Powell Industries, Inc. — Form 10-Q Summary
Business context and reporting period
Powell designs, manufactures and services custom-engineered electrical distribution, control and monitoring systems for oil and gas, petrochemical, electric utility, traction power and other industrial markets. The filing covers the quarter and nine months ended June 30, 2019, representing the third quarter and first nine months of fiscal 2019. Results are unaudited.
Approximately 93% of revenue was recognized over time, primarily using cost-to-cost percentage-of-completion accounting. Backlog was $407.0 million at June 30, 2019, with approximately $368.7 million expected to be recognized within twelve months.
Financial performance and position
| Metric | Three months ended June 30, 2019 | Three months ended June 30, 2018 | Nine months ended June 30, 2019 | Nine months ended June 30, 2018 |
|---|---|---|---|---|
| Revenue | $135.6 million | $122.1 million | $368.7 million | $313.8 million |
| Gross profit | $23.7 million | $18.4 million | $58.4 million | $41.4 million |
| Gross margin | 17% | 15% | 16% | 13% |
| Operating income | $5.6 million | $0.5 million | $3.8 million | $(12.2) million |
| Operating margin | 4.2% | 0.4% | 1.0% | (3.9)% |
| Net income (loss) | $5.1 million | $0.3 million | $3.4 million | $(8.7) million |
| Diluted EPS | $0.44 | $0.03 | $0.29 | $(0.76) |
- Quarterly SG&A increased 6% to $17.1 million, while SG&A as a percentage of revenue remained 13%. Nine-month SG&A increased 4% to $50.2 million, but declined to 14% of revenue from 15%.
- The quarterly effective tax rate was 14%, compared with 56% in the prior-year quarter. The nine-month rate was 22% in both periods.
- Operating cash flow was $33.9 million for the nine months, compared with $(26.1) million in the prior-year period. Cash flow benefited from collections, contract billing milestones and a $6.6 million income tax refund.
- Cash, cash equivalents and short-term investments totaled $78.0 million at June 30, 2019, compared with $49.8 million at September 30, 2018. Total cash, cash equivalents and restricted cash was $88.6 million.
- Current assets exceeded current liabilities by approximately 2.2 times. Total debt was $1.2 million, down from $1.6 million at September 30, 2018; debt to total capitalization was 0.40%.
- The $75.0 million revolving credit facility had no borrowings outstanding. Letters of credit reduced availability by $11.8 million, leaving $63.2 million available for letters of credit, subject to cash-collateral requirements. Restricted cash held as collateral was $16.7 million.
- Cash used in financing activities was $10.5 million, primarily reflecting $9.0 million of dividends and $0.4 million of debt repayments. Capital expenditures were $3.2 million.
Material changes versus the prior comparable period
- Third-quarter revenue increased 11%, primarily from higher orders in oil and gas and petrochemical markets. Domestic revenue rose 14%, while international revenue increased 4%.
- Nine-month revenue increased 17%; domestic revenue increased 30%, while international revenue declined 14%, primarily because of lower export projects from domestic facilities.
- Gross profit increased 29% in the quarter and 41% for the nine months. Management attributed margin improvement to stronger market conditions, increased volume and manufacturing efficiencies in domestic and Canadian facilities.
- The company returned to profitability for the nine-month period, compared with a substantial prior-year loss.
- Backlog increased from $260.9 million at September 30, 2018 and $397.2 million at March 31, 2019 to $407.0 million at June 30, 2019. Nine-month new orders increased to $513.9 million from $380.6 million.
- Contract assets declined to $57.2 million from $82.5 million at September 30, 2018, while contract liabilities increased to $60.9 million from $43.2 million, resulting in a net contract liability of $3.6 million versus a net contract asset of $39.4 million.
Guidance, outlook, risks and unusual items
Management stated that improved customer investment in oil and gas and petrochemical projects favorably affected orders, backlog, revenue and operating results, and expected the improvement to continue through the remainder of fiscal 2019. Management also expects available cash, short-term investments and working capital to fund operating activities, capital improvements, research and development and debt repayments for the foreseeable future. No quantified earnings or revenue guidance was provided.
- Quarterly operating income included $1.0 million of insurance proceeds from the final settlement of a Hurricane Harvey business-interruption claim.
- Nine-month results included $0.7 million of lease accrual adjustments for unused Canadian facilities and a $0.5 million recovery related to a prior subsidiary divestiture claim.
- Nine-month operating results benefited by $4.3 million from changes in contract estimates, primarily favorable project execution and negotiations of variable consideration.
- Fixed-price contracts, percentage-of-completion accounting, change orders, liquidated damages, customer delays, project claims and cost estimates can create earnings volatility or losses.
- The business is cyclical and remains significantly exposed to oil and gas prices, customer capital spending, raw-material costs, labor availability, competition, foreign exchange, regulation and international operations.
- Backlog may be cancelled or modified and is not necessarily indicative of future revenue or earnings. Outstanding surety bonds totaled $152.9 million, and letters of credit totaled $11.8 million.
- Management reported no material changes to previously disclosed risk factors, no material adverse effect expected from pending litigation, effective disclosure controls and no material changes in internal control over financial reporting.
- The board declared a $0.26 per-share quarterly dividend on August 6, 2019, payable September 18, 2019.
Investor verification priorities
- Verify the sustainability of the revenue and margin recovery, particularly as oil and gas and petrochemical markets remain cyclical.
- Reconcile backlog conversion, cancellations, new orders and the timing of the $368.7 million expected to be recognized within twelve months.
- Review contract assets, liabilities and estimate revisions because percentage-of-completion accounting and project assumptions materially affect reported earnings.
- Assess cash generation excluding the $6.6 million tax refund and monitor working-capital needs as project volume grows.
- Confirm compliance with revolver covenants, cash-collateral requirements and the availability of letters of credit and surety bonding.
- Evaluate exposure to raw-material inflation, foreign currency movements, customer claims, liquidated damages, warranties and pending litigation.