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| POWL > SEC Filings for POWL > Form 10-Q on 8-Aug-2012 | All Recent SEC Filings |
8-Aug-2012
Quarterly Report
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for the year ended September 30, 2011, which was filed with the Securities and Exchange Commission on December 12, 2011 and is available on the SEC's website at www.sec.gov.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
We are including the following discussion to inform our existing and potential shareholders generally of some of the risks and uncertainties that can affect our Company and to take advantage of the "safe harbor" protection for forward-looking statements that applicable federal securities law affords.
From time to time, our management or persons acting on our behalf make forward-looking statements to inform existing and potential shareholders about our Company. These statements may include projections and estimates concerning the timing and success of specific projects and our future backlog, revenues, income and capital spending. Forward-looking statements are generally accompanied by words such as "estimate," "project," "predict," "believe," "expect," " anticipate," "plan," "goal" or other words that convey the uncertainty of future events or outcomes. In addition, sometimes we will specifically describe a statement as being a forward-looking statement and refer to this cautionary statement.
In addition, various statements in this Quarterly Report on Form 10-Q, including those that express a belief, expectation or intention, as well as those that are not statements of historical fact, are forward-looking statements. These forward-looking statements speak only as of the date of this report; we disclaim any obligation to update these statements unless required by securities law, and we caution you not to rely on them unduly. We have based these forward-looking statements on our current expectations and assumptions about future events. While our management considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties, most of which are difficult to predict and many of which are beyond our control. These risks, contingencies and uncertainties relate to, among other matters, the following:
• The ongoing economic uncertainty and financial market conditions have negatively impacted and may continue to impact our customer base, suppliers and backlog.
• Our backlog is subject to unexpected adjustments and cancellations and, therefore, may not be a reliable indicator of our future earnings.
• Our volume of fixed-price contracts and the use of percentage-of-completion accounting could result in volatility in our results of operations.
• Fluctuations in the price and supply of raw materials used to manufacture our products may reduce our profits.
• Our industry is highly competitive.
• Our operations could be adversely impacted by the continuing effects from the U.S. government regulations on offshore deepwater and Outer Continental Shelf (OCS) drilling projects.
• International and political events may adversely affect our operations.
• Our acquisition strategy involves a number of risks.
• Our operating results may vary significantly from quarter to quarter.
• We may be unsuccessful at generating profitable internal growth.
• The departure of key personnel could disrupt our business.
• Our business requires skilled labor, and we may be unable to attract and retain qualified employees.
• Unforeseen difficulties with the maintenance or operation of our enterprise resource planning system could adversely affect our internal controls and our business.
• We carry insurance against many potential liabilities, and our management of risk may leave us exposed to unidentified or unanticipated risks.
• We may incur additional healthcare costs arising from federal healthcare reform legislation.
• Technological innovations by competitors may make existing products and production methods obsolete.
• Catastrophic events could disrupt our business.
We believe the items we have outlined above are important factors that could cause estimates included in our financial statements to differ materially from actual results and those expressed in a forward-looking statement made in this report or elsewhere by us or on our behalf. We have discussed many of these factors in more detail in our Annual Report on Form 10-K for the year ended September 30, 2011. These factors are not necessarily all of the factors that could affect us. Unpredictable or unanticipated factors we have not discussed in this report could also have material adverse effects on actual results of matters that are the subject of our forward-looking statements. We do not intend to update our description of important factors each time a potential important factor arises, except as required by applicable securities laws and regulations. We advise our shareholders that they should (1) be aware that factors not referred to above could affect the accuracy of our forward-looking statements and (2) use caution when considering our forward-looking statements.
Overview
We develop, design, manufacture and service custom engineered-to-order equipment and systems for the management and control of electrical energy and other critical processes. Headquartered in Houston, Texas, we serve the transportation, environmental, energy, industrial and utility industries. Our business operations are consolidated into two business segments: Electrical Power Products and Process Control Systems. Revenues and costs are primarily related to engineered-to-order equipment and systems which precludes us from providing detailed price and volume information.
The global markets in which Powell participates are capital-intensive and cyclical in nature. Cyclicality is driven by customer demand, global economic markets and potential environmental or regulatory impacts which affect the manner in which our customers proceed with capital projects. Our customers analyze various factors including the short-term demand for oil and electrical energy, the overall banking environment, federal and state budgets, the outlook for offshore drilling and related regulatory actions and the drive towards environmental controls over the type and way energy is produced and utilized. These factors have contributed to decisions by customers to delay or to change where they place new capital projects, which decreased our backlog of orders to $282.3 million entering fiscal 2011, down $83.5 million from the beginning of fiscal 2010. However, during fiscal 2011, orders received were $725.2 million compared to $466.8 million during fiscal 2010 and our backlog has increased to $443.0 million at the beginning of fiscal 2012 (our current fiscal year). This resulted in an increase in backlog of 57% compared to the backlog at the beginning of fiscal 2011. Some of our orders received in fiscal 2011 are for large complex petrochemical and offshore oil and gas construction projects which will take several months to produce. Orders received during the first nine months of fiscal 2012 were $525.1 million, a decrease of $75.3 million from the same period of the prior year.
