Powell Industries, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Powell develops, manufactures and services engineered-to-order electrical energy management and process-control equipment for transportation, environmental, energy, industrial and utility markets. The filing covers the second quarter and first six months of fiscal 2013, ended March 31, 2013. The financial statements are unaudited and prepared under U.S. GAAP.
Key Financial Metrics
| Metric | Three Months Ended March 31, 2013 | Three Months Ended March 31, 2012 | Six Months Ended March 31, 2013 | Six Months Ended March 31, 2012 |
|---|---|---|---|---|
| Revenue | $153.9 million | $181.5 million | $307.9 million | $338.9 million |
| Gross profit | $31.7 million | $34.2 million | $65.5 million | $54.6 million |
| Gross margin | 20.6% | 18.9% | 21.3% | 16.1% |
| Operating income | $7.2 million | $12.0 million | $18.2 million | $11.9 million |
| Net income | $6.8 million | $7.4 million | $14.2 million | $5.7 million |
| Diluted EPS | $0.57 | $0.63 | $1.18 | $0.48 |
| Cash flow from operations | Not separately provided | Not separately provided | $57.2 million | $23.4 million |
At March 31, 2013, cash and cash equivalents were $114.1 million, compared with $90.0 million at September 30, 2012. Current assets were $343.6 million and current liabilities were $141.3 million. Total debt and capital lease obligations were $3.7 million, including $3.2 million of long-term obligations. Debt-to-total-capitalization was 1.1%.
Powell had no borrowings under its $75.0 million U.S. revolving facility or approximately $9.8 million Canadian revolving facility. Available capacity was $54.1 million in the United States and $9.7 million in Canada after outstanding letters of credit. The company reported compliance with all financial covenants.
Capital expenditures were $33.3 million during the first six months, primarily for new facilities in Houston, Texas, and near Edmonton, Alberta, as well as enterprise resource planning system enhancements.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue declined 15.2%, primarily because several large domestic and international petrochemical and oil and gas projects completed during fiscal 2012.
- First-half revenue declined 9.2%, while first-half gross profit increased 19.9% because the prior-year period included significant execution challenges and cost overruns on large Powell Canada projects.
- Second-quarter operating income decreased to $7.2 million from $12.0 million, reflecting lower revenue and higher selling, general and administrative expenses.
- First-half net income increased to $14.2 million from $5.7 million. The prior-year period was adversely affected by Canadian project execution issues and the inability to recognize certain Canadian tax benefits.
- Second-quarter SG&A increased $2.5 million to $24.1 million, driven by personnel costs, long-term incentive compensation and legal expenses associated with Canadian project cost recovery and litigation.
- The effective tax rate declined to 23.5% for the quarter and 28.5% for the first half, partly because of the reinstated federal research and development tax credit, Canadian loss carryforward utilization and foreign tax credits.
- Backlog increased to $521.8 million at March 31, 2013, from $436.7 million at September 30, 2012 and $497.0 million at March 31, 2012. Second-quarter new orders were $124.1 million, compared with $203.3 million in the prior-year quarter.
- Foreign currency translation reduced comprehensive income by $1.6 million in the quarter and $1.9 million for the first half.
Guidance, Outlook, Risks and Unusual Items
Management did not provide specific earnings or revenue guidance. Management expects long-term energy demand, infrastructure replacement, oil sands activity and transit investment to support opportunities, but noted that project timing, pricing and customer capital spending remain difficult to predict.
Powell is constructing two facilities with an estimated total cost, including land, of approximately $75 million; $38.9 million had been incurred by the filing date. Completion was expected in summer 2013, with relocation planned for the fourth quarter of fiscal 2013. The company may be unable to sublease its existing Canadian facility, which has annual lease costs of approximately $1.2 million.
- Backlog may be affected by cancellations, scope changes and project close-out timing.
- Fixed-price and percentage-of-completion contracts can create earnings volatility, particularly when costs, change orders or penalties are uncertain.
- Commodity price and supply fluctuations may reduce margins, and fixed-price contracts may limit the ability to pass through cost increases.
- International operations expose Powell to foreign currency, political, regulatory and economic risks.
- Canadian projects remain subject to recovery of approximately $1.4 million of recorded project cost overruns; recovery was not assured.
- Powell settled a lawsuit against former Powell Canada owners for $1.7 million in March 2013; cash was received in April 2013 and recorded as other income.
- The company had $21.0 million of outstanding letters of credit, $265.4 million of performance and maintenance bonds, and $4.9 million of guarantees under a Canadian facility agreement.
- Ordinary-course litigation remains pending, but management did not expect it to have a material adverse effect on financial position, results or liquidity.
- Approximately $13.4 million of cash was held outside the United States and intended to remain reinvested internationally; repatriation could result in additional tax expense.
Investor Verification Points
- Verify whether backlog converts to revenue and cash at expected margins, particularly in oil and gas, refining, transportation and Canadian projects.
- Monitor execution of the Houston and Edmonton facilities, total spending versus the $75 million estimate, relocation costs and the Canadian lease/sublease exposure.
- Assess collectability and recovery of the $1.4 million Canadian project-overrun asset and the sustainability of project accounting estimates.
- Review the impact of higher SG&A, incentive compensation and legal costs on operating leverage.
- Track availability and covenant compliance under the U.S. and Canadian revolving facilities, as well as letters of credit and bonding commitments.
- Evaluate the sustainability of the lower effective tax rate, including research credits, foreign tax credits and Canadian loss carryforward utilization.
- Consider exposure to commodity prices, foreign exchange, customer concentration, fixed-price contracts and cyclical capital spending.