Powell Industries, Inc. — Fiscal 2021 First-Quarter 10-Q Summary
Business Context and Reporting Period
Powell designs, manufactures and services custom-engineered electrical distribution, control and monitoring equipment for oil and gas, petrochemical, LNG, electric utility, traction power, mining, metals and other industrial markets. The filing covers the three months ended December 31, 2020, compared with the three months ended December 31, 2019. Results were materially affected by COVID-19, reduced energy demand, oil and gas commodity volatility, and customer delays or cancellations of capital projects.
Financial Performance and Position
| Metric | Q1 Fiscal 2021 | Q1 Fiscal 2020 |
|---|---|---|
| Revenue | $106.6 million | $134.2 million |
| Gross profit | $18.3 million | $21.8 million |
| Gross margin | 17% | 16% |
| Operating income (loss) | $(0.3) million | $3.0 million |
| Net income (loss) | $(0.4) million | $2.8 million |
| Diluted earnings (loss) per share | $(0.03) | $0.24 |
| Cash flow from operating activities | $(25.2) million | $2.1 million |
- Revenue declined 21%, primarily because of lower orders, project delays and cancellations. Oil and gas revenue fell 33% to $40.0 million, and petrochemical revenue fell 70% to $9.2 million. Electric utility revenue increased 22% to $28.2 million, while traction power revenue increased 60% to $13.4 million.
- Gross profit benefited from favorable project close-out gains, cost and productivity efficiencies, and cancellation fees. These benefits helped lift gross margin despite the revenue decline.
- SG&A decreased 2% to $16.9 million, but increased to 16% of revenue from 13% because of lower sales. Research and development expense was $1.7 million.
- The $0.1 million income tax provision produced a negative 41% effective tax rate because of foreign losses subject to valuation allowances and discrete items, partly offset by an estimated research and development tax credit.
- Cash, cash equivalents and short-term investments totaled $149.7 million at December 31, 2020, down from $178.9 million at September 30, 2020. Cash and cash equivalents were $134.0 million.
- Operating cash flow was negative primarily because of lower accounts receivable collections, contract billing timing and payment of prior-year variable incentive compensation. Capital expenditures were $1.0 million.
- Current assets exceeded current liabilities by approximately 2.4 times. Total debt was $0.4 million, consisting of industrial development revenue bonds due in 2021; debt to total capitalization was 0.13%.
- The $75.0 million U.S. revolving credit facility had no borrowings, $38.9 million of outstanding letters of credit and $36.1 million of remaining availability at quarter-end. The company was in compliance with its covenants.
- Powell paid a quarterly dividend of $0.26 per share, or approximately $3.0 million in total, and declared another $0.26 per-share dividend payable March 17, 2021.
Material Changes Versus the Prior Comparable Period
- Revenue decreased by $27.6 million, or 21%, and the company moved from $2.8 million of net income to a $0.4 million net loss.
- Bookings, net of cancellations and scope reductions, declined 34% to $91.1 million from $137.4 million.
- Backlog was $464.9 million at December 31, 2020, down 2% from September 30, 2020 but up 9% from December 31, 2019. Approximately $306.8 million was expected to be recognized as revenue within the following twelve months.
- Operating cash flow deteriorated by $27.3 million year over year, from positive $2.1 million to negative $25.2 million.
- Cash, cash equivalents and short-term investments decreased by $29.2 million from September 30, 2020, while total liabilities declined by $25.2 million and stockholders’ equity increased modestly to $307.8 million.
- Foreign currency translation adjustments generated $4.3 million of comprehensive income, reducing accumulated other comprehensive loss to $20.2 million.
Guidance, Outlook, Risks and Unusual Items
Management did not provide numerical fiscal-year revenue or earnings guidance. It expects cyclical market conditions to persist through Fiscal 2021 and cannot reasonably estimate the duration or severity of the COVID-19 pandemic or its effect on operations and cash flows.
- Customers have deferred or suspended capital expenditures, and some requested delays or cancellations of manufacturing projects. Powell recognized cancellation fees on certain contracts based on contract terms and project progress.
- A substantial domestic industrial project awarded in Fiscal 2020 is expected to be substantially completed in Fiscal 2022 and represented approximately 13% of first-quarter revenue.
- Management reduced its workforce and discretionary spending during Fiscal 2020 and may further reduce capital expenditures, research and development costs, or future dividends to preserve liquidity.
- Backlog is subject to cancellations, scope reductions and modifications and may not be indicative of future earnings. Fixed-price contracts expose Powell to material, labor, execution, delay, change-order and liquidated-damages risks.
- Surety bonds outstanding totaled $185.0 million, with $565.0 million of additional bonding capacity. The company also had $38.9 million of letters of credit and $7.6 million of outstanding guarantees under its U.K. facility.
- Raw-material price volatility, foreign currency movements, customer credit risk, covenant compliance, litigation, supply-chain disruptions and prolonged weakness in energy markets remain key risks. Management stated that pending legal matters are not expected to have a material adverse effect, although outcomes are uncertain.
- The company adopted the current expected credit loss standard on October 1, 2020 without a material impact.
Important Facts for Investors to Verify
- Whether bookings and backlog stabilize or continue to decline as COVID-19 and energy-market effects persist.
- The timing, profitability and cash-collection profile of the large domestic industrial project and other major contracts.
- Whether favorable project close-out gains and cancellation fees recur, since they supported first-quarter gross margin.
- Operating cash flow, accounts receivable collections and contract billing milestones in subsequent quarters.
- Compliance with the revolver’s leverage, interest coverage and minimum cash covenants, particularly if EBITDA declines.
- The sustainability of the $0.26 per-share quarterly dividend given management’s stated willingness to reduce or eliminate future payments.
- Potential effects of customer cancellations, fixed-price contract losses, raw-material inflation, supply constraints and unrecorded legal or warranty exposures.