Business Context and Reporting Period
Powell Industries, Inc. designs, manufactures and services custom-engineered electrical distribution, control and monitoring systems for oil and gas, petrochemical, utility, mining, transit and other heavy-industrial markets. The filing covers the quarter ended December 31, 2017, the first quarter of Fiscal 2018, and is unaudited.
Key Financial Metrics
| Metric | Q1 Fiscal 2018 | Q1 Fiscal 2017 |
|---|---|---|
| Revenue | $90.2 million | $110.3 million |
| Gross profit | $10.6 million | $15.0 million |
| Gross margin | 12% | 14% |
| Operating loss | $7.4 million | $2.3 million |
| Net loss | $5.7 million | $0.3 million |
| Diluted loss per share | $0.49 | $0.03 |
| Income tax benefit | $1.1 million | $1.4 million |
| Cash used in operating activities | $14.1 million | Cash provided of $3.4 million |
| Capital expenditures | $1.7 million | $0.9 million |
| Dividends paid | $3.0 million | $3.0 million |
At December 31, 2017, cash and cash equivalents were $49.6 million, short-term investments were $23.1 million and restricted cash was $27.8 million. Current assets were $239.2 million versus current liabilities of $84.7 million. Total debt was $1.6 million, including $0.4 million of current maturities, and debt to total capitalization was 0.51%.
The $75.0 million U.S. revolving credit facility had no borrowings outstanding, $27.0 million of letters of credit reducing availability, and $48.0 million of remaining availability. The company was in compliance with its credit covenants. Approximately $35 million of cash and short-term investments was held outside the United States.
Material Changes Versus the Prior Comparable Period
- Revenue declined 18%, primarily because of lower project backlog and weaker demand in core oil, gas and petrochemical markets.
- Domestic revenue fell 30% to $60.1 million, while international revenue increased 22% to $30.1 million.
- Commercial and industrial revenue declined 16% to $60.8 million. Utility revenue increased 53% to $25.3 million, while municipal and transit revenue decreased 80% to $4.1 million, primarily due to project timing.
- Approximately $7 million of revenue from short-term Hurricane Harvey remediation work partially offset market weakness.
- Gross profit declined 30% and gross margin fell to 12%, reflecting lower volume, manufacturing under-absorption, smaller-project mix, competitive pricing and costs on an oil and gas project for which change orders had not been finalized.
- SG&A increased 3% to $16.2 million, causing SG&A as a percentage of revenue to rise to 18% from 14%.
- Backlog increased to $260.3 million at December 31, 2017 from $250.1 million at September 30, 2017. First-quarter new orders were $100.0 million versus $90.8 million in the prior-year quarter.
- Operating cash flow worsened primarily because of the net loss and a $25.1 million increase in accounts receivable, partly offset by project billings.
- The effective tax rate was 16% versus 83% in the prior-year quarter. The Tax Cuts and Jobs Act reduced the blended U.S. rate but also resulted in $0.7 million of deferred tax expense from remeasuring deferred tax assets.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide specific quantitative earnings or revenue guidance. Management expects the oil, gas and petrochemical markets to remain challenging and uncertain, with customer investment affected by commodity prices, economic conditions and regulatory factors. Additional cost-structure actions may be necessary during Fiscal 2018.
Management states that available cash, low debt and revolving-credit capacity should be sufficient to fund operations, research and development, capital improvements and debt repayments for the foreseeable future. However, project timing, customer approvals, change orders, project close-out and contract claims may materially affect margins and cash flow.
- Potential liquidated-damages exposure was $2.4 million, of which approximately $1.5 million was considered probable; $1.4 million had been recorded as a reduction to revenue.
- Outstanding surety bonds totaled $217.0 million, with $533.0 million of additional bonding capacity. Letters of credit totaled $27.0 million.
- Costs and estimated earnings in excess of billings were $39.0 million, while billings in excess of costs and estimated earnings were $36.7 million.
- Management identified a $2.0 million positive impact on operating loss from changes in contract estimates for projects in progress at the beginning of the periods, primarily reflecting execution, close-out and changed circumstances.
- Fixed-price and percentage-of-completion contracts expose the company to cost overruns, estimate revisions, performance penalties and volatility in reported results.
- Other material risks include continued weakness in oil and gas spending, commodity-price and supply volatility, foreign-exchange exposure, customer credit risk, litigation, cybersecurity, skilled-labor availability and compliance with credit and bonding requirements.
- The board declared a quarterly dividend of $0.26 per share on February 5, 2018, payable March 21, 2018.
Important Facts for Investors to Verify
- Whether backlog growth and new orders persist and convert into revenue and cash generation.
- The resolution and margin impact of the oil and gas project with unresolved change orders.
- Whether liquidated-damages exposure, contract claims and estimate changes result in additional charges.
- The collection of elevated accounts receivable and the timing of customer milestone payments.
- The sustainability of the $0.26 per-share dividend while operating cash flow is negative.
- The final tax effects of the Tax Cuts and Jobs Act, including the realizability of deferred tax assets.
- Renewal or replacement of the Powell UK facility agreement, which had $3.9 million of guarantees outstanding and expires in May 2018.
- Compliance with revolving-credit, bond, letter-of-credit and surety-bond requirements.