Powell Industries, Inc. — Form 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, electric utility, traction power and other industrial markets. This unaudited filing covers the three months ended December 31, 2019, the first quarter of Fiscal 2020, compared with the first quarter of Fiscal 2019.
Key financial metrics
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Revenue | $134.2 million | $109.4 million | Up 23% |
| Gross profit | $21.8 million | $14.6 million | Up 49% |
| Gross margin | 16.3% | 13.4% | Up approximately 3 percentage points |
| Operating income | $3.0 million | $(3.0) million | Improved by $6.1 million |
| Net income | $2.8 million | $(2.7) million | Returned to profitability |
| Diluted EPS | $0.24 | $(0.23) | Improved by $0.47 |
| Cash flow from operations | $2.1 million | $9.1 million | Down $7.0 million |
SG&A was $17.3 million, up 9%, but declined to approximately 13% of revenue from 15% in the prior-year quarter. The effective tax rate was 17%, compared with 8% in the prior-year period, which included a tax benefit on a pretax loss.
At December 31, 2019, cash and cash equivalents were $121.0 million, compared with $118.6 million at September 30, 2019. Cash, cash equivalents and short-term investments totaled $121.0 million, versus $124.7 million at fiscal year-end because short-term investments had matured. Current assets exceeded current liabilities by 2.1 times. Total debt was $0.8 million, and debt to total capitalization was 0.26%.
The $75.0 million U.S. revolving credit facility had no borrowings, $13.4 million of letters of credit outstanding and $61.6 million available. Powell was in compliance with its financial covenants. Investing activities provided $3.7 million, including $6.1 million of investment maturities and $2.4 million of capital expenditures. Financing activities used $4.0 million, including $3.0 million of dividends and $0.4 million of debt repayment.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by improved petrochemical and oil and gas activity, increased international operations and higher project volume. Petrochemical revenue rose 54% to $30.4 million, oil and gas revenue rose 21% to $60.0 million, utility revenue rose 20% to $23.0 million, and traction revenue rose 67% to $8.4 million.
- Gross margin improved due to favorable market conditions and manufacturing efficiencies from higher volume.
- Results benefited from $4.3 million of favorable changes in contract estimates for projects in progress at the beginning of the quarter, compared with a $3.1 million benefit in the prior-year quarter. These changes primarily reflected project execution and negotiations involving variable consideration.
- Backlog was $425.9 million at December 31, 2019, up slightly from $419.0 million at September 30, 2019 and 32% from $322.0 million at December 31, 2018. Approximately $367.4 million was expected to be recognized within twelve months.
- New orders declined 20% to $137.4 million, compared with $172.4 million in the prior-year quarter, primarily because of the timing of select prior-year awards.
- Operating cash flow declined because the prior-year period benefited from a $6.6 million income tax refund. Working capital also reflected project timing, including changes in receivables, contract balances, inventory, payables and accrued liabilities.
- Effective October 1, 2019, Powell adopted the new lease accounting standard, recording approximately $7.0 million of operating lease assets and liabilities without a retained-earnings adjustment. Lease liabilities totaled $7.0 million at December 31, 2019.
Guidance, outlook, risks and unusual items
Powell did not provide formal quantified revenue or earnings guidance in the filing. Management stated that increased orders in Fiscal 2018 and 2019 had improved revenue and operating results and that it anticipated this improvement would continue through Fiscal 2020. Management also noted a substantial natural-gas-related contract awarded in January 2020 for a large U.S. industrial complex; the project is expected to take more than three years to design, manufacture, integrate, test and ship.
The business remains exposed to cyclical and capital-intensive end markets, commodity prices, customer capital spending, project timing, customer construction delays, change orders, contract claims, liquidated damages, fixed-price contract cost inflation and raw-material availability. Backlog may be canceled or modified and is not necessarily indicative of future earnings. Approximately $21.8 million of cash was held outside the United States and was intended to remain reinvested internationally.
Powell had $180.0 million of outstanding surety bonds, $570.0 million of additional bonding capacity, $13.4 million of letters of credit and $5.2 million of bank guarantees under its U.K. facility. Management stated that there had been no significant draws or claims on these security instruments and that litigation was not expected to have a material adverse effect, although outcomes remain uncertain.
Foreign currency translation adjustments improved accumulated other comprehensive loss by $2.4 million during the quarter. Powell reported a realized foreign exchange loss of $0.3 million in SG&A and generally does not hedge foreign currency translation or commodity-price exposure. The company declared a subsequent quarterly dividend of $0.26 per share on February 4, 2020.
Important facts for investors to verify
- Whether the favorable $4.3 million contract-estimate benefit is recurring or represents a one-time contribution to gross margin.
- Conversion of the $425.9 million backlog into revenue and cash, including cancellation, modification and execution risks.
- New-order trends after the 20% quarterly decline and the timing of the large January 2020 natural-gas project.
- Cash conversion and working-capital requirements as project volume increases.
- Exposure to oil, gas and petrochemical capital spending, raw-material prices, fixed-price contracts and foreign exchange.
- Availability under the revolving facility, covenant compliance and contingent obligations from letters of credit, surety bonds and bank guarantees.
- Potential changes in the effective tax rate, including the possible reduction of approximately $0.9 million in unrecognized tax benefits within twelve months.