Execution challenges in the first three months of fiscal 2012 on certain large projects at Powell Canada have negatively impacted net income during fiscal 2012. These execution challenges resulted from scope changes and cost overruns on certain projects. The Company is currently pursuing recovery of certain of these costs. However, there is no assurance these costs can be recovered and costs recovered are recorded when change orders are approved by the customers.
Results of Operations
Revenue and Gross Profit
Consolidated revenues increased $52.7 million to $194.1 million in the third quarter of fiscal 2012 compared to $141.4 million in the third quarter of fiscal 2011. For the third quarter of fiscal 2012, domestic revenues increased by 8.9% to $105.5 million compared to the third quarter of 2011. Total international revenues were $88.6 million in the third quarter of 2012 compared to $44.6 million in the third quarter of 2011. Gross profit for the third quarter of fiscal 2012, as compared to the third quarter of fiscal 2011, increased by approximately $22.0 million, to $43.8 million, and gross profit as a percentage of revenues increased to 22.6% in the third quarter of fiscal 2012, compared to 15.5% in the third quarter of fiscal 2011. The increase in gross profit and gross profit as a percentage of revenues resulted from the mix of projects in our backlog, and increased production volume and reduced costs on project completion due to operational efficiencies.
For the nine months ended June 30, 2012, consolidated revenues increased $141.8 million to $533.0 million compared to $391.2 million for the nine months ended June 30, 2011. For the first nine months of fiscal 2012, domestic revenues increased by 17.4% to $307.9 million compared to the first nine months of fiscal 2011. Total international revenues increased to $225.2 million in the first nine months of 2012 compared to $128.9 million in the first nine months of fiscal 2011. Gross profit for the first nine months of fiscal 2012, as compared to the first nine months of fiscal 2011, increased by $25.9 million, to $98.5 million, as a result of increased production volume and reduced costs on project completion due to operational efficiencies. Gross profit as a percentage of revenues decreased slightly to 18.5% for the first nine months of fiscal 2012, compared to 18.6% for the first nine months of fiscal 2011 due to execution challenges on certain large projects at Powell Canada.
Electrical Power Products
Our Electrical Power Products business segment recorded revenues of $186.3 million in the third quarter of fiscal 2012, compared to $134.4 million for the third quarter of fiscal 2011. In the third quarter of 2012, revenues from public and private utilities were approximately $38.7 million, compared to $37.0 million in the third quarter of fiscal 2011. Revenues from industrial and commercial customers totaled $137.3 million in the third quarter of 2012, an increase of $47.4 million compared to the third quarter of fiscal 2011. Municipal and transit projects generated revenues of $10.3 million in the third quarter of fiscal 2012 compared to $7.5 million in the third quarter of fiscal 2011.
Business segment gross profit, as a percentage of revenues, was 22.4% in the third quarter of fiscal 2012, compared to 14.7% in the third quarter of fiscal 2011. This increase in gross profit as a percentage of revenues resulted primarily from increased production volume and reduced costs on project completion due to operational efficiencies.
For the nine months ended June 30, 2012, our Electrical Power Products segment recorded revenues of $510.9 million, compared to $370.1 million for the nine months ended June 30, 2011. In the first nine months of fiscal 2012, revenues from public and private utilities were approximately $96.2 million, compared to $101.5 million in the first nine months of fiscal 2011. Revenues from commercial and industrial customers totaled $383.2 million in the first nine months of fiscal 2012, an increase of $135.4 million compared to the first nine months of fiscal 2011. Municipal and transit projects generated revenues of $31.5 million in the first nine months of fiscal 2012, compared to $20.8 million in the first nine months of fiscal 2011.
For the nine months ended June 30, 2012, gross profit from the Electrical Power Products business segment, as a percentage of revenues, was 18.2%, compared to 18.2% for the nine months ended June 30, 2011. Gross profit as a percentage of revenue for the nine months ended June 2012 was negatively impacted by execution challenges in the first quarter of fiscal 2012 on certain large projects at Powell Canada.
Process Control Systems
Our Process Control Systems business segment recorded revenues of $7.8 million in the third quarter of fiscal 2012, an increase from $6.9 million in the third quarter of fiscal 2011. Business segment gross profit, as a percentage of revenues, decreased to 27.7% in the third quarter of fiscal 2012 compared to 29.9% in the third quarter of fiscal 2011.
