Powell Industries, Inc. (POWL) Q3 2016 Earnings Report, Transcript and Summary

Greetings and welcome to the Powell Industries Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Natalie Hairston, Senior Vice President with Dennard-Lascar Associates. Thank you. You may begin.

Thanks, Jessie, and good morning, everyone. We appreciate you joining us today for Powell Industries’ conference call to review fiscal year 2016 third quarter results. We’d also like to welcome our Internet participants listening to the call that’s been webcast. Before I turn the call over to management, I have the usual details to cover. If you didn’t receive an email of the news release issued yesterday afternoon and would like one, please call our offices at Dennard-Lascar and we will get one to you. That number is 713-529-6600. Also, if you want to be on the email distribution list for Powell releases, please relay that information to us. There will be a replay of today’s call, it will be available via webcast by going to the Company’s website at powellind.com or a replay will be available by telephone, and that’s until August 10. The information on how to access the replay was provided in yesterday’s earnings release. Please note that information recorded on this call speaks only as of today, August 3, 2016 and therefore, you are advised that time-sensitive information may no longer be accurate as of the time of any replay listening or transcript readings. This conference call includes certain statements, including statements related to the Company’s expectations of its future operating results that may be deemed to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involve risks and uncertainties, and that actual results may differ materially from those projected in the forward-looking statements. These risks and uncertainties include but are not limited to competition and the competitive pressures, sensitivity to general economic and industry conditions, international political and economic risks, availability and price of raw materials and execution of business strategies. For more information, please refer to the Company’s filings with the Securities and Exchange Commission. With me on the call are Tom Powell, Chairman, President and Chief Executive Officer; Brett Cope, Chief Operating Officer; and Don Madison, Chief Financial Officer. Now I’ll turn the call over to Tom.

Okay. Thank you, Natalie, and good morning, everyone. Thank you for joining us today to review our 2016 third quarter results. I’ll make a few comments and then I’ll turn the call over to Brett and then Don for more commentary, before we take your questions. Solid operational performance both project execution and manufacturing efficiencies grow our third quarter earnings performance. Quarter-over-Quarter performance in both our Houston and our UK operations resulted in improved gross margins, thank goodness. I'm also pleased that our Canadian operation reported solid earnings again this quarter. Our business like many others in the current environment, is facing the headwind of drastically reduced spending by our clients. Oil and gas capital spending has limited the number of opportunities for new work and competitive price pressures are sharply increasing on the remaining projects. Believe me we’re turning over every stone. We are saying fewer opportunities in our markets not just oil and gas. As we work through these difficult market conditions will continue investing in our future. Cost initiatives continue to be a major focus of the operation. We are increasing our attention on research and development efforts to improve the cost of our existing products. While continuing work on additional features, intelligence and new products. We believe R&D is paramount investment in Powell’s future that will have a positive and far-reaching impact on our business. Meanwhile, we are going to ensure our valued clients are supported by our best-in-class product, service and customer support. So at this point I will turn it over to Brett to provide some additional color on the operations.

Thank you, Tom, and good morning and thank you to everyone for joining on today’s call. As Tom mentioned our Canadian UK and Houston electrical operations posted better than expected results. Over the past several months we have taken solid steps to improve project execution and operational efficiencies. I would like to recognize and thank our employees for their flexibility and contributions as we work through these challenging market conditions. Employees have stepped up across the company, training on new skills and cross training across production lines to allow portability. Our engineers have engaged in developing processes and procedures to more effectively share workloads across division lines to better address the demands of our backlog. In addition employees have supported various initiatives to take temporary assignments to assist and short-term needs and to capitalize on their unique manufacturing efficiency strengths. We truly appreciate their support. As we enter our fourth quarter, we will continue to improve our project efficiencies ensuring that we are achieving delivery commitments and in some cases accelerating our project schedules to meet changing customer needs. As Tom notes we are increasing our focus on our product development activities to provide increased benefits, improved safety and enhanced communication features to our customers and to improve our cost position. We continue to experience softness in our orders and backlog. The decline of capital spending in our core oil, gas and petrochemical markets continues to be a headwind and new orders especially associated with onshore and offshore production and pipeline projects. The number of large mega projects has also declined as the number of new plants or large expansions are being delayed primarily due to a lack of funding by our customers. Additionally we are experiencing increased price pressure on new orders as competition continues to intensify. Even though our oil and gas markets are soft, we continue to make progress growing our markets where we have not had a strong presence historically. We have been successful in winning several contracts from new clients in various geographical regions and new market sectors. In addition we are expanding our focus on opportunities that extend the strength of our electrical and integration solutions as well as capitalize on Powell’s full breadth of service and product offerings. Before I turn it over to Don, I want to stress that we believe successful outcomes require a disciplined and nimble decision making process. While we cannot predict when order activity will begin to improve. We believe we have laid the groundwork to manage through this challenging period. Now, let me turn the call over to Don.

