Powell Industries, Inc. — Fiscal 2018 Second-Quarter 10-Q Summary
Business context and reporting period
Powell develops, manufactures and services custom-engineered electrical distribution, control and monitoring systems for industrial, oil and gas, utility, transit and related markets. The filing covers the quarter and six months ended March 31, 2018; fiscal years end September 30. Results are unaudited and primarily reflect percentage-of-completion accounting for engineered-to-order contracts.
Financial performance and position
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Revenue | $101.5 million | $191.7 million |
| Gross profit | $12.4 million; 12% margin | $23.0 million; 12% margin |
| Operating loss | $5.3 million | $12.7 million |
| Net loss | $3.3 million; $0.29 diluted loss per share | $9.0 million; $0.78 diluted loss per share |
| Cash flow from operations | Not separately provided for the quarter | $(10.6) million |
- Second-quarter selling, general and administrative expense was $16.1 million, or 16% of revenue. Research and development expense was $1.6 million.
- Cash, cash equivalents and short-term investments totaled $69.2 million at March 31, 2018, down from $95.2 million at September 30, 2017. Total restricted cash was $30.5 million.
- Current assets were $235.9 million versus current liabilities of $85.7 million. Total assets were $400.1 million and stockholders’ equity was $306.4 million.
- Total debt was $1.6 million, consisting of industrial development revenue bonds; no borrowings were outstanding under the $75.0 million U.S. revolving credit facility.
- The revolver had $46.0 million available for letters of credit after $29.0 million of outstanding letters of credit. The company was in compliance with its financial covenants.
- Capital expenditures were $2.8 million during the first six months. Dividends paid were $5.9 million, or $0.52 per share.
Material changes versus the prior comparable period
- Second-quarter revenue declined 3% from $104.7 million to $101.5 million. Six-month revenue declined 11% from $215.0 million to $191.7 million.
- Second-quarter gross profit fell 21% from $15.8 million to $12.4 million, and the gross margin decreased from 15% to 12%. Six-month gross profit fell 25%, with margin declining from 14% to 12%.
- The company attributed weaker profitability to reduced volume, manufacturing under-absorption, smaller-project mix, competitive pricing pressure and costs on an oil and gas project for which change orders had not been finalized.
- Second-quarter net loss increased from $0.8 million to $3.3 million. Six-month net loss increased from $1.1 million to $9.0 million.
- Operating cash flow changed from $19.7 million provided in the first six months of fiscal 2017 to $10.6 million used in fiscal 2018, primarily due to lower earnings and increased accounts receivable.
- No restructuring or separation expense was recorded in fiscal 2018, compared with $0.8 million in the prior-year periods.
- Backlog increased to $299.8 million at March 31, 2018, from $250.1 million at September 30, 2017, and new six-month orders increased to $241.4 million from $152.8 million.
Guidance, outlook, risks and unusual items
- Management expects second-half fiscal 2018 revenue and operating results to improve from the first half, supported by increased domestic bookings. No quantitative earnings or revenue guidance was provided.
- Management continues to characterize oil, gas and petrochemical markets as challenging and uncertain, with customer investment delays, reduced project opportunities and pricing pressure.
- Revenue and margins remain sensitive to project timing, customer approvals, change orders, contract claims, liquidated damages and fixed-price contract execution. Changes in contract estimates positively affected first-half operating loss by $2.5 million.
- Potential liquidated damages exposure was $2.5 million, of which approximately $1.6 million was considered probable and recorded as a reduction of revenue. Additional amounts could be payable if contractual relief is not obtained.
- Outstanding surety bonds totaled $176.9 million, with $573.1 million of additional bonding capacity. Letters of credit totaled $29.0 million, and U.K. bank guarantees totaled $4.0 million.
- The company reported $0.6 million of realized foreign-exchange losses during the first six months and does not hedge foreign-currency translation exposure. Accumulated other comprehensive loss was $20.3 million at March 31, 2018.
- The Tax Cuts and Jobs Act reduced the U.S. corporate tax rate and affected the company’s effective tax rate. Fiscal 2018 also included a deferred tax expense related to remeasurement of U.S. deferred tax assets.
- Key risks include oil and gas market dependence, backlog cancellations, commodity-cost inflation, customer and contract performance risk, reliance on surety and credit facilities, foreign exchange, litigation, cybersecurity and regulatory changes.
Important facts for investors to verify
- Whether the higher backlog and new-order levels convert into profitable revenue and improved second-half results.
- The status and financial resolution of the oil and gas project with unresolved change orders.
- Whether probable and potential liquidated damages increase beyond the $1.6 million recorded.
- The sustainability of cash balances and operating liquidity given first-half operating cash use, dividends and restricted collateral requirements.
- Compliance with revolver and other facility covenants, including the June 2018 expiration of the U.K. facility agreement.
- The realizability of deferred tax assets and the effect of tax-law implementation on future effective tax rates.
- Exposure to oil and gas capital-spending trends, raw-material prices, foreign exchange and fixed-price contract margin volatility.