Powell Industries, Inc. — Fiscal 2022 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, utility, traction power, mining, metals and other industrial markets. The filing covers the three months ended December 31, 2021, compared with the three months ended December 31, 2020. The company’s fiscal year ends September 30.
Key financial metrics
| Metric | Q1 FY2022 | Q1 FY2021 |
|---|---|---|
| Revenue | $106.6 million | $106.6 million |
| Gross profit | $13.4 million | $18.3 million |
| Gross margin | 13% | 17% |
| Operating loss | $4.3 million | $0.3 million |
| Net loss | $2.8 million | $0.4 million |
| Diluted loss per share | $0.24 | $0.03 |
| Operating cash flow | $(27.8) million | $(25.2) million |
- SG&A declined 6% to $15.9 million, while research and development expense increased to $1.8 million from $1.7 million.
- The company recorded a $1.4 million income tax benefit, compared with a $0.1 million tax provision in the prior-year quarter. The effective tax rate was 34% versus negative 41%.
- Cash and cash equivalents were $77.9 million at December 31, 2021. Including short-term investments, liquidity totaled $101.5 million, down from $134.0 million at September 30, 2021.
- Current assets exceeded current liabilities by approximately 2.6 times.
- The company had no outstanding long-term debt after repaying the remaining $0.4 million of industrial development revenue bonds. No borrowings were outstanding under the $75.0 million revolving credit facility; $43.8 million remained available after letters of credit.
- Capital expenditures were $0.4 million. Financing cash uses included $3.0 million of dividends and $0.4 million of debt repayment.
- Backlog was $416.0 million at December 31, 2021, including approximately $301.7 million expected to be recognized as revenue within twelve months.
Material changes versus the prior comparable period
- Revenue was essentially flat, but gross profit decreased 26% because of higher global commodity costs and fewer favorable project close-outs.
- Net loss increased substantially, primarily because of the lower gross profit.
- Oil and gas revenue excluding petrochemical increased 7% to $43.0 million, and petrochemical revenue increased 88% to $17.2 million. Utility revenue fell 24% to $21.5 million, and traction power revenue fell 15% to $11.4 million.
- Domestic revenue increased 2% to $82.1 million, while international revenue decreased 6% to $24.4 million.
- Bookings, net of cancellations and scope reductions, increased 18% to $107.7 million; however, backlog declined 11% from $464.9 million at December 31, 2020.
- Operating cash use increased to $27.8 million, driven mainly by contract asset and liability timing, higher inventory and accrued-liability changes. Net contract assets increased to $18.5 million from $11.8 million at September 30, 2021.
Guidance, outlook, risks and unusual items
- Management did not provide specific revenue or earnings guidance. It expects cyclical conditions and COVID-19-related uncertainty may persist throughout fiscal 2022.
- Customer project delays, cancellations and reduced capital spending continue to affect industrial end markets. A large domestic industrial project awarded in fiscal 2020 is expected to be substantially completed in fiscal 2022 and represented approximately 19% of first-quarter revenue.
- Higher raw-material and commodity costs remain a significant margin risk, particularly because fixed-price contracts may limit the ability to pass cost increases to customers. The company does not currently hedge commodity-price exposure.
- Results may vary based on project timing, customer approvals, change orders, contract claims, liquidated damages, project close-outs and revisions to estimated contract costs. Favorable contract-estimate changes contributed $2.8 million to first-quarter operating results, compared with $5.5 million in the prior-year quarter.
- Management stated that it may reduce capital expenditures and research and development spending or reduce or eliminate future dividends to preserve liquidity if economic conditions deteriorate. The board subsequently declared a $0.26-per-share quarterly dividend payable March 16, 2022.
- Letters of credit totaled $31.2 million, and surety bonds totaled $144.4 million. Changes in market conditions could require cash collateralization. The company reported compliance with its revolver and UK facility covenants.
- Pending litigation and commercial disputes were not expected by management to have a material adverse effect, although outcomes remain uncertain. No material changes were reported to the risk factors in the prior Form 10-K.
- Disclosure controls and procedures were assessed as effective, with no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether commodity-cost inflation continues to pressure gross margins and whether price increases or contract protections offset those costs.
- The timing, profitability and cash-collection profile of the large domestic industrial project and the increase in net contract assets.
- Whether backlog converts to revenue as expected, given customer cancellation, scope-reduction and project-delay risks.
- Operating cash flow, inventory levels and milestone billings, particularly after the first-quarter cash decline.
- Availability under the revolving credit facility, covenant headroom and potential collateral requirements for letters of credit and surety bonds.
- The sustainability of the $0.26-per-share dividend while the company is generating operating cash outflows and reporting losses.