Thank you, Brett. Revenues decreased by $44 million or 25% to a $133 million in the third quarter compared to the third quarter of fiscal 2015. Domestic revenues decreased by $14 million or 30% to $94 million in the third quarter and international revenues decreased by $4 million or 8% to $39 million due to fewer number of projects in our backlog. Gross profit as a percentage of revenues increased to 21% in the third quarter of fiscal 2016 compared to 19% in the third quarter of fiscal 2015 due to improvements in our international operations, driven by project improved execution, operational efficiencies and reduced cost in our Canadian operations. The increasing gross profit from our international operations was offset by decline in gross profit from our domestic operations. As margins were negatively impacted by reduced volume and cost and a cost overrun related to a large transit project. Selling, general and administrative expenses as a percentage of revenues increased to 15% in the third quarter, compared to 10% a year-ago due to increased expenses and lower revenues. In the third quarter, we incurred $647,000 in restructuring and separation cost. In the third quarter of fiscal 2016 we reported net income of $4.9 million or $0.43 per diluted share. Excluding restructuring and separation costs, income in the third quarter of fiscal 2016 was $5.4 million or $0.47 per share. For nine months ended June 30, 2016, revenues decreased by 13% or $64 million to $435 million compared to the same period a year ago. Gross profit as a percentage of revenues was 19% compared to 16% in the first nine months of fiscal 2015 due to improvements in our international operations Selling, general and administrative expenses decreased by $506,000 to $58 million compared to the first nine months of fiscal 2015. SG&A expenses as a percentage of revenues increased to 13% compared to 12% for the first nine months of fiscal 2015 due to reductions in year-over-year revenues. And the nine month ended June 30, 2016 we incurred approximately $7.7 million or $5.3 million net of tax in restructuring and separation costs. As we aligned our management, salaried and hourly workforces with anticipated production requirements. We recorded an income tax provision of $844,000 for the nine months ended June 30, 2016. The effective tax rate for the first nine months was 8%, which was favorably impacted by the mix of income from our Canadian operations and the utilization of net operating loss carry-forwards in Canada that were fully reserved with a valuation allowance. Additionally, the effective tax rate was favorably impacted by $841,000 due to the retroactive reinstatement of the R&D tax credit. For the nine months ended June 30, 2016, we reported net income of $10 million or $0.87 per diluted share. Excluding restructuring and separation charges, net income for the first nine months was $15.3 million or $1.34 per share. New orders received during the quarter were $88 million, resulting in a backlog of $312 million, compared to a backlog of $357 million at the beginning of the quarter and $518 million a year ago. At the end of our third quarter, we had cash of $89 million compared to $44 million at the beginning of the fiscal year. For the first nine months of fiscal 2016, cash provided by operating activities totaled $62 million and investments in property, plant, and equipment totaled approximately $2 million. Also during the same period, we paid dividends totaling $8.9 million and repurchased $3.7 million of Company stock to complete our share repurchase program. Long-term debt including current maturities totaled $2.4 million. Looking ahead, based on our backlog and current business conditions, we expect full-year fiscal 2016 revenues to range between $550 million and $565 million, compared to our previous guidance of $520 million to $560 million. And we expect adjusted earnings to range between $1.30 and $1.45 per share compared to our previous guidance of $0.80 to $1.10 per diluted share. Our earnings guidance, excludes restructuring and separation charges. We will continue to evaluate additional actions that maybe needed to align our operating costs with market conditions. In closing, I would like to remind everyone of our strong financial position. At the end of the third quarter, working capital totaled to $183 million of which $89 million worth cash. Over the coming quarters, we expect our cash balance to continue to increase as we complete many of projects currently in process. We have virtually no debt and have nearly $60 million available under existing credit agreements. We are well-prepared to manage the business through the depressed capital spending we are currently experiencing. At this point, we will be happy to answer your questions.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question is coming from the line of Jon Tanwanteng with CJS. Please proceed with your question.

