Powell Industries, Inc. — Form 10-Q Summary
Reporting period: Three months ended December 31, 2013, representing the first quarter of fiscal 2014. The financial statements are unaudited and presented in accordance with U.S. GAAP. Powell designs, manufactures and services custom engineered-to-order electrical energy management and control systems for energy, industrial, utility and transportation markets.
Financial Performance and Position
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Revenue | $171.9 million | $146.9 million | Up 17.0% |
| Gross profit | $35.2 million | $32.4 million | Up 8.5% |
| Gross margin | 20.5% | 22.1% | Down 1.6 percentage points |
| Operating income | $11.3 million | $10.6 million | Up 6.5% |
| Income from continuing operations | $7.3 million | $7.1 million | Up 2.1% |
| Net income | $8.3 million | $7.4 million | Up 11.8% |
| Diluted EPS | $0.68 | $0.62 | Up $0.06 |
| Cash flow from operating activities | $5.3 million | $21.2 million | Down $15.9 million |
Operating margin was approximately 6.6%, compared with 7.2% in the prior-year quarter. The effective tax rate was 35.1%, compared with 32.5%. Selling, general and administrative expense increased to $21.6 million from $19.7 million, primarily due to higher personnel and administrative costs, while research and development expense was $1.8 million.
Cash and cash equivalents were $103.7 million at December 31, 2013, compared with $107.4 million at September 30, 2013. Current assets exceeded current liabilities by approximately 2.4 times. Total debt and capital lease obligations were $3.2 million, down from $3.6 million, and debt represented 0.88% of total capitalization. The company had no borrowings under its $72.0 million U.S. revolving facility or $9.4 million Canadian revolving facility. Available capacity was $52.9 million and $9.3 million, respectively, after letters of credit.
Capital expenditures were $5.8 million, compared with $13.4 million in the prior-year quarter. Cash used in financing activities was $3.9 million, including a $3.0 million dividend payment. Backlog was $455.1 million at December 31, 2013, up from $437.9 million at September 30, 2013. First-quarter orders were $192.2 million, compared with $250.9 million in the prior-year quarter.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven principally by the expansion and ramp-up of Canadian operations and timing of oil and gas construction projects. Domestic revenue increased 2.3% to $89.0 million, while international revenue increased 38.4% to $82.8 million.
- Gross margin declined because of costs and inefficiencies associated with the Canadian expansion and ramp-up.
- Operating cash flow declined substantially, primarily reflecting contract billing and collection timing and working-capital movements, despite $10.0 million received under an amended General Electric supply agreement.
- Transdyn was classified as a discontinued operation. Its first-quarter revenue was $12.4 million and net income was $1.0 million, compared with $7.1 million and $0.3 million, respectively, in the prior-year quarter.
- Powell amended its GE supply agreement on December 30, 2013. GE paid $10.0 million at execution and agreed to pay an additional $7.0 million over three years. Powell wrote off the related $9.2 million unamortized supply-agreement intangible asset and recorded an $8.1 million deferred credit to be amortized over four years.
- Powell paid a $0.25-per-share quarterly dividend in December 2013 and declared another $0.25-per-share dividend payable in March 2014.
Guidance, Outlook, Risks and Unusual Items
Management did not provide specific numerical revenue or earnings guidance. Management described the long-term outlook as positive, citing expected energy-demand growth, replacement of aging infrastructure, strength in oil and gas production, Canadian oil sands, refining and traction-power markets. Near-term project timing and pricing remain difficult to predict because of global market conditions, customer approvals, change orders and project close-outs.
The Canadian facility has been completed, but its ramp-up and staffing remain operational challenges and may continue to pressure margins. Management expects cash on hand and existing borrowing capacity to fund anticipated operations, capital improvements, expansions and debt repayments for the foreseeable future.
Key risks include cyclical capital spending, backlog cancellations or adjustments, percentage-of-completion accounting estimates, fixed-price contracts and penalty provisions, raw-material price volatility, international and foreign-exchange exposure, competitive pressures, skilled-labor availability, litigation, business-system implementation, and potential difficulties ramping new facilities. Outstanding performance and maintenance bonds totaled $333.3 million, with additional bonding capacity of $66.7 million. Letters of credit totaled $19.2 million.
On January 15, 2014, Powell sold Transdyn for $16.0 million, subject to working-capital adjustments. It received $14.4 million in cash, with $1.6 million placed in escrow until April 2015 subject to certain contingent obligations. Management stated that ordinary-course litigation is not expected to have a material adverse effect.
Important Facts for Investors to Verify
- Verify the sustainability of revenue growth and backlog conversion, particularly the $455.1 million backlog and lower first-quarter order intake.
- Monitor Canadian operations for further ramp-up costs, inefficiencies and effects on gross margin.
- Reconcile operating cash flow with earnings and track contract billing, underbillings and collections.
- Review the amended GE agreement, including the remaining $7.0 million payments and four-year deferred-credit amortization.
- Assess the final economics and escrow release conditions of the Transdyn sale.
- Review fixed-price contract estimates, performance bonds, letters of credit and potential warranty or litigation exposure.
- Confirm compliance with credit-facility covenants and availability after letters of credit.