Powell Industries, Inc. — Fiscal 2016 Second-Quarter Form 10-Q
Business context and reporting period
Powell designs, manufactures and services custom-engineered electrical distribution, control and monitoring equipment for industrial, oil and gas, utility, infrastructure and related markets. The filing covers the three and six months ended March 31, 2016; the balance sheet compares March 31, 2016 with September 30, 2015. Results are unaudited and are substantially affected by percentage-of-completion accounting for engineered-to-order contracts.
Key financial metrics
| Metric | Three months ended March 31, 2016 | Prior-year period | Six months ended March 31, 2016 | Prior-year period |
|---|---|---|---|---|
| Revenue | $152.3 million | $170.2 million | $302.2 million | $322.8 million |
| Gross profit | $30.1 million | $24.3 million | $53.2 million | $45.4 million |
| Gross margin | 20% | 14% | 18% | 14% |
| Operating income | $5.8 million | $1.8 million | $3.8 million | $0.1 million |
| Net income (loss) | $5.6 million | $(3.7) million | $5.1 million | $(3.9) million |
| Diluted EPS | $0.49 | $(0.31) | $0.45 | $(0.33) |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $25.2 million | $(4.1) million |
Cash and cash equivalents were $57.4 million at March 31, 2016, up from $43.6 million at September 30, 2015. Total current assets were $293.2 million versus current liabilities of $117.7 million. Total debt, including current maturities, was $2.4 million, and debt to total capitalization was 0.72%.
Powell had no borrowings under its $75.0 million U.S. revolving facility or $7.7 million Canadian revolving facility. Availability was $50.3 million under the U.S. facility, after letters of credit, and $7.7 million under the Canadian facility. Outstanding letters of credit totaled $24.7 million. Surety bonds totaled $298.9 million, with $451.1 million of additional bonding capacity.
Capital expenditures were $1.1 million for the six months, compared with $28.7 million in the prior-year period, primarily reflecting completion of the Canadian facility expansion in fiscal 2015. Dividends were $0.26 per share for the quarter and $0.52 per share for the six months.
Material changes versus the prior comparable period
- Second-quarter revenue declined 11% year over year, primarily because of lower oil and gas market demand and a smaller project backlog. Domestic revenue declined 11% and international revenue declined 9%.
- Gross profit increased 24% in the quarter and 17% for the six-month period. Margin improvement was attributed primarily to better international project execution and lower costs in Canada.
- Operating income improved to $5.8 million in the quarter and $3.8 million for the six months, despite restructuring costs.
- Net income benefited from improved gross profit and substantially lower income tax expense compared with the prior year. The prior-year period included a $9.0 million valuation allowance against Canadian deferred tax assets.
- Restructuring and separation costs increased to $3.3 million in the quarter and $7.1 million for the six months, compared with $1.3 million in the prior-year quarter and six-month period. These costs related to senior-management restructuring, the former CEO’s departure and workforce alignment; $3.6 million remained payable over the following nine months.
- Backlog declined to $357.4 million at March 31, 2016 from $441.4 million at September 30, 2015. Six-month new orders were $218.6 million, down from $321.5 million in the prior-year period.
- The company completed its share repurchase program on December 31, 2015, purchasing 806,018 shares for an aggregate $25.0 million.
Guidance, outlook, risks and unusual items
The filing does not provide quantitative revenue, earnings or margin guidance. Management expects continued pressure from lower oil and gas prices, reduced customer capital spending, project delays, cancellations and increased market-price competition. These conditions may negatively affect orders, backlog, revenue, operating results and operating cash flow.
Management expects cash on hand and available borrowing capacity to fund operating activities, capital improvements and debt repayments for the foreseeable future. Approximately $27 million of cash was held outside the United States and was intended to remain indefinitely reinvested internationally.
Potential liquidated-damages exposure was $8.9 million, of which approximately $2.0 million was considered probable; $1.6 million had been recorded as a reduction of revenue. Additional losses could arise if change orders or contract extensions are not obtained. The company also faces risks from fixed-price contracts, percentage-of-completion estimates, raw-material costs, foreign exchange, international operations, customer credit, litigation, skilled-labor availability and cyclical industrial markets.
Other unusual items included a $1.0 million gain from amortization of the deferred gain on the amended GE supply agreement and a $0.8 million discrete tax benefit from the retroactive reinstatement of the federal research and development tax credit. The company received $2.3 million in April 2016 related to that GE agreement.
Management stated that pending litigation is not expected to have a material adverse effect, although outcomes are uncertain. Disclosure controls and procedures were assessed as effective, with no material changes in internal control over financial reporting.
Investor verification priorities
- Verify whether backlog and new-order trends stabilize, particularly in oil and gas markets.
- Assess whether Canadian operational improvements are sustainable and offset lower volumes and pricing pressure.
- Monitor restructuring cash payments, further workforce actions and any additional separation costs.
- Review estimates for liquidated damages, contract claims, warranty obligations and percentage-of-completion accounting.
- Track cash conversion, milestone collections, underbilled contracts and the sustainability of operating cash flow.
- Confirm compliance with revolving-credit covenants and the availability of credit after letters of credit and surety obligations.
- Evaluate the effect of foreign exchange movements and the tax implications of foreign cash that remains indefinitely reinvested.