Powell Industries, Inc. — Fiscal 2014 Second-Quarter 10-Q Summary
Business Context and Reporting Period
Powell designs, manufactures and services custom engineered-to-order electrical power management and control equipment for energy, industrial, utility and transportation customers. The filing covers the quarter and six months ended March 31, 2014, Powell’s fiscal second quarter. Results exclude Transdyn from continuing operations after its sale on January 15, 2014.
Key Financial Metrics
| Metric | Three Months Ended March 31, 2014 | Year-over-Year Change |
|---|---|---|
| Revenue | $162.3 million | Up 11.1% |
| Gross profit | $34.9 million | Up 18.2% |
| Gross margin | 21.5% | Up from 20.2% |
| Operating income | $10.6 million | Up from $6.3 million |
| Income from continuing operations | $7.0 million | Up from $6.2 million |
| Diluted EPS from continuing operations | $0.58 | Up from $0.52 |
| Net income | $15.6 million | Up from $6.8 million |
| Diluted EPS | $1.29 | Up from $0.57 |
For the six months ended March 31, 2014, revenue was $334.2 million, gross profit was $70.1 million, operating income was $21.8 million, income from continuing operations was $14.2 million, and diluted EPS from continuing operations was $1.18. Six-month gross margin was 21.0%, compared with 21.1% in the prior-year period.
Net cash used in operating activities was $6.8 million for the first six months, compared with $57.2 million of operating cash flow generated in the prior-year period. Cash used working capital, including accounts receivable, contract positions, accounts payable and accrued liabilities.
Cash and cash equivalents were $101.4 million at March 31, 2014, compared with $107.4 million at September 30, 2013. Total debt and capital lease obligations were $3.2 million, and debt represented 0.85% of total capitalization. Powell had no borrowings under its $75.0 million U.S. revolver or $9.0 million Canadian revolver. Available capacity was $53.1 million and $8.9 million, respectively.
Material Changes Versus Prior Comparable Period
- Quarterly revenue growth was driven primarily by the expansion and ramp-up of Canadian operations and project timing. International revenue increased 24.0% to $70.4 million, while domestic revenue increased 2.9% to $91.9 million.
- Quarterly gross margin improved because of project mix and higher activity spreading fixed overhead, partly offset by Canadian ramp-up costs.
- Quarterly SG&A rose to $22.1 million, but declined to 13.6% of revenue from 14.4%. Management noted that certain favorable depreciation and capitalized personnel cost effects related to new business systems will not continue after implementation.
- The effective tax rate on continuing operations increased to 36.8% from 22.1%, principally because the prior-year rate benefited from Canadian tax loss carryforward utilization.
- Backlog was $452.2 million at March 31, 2014, compared with $437.9 million at September 30, 2013 and $455.1 million at December 31, 2013. Second-quarter orders were $162.6 million; six-month orders were $354.8 million, down from $369.1 million in the prior-year period.
- Six-month investing cash flow improved to $6.4 million provided, from $32.6 million used, reflecting $14.8 million of Transdyn sale proceeds and lower capital expenditures. Capital expenditures were $8.5 million versus $33.3 million in the prior-year period.
Guidance, Outlook, Risks and Unusual Items
- Management did not provide specific numerical revenue or earnings guidance. It described the long-term outlook as positive, supported by energy demand, infrastructure replacement, oil and gas production, refining and Canadian oil sands projects.
- Near-term project awards, pricing and execution remain difficult to predict because of global market conditions, industry constraints, customer approvals, change orders and project close-out timing.
- Canadian facility ramp-up and project execution continue to present operational risks. The company also planned to implement new enterprise resource planning, engineering and manufacturing systems in the third fiscal quarter and will monitor related internal controls.
- Powell sold Transdyn for $16.0 million, receiving $14.4 million in cash, an additional $0.4 million after a working-capital adjustment, and placing $1.6 million in escrow through April 2015 subject to contingent obligations. The sale generated an $8.6 million after-tax gain included in discontinued operations.
- Powell amended its GE supply agreement. GE paid $10.0 million upon execution and agreed to pay an additional $7.0 million over three years subject to conditions. Powell wrote off the related supply-agreement intangible asset, recorded an $8.1 million deferred credit, and recognized $0.5 million of other income in the first six months.
- Outstanding letters of credit totaled approximately $22.1 million. Performance and maintenance bonds totaled $306.7 million, with $293.3 million of additional bonding capacity. Management believes ordinary-course litigation will not materially affect financial position, results or liquidity.
- Principal risks include cyclical customer capital spending, backlog cancellations or adjustments, percentage-of-completion estimates, fixed-price contracts, commodity costs, international operations and currency movements, skilled labor availability, systems implementation, litigation, and facility ramp-up challenges.
Important Facts for Investors to Verify
- Reconcile reported net income and EPS with continuing operations and the one-time Transdyn disposal gain.
- Assess whether operating cash flow recovers from the six-month use of $6.8 million as contract billings and collections progress.
- Monitor Canadian operations for further ramp-up costs, execution issues and margin effects.
- Review backlog quality, cancellation exposure, project timing, change orders and the lower year-to-date order intake.
- Verify the remaining GE supply-agreement payments, deferred-credit amortization and related customer concentration or transition effects.
- Track the third-quarter business-systems implementation and any effects on internal controls, costs or operating execution.
- Review letters of credit, performance bonds, escrowed Transdyn proceeds and other contingent obligations.
- Consider the higher normalized tax rate relative to the prior-year period and its effect on future earnings.