Powell Industries, Inc. — Fiscal 2015 Second-Quarter Form 10-Q
Reporting period: Three and six months ended March 31, 2015. The interim financial statements are unaudited. Powell designs, manufactures and services custom-engineered electrical distribution, control and monitoring systems for energy, industrial, transportation and utility customers.
Financial Highlights
| Metric | Three Months Ended March 31, 2015 | Three Months Ended March 31, 2014 | Six Months Ended March 31, 2015 | Six Months Ended March 31, 2014 |
|---|---|---|---|---|
| Revenue | $170.2 million | $162.3 million | $322.8 million | $334.2 million |
| Gross profit | $24.3 million | $34.9 million | $45.4 million | $70.1 million |
| Gross margin | 14.3% | 21.5% | 14.1% | 21.0% |
| Operating income | $1.8 million | $10.6 million | $0.1 million | $21.8 million |
| Income from continuing operations | $(3.7) million | $7.0 million | $(3.9) million | $14.2 million |
| Net income | $(3.7) million | $15.6 million | $(3.9) million | $23.8 million |
| Diluted EPS | $(0.31) | $1.29 | $(0.33) | $1.98 |
Balance Sheet and Liquidity
- Cash and cash equivalents were $55.7 million at March 31, 2015, down from $103.1 million at September 30, 2014.
- Total assets were $506.4 million and stockholders’ equity was $345.0 million at March 31, 2015.
- Total debt and capital lease obligations were $2.8 million, including $0.4 million of current maturities, compared with $3.2 million at September 30, 2014.
- No borrowings were outstanding under the $75.0 million U.S. revolving credit facility; availability was $57.0 million after outstanding letters of credit.
- Current assets exceeded current liabilities by approximately 2.2 times. Management reported debt to total capitalization of 0.81%.
- Letters of credit totaled $18.0 million. Performance and maintenance bonds totaled $300.9 million, with additional bonding capacity of $299.1 million.
Cash Flow and Capital Allocation
- Operating cash flow was negative $4.1 million in the first six months of Fiscal 2015, compared with positive $6.8 million in the prior-year period.
- Capital expenditures were $28.7 million, up from $8.5 million, primarily reflecting the expansion of the Canadian manufacturing facility.
- Financing cash outflows were $13.0 million, including $5.8 million for share repurchases and $6.3 million of dividends.
- The company repurchased 171,416 shares for $5.8 million, or an average $33.60 per share, under a program authorizing up to $25 million through December 31, 2015.
- Dividends were $0.26 per share in the second quarter and $0.52 per share for the six-month period.
Material Changes Versus Prior Comparable Period
- Second-quarter revenue increased 4.9%, but gross profit fell 30.4% and gross margin declined 720 basis points to 14.3%.
- Six-month revenue decreased 3.4%, while gross profit declined 35.3% and gross margin fell 690 basis points to 14.1%.
- Domestic revenue increased 31.0% in the quarter and 20.1% for the six-month period. International revenue declined 29.3% and 31.2%, respectively, primarily because a large international project was substantially completed in Fiscal 2014.
- Commercial and industrial revenue increased, while utility revenue declined. Six-month municipal and transit revenue also decreased.
- SG&A expense declined to $19.5 million in the quarter and $40.3 million for six months, primarily because of lower performance-based compensation and cost reductions.
- Results included $1.3 million of restructuring and separation costs related to the former Chief Operating Officer’s departure and severance in Canadian and certain U.S. operations.
- Prior-year results included $8.6 million of after-tax income from discontinued operations in the quarter and $9.6 million for six months, including the gain on the 2014 sale of Transdyn. Fiscal 2015 included no discontinued-operation income.
- Backlog was $498.5 million at March 31, 2015, compared with $507.1 million at September 30, 2014. Six-month new orders were $321.5 million versus $354.8 million in the prior-year period.
Guidance, Outlook, Risks and Unusual Items
- Management did not provide specific numerical revenue or earnings guidance in the filing.
- Management expects the Canadian facility expansion to be completed in the third quarter of Fiscal 2015. Approximately $25 million of the planned $26 million expansion had been incurred by March 31, 2015.
- Canadian operations continued to experience inefficiencies, extended delivery times, incremental costs, gross-margin deterioration and operating losses. Management stated that Canadian operating losses may continue in the near term.
- Lower oil prices have caused customers to reduce capital budgets, defer or cancel projects, and apply greater pricing pressure. Management expects these conditions to negatively affect future orders, revenue, operating results and operating cash flow.
- The second-quarter income tax provision was $6.4 million on $2.7 million of pretax income, producing a 236.6% effective tax rate. The principal drivers were a $9.0 million valuation allowance against Canadian deferred tax assets, partially offset by a $4.1 million release of an IRS-related research and development tax credit reserve.
- Foreign currency translation losses were $11.1 million for the six-month period and reduced accumulated other comprehensive income.
- Customer contracts are frequently fixed-price and accounted for using percentage-of-completion accounting, creating exposure to cost overruns, project delays, change orders and margin volatility.
- Other risks include raw-material price volatility, customer credit risk, international currency exposure, cyclical oil and gas markets, competition, skilled-labor availability, litigation, regulatory changes and potential disruption from business systems or facility expansion.
- Management stated that existing cash and borrowing capacity should be sufficient for anticipated operations, capital improvements, debt repayments and share repurchases. Legal proceedings were described as ordinary-course matters that management does not expect to have a material adverse effect.
Most Important Facts to Verify
- Whether Canadian operations stabilize as the facility expansion is completed and whether related losses and margin pressure decline.
- The recoverability of Canadian deferred tax assets and the potential for future changes to the $9.0 million valuation allowance.
- Backlog conversion, order trends and cancellation or delay risk amid lower oil prices and reduced customer capital spending.
- Working-capital requirements and cash generation, particularly the effect of receivables, contract billing positions and continued capital expenditures.
- The availability and covenant requirements of credit facilities. The notes state the U.S. revolver expires December 31, 2018, while the MD&A states December 2016; this apparent inconsistency should be reconciled.
- Exposure represented by $300.9 million of performance and maintenance bonds and $18.0 million of letters of credit.
- The effect of fixed-price, percentage-of-completion contracts, raw-material costs and project execution on future gross margins.