For the nine months ended June 30, 2012, our Process Control Systems business segment recorded revenues of $22.1 million, an increase from $21.0 million for the nine months ended June 30, 2011. Business segment gross profit decreased as a percentage of revenues to 23.8% for the first nine months of fiscal 2012, compared to 25.6% for the first nine months of fiscal 2011. This decrease in gross profit as a percentage of revenues is related to the mix of projects.
For additional information related to our business segments, see Note K of Notes to Condensed Consolidated Financial Statements.
Consolidated Selling, General and Administrative Expenses
Consolidated selling, general and administrative expenses decreased to 12.8% of revenues in the third quarter of fiscal 2012 compared to 13.7% of revenues in the third quarter of fiscal 2011. Selling, general and administrative expenses were $24.8 million for the third quarter of fiscal 2012, compared to $19.4 million for the third quarter of fiscal 2011. This increase is primarily due to increases in short-term and long-term incentive compensation, resulting from increased earnings compared to the third quarter of fiscal 2011. Selling, general and administrative expenses decreased as a percentage of revenues as a result of our increase in revenues.
For the nine months ended June 30, 2012, consolidated selling, general and administrative expenses decreased to 12.4% of revenues, compared to 15.8% of revenues for the nine months ended June 30, 2011. Selling, general and administrative expenses were $66.1 million for the first nine months of fiscal 2012, compared to $61.9 million for the first nine months of fiscal 2011. This increase is primarily related to increased short-term and long-term incentive compensation resulting from higher earnings, as well as increased bad debt expense. Selling, general and administrative expenses decreased as a percentage of revenues as a result of our increase in revenues.
Gain on Sale of Investment
Gain on sale of investment consists of a $1.2 million gain recorded in the second quarter of fiscal 2011 that resulted from cash received from the sale of our 50% equity investment in a joint venture in Kazakhstan, which was previously a part of the acquisition of Powell Canada in fiscal 2010.
Provision for Income Taxes
Our provision for income taxes reflects an effective tax rate on earnings before income taxes of 33.6% in the third quarter of fiscal 2012, compared to 93.9% in the third quarter of fiscal 2011. For the first nine months of fiscal 2012, our effective tax rate was 40.9%, compared to 48.2% for the first nine months of fiscal 2011. The effective tax rates for the third quarter of fiscal 2011, and the first nine months of fiscal 2012 and 2011 have been negatively impacted by our inability to record a tax benefit related to pre-tax losses in Canada.
Net Income
In the third quarter of fiscal 2012, we generated net income of $12.1 million, or $1.02 per diluted share, compared to $0.1 million, or $0.01 per diluted share, in the third quarter of fiscal 2011. For the nine months ended June 30, 2012, we recorded net income of $17.8 million, or $1.50 per diluted share, compared to $4.2 million, or $0.36 per diluted share, for the nine months ended June 30, 2011.
Backlog
The order backlog at June 30, 2012, was $433.5 million, compared to $443.0 million at September 30, 2011, and $491.4 million at the end of the third quarter of fiscal 2011. New orders placed during the third quarter of fiscal 2012 totaled $133.0 million compared to $197.7 million in the third quarter of fiscal 2011. Backlog has decreased slightly due to the completion of certain oil and gas production and petrochemical projects.
Liquidity and Capital Resources
Cash and cash equivalents decreased to $106.8 million at June 30, 2012, primarily as a result of the recent purchases of land to build facilities in the United States and Canada during the first nine months of fiscal 2012 to support our continued expansion of the offshore production markets and the Canadian Oil Sands. As of June 30, 2012, current assets exceeded current liabilities by 2.4 times and our debt to total capitalization was 1.5%.
At June 30, 2012, we had cash and cash equivalents of $106.8 million, compared to $123.5 million at September 30, 2011. We have a $75.0 million revolving credit facility in the U.S., which expires in December 2016. As of June 30, 2012, there were no amounts borrowed under this line of credit. We also have a $9.8 million revolving credit facility in Canada. At June 30, 2012, there was no balance outstanding under the Canadian revolving credit facility. Total long-term debt and capital lease obligations, including current
maturities, totaled $4.5 million at June 30, 2012, compared to $5.4 million at September 30, 2011. Letters of credit outstanding were $41.1 million at June 30, 2012, compared to $13.2 million at September 30, 2011, which reduce our availability under our US Revolver. Amounts available under the U.S. revolving credit facility were $33.9 million at June 30, 2012. Amounts available under the Canadian revolving credit facility were $9.8 million at June 30, 2012. For further information regarding our debt, see Notes G and I of Notes to Condensed Consolidated Financial Statements.
Approximately $7.1 million of our cash at June 30, 2012, was held internationally for international operations. It is our intention to indefinitely reinvest all current and future foreign earnings internationally in order to ensure sufficient working capital and support and expand these operations. In the event that the Company elects to repatriate some or all of the foreign earnings that were previously deemed to be indefinitely reinvested outside the U.S., under current tax laws we would incur additional tax expense upon such repatriation.