Good morning. It’s Pete Lucas for Jon. Congratulations on the quarter guys. Just had a question, given that backlogs are down 40% and crude prices have retreated again. How should we think about base level of revenue going forward and the margin that you can squeeze out at that run rate?

For the balance of the current year, we're looking at approximately $115 million to $130 million, looking at beyond that it’s going to be something that we're going to have to manage on a month-by-month, quarter-by-quarter basis because the market predictability today is very challenging.

Great. Thanks. And then on that challenging aspect I know you look for 2017 to still - conditions just still persist, any sense of timing on the recovery or market conditions that we can look for?

Pete, it’s Brett Cope. Impossible to predict. I mean conditions with the customers are - were engaged heavily day to day on all the projects, still a lot of pressure on the whole cost change to get a project justified and even funded and then of course the competitive pressures aren’t getting any better. So it is a challenging environment.

Great. Thanks. I'll jump back into the queue.

Thank you. Our next question is coming from the line of John Franzreb with Sidoti & Company. Please proceed with your question.

Good morning, everybody.

Good morning.

I'd like to talk a little bit about the revenue expectations going into the fourth quarter. It seems to me that last quarter we had some deliveries pull forward. Are you seeing that phenomenon again in the fourth quarter where some deliveries being pulled from fiscal 2017 into Q4 of 2016?

I think we're seeing probably a more balanced during the most recent weeks, months. We've seen some that have pulled in, but we're also seeing a couple of the projects that are being extended due to the client’s construction schedule, so I would say today it's a little bit more balanced. We are having some success at filling in some of our production holes with short cycle business. We continue to pursue that. And let's say with our current capacity situation, we're in a much better position to respond to short cycle requests then we have been in the past, so that is a small positive I think in the current situation.

Okay. And regarding the incoming order book at $88 million, that's the lowest number I’ve seen in 10 years, is your sense that that maybe [indiscernible] the order intake or are your current conversations with customers suggesting that there's a lot of uncertainty about what the near-term incoming bookings will look like?

Well, let me open that and I'll let Brett to add some more color. The overall activity probably has not changed dramatically in the last 90 days. I think what we're seeing is the same thing that we've seen in the past with when we talk about the $40 million projects, they seem to slide to the right before their actual closing. Today, we're seeing that same phenomenon, but it’s worth the $8 million to $10 million projects. We're seeing them go through more and more rounds of iterations of trying to be squeezed the cost out of the project, re-bidding it and the whole process is moving the award further out that what we would have experienced on that same size order two years ago.

The only thing I would add, first on the activity quarter on coating has been relatively constant, again quarter-over-quarter. The delays on not just getting the funding also a challenge and besides the price competition, I'd say there is also increased requests on terms risk that have created new challenges in the market. So it's definitely a buyer's market.

Okay. All right. Thank you. I’ll get back in the queue.

Thank you. [Operator Instructions] We do have a follow-up question coming from the line of Jon Tanwanteng with CJS. Please proceed with your question.

Just to follow-up on the restructuring, are you comfortable where you're at this point. Or do you think there's more to come in terms of that?

I think the most significant impacts of what we need to do are behind this. It's something that we continue to manage and watch on a week-by-week, month-by-month basis. There will maybe some minor adjustments that we would have to take at individual facilities to make sure that we are properly aligned with our skill sets and the available backlog. But I don't see any major changes that are going to be needed going forward.

