled or modified and is not necessarily indicative of future results. Additional risks include fixed-price contract cost overruns, raw-material inflation, customer credit exposure, surety and letter-of-credit requirements, foreign exchange, covenant compliance, litigation and potential force majeure disputes. Outstanding surety bonds totaled $162.0 million, with $588.0 million of additional bonding capacity.
The board declared a quarterly dividend of $0.26 per share on August 4, 2020, payable September 16, 2020. Management stated that future dividends could be reduced or eliminated depending on conditions.
Important facts for investors to verify
- Whether new orders and backlog conversion recover after the sharp third-quarter order decline.
- The duration and financial effect of COVID-19-related customer delays, supply disruptions and workforce actions.
- Contract-estimate revisions, fixed-price project margins, change orders, liquidated damages and potential loss contracts.
- The sustainability of the 18% gross margin and the effect of lower utilization, raw-material costs and operating restrictions.
- Cash collection and milestone-billing timing, including the increase in net contract liabilities to $46.2 million.
- Customer credit quality, the $33.1 million of letters of credit, $162.0 million of surety bonds and remaining revolver capacity.
- Future dividend decisions and the use of cash held outside the United States.
- The impact of tax benefits and the $1.7 million tax-reserve release on reported earnings and future effective tax rates.