We believe that cash available and borrowing capacity under our existing credit facility should be sufficient to finance anticipated operating activities, capital improvements and expansions, as well as debt repayments for the foreseeable future. We will continue to monitor the factors that drive our markets and strive to maintain our leadership and competitive advantage in the markets we serve while aligning our cost structures with market conditions.
Operating Activities
Cash provided by operating activities was $6.5 million during the first nine months of fiscal 2012 and $25.2 million during the first nine months of fiscal 2011. Cash flow from operations is primarily influenced by demand for our products and services and is impacted as our progress payment terms with our customers are matched with the payment terms with our suppliers. Cash flow from operations decreased during the first nine months of fiscal 2012 compared to the same period in the prior year, primarily due to cash used to support higher levels of business activity and the timing of billing milestones on certain large projects.
Investing Activities
Investments in property, plant and equipment during the first nine months of fiscal 2012 totaled $25.5 million, compared to $4.1 million during the first nine months of fiscal 2011. A significant portion of these investments has been to acquire land and build facilities in the United States and Canada to support our continued expansion in the offshore production markets and Canadian Oil Sands. During the first nine months of fiscal 2011, we received cash of $1.2 million from the sale of our 50% equity investment in Kazakhstan.
Financing Activities
Net cash provided by financing activities was $1.4 million for the first nine months of fiscal 2012 due to cash being received from the exercise of stock options that were set to expire on June 24, 2012. Net cash used in financing activities was $0.7 million for the first nine months of fiscal 2011, resulting from payments made on capital lease agreements.
New Accounting Standards
See Note A to our condensed consolidated financial statements included in this report for information on new accounting standards.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations are based on our condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities known to exist at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. We evaluate our estimates on an ongoing basis, based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. There can be no assurance that actual results will not differ from those estimates.
There have been no material changes to our critical accounting policies as disclosed in our Annual Report on Form 10-K for the year ended September 30, 2011.
Outlook
The global markets in which Powell participates are capital-intensive and cyclical in nature. Cyclicality is driven by customer demand, global economic markets and potential environmental or regulatory impacts which affect the manner in which our customers proceed with large capital projects. Our customers analyze various factors including the short-term demand for oil and electrical energy, the overall banking environment, federal and state budgets, the outlook for offshore drilling and related regulatory actions and the drive towards environmental controls over the type and way energy is produced and utilized. These factors have contributed to decisions by customers to delay or to change where they place new capital projects, which decreased our backlog of orders to $282.3 million entering fiscal 2011, down $83.5 million from the beginning of fiscal 2010. However, during fiscal 2011, orders received were $725.2 million compared to $466.8 million during the same twelve-month period of fiscal 2010 and our backlog increased to $443.0 million at the beginning of fiscal 2012. This resulted in an increase in backlog of 57% at the beginning of fiscal 2012 compared to the backlog at the beginning of fiscal 2011. Some of our orders received in fiscal 2011 are for large complex petrochemical and offshore oil and gas construction projects which will take several months to produce. Execution challenges on certain large projects at Powell Canada have negatively impacted our net income for fiscal 2012. These execution challenges resulted from scope changes and cost overruns on certain projects. The Company is currently pursuing recovery of certain of these costs. However, there is no assurance these costs can be recovered and costs recovered are recorded when change orders are approved by the customers. Orders received during the first nine months of fiscal 2012 were $525.1 million, a decrease of approximately $75.3 million from the same period of the prior year.
Growth in demand for energy is expected to continue over the long term. New infrastructure investments will be needed to ensure the available supply of petroleum products. New power generation and distribution infrastructure will also be needed to meet the growing demand for electrical energy. New power generation plants will also be needed to replace the aging facilities across the United States, as those plants reach the end of their life cycle. A heightened concern for environmental damage, together with the uncertainty of gasoline prices, has expanded the popularity of urban transit systems, which should drive demand for investment in transit infrastructure, contingent upon available financing. Opportunities for future projects continue, however, the timing and pricing of many of these projects is difficult to predict. The demand for our products and services should continue as investments in large capital-intensive infrastructure projects receive funding and support.
We believe that cash available and borrowing capacity under our existing credit facility should be sufficient to finance anticipated operational activities, capital improvements, market expansions and debt repayments for the foreseeable future. We will continue to monitor the factors that drive our markets and strive to maintain our leadership and competitive advantage and invest in the markets we serve while aligning our cost structures with market conditions.
We have recently acquired land and begun to build facilities in the United States and Canada to support our continued expansion in the offshore production markets and the Canadian Oil Sands. The total investment in land, buildings and equipment is to be funded with cash in the amount of approximately $75 million.
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