Powell Industries, Inc. — Fiscal 2017 Second-Quarter 10-Q Summary
Business Context and Reporting Period
Powell develops, manufactures and services custom-engineered electrical distribution, control and monitoring equipment for industrial, utility, transit, oil and gas, petrochemical, mining and related markets. The filing covers the three and six months ended March 31, 2017, with comparisons to the corresponding periods of Fiscal 2016. Results are affected by percentage-of-completion accounting and the timing of project awards, execution, milestones and customer changes.
Key Financial Metrics
| Metric | Three Months Ended March 31, 2017 | Three Months Ended March 31, 2016 | Six Months Ended March 31, 2017 | Six Months Ended March 31, 2016 |
|---|---|---|---|---|
| Revenue | $104.7 million | $152.3 million | $215.0 million | $302.2 million |
| Gross profit | $15.8 million | $30.1 million | $30.8 million | $53.2 million |
| Gross margin | 15% | 20% | 14% | 18% |
| Operating income (loss) | $(2.7) million | $5.8 million | $(5.0) million | $3.8 million |
| Net income (loss) | $(0.8) million | $5.6 million | $(1.1) million | $5.1 million |
| Diluted EPS | $(0.07) | $0.49 | $(0.10) | $0.45 |
| Operating cash flow | Not separately provided | Not separately provided | $19.7 million | $25.2 million |
At March 31, 2017, cash and cash equivalents were $93.5 million and short-term investments were $14.9 million, for combined liquidity of $108.3 million. Current assets were $266.0 million versus current liabilities of $83.9 million. Total debt was $2.0 million, consisting of industrial development revenue bonds, down from $2.4 million at September 30, 2016. Debt to total capitalization was 0.61%.
The company had no borrowings under its $75.0 million U.S. revolver or $7.5 million Canadian revolver. Available capacity was $53.6 million and $7.5 million, respectively, after outstanding U.S. letters of credit of $21.4 million. Management stated that the company was in compliance with applicable financial covenants.
Six-month investing cash outflows were $16.6 million, including $14.9 million invested in short-term investments and $1.7 million of capital expenditures. Financing cash outflows were $6.7 million, including $5.9 million of dividends and $0.4 million of debt repayments. Cash and cash equivalents declined from $97.7 million at September 30, 2016 to $93.5 million at March 31, 2017, partly offset by the new short-term investments.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue declined 31% to $104.7 million; six-month revenue declined 29% to $215.0 million.
- Backlog fell to $227.9 million at March 31, 2017 from $291.4 million at September 30, 2016. Second-quarter new orders were $62.0 million versus $116.9 million in the prior-year quarter; six-month new orders were $152.8 million versus $218.6 million.
- Revenue weakness primarily reflected lower demand and project cancellations or delays in core oil, gas and petrochemical markets following the decline in oil and gas prices.
- Commercial and industrial revenue declined 40% in the quarter, while utility revenue declined 40%. Municipal and transit revenue increased 84% because of project timing and production ramp-up; these projects generally carry lower margins.
- Gross margin fell to 15% in the quarter and 14% for the six-month period, primarily because of lower volume, competitive pricing pressure and a less favorable project mix.
- SG&A declined 16% in the quarter and 18% for the six-month period as a result of prior cost-reduction actions, but SG&A as a percentage of revenue increased because of the lower sales base.
- Restructuring and separation costs decreased to $0.8 million in both the quarter and six-month period, compared with $3.3 million and $7.1 million, respectively, in the prior-year periods.
- The company recorded a $1.3 million quarterly tax benefit and a $2.8 million six-month tax benefit. The six-month benefit included a $0.3 million favorable discrete item from the closure of an IRS audit and release of an R&D tax credit reserve.
Guidance, Outlook, Risks and Unusual Items
Management did not provide quantified revenue or earnings guidance. It stated that the depressed oil, gas and petrochemical market cycle is difficult to predict and may continue to reduce backlog, revenue and operating results. Management expects to report a net loss for Fiscal 2017 and stated that cost-reduction actions will not be sufficient to avoid near-term operating losses.
Management expects available cash, short-term investments, borrowing capacity and the company’s low debt position to fund operating activities, capital improvements, research and development and debt repayments for the foreseeable future. Approximately $34 million of cash and short-term investments was held outside the United States and was intended to remain reinvested internationally.
- Potential liquidated-damages exposure was $2.7 million, of which approximately $1.7 million was considered probable; $1.6 million had been recorded as a reduction of revenue. Additional amounts could affect future results.
- Outstanding surety bonds totaled $216.0 million, with $534.0 million of additional bonding capacity. Outstanding letters of credit totaled $21.4 million.
- The company had $4.7 million of guarantees under its U.K. facility, with $1.5 million available; the facility was scheduled to expire in May 2017.
- Fixed-price contracts expose the company to material, labor and component cost inflation, schedule delays, change-order risk, contract claims and margin volatility.
- Backlog may be adjusted or canceled and is not necessarily a reliable indicator of future earnings. Percentage-of-completion accounting can increase period-to-period volatility.
- Other key risks include cyclical customer spending, foreign exchange movements, international operations, litigation, warranty claims, cyber and business-system disruptions, environmental regulation, skilled-labor availability and competitive pressure.
- The company does not currently hedge commodity-price or foreign-currency translation exposure. Accumulated other comprehensive loss was $25.5 million at March 31, 2017.
- The company was evaluating the future revenue-recognition standard and had not selected a transition method or determined its reporting impact.
Important Facts for Investors to Verify
- Whether backlog and new-order trends stabilize or continue to decline, particularly in oil, gas and petrochemical markets.
- Whether transit and other lower-margin work further affects gross margin and whether Canadian operational improvements continue.
- The timing and amount of future operating losses, restructuring costs and additional cost-reduction actions.
- Whether the $2.7 million liquidated-damages exposure and other contract contingencies result in additional charges or revenue reductions.
- Actual cash conversion, milestone collections and working-capital requirements as project activity declines.
- Renewal or replacement of the U.K. facility scheduled to expire in May 2017 and continued compliance with revolving-credit covenants.
- The impact of pending revenue-recognition and lease accounting standards when adopted.