Powell Industries, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Powell develops, manufactures and services custom engineered-to-order electrical energy management and process-control systems for transportation, environmental, energy, industrial and utility customers. The report covers the three and nine months ended June 30, 2011, within the fiscal year ending September 30, 2011. Financial statements are unaudited.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2011 | Three Months Ended June 30, 2010 | Nine Months Ended June 30, 2011 | Nine Months Ended June 30, 2010 |
|---|---|---|---|---|
| Revenue | $142.1 million | $138.9 million | $392.4 million | $416.9 million |
| Gross profit | $23.5 million | $38.2 million | $75.0 million | $112.6 million |
| Gross margin | 16.5% | 27.5% | 19.1% | 27.0% |
| Operating income | $2.9 million | $16.0 million | $9.5 million | $46.6 million |
| Net income attributable to Powell | $1.7 million | $10.3 million | $6.6 million | $29.8 million |
| Diluted EPS | $0.14 | $0.88 | $0.56 | $2.56 |
| Cash flow from operations | Not separately provided | Not separately provided | $25.2 million | $52.2 million |
- Cash and cash equivalents were $137.3 million at June 30, 2011, compared with $115.4 million at September 30, 2010.
- Total assets were $439.8 million and stockholders’ equity was $287.1 million at June 30, 2011.
- Total debt and capital lease obligations, including current maturities, were $5.8 million, down from $6.9 million at September 30, 2010.
- There were no borrowings under either the $75.0 million U.S. revolver or the Canadian revolving facility. Availability was approximately $63.4 million in the United States and $15.9 million in Canada, subject to borrowing-base limitations.
- Current assets exceeded current liabilities by 2.4 times; debt to total capitalization was 2.0%.
- Capital expenditures were $4.1 million during the first nine months, compared with $3.5 million in the prior-year period.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue increased 2.3%, but nine-month revenue declined 5.9% because of lower beginning backlog and reduced domestic revenue.
- Gross profit declined 38.5% in the quarter and 33.4% year to date. Management attributed the deterioration primarily to a less favorable project mix, competitive pricing and higher commodity costs.
- Electrical Power Products revenue increased in the quarter but declined for the nine-month period; its gross margin fell to 15.8% from 27.1% in the quarter and to 18.8% from 26.4% year to date.
- Process Control Systems revenue and margins also declined, with nine-month revenue falling to $21.0 million from $26.0 million and gross margin declining to 25.6% from 36.3%.
- SG&A expense declined modestly in absolute terms, primarily because of lower incentive compensation, commissions and bad-debt expense. SG&A nevertheless increased to 15.8% of revenue year to date from 15.1%.
- Year-to-date operating cash flow fell to $25.2 million from $52.2 million, reflecting lower earnings and increased working-capital investment in receivables, contract assets and inventory.
- Backlog increased to $491.4 million at June 30, 2011, from $282.3 million at September 30, 2010 and $309.9 million at June 30, 2010. Orders received during the first nine months were $600.4 million versus $360.2 million in the prior-year period.
Guidance, Outlook, Risks and Unusual Items
- Management did not provide specific earnings or revenue guidance. It expects continued pressure on gross margins as the company executes competitively bid petrochemical and offshore oil and gas projects during fiscal 2011 and 2012.
- Management views long-term demand for energy infrastructure, power generation and distribution, environmental controls and transit infrastructure as supportive of future opportunities, although project timing and pricing remain difficult to predict.
- A $1.2 million gain from the sale of Powell’s 50% Kazakhstan joint-venture investment was recorded in the second quarter and benefited year-to-date results.
- Outstanding performance and maintenance bonds totaled approximately $202.1 million, with additional bonding capacity of approximately $397.9 million. Letters of credit totaled $11.6 million.
- Key risks include economic and financial-market uncertainty, offshore drilling impacts related to the Macondo incident and regulation, raw-material price volatility, fixed-price contract exposure, percentage-of-completion estimates, backlog cancellations, customer credit risk, competition, international operations, litigation and employee retention.
- Foreign-currency forward contracts had approximately $0.8 million of notional value and a $32,000 net liability at June 30, 2011. Commodity-price risk was not hedged with derivatives.
- Management stated that cash, operating cash flow and available borrowing capacity should be sufficient for anticipated operations, capital improvements and debt repayments. The company was in compliance with its credit-facility covenants.
- No significant subsequent events were identified before filing. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Investor Verification Checklist
- Verify whether the $491.4 million backlog converts into revenue at expected margins, particularly for competitive petrochemical and offshore oil and gas projects.
- Monitor gross-margin recovery or further deterioration as commodity costs and project mix affect fixed-price contracts.
- Assess working-capital requirements, including the net overbilled contract position of $20.6 million and growth in receivables and contract assets.
- Review liquidity after considering letters of credit, performance bonds, borrowing-base restrictions and the February 2012 expiration of the Canadian facility.
- Separate recurring operating performance from the $1.2 million Kazakhstan disposal gain and other project-specific benefits recognized in the prior year.
- Evaluate exposure to offshore drilling, energy-capital spending, customer financing conditions, raw-material prices, foreign exchange and potential contract claims.