And then one more any updates to cash flow or cash flow targets exiting Q4 or for the year and any changes to priorities for that cash?

So cash flow which is expected to continue to be positive, we do expect our cash balance to increase between now and the over the next one to two quarters as we roll through projects that are currently in process. From a utilization of cash, you’ve got the standard textbook type approaches. But internally we have spent more time discussing quarter right and the approach would be to grow the company through potential acquisitions, so that is something that is more keen to our mind today than it might have been with some of the operational challenges we have a year or so ago.

Great thank you.

Thank you. Our next question is coming from the line of Tom Spiro with Spiro Capital. Please proceed with your question.

Good morning.

Thomas, how you are doing?

I’m okay. Nice quarter guys. I just had one question about the intensifying competition in terms of price and terms. At the start of a strategic matter are you guys taking the position that you're going to be in there? And you're going to sort of defend your position almost irrespective of price in terms? Or you finding there are projects, we're basically saying it's gotten so low. The terms are so unpalatable we’ll just walk away.

Tom, we looked. We are looking at more often at every opportunity to look at the risk profile for Powell. Not just the impact on the margin of the job but the risks associated with it as we continue to execute better on the existing backlog. So there are cases in the last quarter where some of the terms have gotten to the point of it just doesn't make sense. The risk for the benefit is just out of balance and we have - that as added to the competitive pressure, so it's not all price. There are some things in there that are little strange and I don't think in the best interest of the company. But there are - there is considerable price pressure and we aren’t just watching we do look at them and I’d say more closely today.

Tom I have - let me weigh in here. While these guys are giving me dirty standards. I'd rather take work at no margin, no profit to keep that pool of talented people we have in this organization. And I'm going to do, we're going to do our very best to keep everybody we have on board in this organization. And that means we may take some jobs at no margin.

Well thanks much for elaborating and good luck.

Thanks, Tom.

Thank you. We do have a follow-up question coming from the line of John Franzreb with Sidoti & Company. Please proceed with your question.

Yes. Firstly, can you kind of address the market place outside of the oil and gas market, what you are hearing maybe in the utility market or other industrial markets that might be able to fill some of the gap?

Sure. So utility, both generation and T&D have held pretty constant quarter-over-quarter. T&D as we noted in last call were sort of an uptick that maintain this last quarter. The offshore market we talked about continues to be extremely challenged. I think of all the market sectors geographically, we're still seeing I think again last call we noted Middle East sort of being the least depressed of the core oil and gas and geographically Canada being one of the more tougher markets oil and gas. But commercially we're still which we depend on our channels some of our OEMs continues to be okay. So utility and commercial I would say holding pretty constant period-over-period.

Okay. Fairly constant that okay. And on the gross margin profile I guess kind of follow up on Tom's remarks. If I remember correctly in the last downturn you have actually had a period where change orders would become more volatility at the end of the cycle and could actually result and since we you know higher gross margins than were normally offset by the start of other projects. Is that kind of going to play out in the next couple quarters also?

That is in part what happened in this past quarter. While it was still driven predominantly by operating efficiencies, there was nothing that was substantial as far as any one order but as we move towards the end of the project he do tend to get favorable pick up. We are moving towards the end of projects in our backlog and I would expect that phenomena to continue near-term.

Got it. And regarding cash any sense of maybe stock repurchase or anything else using cash M&A? What are the thoughts there?

I mean I think the best use - this is me speaking personally the best use of cash long-term is to find the way to grow the business through an acquisition. But on the table you can't rule out dividends and you can't rule out additional stock repurchases that we did a year ago.

Okay. Thanks guys. That's all from me.

Thank you. Mr. Powell, there are no further questions at this time. So I would like to turn the floor back over to you for additional conclusion comments.

Okay. Gentlemen, rest assured, ladies, we have been focused on expanding our sales coverage, improving our operational efficiencies and cost structures. We are a strong organization in weak market conditions but we'll get where we need to get. I want to thank you for joining us today. Look forward to speaking with you again next quarter. Have a good day.

Ladies and gentlemen, thank you for your participation. This does conclude today’s teleconference. You may disconnect your lines at this time and have a wonderful day.