Powell Industries, Inc. — Fiscal 2019 First-Quarter 10-Q Summary
Business Context and Reporting Period
Powell develops, manufactures and services custom-engineered electrical distribution, control and monitoring systems for oil and gas, petrochemical, electric utility and traction-power customers. The filing covers the three months ended December 31, 2018, compared with the three months ended December 31, 2017. Results are affected by cyclical capital spending, project timing and the holiday-related manufacturing shutdown during November and December.
The company adopted the new revenue recognition standard on October 1, 2018, using the modified retrospective method. No adjustment to opening retained earnings was required.
Key Financial Metrics
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Revenue | $109.4 million | $90.2 million | Up 21% |
| Gross profit | $14.6 million | $10.6 million | Up 39% |
| Gross margin | 13% | 12% | Up approximately 1 percentage point |
| Operating loss | $3.0 million | $7.4 million | Improved $4.4 million |
| Net loss | $2.7 million | $5.7 million | Improved $3.0 million |
| Diluted loss per share | $0.23 | $0.49 | Improved $0.26 |
| Cash flow from operations | $9.1 million provided | $14.1 million used | Improved $23.2 million |
| Dividends per share | $0.26 | $0.26 | Unchanged |
SG&A declined to $15.9 million from $16.2 million, while SG&A as a percentage of revenue declined to 15% from 18%. Research and development expense was $1.7 million, essentially unchanged. The prior-year period included $0.5 million of other income from an amended supply agreement; that amount was fully amortized by December 31, 2017.
Operating cash flow benefited primarily from collections of accounts receivable and a $6.6 million income-tax refund. Investing activities provided $5.0 million, including net maturities of short-term investments, while financing activities used $4.1 million, primarily for dividends and debt repayment.
Financial Position, Debt and Liquidity
- Cash and cash equivalents were $55.0 million at December 31, 2018, compared with $36.6 million at September 30, 2018.
- Cash, cash equivalents and short-term investments totaled $62.3 million, up from $49.8 million at fiscal year-end.
- Total restricted cash was $15.9 million, primarily pledged as collateral under the U.S. revolving credit facility.
- Current assets exceeded current liabilities by approximately 2.5 times.
- Total debt was $1.2 million, consisting of industrial development revenue bonds; debt to total capitalization was 0.41%.
- The $75.0 million U.S. revolving credit facility had no borrowings outstanding. Letters of credit reduced availability by $15.2 million, leaving $59.8 million available for letters of credit, subject to collateral and covenant requirements.
- Surety bonds outstanding totaled $172.3 million, with additional bonding capacity of $577.7 million. Outstanding U.K. bank guarantees totaled $3.9 million.
Material Changes Versus the Prior Comparable Period
- Revenue increased $19.2 million, driven primarily by higher domestic orders and improved oil and gas market conditions. Domestic revenue rose 50% to $89.9 million, while international revenue declined 35% to $19.5 million.
- Gross profit and margin improved due to higher volume and production efficiencies in domestic facilities.
- Backlog increased to $322.0 million at December 31, 2018, from $260.9 million at September 30, 2018. Approximately $302 million was expected to be recognized within twelve months.
- New orders increased to $172.0 million from $100.0 million in the prior-year quarter, primarily in oil, gas and petrochemical markets.
- Net contract assets declined to $18.2 million from $39.4 million, reflecting the timing of billing milestones and new orders.
- Accumulated other comprehensive loss increased by $4.1 million to $25.9 million, primarily from Canadian dollar and British pound currency translation effects.
- The company recognized approximately $3.1 million of favorable contract-estimate changes in the current quarter, compared with $2.0 million in the prior-year quarter. Contract estimates remain a significant source of earnings variability.
Guidance, Outlook, Risks and Unusual Items
Management did not provide specific numerical revenue or earnings guidance. Management stated that improved orders in fiscal 2018 continued into the first quarter of fiscal 2019 and anticipated that improvement in revenue and operating results would continue during fiscal 2019. The company expects its cash, investments and working capital to fund operating activities, research and development, capital improvements and debt repayments for the foreseeable future.
- Markets remain capital-intensive and cyclical, with results sensitive to oil and gas prices, customer capital budgets, project awards, construction schedules and regulatory developments.
- Backlog is not a guarantee of future revenue because projects may be delayed, cancelled or modified.
- Percentage-of-completion accounting requires estimates of contract costs, variable consideration, change orders, claims, liquidated damages and project completion; revisions can materially affect margins.
- Fixed-price contracts expose the company to raw-material price volatility, labor availability, execution issues and inability to fully pass through cost increases.
- The company was in compliance with its revolving-credit and U.K. facility covenants, but the U.S. revolver is currently restricted primarily to letters of credit until specified financial ratios are met.
- Legal proceedings and commercial disputes are ongoing, but management believes any resulting liability will not materially affect financial position, results or liquidity.
- Foreign-currency translation, commodity prices, interest rates, cybersecurity, skilled-labor availability, product quality and customer creditworthiness remain relevant risks.
- The board declared a $0.26-per-share quarterly dividend on February 5, 2019, payable March 20, 2019.
Important Facts for Investors to Verify
- Whether the $322.0 million backlog converts to revenue as expected and whether cancellations, delays or contract modifications increase.
- Whether favorable contract-estimate adjustments remain sustainable and whether fixed-price project costs or claims pressure future gross margins.
- Progress toward meeting the U.S. revolver’s financial ratios and release of pledged restricted cash.
- The sustainability of operating cash flow as project volume increases and working-capital requirements grow.
- Exposure to oil and gas capital spending, raw-material inflation, foreign exchange movements and international market weakness.
- The effect of the new revenue recognition standard on contract assets, liabilities, backlog and period-to-period comparability.
- The company’s ability to maintain the quarterly dividend while reporting net losses.