Powell Industries, Inc. — Fiscal 2018 Third-Quarter Form 10-Q
Reporting period: Quarter and nine months ended June 30, 2018; filed August 8, 2018. Powell designs, manufactures and services custom-engineered electrical distribution, control and monitoring systems for energy, industrial, utility, mining, transit and other heavy-industrial markets. Results are affected by project timing and percentage-of-completion accounting.
Financial performance and condition
| Metric | Three months ended June 30, 2018 | Three months ended June 30, 2017 | Nine months ended June 30, 2018 | Nine months ended June 30, 2017 |
|---|---|---|---|---|
| Revenue | $122.1 million | $85.9 million | $313.8 million | $300.9 million |
| Gross profit | $18.4 million | $9.1 million | $41.4 million | $39.9 million |
| Gross margin | 15% | 11% | 13% | 13% |
| Operating income (loss) | $0.5 million | $(7.5) million | $(12.2) million | $(12.5) million |
| Net income (loss) | $0.3 million | $(3.2) million | $(8.7) million | $(4.3) million |
| Diluted EPS | $0.03 | $(0.28) | $(0.76) | $(0.38) |
| Operating cash flow | Not separately provided for the quarter | $(26.1) million | $27.1 million |
- Quarterly revenue increased 42%, primarily from higher domestic orders. Commercial and industrial revenue rose 94%, while utility revenue declined 32%, principally because of project timing.
- Nine-month revenue increased 4%; approximately $7 million was attributable to remediation work following Hurricane Harvey.
- Quarterly gross profit more than doubled, reflecting higher volume and improved manufacturing efficiency. Nine-month gross margin remained 13%.
- Quarterly SG&A increased to $16.2 million, but declined to 13% of revenue from 17%. Nine-month SG&A was $48.5 million, or 15% of revenue.
- Cash, cash equivalents and short-term investments totaled $55.3 million at June 30, 2018, down from $95.2 million at September 30, 2017. Total restricted cash was $23.6 million.
- Current assets were 2.5 times current liabilities. Total debt was $1.6 million, including $0.4 million due within one year; debt to total capitalization was 0.53%.
- Cash used in operations reflected increased accounts receivable, contract working capital and inventories associated with higher project volume.
- Capital expenditures were approximately $4.0 million for the nine-month period, and dividends paid were $8.9 million. The board subsequently declared a $0.26-per-share dividend payable September 19, 2018.
Material changes versus the prior comparable period
- The company returned to quarterly profitability, compared with a loss in the prior-year quarter, driven by stronger revenue and gross profit.
- Nine-month net loss increased despite modest revenue growth, mainly because the prior-year period benefited from a larger income tax benefit. The 2018 nine-month tax benefit was $2.4 million versus $6.5 million in 2017.
- No restructuring or separation expense was recorded in the first nine months of 2018, compared with $0.8 million in the prior-year period.
- New orders increased to $139.2 million in the quarter from $90.7 million and to $380.6 million for the nine months from $243.5 million.
- Backlog was $316.2 million at June 30, 2018, compared with $299.8 million at March 31, 2018 and $250.1 million at September 30, 2017.
- Accumulated other comprehensive loss increased to $22.9 million, primarily from Canadian dollar and British pound translation effects.
Guidance, outlook, risks and unusual items
- Management stated that oil, gas and petrochemical markets were strengthening, with increased bookings and anticipated improvement in revenue and operating results for the remainder of fiscal 2018 and into fiscal 2019. No numerical earnings or revenue guidance was provided.
- Customers were investing in maintenance and smaller projects but continued to delay major capital investments. Pricing pressure, project delays, cancellations and changes in customer schedules could affect backlog, margins and revenue timing.
- Potential liquidated-damages exposure was $2.6 million, of which approximately $1.6 million was considered probable. The company had recorded $1.5 million as a reduction of revenue, including approximately $1.0 million recognized in prior periods.
- Outstanding letters of credit totaled $22.3 million, and surety bonds totaled $168.3 million. The company had $52.7 million available for letters of credit under its $75 million U.S. revolving facility, with no revolver borrowings outstanding.
- The company was in compliance with its credit-facility covenants. Litigation exposure was described as uncertain but not expected by management to have a material adverse effect.
- Raw-material price volatility, fixed-price contracts, foreign currency movements, customer credit risk and dependence on cyclical oil and gas markets remain material risks. The company does not currently hedge commodity or foreign-currency translation exposure.
- The company was evaluating the forthcoming revenue-recognition standard and had not estimated its effect. Adoption was planned for October 1, 2018, using the modified retrospective method.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Key facts investors should verify
- Whether stronger bookings and the $316.2 million backlog convert into sustained revenue and margin improvement.
- Whether operating cash flow improves as receivables, contract assets and inventories normalize.
- The ultimate effect of liquidated damages, contract estimates, change orders and project close-outs on gross margin and revenue.
- The impact of the new revenue-recognition standard on contract accounting, backlog and reported results after adoption.
- Exposure to oil and gas capital spending, raw-material inflation, customer cancellations and fixed-price contract losses.
- The availability of cash held outside the United States and any tax cost if foreign earnings are repatriated.